<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 24, 1997
REGISTRATION NO. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
PREFERRED CREDIT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
NEVADA 6141 33-0506860
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NO.) IDENTIFICATION NO.)
</TABLE>
3347 MICHELSON, SUITE 400
IRVINE, CALIFORNIA 92612
(714) 474-0700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
TODD A. RODRIGUEZ, CHIEF EXECUTIVE OFFICER
PREFERRED CREDIT CORPORATION
3347 MICHELSON, SUITE 400
IRVINE, CALIFORNIA 92612
(714) 474-0700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
----------------
COPIES TO:
DAVID H. SANDS, ESQ. LAURA B. HUNTER, ESQ.
SCOTT W. ALDERTON, ESQ. ROGER M. COHEN, ESQ.
TROOP MEISINGER STEUBER & PASICH, LLP ETHAN D. FEFFER, ESQ.
10940 WILSHIRE BOULEVARD BROBECK, PHLEGER & HARRISON LLP
LOS ANGELES, CALIFORNIA 90024 4675 MACARTHUR COURT, SUITE 1000
(310) 824-7000 NEWPORT BEACH, CALIFORNIA 92660-1846
(714) 752-7535
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par
value................. 5,750,000 $23.00 $132,250,000 $40,076
</TABLE>
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- -------------------------------------------------------------------------------
(1) Includes 750,000 shares of Common Stock issuable upon exercise of an
option granted to the Underwriters to cover over-allotments.
(2) Estimated solely for the purpose of calculating the registration fee under
Rule 457(a).
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION, DATED JUNE 24, 1997
5,000,000 SHARES
PREFERRED CREDIT CORPORATION
COMMON STOCK
Of the 5,000,000 shares of common stock, par value $.001 per share (the
"Common Stock"), offered hereby, 4,775,000 shares are being sold by Preferred
Credit Corporation (the "Company") and 225,000 shares are being sold by
stockholders of the Company (the "Selling Stockholders"). See "Principal and
Selling Stockholders." The Company will not receive any of the proceeds from
the sale of the shares by the Selling Stockholders. Prior to this offering,
there has been no public market for the Common Stock. It is currently estimated
that the initial public offering price will be between $20.00 and $23.00 per
share. See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. Application has been made to
list the Common Stock on the Nasdaq National Market under the symbol "PREF."
-----------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" AT PAGES 8 TO 18 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY EACH PROSPECTIVE INVESTOR.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING DISCOUNTS PROCEEDS TO PROCEEDS TO SELLING
PRICE TO PUBLIC AND COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.............. $ $ $ $
- -----------------------------------------------------------------------------------------------
Total(3)............... $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses of the offering payable by the Company estimated
to be $600,000.
(3) The Selling Stockholders have granted the Underwriters a 30-day option to
purchase up to 750,000 additional shares of Common Stock solely to cover
overallotments, if any. To the extent that the option is exercised, the
Underwriters will offer the additional shares of Common Stock at the Price
to Public shown above. If the option is exercised in full, the total Price
to Public, Underwriting Discounts and Commissions, Proceeds to Company and
Proceeds to Selling Stockholders will be $ , $ , $ and
$ , respectively. See "Underwriting."
-----------
The Common Stock offered by the Underwriters in the offering is subject to
prior sale, when, as and if delivered to and accepted by the Underwriters, and
subject to their right to withdraw, modify, correct and reject orders in whole
or in part. It is expected that delivery of the certificates representing such
shares of Common Stock will be made against payment therefor at the offices of
Keefe, Bruyette & Woods, Inc. ("KBW"), or in book entry form through the
facilities of The Depository Trust Company, on or about , 1997.
KEEFE, BRUYETTE & WOODS, INC. PIPER JAFFRAY INC.
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
[PICTURES]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE,
PURCHASE OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE
COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information (including "Risk Factors" and the financial statements and notes
thereto) appearing elsewhere in this Prospectus. Unless otherwise indicated,
all information included in this Prospectus has been adjusted to reflect the
6,000 for one stock split of the Common Stock effected in June, 1997 and
assumes no exercise of the Underwriters' over-allotment option. See
"Description of Capital Stock" and "Underwriting."
THE COMPANY
OVERVIEW
Preferred Credit Corporation is a specialized consumer finance company
primarily engaged in the origination, purchase, sale and securitization of non-
traditional consumer loans. The Company's principal loan product ("core loans")
consists of second mortgage loans to qualified individuals who generally have
above average to superior credit and satisfy the Company's underwriting
criteria based on income, credit scores and other factors, but who have limited
access to traditional mortgage-related financing generally because of a lack of
equity in their homes. The Company originates and acquires its core loans on a
nationwide basis through three different production channels including retail
offices, wholesale brokers and correspondent lenders. For the year ended
December 31, 1996 and the three months ended March 31, 1997, 14.5% and 19.1%,
respectively, of the Company's core loan production was originated through its
retail/consumer direct loan channel, 72.8% and 38.2%, respectively, was
originated through wholesale brokers and 12.7% and 42.7%, respectively, was
acquired from correspondent lenders, not including a one-time bulk purchase of
$136.0 million in 1996. During 1996 and the first three months of 1997, the
Company originated or acquired loans in 43 states with only one state,
California, accounting for more than 5% of the Company's total production. For
the three months ended March 31, 1997, California accounted for 37.0% of all
core loans originated or purchased by the Company, as compared to 65.4% for the
year ended December 31, 1996.
From 1994 to 1996, the Company's annual loan production volume increased from
$16.5 million to $596.9 million (including $496.3 million of core loans during
1996). For the three months ended March 31, 1997, the Company originated or
acquired $250.8 million of core loans and brokered a nominal amount of non-core
loans. Based upon available industry data, the Company believes it is one of
the largest companies in the United States specializing in the origination and
purchase of loans similar to the Company's core loans.
The Company sells substantially all of its core loans in securitization
transactions and, to a lesser extent, on a whole loan basis. Since it commenced
its securitization program in June 1996, the Company has sold a total of
$487.3 million of core loans in securitization transactions, $256.7 million
during 1996 and $230.6 million during the three months ended March 31, 1997,
recognizing a weighted average gain of 5.5% and 8.3%, respectively, on such
sales.
The Company's overall business strategy is to continue its recent growth and
solidify its position as a leading consumer finance lender within its niche
market. The Company intends to achieve this objective by increasing the volume
of core loans originated and purchased, and continuing to seek ways to improve
customer service, risk management and cash flow. The Company's business
strategy focuses on expanding its core loan production on a nationwide basis,
primarily through expansion of its retail production offices and also through
increasing loan production through existing and new wholesale brokers and
correspondent lenders. As a key element of its business strategy, the Company
intends to leverage its increased loan production and increase profitability
and cash flow through a combination of regular sales of loans on a whole loan
basis and the securitization of a substantial portion of core loans on a
quarterly basis. In addition, in order to support the anticipated increases in
loan production levels without degradation of underwriting standards and to
increase operating efficiencies by permitting wholesale brokers to make online
underwriting decisions, the Company has undertaken a program to enhance and
further automate its underwriting systems by the end of 1997.
3
<PAGE>
PRODUCT FOCUS
The Company's core loans are typically closed-end (usually 15 year), fixed-
rate, fully-amortizing loans secured by a second lien on the borrower's primary
residence, and are typically used by consumers to pay-off credit card and other
unsecured indebtedness. The Company believes that its core loan product
represents an attractive alternative to other financial products because it may
allow borrowers to consolidate outstanding indebtedness into a single loan
having a longer repayment term and possibly a lower interest rate than other
forms of unsecured consumer debt, and affords borrowers the opportunity to
lower their overall monthly debt payments. In addition, the potential for tax
deductibility of interest payments on the core loan product offers a benefit
for many borrowers. The Company also originates a small volume of traditional
single family residential mortgage loans, substantially all of which are sold
in the secondary market through programs sponsored by the Federal Home Loan
Mortgage Corporation ("Freddie Mac"), Federal National Mortgage Association
("Fannie Mae") and others, or are brokered to other lenders.
UNDERWRITING STANDARDS AND BORROWER PROFILE
Because of the limited equity value of the collateral underlying the
Company's core loans, and the Company's typical position as a junior lien
holder on that collateral, the Company relies principally on the borrower's
creditworthiness and ability to repay the loan in making its underwriting
decisions. The Company reviews the borrower's income relative to the amount of
the loan and other existing debt in evaluating the repayment ability of the
borrower. In order to evaluate the creditworthiness of potential borrowers, the
Company uses its own computer-assisted underwriting system. This system is
based in part on the borrower's "FICO" credit score, which is a credit
evaluation score methodology developed by Fair, Isaac & Company ("Fair Isaac"),
and in part on the Company's evaluation of the borrower's employment history,
earnings stability, credit history, length of home ownership, stability in the
community and other traditional underwriting criteria. During 1996 and for the
three months ended March 31, 1997, loans securitized by the Company had a
weighted average FICO score of approximately 670 to 680, which is generally
classified by Fannie Mae and Freddie Mac as loans that have acceptable credit
risks.
DISTRIBUTION CHANNELS
The Company began opening retail production offices in 1995 and, as of May
31, 1997, had 12 retail production offices in seven states (California,
Arizona, Colorado, Florida, Nevada, New Mexico and Oregon). The Company plans
to open additional offices at the rate of approximately three each quarter
during the remainder of 1997. The Company believes that the retail
consumer/direct channel is the Company's most profitable production channel and
is subject to less competitive pricing pressures than either the wholesale or
correspondent channel. As of May 31, 1997, the Company's broker network
included approximately 900 independent mortgage brokers located in 42 states
and its correspondent network included approximately 160 approved correspondent
lenders located in 27 states. The Company intends to continue to increase its
loan production from correspondent lenders and wholesale brokers by adding new
correspondents and brokers, by offering them a relatively new product to
diversify their existing product lines and by increasing the efficiency and
production of the correspondents and brokers that are a part of the Company's
existing network. The Company believes that its network of production channels,
emphasis on retail production and geographic diversity of loan production
provides it with a competitive advantage for increasing production of its core
loans.
INFORMATION SYSTEMS
The Company is developing a fully-integrated proprietary loan processing
system to monitor its underwriting process on a real-time basis to insure
consistent application of its underwriting procedures prior to funding. The
Company believes this enables it to process an increasingly greater number of
loans without degradation of its underwriting standards. In addition, the
Company has recently made a significant investment in its information systems
for its main office which are intended to enable it effectively to monitor,
audit and perform quality control review on loans. The Company continuously
reviews its technologies needs, and seeks to add additional applications as its
growth and operations require.
4
<PAGE>
MANAGEMENT
The Company has an experienced senior management team with an aggregate of
over 60 years in the lending business. The Company's management team is
particularly experienced in Fannie Mae and Freddie Mac eligibility
requirements, which are significantly focused on an evaluation of the
creditworthiness of borrowers and their ability to repay. In addition, the
Company's underwriting managers have an average of 16 years experience in the
consumer finance business and its branch managers have an average of 10 years
experience in the consumer finance business.
COMPANY EVOLUTION
Since commencing operations in 1989 as a mortgage broker (which were expanded
to include mortgage banking in 1994), the Company has focused on lending to
creditworthy borrowers. Until 1995, the Company primarily originated loans
meeting the underwriting guidelines of Freddie Mac and Fannie Mae. In late
1994, management believed that market conditions (primarily increasing
competition and higher interest rates) were reducing the profitability for
originators and purchasers of Freddie Mac and Fannie Mae eligible loans. As a
result, commencing in late 1994, the Company decided to expand its loan
products to include core loans. The Company believed that core loans offered a
greater profit margin than non-core loans and, due to the similar credit
characteristics and underwriting approach between core loans and the non-core
loans originated by the Company prior to 1995, permitted the Company to utilize
its existing expertise and personnel to expand its operations. The increasing
consumer demand for the Company's core loan product has substantially increased
the Company's operating revenues and profitability. From 1994 to 1996, the
Company's annual revenues increased from $867,000 to $27.2 million, and its net
earnings increased from $81,000 (or $48,000 on a pro forma basis adjusted for
taxes) to $7.1 million. For the three months ended March 31, 1997, the Company
recognized total revenues of $23.2 million and net income of $9.7 million.
RISK FACTORS
See "Risk Factors" for a description of certain factors which should be
considered carefully in evaluating an investment in the Common Stock offered by
this Prospectus.
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered....................... 5,000,000 shares
Common Stock to be outstanding
after the offering........................ 16,994,000 shares(1)
Use of Proceeds............................ To repay certain indebtedness,
fund overcollaterization
requirements of future
securitizations, fund loan
originations and acquisitions,
and for general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq National Market Symbol..... "PREF"
</TABLE>
- --------
(1) Excludes up to 3,412,310 shares of Common Stock issuable upon exercise of
outstanding options and warrants and 289,906 shares of Common Stock
reserved for issuance pursuant to options that may be granted in the future
under the Company's 1996 Stock Option Plan (the "Company's Stock Option
Plan" or the "1996 Plan"). See "Management--Stock Option Plan," "Shares
Eligible for Future Sale" and "Underwriting."
5
<PAGE>
SUMMARY FINANCIAL AND OTHER DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED MARCH
DECEMBER 31, 31,
-------------------- --------------
1994 1995 1996 1996 1997
----- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Revenues:
Gain on sale--net of origination
costs(1)................................ $ 447 $4,342 $19,054 $ 980 $18,967
Interest income.......................... 59 1,327 8,135 2,010 4,222
Other income............................. 361 -- -- -- --
----- ------ ------- ------ -------
Total revenues.......................... 867 5,669 27,189 2,990 23,189
Expenses:
Personnel................................ 201 864 3,576 553 1,050
Interest................................. 31 1,228 5,051 1,305 3,023
Provision for loan losses................ -- -- 840 -- --
General, administrative and other........ 552 1,319 4,934 589 2,413
----- ------ ------- ------ -------
Total expenses.......................... 784 3,411 14,401 2,447 6,486
----- ------ ------- ------ -------
Earnings before income taxes............... 83 2,258 12,788 543 16,703
Income taxes............................... 2 35 5,707 19 7,015
----- ------ ------- ------ -------
Net earnings(2)............................ $ 81 $2,223 $ 7,081 $ 524 $ 9,688
===== ====== ======= ====== =======
PRO FORMA(2):
Pro forma earnings before income taxes..... $ 83 $2,258 $12,788 $ 543 $16,703
Pro forma income taxes .................... 35 948 5,371 228 7,015
----- ------ ------- ------ -------
Pro forma net earnings..................... $ 48 $1,310 $ 7,417 $ 315 $ 9,688
===== ====== ======= ====== =======
Pro forma net earnings per share:
Primary and fully diluted(3)............. .01 .11 .49 .03 .64
===== ====== ======= ====== =======
Weighted average number of shares
outstanding:
Primary.................................. 6,000 11,994 15,179 11,994 15,179
===== ====== ======= ====== =======
Fully diluted............................ 6,000 11,994 15,188 11,994 15,188
===== ====== ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1997
----------------------- --------------------
1994 1995 1996 ACTUAL ADJUSTED(5)
------ ------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Mortgage loan held for sale,
net............................ $1,878 $30,020 $ 76,032 $ 93,496 $ 93,496
Residual interest in
securitization, net(4)......... -- -- 36,879 70,281 70,281
Total assets.................... 2,477 32,115 121,730 172,199 240,672
Short-term notes payable........ 1,838 28,549 88,136 109,080 109,080
Short-term residual financing... -- -- 14,258 27,407 --
Total liabilities............... 1,969 29,839 111,715 152,497 125,090
Total stockholders' equity...... 508 2,276 10,015 19,702 115,582
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
----------------- ------------------
1995 1996 1996 1997
-------- -------- ------------------
<S> <C> <C> <C> <C>
OPERATING DATA:
Core loans originated or acquired:
Retail/consumer direct................. $ -- $ 52,225 $ 2,232 $ 47,787
Wholesale.............................. 106,411 262,435 70,510 95,851
Correspondent.......................... -- 45,617 -- 107,161
Bulk acquisition(6).................... -- 135,979 -- --
======== ======== ======== =========
Total................................ $106,411 $496,256 $ 72,742 $ 250,799
======== ======== ======== =========
Non-core loans originated or acquired.... $ 87,172 $100,623 $ 40,128 $ --
======== ======== ======== =========
Core loans sold through securitization... $ -- $256,692 $ -- $ 230,571
======== ======== ======== =========
Core and non-core loans sold on whole
loan, servicing released basis.......... $165,401 $287,671 $ 59,310 $ 35
======== ======== ======== =========
Number of states where loans were
originated or acquired
(at period end)(7).................... 38 43
Number of branches (at period
end)(7)(8)............................ 10 10
</TABLE>
- --------
(1) Gain on sale includes net interest receivable from sales of asset backed
securities and whole loan sales, offset by selling expenses related to
securitization. See "Risk Factors--Possible Adverse Effect of Prepayments,
Delinquencies and Defaults" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Accounting Considerations
Used in Determining Gain on Sale."
(2) Prior to June 1996, the Company was operated as an S Corporation for
federal tax purposes and consequently was not responsible for federal
income taxes. Pro forma tax adjustments have been made to earnings and
provision for income taxes for periods that the Company was operated as an
S Corporation by applying an income tax rate of 42% to earnings before
income taxes. In 1996, the actual income tax of $5.7 million included
amounts that would have been deferred had the Company not elected a change
in tax status resulting in lower net earnings as compared to that under the
pro forma calculation.
(3) Pro forma earnings per share has been computed by dividing pro forma net
earnings by the pro forma weighted average number of shares outstanding.
The pro forma weighted average number of shares includes all options and
warrants issued below the estimated initial public offering price within
one year prior to the filing of the Registration Statement for the initial
public offering and is calculated using the treasury stock method.
(4) Residual interest in securitization includes $8.7 million in
overcollateralization and $45.0 million in net interest receivable, offset
by $16.8 million discounted estimate of default losses as of December 31,
1996, and $20.1 million in overcollateralization and $83.4 million in net
interest receivable, offset by $33.2 million discounted estimate of default
losses as of March 31, 1997.
(5) Adjusted to give effect to the exercise of Warrants to purchase 225,000
shares of Common Stock by Merrill Lynch at an exercise price per share of
$2.18 per share and the sale of 4,775,000 shares of Common Stock offered by
the Company hereby at an assumed public offering price of $21.50 per share
and the application of the estimated net proceeds therefrom. See "Use of
Proceeds" and "Capitalization."
(6) Represents a single bulk acquisition of core loans acquired from Credit
Suisse First Boston Mortgage Capital Corp. ("CSFB Mortgage"). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Certain Transactions."
(7) Data for the year ended December 31, 1995 and the three months ended March
31, 1996 are not comparable and have not been presented.
(8) Includes 8 retail branches, one correspondent branch in Arizona and one
wholesale branch within the Company's headquarters.
7
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating the Company and its
business before purchasing the shares of Common Stock offered hereby. This
Prospectus contains, in addition to historical information, forward-looking
statements that involve risks and uncertainties. The Company's actual results
or experience could differ significantly from those discussed in the forward-
looking statements. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section as well as
those discussed elsewhere in this Prospectus.
LIMITED OPERATING HISTORY; LACK OF SEASONING
The Company has a limited operating history upon which an evaluation of its
current operations and prospects can be based. Although the Company has been
involved in the origination of mortgage loans since 1989, it commenced
origination of its core loans in late 1994. In addition, the Company began its
securitization program in the second quarter of 1996. As a result, the
Company's historical results of operations, including its loss and prepayment
experience, may be of limited relevance to an investor seeking to evaluate the
Company's future prospects. Although the Company has experienced significant
growth in recent periods, there can be no assurance that the origination
levels, revenues or net earnings of the Company will continue to increase, or
even remain at their current level. Therefore, recent quarterly origination,
revenue and earnings comparisons should not be considered indicative of the
operating results or rate of growth, if any, that can be expected in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The loans originated and acquired by the Company and included in the
Company's securitizations have not been outstanding for a sufficient period of
time to determine whether there are material adverse credit, delinquency,
loss, prepayment or other issues associated with these loans. Furthermore, the
Company's loans represent a relatively new loan product within the consumer
finance industry and accordingly the Company cannot rely on the historical
experience of other companies issuing a comparable product. In addition, a
substantial portion of the income recognized by the Company during 1996
reflects its estimation of cash proceeds it expects to receive in the future
from securitization of its core loans. See "--Possible Adverse Effects of
Prepayments, Delinquencies and Defaults." Although the delinquency, prepayment
and loss experience of the Company's loans originated and acquired to date has
been relatively consistent with management's assumptions, no assurance can be
given that the delinquency, prepayment and loss experience of these loans will
remain consistent with management's assumptions and estimates. Any material
change in delinquencies, prepayments and losses from management's assumption
and estimates may adversely affect the Company's financial condition and
results of operations. The actual performance of such loans will not be known
until sometime in the future. See "--Credit Risk of Company's Products."
CREDIT RISK OF COMPANY'S PRODUCTS
Although the Company's core loans are secured by real estate, because of the
relatively high loan-to-value ("LTV") of the Company's loans, in most cases
the value of the underlying collateral will be less than the principal amount
of the loans, and effectively unsecured. The weighted average combined LTV
ratio of core loans securitized by the Company for the 1996-1, 1996-2, and
1997-1 securitization transactions were 90.61%, 110.19% and 115.80%,
respectively. Accordingly, in making underwriting decisions, the Company
relies principally on the creditworthiness of the borrower, rather than the
underlying collateral for repayment. Because of the relatively high combined
LTV ratios of the Company's core loans and the Company's position as a
subordinate lien holder with respect to the collateral underlying the
Company's loans, the Company is likely to incur a total loss in the event that
a customer defaults on its loan obligations to the Company or to the senior
lien holder.
Although the Company intends to sell substantially all of the loans which it
originates or acquires through securitization transactions or whole loan
sales, the Company retains some degree of credit risk on substantially
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all such loans sold. The documents governing the Company's securitization
transactions require the Company to establish levels of overcollateralization
through application of excess interest spread distributions in order to reduce
the principal balance of the senior interests issued by the trust that
acquires the loans. Such amounts serve as credit enhancement for the relevant
trust and are therefore available to fund losses realized on loans held by
such trust. In addition, when borrowers are delinquent in making monthly
payments on loans included in a trust, the servicer is required to advance
interest payments with respect to such delinquent loans to the extent that the
servicer deems such advances ultimately recoverable. If deemed not
recoverable, the loans will be charged off against the overcollaterization
account and to the extent there is a deficit in the overcollaterization
account, a claim could be made against the insurance company which then may
have a right to be reimbursed out of future cash flows otherwise payable to
the Company by the trust. As a result, the Company continues to be subject to
the risks of delinquency and loss following securitization to the extent that
anticipated excess interest spread distributions to the Company may be
required to be applied to fund the overcollateralization account, reimburse
the insurer or servicer or make distributions to the senior certificate
holders. If the losses required to be absorbed by the Company exceed the
Company's estimates of such losses, the Company could be required to write
down the value of its residual interest in securitization which could have a
material adverse effect on the Company's financial condition and results of
operations. In addition, a significant increase in non-performing loans could
trigger an acceleration of repayment obligations of principal outstanding
under the senior interests issued by the affected trusts, which would
materially adversely affect the Company's receipt of cash flows from its
residual interest in the securitization. See "Business--Loan Securitizations
and Sales."
The trustee and the monoline insurance company with respect to such
securitization will have recourse to the Company with respect to the breach of
representations or warranties made be the Company at the time such loans are
transferred. In connection with any such breach with respect to any loan, the
Company will be required either to (i) purchase such loans form the trust or
(ii) substitute such loan with a substantially similar one. While the Company
generally has recourse to the sellers of mortgage loans for any such breaches,
there can be no assurance of the sellers' abilities to honor their respective
obligations. Also the Company has in the past engaged and intends in the
future to engage in bulk whole loan sales pursuant to agreements that
generally provide for recourse by the purchaser against the Company in the
event of a breach of a representation or warranty made by the Company, any
fraud or misrepresentation during the loan origination process or upon early
default on such loans.
POSSIBLE ADVERSE EFFECT OF PREPAYMENTS, DELINQUENCIES AND DEFAULTS
The Company derives a substantial portion of its income by recognizing gains
upon sales of senior interests in loans through securitizations and records
its retained interest in its securitized loans (referred to as "residual
interest in securitization") in an initial amount equal to the present value
of the amounts it expects to receive over the life of the securitized loans.
At December 31, 1996 and March 31, 1997, the Company's balance sheet reflected
the present value of the residual interest in securitization as approximately
$36.9 million and $70.3 million, respectively. The calculation of gain on sale
and the valuation of the residual interest in securitization are based on
certain management estimates relating to the appropriate discount rate,
anticipated average lives and default loss expectations of the loans
securitized. The Company has utilized an effective discount rate, net of
estimated default losses, of between 13% and 16%. To estimate the anticipated
average lives of the loans sold in securitization transactions, management
estimates prepayment, default and interest rates on a pool-by-pool basis. The
Company believes its estimates and assumptions are consistent with those that
would be utilized by an unaffiliated third party purchaser and records the
residual interest in securitization as trading securities at fair value in
accordance with Statement of Financial Accounting Standards ("SFAS No.") 115,
"Accounting for Certain Debt and Equity Securities." See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Cash realization of the residual interest in securitization is subject to
the prepayment and default loss characteristics of the underlying loans and to
the timing and ultimate realization of the stream of cash flows associated
with such loans. In the event that pools of loans underlying any
securitizations by the Company experience a greater number of prepayments or
default losses than were anticipated and used by the Company in
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the valuation of the residual interest in securitization, future cash flows
and earnings would be negatively impacted. This risk is magnified due to the
lack of performance history available on the loans included in the Company's
securitizations. Thus, the Company's estimates and assumptions have been
tested only over a short period of time and there can be no assurances that
such estimates and assumptions will prove accurate, or even reasonable, in the
long term or that the Company will not be required to write down its residual
interest in securitization in the future. Any such writedown would be a charge
against earnings and could have a material adverse effect on the Company's
financial condition and results of operations.
ILLIQUIDITY OF RESIDUAL INTEREST IN SECURITIZATIONS
To the Company's knowledge, there is no active market for the sale of the
type of residual interest in securitization created by the Company's
securitizations. As a result, no assurance can be given that the residual
interest in securitization could be sold at its reported value, if at all. In
addition, the gains on sales of the senior interests are recognized in the
period during which loans are sold, while cash payments are received by the
Company over the lives of the securitized loans. This difference in the timing
of cash flows could cause a cash shortfall, which may have a material adverse
effect on the Company's financial condition and liquidity. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
NEGATIVE OPERATING CASH FLOW; DEPENDENCE ON FINANCING SOURCES
The Company's operating cash requirements currently exceed its cash flow.
While the Company is currently evaluating a number of different strategies to
reduce its cash needs, including modifying the structure of its securitization
transactions and increasing the volume of loans sold on a whole loan basis,
the Company anticipates that it may continue operating on a negative cash flow
basis as long as it continues to sell the majority of its loans through
securitization transactions. If the Company is unable or unwilling to
implement these or other strategies to satisfy its cash needs, the Company
will be dependent on its ability to access its warehouse and other credit
facilities, and to successfully complete debt and additional equity offerings,
to finance its cash requirements. The Company's primary cash requirements
include the funding of (i) loan originations and purchases, (ii) investment in
residual interest in securitizations, (iii) fees and expenses incurred in
connection with its securitization transactions, (iv) premiums paid to
correspondent lenders and wholesale brokers in connection with loan purchases
and loan acquisitions, (v) interest expense incurred on borrowings under its
warehouse facilities, (vi) income taxes, (vii) capital expenditures, and
(viii) other operating and administrative expenses. The Company generates cash
flow from loans sold through securitizations, whole loan sales, interest
income on loans held for sale, and loan fee income from originations. The
Company has also funded its cash requirements from borrowings under the
Company's existing credit facilities. The manner in which the Company disposes
of its loans will be based on many factors, including the demand for
securities collateralized by the Company's core loans, the prices at which the
Company can sell its loans on whole loan basis and the Company's ability to
access capital to finance securitization transactions at favorable rates. To
the extent the Company elects to continue to increase the volume of its
securitization transactions, the Company expects that its cash requirements
will continue to grow.
The Company's ability to implement its business strategy will depend upon
its ability to continue to effect securitizations, to sell its loans on a
whole loan basis on favorable terms, to establish alternative long-term
financing arrangements, to maintain sufficient financing under warehousing
facilities upon acceptable terms, and to access the public or private capital
markets in connection with the issuance of its equity or debt securities.
There can be no assurance that such financing will be available to the Company
on favorable terms, if at all. If such financing were not available or the
Company's capital requirements exceed anticipated levels, then the Company
would be required to obtain additional financing. The Company cannot presently
estimate the amount and timing of additional financing requirements because
such requirements are dependent upon, among other things, the growth of the
Company. If the Company were unable to raise such additional capital, its
results of operations and financial condition would be adversely affected. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition--Liquidity and Capital Resources."
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The Company is significantly dependent upon its access to credit facilities
in order to fund new originations and acquisitions of loans. A primary source
of funds for the Company consists of a whole loan repurchase facility with
CSFB Mortgage (the "First Boston Facility"), which was established in October
of 1996. Currently the First Boston Facility may be used to fund up to $200
million of loans (the "FB Warehouse Line") and to fund up to $30 million for
working capital and other cash requirements (primarily the funding of the
Company's overcollateralization requirements in conjunction with
securitizations and funding of premiums in conjunction with its correspondent
loan program) (the "FB Residual Line"). The FB Residual Line is secured by the
Company's interest in its residual interest in securitization. Currently the
Company has several other warehouse lines of credit, with a total combined
commitment amount of $190 million, all of which expire within the next 12
months. In total, the Company's current credit facilities provide the Company
with up to an aggregate of $390 million in financing for loan origination and
acquisition activities and up to approximately $30 million for other working
capital needs. The Company expects to be able to maintain existing credit
facilities and/or obtain replacement or additional financing as current
arrangements expire or become fully utilized; however, there can be no
assurance that such financing will be obtainable on favorable terms, or at
all. At December 31, 1996 and March 31, 1997, the Company had cash and cash
equivalents of approximately $4.6 million and $3.8 million, respectively, and
the net proceeds of this offering, along with the Company's current credit
facilities, are expected to be sufficient to fund the Company's liquidity
requirements for approximately 12 months. To the extent that the Company is
unable to retain its existing credit facilities or arrange new credit
facilities or successfully obtain additional debt or equity financing, the
Company will most likely have to curtail loan origination and acquisition
activities, which would have a material adverse effect on the Company's
financial position and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
DEPENDENCE ON SECURITIZATION TRANSACTIONS AND WHOLE LOAN SALES
In the second quarter of 1996, the Company implemented a securitization
program that involves the periodic pooling and sale of its core loans. The
securitization proceeds have been used to repay outstanding advances under its
existing warehouse financing credit facilities. Although the Company will not
complete a securitization in the second quarter of 1997, management currently
intends to continue to securitize a substantial portion of its core loans;
however, there can be no assurance that the Company will be able to securitize
its loan production efficiently, or at all. The Company believes that the
securitization market for assets such as its core loans is relatively
undeveloped and may be more susceptible to market fluctuations or other
adverse changes than more developed capital markets. Securitization
transactions may be affected by a number of factors, some of which are beyond
the Company's control, including, among other things, conditions in the
securities markets in general, conditions in the asset-backed securitization
market, performance of securitization pools backed by mortgage loans as well
as other forms of consumer debt and the conformity of loan pools to rating
agency requirements and, to the extent that monoline insurance is used, the
requirements of such insurers.
The Company's securitization transactions have utilized credit enhancements
in the form of financial guaranty insurance policies in order to achieve
AAA/Aaa ratings. There can be no assurance that the Company will be able to
obtain credit enhancement on acceptable terms for its future securitizations
or that any future securitizations will be similarly rated. Failure to obtain
acceptable rating agency ratings or insurance company credit enhancements
could decrease the efficiency or affect the pricing or timing of future
securitization transactions, thus resulting in the Company's need to conduct
whole loan sales or in losses being reported by the Company. A withdrawal of
credit enhancement could result in higher interest costs for future Company
securitizations. Such events could have a material adverse effect on the
Company's results of operations and financial condition.
In addition to its securitization transactions, the Company has in the past
and expects, depending upon existing cash needs and other factors, to sell
loans on a whole loan basis from time to time in the future. The Company
believes that a substantial portion of the existing investors for the
Company's core loans are acquiring such loans for the purpose of including the
loans in securitization transactions. In addition, the Company believes that
current demand for the core loans allows it to sell core loans at a
substantial premium. Any adverse change
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in the securitization market for the Company's core loans may result in a
substantial reduction in the number of investors in or the price or demand for
the Company's core loans, thereby impairing the Company's ability to sell core
loans on a favorable or timely basis. See "Business--Securitization."
UNDERWRITING STANDARDS
The Company considers the underwriting policy under which its core loans are
underwritten to be analogous to unsecured credit lending, rather than
collateral-based lending practices used in traditional mortgage lending.
Because the Company's underwriting decisions are based primarily on the
borrower's credit history and capacity to repay rather than on the potential
value of the underlying collateral, it is extremely important that the Company
appropriately evaluate the credit risk associated with each loan applicant. In
order to evaluate the creditworthiness of the loan applicants, the Company has
developed an underwriting system which is based, in part, on the borrower's
"FICO" credit score, as well as certain other qualitative and quantitative
factors. The FICO credit scoring method was developed by Fair Isaac and is an
evaluation of information contained in the borrower's credit bureau report,
including all reported payment and usage patterns of past and present credit
accounts as well as public records and inquires. Although the Company believes
that it is reasonable to use the FICO credit score to assist in the evaluation
of the creditworthiness of potential borrowers, FICO credit scores only
analyze the information contained in the borrower's credit bureau report which
could be incomplete or erroneous. Also, Fair Isaac only considers a FICO score
to be predictive of credit performance for a period of approximately two
years, which is significantly shorter than the estimated average duration of
the Company's loans of approximately 4.75 years and the typical contractual
maturity of the Company's loans of approximately 15 years. There can be no
assurance that the FICO credit score will accurately predict the actual future
creditworthiness of the borrower beyond a two year period or even within such
two year period. Additionally, because the Company's core loans are a
relatively new product in the consumer finance industry, data on the
relationship between FICO credit scores and the Company's core loans,
including loss estimates and performance data is not available.
In making credit decisions, the Company also relies on the debt-to-income
ratio of its borrowers, which is calculated on the basis that a borrower will
use the loan proceeds to repay or consolidate his or her current outstanding
indebtedness. However, after the borrower's loan has been funded and the
outstanding indebtedness has been consolidated, the Company is subject to the
risk that the borrower could incur substantial additional indebtedness or
suffer a decrease in income, thus increasing his or her debt-to-income ratio
and potential for default.
Additionally, many of the other factors utilized by the Company when
underwriting its loans are weighted in importance based on the Company's past
experience. Because of the Company's relatively short operating history, such
factors, or the weights given to such factors, are unproven. If the Company's
underwriting system proves to be unreliable in evaluating the current and
future creditworthiness of borrowers, the Company may be subject to higher
than expected losses on its securitization transactions. These risks may
become more acute in periods of economic downturn or recession. See
"Business--Underwriting."
ABILITY TO IMPLEMENT BUSINESS STRATEGY
The Company's ability to continue its growth depends on its ability to
increase the volume of loans it originates and acquires while successfully
managing its growth. In addition to being dependent on access to adequate
financing, this volume increase is dependent on the Company's ability to (i)
identify and offer attractive products to prospective borrowers, (ii) attract
and retain qualified underwriting, origination and other personnel, (iii)
market its products successfully, (iv) establish and maintain relationships
with independent correspondent lenders and wholesale brokers in states where
the Company is currently active and in additional states, and (v) procure,
maintain and manage increasingly larger credit facilities and other
indebtedness. In addition, because the Company's core loan product is
relatively new, it is not possible to predict with certainty whether
sufficient demand and acceptance from consumers will exist to permit the
Company to increase its core loan production levels as contemplated.
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In order to support the growth of its business, the Company will be required
to continue to implement and improve its operational, financial and management
information systems and controls, and maintain appropriate procedures,
policies and systems to ensure that the Company's loans have an acceptable
level of credit risk, while managing the costs associated with expanding its
infrastructure. The Company will also have to hire, train, motivate and manage
new employees, including management personnel, and integrate them into its
overall operations and culture. There can be no assurance that the Company
will be able to perform such actions successfully.
In addition, the growth experienced by the Company, and the corresponding
increased need for timely information, has placed significant demands on the
Company's existing accounting and management information systems. As a result,
the Company is upgrading these systems with the first priority being to
automate its correspondent lender operations and to further refine and
automate its underwriting system. The Company intends to continuously invest
in improving its financial systems and controls to facilitate expansion. The
Company's failure to manage growth effectively would have a material adverse
effect on the Company's results of operations and its ability to execute its
business strategy. In addition, the increase in personnel and systems will
require higher levels of administrative expense and capital investment. To the
extent that such expenditures do not result in corresponding revenue
increases, the Company's operating results will be adversely affected.
SENSITIVITY TO ECONOMIC CONDITIONS
General. The risks associated with the Company's business will likely
increase in any economic slowdown or recession. Periods of economic slowdown
or recession may be accompanied by employee layoffs, wage reductions and
declining real estate values, thereby further increasing the credit risk
inherent in the Company's core loan products. Further, delinquencies,
foreclosures and the frequency and severity of losses generally increase
during economic slowdowns or recessions. Because the Company's underwriting
decisions are based primarily on the borrower's ability and willingness to
repay and place limited importance on the potential value of the underlying
collateral, any sustained period of such increased delinquencies or
foreclosures will likely result in increased losses with respect to the
Company's loans. Any such increase in losses, or in losses in the consumer
finance industry in general, could increase the cost of securitizing and
selling loans in the secondary market or could adversely affect the Company's
ability to securitize or sell loans in the secondary market. Any sustained
period of such increased losses could cause a write down in the value of the
Company's residual interest in securitization and could have a material
adverse effect on the Company's results of operations and financial condition.
In addition, the Company bears certain fixed costs associated with its retail
branch offices, including lease payments, costs of equipment and personnel
expenses. In times of economic slowdown or recession, the volume of loans
originated from its retail branch offices may decrease without any
corresponding decrease in the Company's fixed operating costs.
Interest Rates. The Company's earnings may be directly affected by the level
of and fluctuations in interest rates which affect the Company's ability to
earn a spread between interest received on its loans and the costs of its
liabilities. While the Company monitors the interest rate environment and, to
the extent management believes necessary under the circumstances, employs a
strategy designed to hedge some of the risks associated with changes in
interest rates, no assurance can be given that the strategy will prevent an
adverse change in the earnings of the Company during any period of fluctuation
in interest rates. A significant increase in interest rates could curtail
demand for the Company's loans, or increase market pressure on the Company to
reduce origination fees or servicing spreads to offset the cost of higher
interest rates. The ultimate sale of the Company's loans will fix the spread
between the interest rates paid by borrowers and the interest rates paid to
investors in securitization transactions with respect to such loans, and in
times of rapidly increasing interest rates such spread may be narrower than
the spread that existed at the time the loans were originated or acquired by
the Company. In addition, since the interest rates on the Company's
indebtedness used to fund and acquire loans are variable and the rates charged
on loans the Company originates and acquires are fixed, increases in interest
rates after loans are originated and prior to their sale could have a material
adverse effect on the net interest income earned by the Company.
Alternatively, a significant decline in interest rates could result in
refinancing activity by the
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Company's borrowers, resulting in an increase in the level of loan
prepayments, thereby reducing the period of time during which the Company
receives income with respect to such prepaid loans and causing a write down in
the residual interest in securitization. Although an increase in interest
rates may reduce prepayment activity, such reduction may not offset the costs
of financing the Company's residual interest in securitization. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON SUBCONTRACTED SERVICING
The Company currently contracts with Advanta Mortgage Corp. USA ("Advanta")
for the servicing of all core loans it originates or acquires. This
arrangement allows the Company to increase the volume of loans it originates
and acquires without incurring the overhead investment associated with
servicing operations. The Company is subject to risks associated with the
provision of inadequate or untimely services by Advanta, in which event the
Company would have the right to terminate its servicing agreement with the
subservicer. The servicing agreement may also be terminated by either party
without cause upon 90 days notice. If the servicing agreement is terminated,
the Company would have to either locate an alternative subservicer or
establish internal servicing capabilities. In either case the servicing of the
Company's loans would be disrupted and delinquency levels would likely
increase. Additionally, no assurance can be given that the Company would be
able to enter into an alternative servicing arrangement on satisfactory terms
or, since the Company's product is relatively new, that there are other
subservicers capable of servicing the Company's product. Although the Company
periodically reviews the costs associated with establishing servicing
operations to service the loans it originates and acquires, it has no plans to
establish and perform servicing operations at this time. See "Business--Loan
Servicing and Delinquencies."
Recently, Advanta Corp., the parent of Advanta, issued a press release
announcing that it had retained an outside advisor to explore various business
strategies. The Company is unable to predict what effects, if any, these
developments will have on its relationship with Advanta, but it is possible
that certain of these business strategies may adversely impact the Company's
ongoing relationship with Advanta. To the extent there is a significant change
in Advanta's personnel or operating strategies, the Company may be forced to
re-evaluate its ongoing relationship with Advanta or seek other sources to
service its loans. If a new servicer were selected, the change in servicing
might result in greater delinquencies and losses on the loans serviced by
Advanta, which would adversely impact the value of the Company's residual
interest in securitization and have a corresponding material adverse impact on
the Company's results of operations and financial condition.
DEPENDENCE ON CORRESPONDENT LENDERS AND WHOLESALE BROKERS
The Company currently depends on correspondent lenders and wholesale brokers
for a substantial majority of its loan production. In 1996, approximately
14.5% of the Company's core loans were originated through correspondent
lenders and 72.8% through wholesale brokers (excluding a one-time bulk
purchase of $136.0 million of core loans), both of which are expected to
remain a significant part of the Company's overall loan production program for
the foreseeable future. As an acquiror of such loans, the Company is exposed
to competition from other acquirors of such loans, market conditions and other
factors. The Company's competitors also have relationships with the Company's
correspondent lenders and wholesale brokers and actively compete with the
Company in its efforts to expand its correspondent and broker networks.
Accordingly, the Company's success depends in large part on its continued
ability to offer its brokers and correspondents a comparably attractive
product and competitive compensation. To the extent that other acquirors
enter, or increase their activities in, the markets in which the Company
competes, competitive pressures may increase the Company's cost of acquiring
such loans or decrease the volume of loans produced through those channels, or
both. See "Business--Competition."
In addition, although the Company acquires and originates loans from a
variety of correspondent lenders and wholesale brokers, a significant portion
of the volume of the loans originated by the Company through wholesale brokers
has been concentrated among a relatively small number of wholesale brokers.
For the fiscal year ended December 31, 1996, and the three months ended March
31, 1997, the Company's top five wholesale
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brokers accounted for 60.7% and 53.8%, respectively, of the total volume of
loans originated by the Company through its wholesale production channel, and
the top wholesale broker accounted for 35.4% and 43.3% of all wholesale
production during these same periods. None of the Company's correspondents or
wholesale brokers are obligated to continue to do business with the Company.
Any significant reduction in the amount of loans available from these sources
could have a material adverse impact on total loan production by the Company,
with a consequent material adverse impact on the Company's results of
operations.
GEOGRAPHIC CONCENTRATION RISK
Approximately 65.4% of the core loans originated or acquired by the Company
during 1996 and 37.0% in the three months ended March 31, 1997 were secured by
residential properties located in California. Although the Company continues to
diversify its origination network in other regions of the country, the
Company's loan production is likely to remain concentrated in California for
the foreseeable future. Consequently, the Company's financial position and
results of operations have been and are expected to continue to be influenced
by general trends in the California economy and its residential real estate
market. The California economy has in the past and may in the future experience
slowdowns or recessions. In addition, California historically has been
vulnerable to certain risks of natural disasters, such as earthquakes and
erosion-caused mudslides, which are not typically covered by the standard
hazard insurance policies maintained by borrowers. Declines in the California
economy and uninsured disasters may adversely impact borrowers' ability to
repay loans made by the Company and the Company's ability to originate new
loans, which could have a material adverse effect on the Company's results of
operations and financial condition.
VARIABLE QUARTERLY RESULTS
The Company intends to complete a securitization transaction each quarter.
However, market and other considerations, including the conformity of loan
pools to monoline insurance company and rating agency requirements, could
affect the timing of such transactions. Any delay in the completion of a
securitization transaction beyond a quarter-end would postpone the recognition
of gain on sale related to such loans until their sale and would likely result
in losses for such quarter being reported by the Company.
COMPETITION
The consumer finance market is intensely competitive. The Company competes
with a number of finance companies that provide financing to individuals who
may not qualify for traditional financing. To a lesser extent, the Company
competes with commercial banks, savings and loan associations, credit unions,
insurance companies and captive finance arms of major manufacturing companies
that may apply more traditional lending criteria. Many of these competitors or
potential competitors are substantially larger and have significantly greater
name recognition, capital and other resources and lower borrowing costs than
the Company. To date, the Company believes that competition to originate loans
similar to the Company's core loans has been less intense than competition in
the more traditional consumer finance markets. However, the current level of
gains realized by the Company and its competitors on the sale of their loans is
attracting additional competitors into this market with the possible effect of
lowering the rates of interest and fees the Company can charge and thereby
lowering gains that may be realized on the Company's future loan sales. Certain
large national finance companies, commercial banks and conforming mortgage
originators have announced their intention to adapt their origination programs
and allocate resources to the origination of loans similar to the Company's
core loans. In the future, the Company may also face competition from
government-sponsored entities, such as Fannie Mae and Freddie Mac. The entrance
of these competitors into the Company's market could have a material adverse
effect on the Company's results of operations and financial condition.
GOVERNMENT REGULATION; LITIGATION
Members of Congress and government officials have from time to time suggested
the elimination of the mortgage interest deduction for federal income tax
purposes, either entirely or in part, based on borrower income, type of loan or
principal amount. Because some the Company's loans may be perceived by
consumers as having
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certain tax advantages which are not available from other forms of consumer
debt, the competitive advantages of tax deductible interest, when compared
with alternative sources of financing, could be eliminated or seriously
impaired by such government action. Accordingly, the reduction or elimination
of these tax benefits could have a material adverse effect on the demand for
loans of the kind offered by the Company.
The operations of the Company are subject to regulation by federal, state
and local government authorities, as well as to various laws and judicial and
administrative decisions, that impose requirements and restrictions affecting,
among other things, the Company's marketing activities, loan originations,
credit activities, maximum interest rates, finance and other charges,
disclosures to customers, the terms of secured transactions, servicing,
collection, repossession and claims-handling procedures, multiple
qualification and licensing requirements for doing business in various
jurisdictions, and other trade practices. Although the Company believes that
it is in compliance in all material respects with applicable local, state and
federal laws, rules and regulations, there can be no assurance that more
restrictive laws, rules or regulations will not be adopted in the future that
could make compliance more difficult or expensive, restrict the Company's
ability to originate, acquire or sell loans, further limit or restrict the
amount of interest and other charges earned on loans originated or acquired by
the Company, further limit or restrict the terms of loan agreements, or
otherwise adversely affect the business or prospects of the Company.
Class-action lawsuits have been filed against a number of mortgage lenders
alleging that such lenders have violated the Federal Real Estate Settlement
Procedures Act ("RESPA") or comparable state disclosure laws by making certain
payments to independent mortgage brokers. These lawsuits have generally been
filed on behalf of a purported nationwide class of borrowers and allege that
payments made by a lender to a broker in addition to payments made by the
borrower to a broker are prohibited by RESPA or comparable state disclosure
laws, and are therefore illegal. If these cases are resolved against the
lenders, it may cause an industry-wide change in the way independent mortgage
brokers are compensated. The Company's broker compensation programs permit
such payments. Future regulatory interpretations or judicial decisions may
require the Company to change its broker compensation programs or subject it
to material monetary judgments or other penalties. Any such changes or
penalties may have a material adverse effect on the Company's results of
operations, financial condition and business prospects. See "Business--
Regulation."
Industry participants are frequently named as defendants in litigation
(including class action lawsuits) by both private litigants and government
agencies involving alleged violations of federal and state consumer lending
laws and regulations, breaches of fiduciary obligations, misrepresentations
and errors and omissions of employees and officers of the Company, as a result
of the consumer-oriented nature of the industry in which the Company operates
and uncertainties with respect to the application of various laws and
regulations in certain circumstances. The Company believes that liability with
respect to any currently asserted claims or legal actions is not likely to be
material to the Company; however, any claims asserted in the future may result
in legal expenses or liabilities which could have a material adverse effect on
the Company. See "Business--Regulation" and "--Legal Proceedings."
DEPENDENCE ON KEY PERSONNEL
The Company's success has and will continue to depend to a significant
extent upon certain key management personnel, many of whom would be difficult
to replace, particularly Messrs. Rodriguez, Villaume and Wolfe. In addition,
the First Boston Facility is cancelable should Mr. Rodriguez cease to be
employed by the Company. Although the Company has entered into employment
agreements with these key personnel, there can be no assurance that such
employees will continue to be available to the Company. See "Business--
Employees" and "Management."
CONTROL BY EXISTING STOCKHOLDERS
Upon consummation of this offering, the Company's officers and directors
(and their affiliates), will beneficially own approximately 70% of the
Company's outstanding shares. As a result, these stockholders will be able to
control the Company and its operations, including the election of all of the
directors and thus, the
16
<PAGE>
policies of the Company and to approve significant corporate transactions
involving the Company such as mergers and other business combinations. The
voting power of these stockholders could also serve to discourage potential
acquirors from seeking to acquire control of the Company through the purchase
of the Common Stock. See "Management," "Principal and Selling Stockholders"
and "Description of Capital Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION
The purchasers of Common Stock will sustain immediate dilution of $14.70 per
share based on the net tangible book value of the Company at March 31, 1997 of
$1.64 per share and an assumed initial public offering price of the shares of
Common Stock offered hereby of $21.50 per share. If all outstanding warrants
and options to purchase Common Stock were exercised, the dilution to
purchasers of Common Stock in this offering would increase to $15.34 per
share. See "Dilution."
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock. The public offering price of the shares of Common Stock has been
determined by negotiations between the Company and the Underwriters and may
not necessarily be reflective of the prices at which the Common Stock will
trade after completion of the offering. The trading price of the Common Stock
could be subject to wide fluctuations in response to quarter to quarter
variations in operating results, news announcements relating to the Company's
business, changes in financial estimates by securities analysts, the operating
and stock price performance of other companies that investors may deem
comparable to the Company as well as other developments affecting the Company
or its competitors. In addition, the market for equity securities in general
is often volatile and the trading price of the Common Stock could be subject
to wide fluctuations in response to general market trends, changes in general
conditions in the economy, the financial markets or the financial services
industry and other factors which may be unrelated to the Company's
performance. There can be no assurance that the shares offered hereby will
trade at market prices in excess of the initial public offering price.
Although the Company has applied for approval for listing of the Common Stock
on the Nasdaq National Market, there can be no assurance that an active
trading market for the Common Stock will develop as a result of this offering
or, if a trading market does develop, that it will continue. In the absence of
such a market, investors may be unable readily to liquidate their investment
in the Common Stock. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of Common Stock by existing stockholders or the availability of
such shares for sale could adversely affect the prevailing market price of the
Company's Common Stock and the Company's ability to raise capital in the
equity markets. Upon completion of this offering, the Company will have
16,994,000 shares of Common Stock outstanding. Of these shares, the 5,000,000
shares of Common Stock offered hereby (5,750,000 if the Underwriters' over-
allotment option is exercised in full) will be freely tradeable without
restriction or further registration under the Securities Act of 1933, as
amended (the "Securities Act"), unless purchased by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act ("Rule
144"). The remaining 11,994,000 shares of Common Stock outstanding are
"restricted shares," as that term is defined by Rule 144, or otherwise subject
to volume limitations of Rule 144 because they are held by affiliates of the
Company and all of these shares are also subject to lock-up agreements. The
Company, and its executive officers, directors and certain stockholders have
agreed that they will not, directly or indirectly, sell, assign or otherwise
transfer any shares of Common Stock owned by them for a period of 180 days
after the effective date of this Prospectus, without the prior written consent
of Keefe, Bruyette & Woods, Inc. (subject to certain exceptions in the case of
the Company). Upon expiration of the lock-up agreements, 11,994,000 shares of
Common Stock will become eligible for sale, subject to compliance with the
volume limitations and manner of sale requirements of Rule 144. See "Shares
Eligible for Future Sale" and "Underwriting."
17
<PAGE>
In addition to the shares that will be outstanding after this offering,
1,995,054 shares of Common Stock will be issuable upon exercise of outstanding
warrants at a weighted average exercise price of $2.21 per share and 1,417,256
shares of Common Stock will be issuable upon exercise of outstanding options
at a weighted average exercise price of $1.95 per share. The warrants are
currently exercisable with respect to 1,963,438 shares of Common Stock and the
options are currently exercisable with respect to 733,356 shares of Common
Stock.
After this offering, the holders of approximately 1,947,630 shares of Common
Stock issuable upon exercise of warrants will have the right, subject to the
lock-up agreements referred to above, to require the Company to register their
shares of Common Stock under the Securities Act, which would permit such
holders to resell shares without complying with Rule 144. Registration and
sale of such shares could have an adverse effect on the trading price of the
Common Stock. See "Description of Capital Stock--Registration Rights."
The Company intends to file a registration statement under the Securities
Act following the completion of this offering to register the shares of Common
Stock reserved for issuance pursuant to the 1996 Plan. This registration
statement will become effective immediately upon filing. As of June 15, 1997,
options to purchase 1,417,256 Common Stock had been granted under the 1996
Plan, none of which had been exercised. See "Management--Stock Option Plan."
The availability for sale, as well as actual sales, of currently outstanding
shares of Common Stock, and shares of Common Stock issuable upon the exercise
of options and warrants, may adversely affect the prevailing market price for
the Common Stock and could adversely affect the terms upon which the Company
would be able to obtain additional equity financing.
EFFECT OF CERTAIN CHARTER PROVISIONS AND NEVADA LAW
Certain provisions of the Company's Articles of Incorporation (the "Articles
of Incorporation") and Bylaws (the "Bylaws") and the Nevada General
Corporation Law could delay or frustrate the removal of incumbent directors
and could make more difficult for another company to consummate a merger,
tender offer or proxy contest involving the Company, even if such events were
viewed as beneficial by the Company's stockholders. The Company is subject to
provisions of the Nevada General Corporation Law that prohibit a publicly held
Nevada corporation from engaging in a broad range of business combinations
with a person who, together with affiliates and associates, owns 10% or more
of the corporation's outstanding voting shares (an "interested stockholder")
for three years after the person became an interested stockholder, unless the
business combination is approved in a prescribed manner.
18
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from this offering, at an assumed offering
price of $21.50 per share and after deducting the estimated underwriting
discounts and offering expenses, are estimated to be approximately $95.4
million.
The net proceeds will be applied as follows: (i) approximately $27.4 million
of these net proceeds to repay all of the indebtedness expected to be
outstanding under the FB Residual Line at the closing of this offering and
(ii) approximately $52 million to fund the costs of its securitizations
(primarily the costs of overcollateralization) that are completed after the
date of this offering.
The Company expects to use the balance of the net proceeds to acquire loans
from correspondent lenders and wholesale brokers, to open new retail branches
and for general corporate purposes, including, upgrading its management
information systems and marketing expenses. The Company has not determined the
specific amounts it plans to expend on each of the uses set forth above or the
timing of such expenditures. Pending such uses, the Company intends to invest
the net proceeds from this offering in short-term, investment grade, interest
bearing securities.
The FB Residual Line bears interest payable based on the 30-day LIBOR rate.
Advances under the FB Residual Line have been primarily used to finance the
Company's residual interest in securitizations. The FB Residual Line expires
on December 31, 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has never paid dividends and has no current intention to pay
dividends on its Common Stock following this offering. The Company intends to
follow a policy of retaining earnings to finance the growth of its business.
Additionally, several of the Company's current credit facilities limit or
prohibit the payment of dividends unless certain conditions are satisfied. Any
future determination to pay dividends will be at the discretion of the Board
of Directors of the Company (the "Board") and will be dependent on the
Company's results of operations, financial condition, contractual and legal
restrictions and other factors deemed relevant by the Board at that time.
19
<PAGE>
DILUTION
The net tangible book value of the Company's Common Stock as of March 31,
1997, was $19.7 million or $1.64 per share. Net tangible book value per share
is equal to the total tangible assets of the Company, less total liabilities,
divided by the number of shares of Common Stock outstanding. After giving
effect to the sale of the 4,775,000 shares offered by the Company hereby (at
an assumed initial offering price of $21.50 per share) and assuming net
proceeds to the Company of $95.4 million (after deducting underwriting
discounts and commissions and estimated offering expenses) and the exercise of
warrants to purchase an aggregate 225,000 shares of Common Stock by Merrill
Lynch Mortgage Capital, Inc. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated (collectively referred to as "Merrill Lynch") at an exercise
price of $2.18 per share, the net tangible book value for the Company's Common
Stock as of March 31, 1997, would have been $115.6 million, or $6.80 per
share. This represents an immediate increase in net tangible book value of
$5.16 per share to existing shareholders and an immediate dilution of $14.70
per share to new investors purchasing shares in this offering. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial offering price................................. $21.50
Net tangible book value per share as of March 31, 1997....... $1.64
Increase attributable to new investors....................... 5.16
-----
Net tangible book value per share after the offering........... 6.80
------
Dilution to new investors...................................... $14.70
======
</TABLE>
The following table summarizes, with respect to existing holders of Common
Stock and new investors, a comparison of the number of shares of Common Stock
acquired from the Company, the percentage ownership of such shares, the total
consideration, the percentage of total consideration and the average price per
share.
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK ACQUIRED TOTAL CONSIDERATION
------------------ -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Officers and directors.. 11,994,000 70.6% $ 2,073,400 1.9% $ 0.17
New investors(1)........ 5,000,000 29.4 107,500,000 98.1 21.50
---------- ----- ------------ ---- ------
16,994,000 100.0% $109,573,400 100% $ 6.45
========== ===== ============ ==== ======
</TABLE>
- --------
(1) If the Underwriters' over-allotment option is exercised in full, the
number of shares held by new investors after this offering will increase
to 5,750,000, or 32.4% of the total shares of Common Stock to be
outstanding after this offering and the percentage of outstanding shares
held by officers and directors will decrease to 67.6%.
The foregoing tables and calculations assume no exercise of outstanding
options and warrants, other than the exercise by Merrill Lynch of warrants to
purchase 225,000 shares of Common Stock at an exercise price of $2.18 per
share. At the date of this Prospectus, 1,417,256 shares of Common Stock were
issuable upon exercise of outstanding options at a weighted average exercise
price of $1.95 per share and 1,995,054 shares of Common Stock were issuable
upon exercise of outstanding warrants at a weighted average exercise price of
$2.21 per share. If all of the currently exercisable options and warrants are
exercised, an additional 2,696,794 shares would be issued and the dilution to
new investors would increase to $15.34 per share.
20
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1997 and as adjusted to give effect to the exercise of warrants to
purchase 225,000 shares of Common Stock by Merrill Lynch at an exercise price
per share of $2.18 per share and the sale of the 4,775,000 shares of Common
Stock offered by the Company hereby (at an assumed offering price of $21.50
per share) and the application of the estimated net proceeds therefrom (after
deducting underwriting discounts and commissions and estimated offering
expenses). See "Use of Proceeds." This table should be read in conjunction
with the Financial Statements and related Notes contained therein and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN
THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Short term debt:
Short-term notes payable................................. $109,080 $109,080
Short-term residual financing............................ 27,407 --
-------- --------
Total short term debt..................................... $136,487 $109,080
-------- --------
Stockholders' equity:
Preferred stock, par value $0.001 per share, 10,000,000
shares authorized; none outstanding...................... $ -- $ --
Common stock, par value $0.001 per share, 50,000,000
shares authorized; 11,994,000 outstanding (16,994,000 as
adjusted)(1)............................................. 1 16
Additional paid-in capital................................ 2,072 97,937
Retained earnings......................................... 17,629 17,629
-------- --------
Total stockholders' equity.............................. 19,702 115,582
-------- --------
Total capitalization.................................. $156,189 $224,662
======== ========
</TABLE>
- --------
(1) Excludes an aggregate of 3,412,310 shares of Common Stock issuable upon
exercise of outstanding options and warrants. See "Management--Stock
Option Plan" and "Description of Capital Stock--Warrants."
21
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below under the captions "Statement of
Earnings Data" and "Balance Sheet Data" for, and as of the end of, each of the
years in the three-year period ended December 31, 1996, are derived from the
financial statements of Preferred Credit Corporation, which financial
statements have been audited by KPMG Peat Marwick LLP, independent auditors.
The selected financial data presented below under the captions "Statement of
Earnings Data" and "Balance Sheet Data" for, and as of the end of, each of the
years in the two-year period ended December 31, 1993, are derived from the
financial statements of Preferred Credit Corporation, which financial
statements have been audited by other auditors. The selected financial data
presented below under the captions "Statement of Earnings Data" and "Balance
Sheet Data" for the three-month periods ended March 31, 1997 and 1996, and as
of March 31, 1997, are derived from unaudited financial statements of
Preferred Credit Corporation included elsewhere in this prospectus. The
financial statements as of December 31, 1996 and 1995, and for each of the
years in the three-year period ended December 31, 1996, and the report
thereon, are included elsewhere in this prospectus. Such selected financial
data should be read in conjunction with those financial statements and the
Notes thereto and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" also included elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- --------------
1992 1993 1994 1995 1996 1996 1997
----- ----- ----- ------ ------- ------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Revenues:
Gain on sale--net of
origination costs(1)......... $ -- $ -- $ 447 $4,342 $19,054 $ 980 $18,967
Interest income............... 2 6 59 1,327 8,135 2,010 4,222
Other income(2)............... 422 765 361 -- -- -- --
----- ----- ----- ------ ------- ------ -------
Total revenues................ 424 771 867 5,669 27,189 2,990 23,189
Expenses:
Personnel..................... 76 167 201 864 3,576 553 1,050
Interest...................... -- -- 31 1,228 5,051 1,305 3,023
Provision for loan losses..... -- -- -- -- 840 -- --
General, administrative and
other........................ 138 229 552 1,319 4,934 589 2,413
----- ----- ----- ------ ------- ------ -------
Total expenses................ 214 396 784 3,411 14,401 2,447 6,486
----- ----- ----- ------ ------- ------ -------
Earnings before income taxes... 210 375 83 2,258 12,788 543 16,703
Provision for income taxes..... 6 9 2 35 5,707 19 7,015
----- ----- ----- ------ ------- ------ -------
Net earnings(3)................ $ 204 $ 366 $ 81 $2,223 $ 7,081 $ 524 $ 9,688
===== ===== ===== ====== ======= ====== =======
PRO FORMA(3):
Pro forma earnings before
income taxes.................. $ 210 $ 375 $ 83 $2,258 $12,788 $ 543 $16,703
Pro forma income taxes......... 88 158 35 948 5,371 228 7,015
----- ----- ----- ------ ------- ------ -------
Pro forma net earnings......... $ 118 $ 217 $ 48 $1,310 $ 7,417 $ 315 $ 9,688
===== ===== ===== ====== ======= ====== =======
Pro forma net earnings per
share(4):
Primary....................... -- -- .01 .11 .49 .03 .64
===== ===== ===== ====== ======= ====== =======
Fully diluted................. -- -- .01 .11 .49 .03 .64
===== ===== ===== ====== ======= ====== =======
Weighted average number of
shares outstanding:
Primary....................... 6,000 6,000 6,000 11,994 15,179 11,994 15,179
===== ===== ===== ====== ======= ====== =======
Fully diluted................. 6,000 6,000 6,000 11,994 15,188 11,994 15,188
===== ===== ===== ====== ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1997
--------------------------------- -----------------------
1992 1993 1994 1995 1996 ACTUAL AS ADJUSTED(6)
---- ---- ------ ------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Mortgage loan held for
sale, net............. $-- $-- $1,878 $30,020 $ 76,032 $ 93,496 $ 93,496
Residual interest in
securitization,
net(5)................ -- -- -- -- 36,879 70,281 70,281
Total assets........... 250 516 2,477 32,115 121,730 172,199 240,672
Short-term notes
payable............... 6 -- 1,838 28,549 88,136 109,080 109,080
Short-term residual
financing............. -- -- -- -- 14,258 27,407 --
Total liabilities...... 15 10 1,969 29,839 111,715 152,497 125,090
Total stockholders'
equity................ 235 506 508 2,276 10,015 19,702 115,582
</TABLE>
22
<PAGE>
- --------
(1) Gain on sale of loans includes net interest receivable from sales of asset
backed securities and whole loan sales, offset by selling expenses related
to securitization. See "Risk Factors--Possible Adverse Effect of
Prepayments, Delinquencies and Defaults" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Accounting
Considerations Used in Determining Gain on Sale."
(2) Prior to 1994, the Company operated as a mortgage broker and received
broker commissions for its origination of mortgage loans.
(3) Prior to June 1996, the Company was operated as an S Corporation for
federal tax purposes and consequently was not responsible for federal
income taxes. Pro forma tax adjustments have been made to earnings and
provision for income taxes for periods that the Company was operated as an
S Corporation by applying an income tax rate of 42% to earnings before
income taxes. In 1996, actual income tax of $5.7 million included amounts
that would have been deferred had the Company not elected a change in tax
status resulting in lower net earnings as compared to that under the pro
forma calculation.
(4) Pro forma earnings (loss) per share has been computed by dividing pro
forma net earnings by the pro forma weighted average number of shares
outstanding. The pro forma weighted average number of shares includes all
options and warrants issued below the estimated initial public offering
price within one year prior to the filing of the Registration Statement
for the initial public offering and is calculated using the treasury stock
method.
(5) Residual interest in securitization includes $8.7 million in
overcollateralization and $45.0 million in net interest receivable, offset
by $16.8 million discounted estimate of default losses as of December 31,
1996, and $20.1 million in overcollaterization and $83.4 million in net
interest receivable, offset by $33.2 million discounted estimate of
default losses as of March 31, 1997.
(6) Adjusted to give effect to the exercise of warrants to purchase 225,000
shares of Common Stock by Merrill Lynch at an exercise price per share of
$2.18 per share and the sale of 4,775,000 shares of Common Stock offered
by the Company hereby at an assumed public offering price of $21.50 per
share and the application of the estimated net proceeds therefrom. See
"Use of Proceeds" and "Capitalization."
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the preceding
Selected Financial Data, the Company's Financial Statements and the Notes
thereto and the other financial data included elsewhere in this Prospectus.
GENERAL
Preferred Credit Corporation is a specialized consumer finance company
primarily engaged in the origination, purchase, sale and securitization of
non-traditional consumer loans, substantially all of which are loans secured
primarily by second liens on real property. The Company concentrates its
efforts on lending to borrowers with above average to superior credit, and who
have limited or no equity value in their primary residence. The Company sells
its core loans primarily through its securitization program or, to a lesser
extent, on a whole loan servicing released basis. For the year ended December
31, 1996 and the three months ended March 31, 1997, respectively, the Company
originated and purchased $360.3 million and $250.8 million of core loans
through its established production channels, securitized an aggregate of
$256.7 million ($136.0 million of such loans were acquired in a one-time bulk
transaction in December 1996) and $230.6 million of core loans and sold an
aggregate of $176.4 million and $35,000 to third-party investors on a whole
loan basis. Strategically, while the Company expects to continue to consider
opportunities to sell whole loans on a selected basis and, to the extent the
Company is able to obtain additional credit facilities, and possibly hold
loans for sale over an extended period, the Company currently expects to
continue to securitize a substantial majority of its core loans. The Company
also originates first lien mortgage loans, or non-core loans, which are
transferred or sold to third party lenders. Non-core loan originations were
$100.6 million and $87.2 million for the years ended December 31, 1996 and
1995, respectively. The Company did not fund any non-core loans during the
three months ended March 31, 1997. The Company expects that the volume of non-
core loans it originates will continue to constitute an insignificant portion
of its overall loan production in the future as the Company focuses its
efforts and resources on originating and purchasing core loans.
ACCOUNTING CONSIDERATIONS
As a fundamental part of its business and financing strategy, the Company
began in June 1996 to sell its core loans in securitization transactions. In a
securitization transaction, loans originated and purchased by the Company are
sold to an independent entity, which may be a REMIC, grantor or owner trust.
The trust holds the loans for third party investors and appoints an approved
servicer (currently Advanta) to service the loans. At the closing of each
securitization, the Company removes from its balance sheet the loans held for
sale and adds to its balance sheet (i) cash received (net of securitization
costs), and (ii) the estimated fair value of the portion of loans retained
which consists primarily of the "residual interest in securitization" or
"residual." The residual consists of the Company's rights in the
overcollateralization account established in connection with the
securitization and a net interest receivable ("NIR"). The excess of the assets
retained by the Company over the carrying value of the loans sold (which
includes the Company's cost to acquire such loans) equals the gain on sale
recorded by the Company. The Company allocates its basis in the loans between
the portion of the loans sold and the portion retained (residual) based on the
relative fair values of those portions on the date of the sale. The Company
may recognize unrealized gains or losses attributable to the change in the
fair value of the residual, which are recorded at estimated fair value and
accounted for as "held-for-trading" securities.
Because the Company is not aware of an active market for the purchase or
sale of residuals the Company estimates the fair value of the residuals by
calculating the present value of the estimated expected future cash flow. In
order to determine the present value of these estimated cash flows, the
Company currently applies a market discount rate which it believes is
consistent with the risks involved. The Company has utilized an effective
discount rate of between 13% and 16%.
24
<PAGE>
The NIR represents the Company's right to receive excess cash flows
generated by the securitized loans and is calculated as the amount by which
the weighted average coupon on the loans sold exceeds the sum of (i) the
coupon on the senior interests, (ii) a base servicing fee paid to servicer of
the loans, (iii) expected default losses to be incurred on the portfolio of
loans sold over the lives of the loans, (iv) insurance expenses, if
applicable, and (v) other expenses. The significant assumptions used in
determining the fair value of their estimated cash flows are closely related
to the anticipated average lives of the loans sold and the anticipated default
losses. The Company estimates prepayments by evaluating the characteristics of
the Company's loans, historical prepayment performance of comparable loans and
the impact of trends in the industry. The Company's prepayment estimates have
resulted in estimated average lives of its mortgage loans of approximately
five years.
The Company estimates default losses using available historical loss data
for comparable loans and the specific characteristics of the loans purchased
or originated by the Company. The Company estimates that cumulative default
losses as a percentage of the original principal balance will total
approximately 9.6%. On the basis of the performance data currently available
to the Company regarding these loans, management believes that the Company's
default loss assumptions are reasonable.
The Company's right to receive the net cash flows represented by the NIR
begins after certain overcollateralization requirements have been met, which
are specific to each securitization transaction and are used for purposes of
credit enhancement. This credit enhancement requirement may be met through an
initial cash deposit at the closing of the securitization transaction and may
include subsequent increases in the account generated from excess cash flows.
The overcollateralization requirement is fixed at a predetermined level by the
monoline insurance company and security rating agency on the basis of the
principal balance of the senior interests. These levels can be increased in
the event delinquencies and or losses exceed certain specified targeted
levels. To the extent that cash in excess of the predetermined levels is
generated, such cash is distributed to the Company. The Company is not
required to fund any deficiencies in the required overcollateralization
account levels from its own cash flows.
As of December 31, 1996, the Company's residual interest in securitization
included $8.7 million in over-collateralization, $45.0 million in net interest
receivable, offset by a discounted allowance for default losses of $16.8
million (or approximately 37.3% of the net interest receivable recognized). As
of March 31, 1997, the Company's residual interest in securitization included
$20.1 million in over-collateralization, $83.4 million in net interest
receivable, offset by a discounted allowance for default losses of $33.2
million (or approximately 39.8% of the net interest receivable recognized).
The Company records its loans held for sale at the lower of cost or market.
The Company typically acquires wholesale and correspondent loans at a premium,
which is not paid in connection with the origination of retail/consumer direct
loans. Any premiums paid in connection with the Company's loan acquisition
activity increases the Company's cost basis in such loans.
There can be no assurance that the Company's estimates, or the information
utilized by the Company to formulate its estimates, in calculating its gain on
sale and residual interest in securitization will accurately reflect the
actual performance of the Company's residuals over the life of each
securitization.
25
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31,
1996
Revenues
Total revenues increased $20.2 million or 675.6% from $3.0 million for the
three months ended March 31, 1996 to $23.2 million for the three months ended
March 31, 1997. The increase in revenue was primarily the result of
significant increases in the Company's overall loan origination volume (from
approximately $113 million to approximately $251 million) and increases in net
gain on sale of loans through securitization (the Company did not engage in
securitization transactions during the three months ended March 31, 1996). The
following table sets forth components of the Company's revenues for the three
months ended March 31, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------
1996 1997
------- --------
<S> <C> <C>
Gain on sale, net of origination costs................... $ 980 $ 18,967
Interest Income.......................................... 2,010 4,222
</TABLE>
Net Gain on sale increased $18.0 million or 1835.4% from approximately $1.0
million during the three months ended March 31, 1996 to approximately $19.0
million during the three months ended March 31, 1997. During the three months
ended March 31, 1997, all of the Company's loans were sold in securitization
transactions. The Company securitized and sold $230.6 million of core loans
during the three months ended March 31, 1997 and sold $29.1 million of loans
on a whole loan basis during the three months ended March 31, 1996. The
following table sets forth certain data with respect to the securitizations
completed by the Company during the three months ended March 31, 1997.
<TABLE>
<CAPTION>
1997-
1996-2AB(1) 1(2) TOTAL
----------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loans sold.................................... $69,877 $154,226 $224,226
Overcollateralization......................... 1,698 4,770 6,345
------- -------- --------
Total loans securitized..................... $71,575 $158,996 $230,571
======= ======== ========
NIR........................................... $12,664 $ 28,276 $ 40,940
Unrealized holding gains--trading securities.. -- 621 621
Cost on sale of securities.................... (769) (6,031) (6,800)
Discounted allowance for default losses....... (4,586) (11,070) (15,656)
------- -------- --------
Net gain on sale of loans..................... $ 7,309 $ 11,796 $ 19,105
======= ======== ========
Net gain on sale of loans as a % of total
loans securitized and sold(3)(4)............. 10.2% 7.4% 8.3%
Weighted average coupon (WAC) rate............ 13.51% 13.91% 13.78%
Weighted average pass through rate on senior
certificates................................. 6.84% 7.27% 7.14%
Weighted average maturity of certificates sold
(years)...................................... 4.37 4.54 4.49
Weighted average FICO score................... 679 672 674
Percentage of loans originated through:
Retail/consumer direct...................... 22.5% 18.0% 19.4%
Wholesale brokers........................... 43.5% 35.8% 38.2%
Correspondent lenders....................... 34.0% 46.2% 42.4%
</TABLE>
- --------
(1) Reflects pre-funded portion of securitization, the larger portion of which
was completed during the three months ended December 31, 1996.
(2) $154.2 million of the $200.0 million securitization was funded during the
three months ended March 31, 1997.
26
<PAGE>
(3) Combined with the larger portion of the securitization completed during the
three months ended December 31, 1996, the net gain after provision for loan
losses as a percentage of total loans securitized and sold would be 6.7%.
(4) Cost on sale of securities includes in part fixed transaction costs
associated with the initial issuance of securities in the securitization
transaction. As a result, the Company typically records greater overall
transaction costs at the time of the initial settlement than the costs
associated with the subsequent delivery of loans in connection with the
satisfaction of the Company's pre-funding obligations.
The following table summarizes activity in residual interests in
securitization at March 31, 1997 (in thousands):
<TABLE>
<CAPTION>
DISCOUNTED
ALLOWANCE
FOR
DEFAULT NIR,
NIR LOSSES NET
------- ---------- -------
<S> <C> <C> <C>
Balance, December 31, 1996.................. $45,010 $(16,835) $28,175
NIR recognized.............................. 41,562 (15,656) 25,906
Additions to discounted allowance for
default losses............................. -- (2,060) (2,060)
Amortization................................ (3,200) 1,350 (1,850)
------- -------- -------
$83,372 $(33,201) $50,171
======= ======== =======
</TABLE>
At March 31, 1997, the Company included in its trading portfolio the residual
interests in securitization, and recorded $621,000 in unrealized holding gains
which was included in NIR recognized.
Net gain on sale of loans recognized during the three months ended March 31,
1997 consisted of the following components (in thousands):
<TABLE>
<S> <C>
Gain from loan sale through securitization........................ $25,285
Unrealized gain on held for trading securities.................... 621
Cost on sale of securities, net................................... (6,800)
Other............................................................. 111
Provision for losses.............................................. (250)
-------
$18,967
=======
</TABLE>
The Company funded $40.1 million and $0 in non-core loans during the three
months ended March 31, 1996 and March 31, 1997, respectively.
During the first quarter of 1997, the Company recorded as a reduction to net
gain on sale of loans $250,000 in general loan loss allowance for non-core
loans against possible repurchases as a result of standard representations and
warranties made in connection with whole loan servicing released sales. Such
allowance is not expected to increase materially in future periods given the
Company's current volume of non-core loans.
Interest income increased $2.2 million or 110.0% from $2.0 million for the
three months ended March 31, 1996 to $4.2 million for the three months ended
March 31, 1997. This increase was primarily due to increased loan origination
and greater dollar volume of loans held for sale in 1997 and the higher overall
average interest rate on the Company's loans. The greater dollar volume of
loans held for sale for the three months ended March 31, 1996 and 1997 averaged
$55.1 million and $108.1 million, respectively. The Company also recognized
$1.1 million in interest income based on the interest method from its "residual
interest in securitization" during the three months ended March 31, 1997.
27
<PAGE>
Expenses
The following table sets forth components of the Company's expenses for the
three months ended March 31, 1996 and 1997 (in thousands).
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH
31,
-------------
1996 1997
------ ------
<S> <C> <C>
Personnel................................................... $ 553 $1,050
Interest.................................................... 1,305 3,023
General, administrative and other........................... 589 2,413
</TABLE>
Total expenses increased $4.0 million or 165.1% from $2.5 million for the
three months ended March 31, 1996 to $6.5 million for the three months ended
March 31, 1997. The increase in expenses was primarily the result of increased
interest expenses arising from the greater dollar volume of loans held for
sale, additional personnel costs, added selling expenses and advertising due
to the expansion of the Company's retail/consumer direct channel, and the
related overall operating expenses required to support the increased loan
origination and purchase volume levels during 1997 as compared with 1996.
Personnel expenses increased $497,000 or 89.9% from $553,000 for the three
months ended March 31 1996 to $1.1 million for the three months ended March
31. 1997. The Company increased the number of employees from 128 persons at
March 31, 1996 to 284 persons as of March 31, 1997, primarily due to the
additional personnel necessary to support the Company's higher loan
origination and purchase levels and securitization program. While total
revenues during this same period increased from $3.0 million to $23.2 million,
the Company earned $81,651 of revenue per employee during the three months
ended March 31, 1997 compared to $23,359 per employee for the three months
ended March 31, 1996. Due to the greater number of employees necessary to
service the Company retail/consumer direct production channel, if the Company
successfully implements its strategy to increase retail volume (both on an
aggregate basis and as a percentage of overall production), the Company
expects personnel expense as a percentage of revenue to increase. No assurance
can be given that the Company will be able to successfully implement this
strategy. See "Business--Loan Production Channels".
Interest expense increased $1.7 million or 131.5% from $1.3 million for the
three months ended March 31, 1996 to $3.0 million for the three months ended
March 31, 1997. Interest expense increased primarily due to the significant
increase in borrowings under the Company's warehouse facilities which were
necessary to support the higher level of loan originations and purchases and
the longer holding period by the Company of its loans pending securitization
and borrowings under the FB Residual Line during the three months ended March
31, 1997 (which were necessary to support the Company's securitization
program). During the three months ended March 31, 1996, and 1997, the
Company's average outstanding borrowings were $54.8 million and $106.2
million, respectively. Included in interest expense for the three months ended
March 31, 1997, the Company recorded $449,000 for amortization of prepaid
commitment fees associated with stock warrants issued in 1996 to CS First
Boston and certain affiliates of Merrill Lynch. See "Description of Capital
Stock". The Company anticipates that it will incur a similar amortization
expense relating to these warrants in each of the remaining quarters of 1997
(or an aggregate of approximately $1.3 million during 1997). Due to the
Company's intention to increase its volume of whole loan sales in future
periods, and to implement new structures for the securitization of its core
loans, management believes that its dependence on borrowings under the FB
Residual Line, or similar financing arrangements, may decrease in future
periods. If the Company is successful in these strategies, the Company expects
that interest expense as a percentage of total revenue should decrease in
future periods.
General and administrative expenses increased $1.8 million or 310.0% from
$589,000 for the three months ended March 31, 1996 to $2.4 million for the
three months ended March 31, 1997. The increase in general and administrative
expenses was primarily the result of $l.3 million increase in marketing
expenses to support retail/consumer direct expansion and to promote name
recognition in the nationwide wholesale market.
28
<PAGE>
During the three months ended March 31, 1996 and 1997, retail/consumer direct
loans accounted for 3.1% and 19.1% of the total core loan production,
respectively. As noted above, the Company is seeking to increase its
retail/consumer direct production channel. If successful, the Company expects
potentially significant increases in general and administrative expenses to
support this production, both on an overall basis and as a percentage of
revenues. Other operating expenses also increased to accommodate the increased
overhead required to support the growth in all production channels.
Income Taxes
Prior to June 20, 1996, the Company elected S Corporation status under the
Internal Revenue Code and the corresponding tax laws of the State of
California. Accordingly, income was taxed directly to the stockholders for
federal income and state franchise tax purposes. The Company reimbursed
stockholders for such taxes arising from the Company's operations and recorded
such reimbursements as distribution of retained earnings to the stockholders.
The Company converted its tax filling status from S Corporation to C
Corporation on June 20, 1996, in connection with incorporating its wholly-
owned subsidiary, Preferred Mortgage SPC Funding Corporation ("PSPCFC").
PSPCFC was incorporated to facilitate the implementation of the Company's
securitization program. On a pro forma basis, applying the C Corporation
statutory tax rates to the earnings under the S Corporation status, net
earnings would have been $315,000 as compared to $524,000 for the three month
period ended March 31, 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues
Total revenues increased $21.5 million or 379.6% from $5.7 million in 1995
to $27.2 million in 1996. The increase in revenues was primarily the result of
a substantial increase in the number and volume of core loans originated by
the Company, combined with the Company's decision to commence its
securitization program in 1996. The Company commenced its securitization
program primarily due to the increasing volume of originations, the limited
number of investors for the Company's core loans and management's belief that
significant pricing inefficiencies existed in the whole loan market. While the
securitization of loans reduces the Company's overall cash flows, such sales
allow the Company to capture a higher profit margin from sales compared to
whole loan sales. The following table sets forth the components of the
Company's revenues for the years ended December 31, 1995 and 1996 (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------
1995 1996
------ -------
<S> <C> <C>
Gain on sale of loans, net of origination costs............ $4,342 $19,054
Interest Income............................................ $1,327 $ 8,135
</TABLE>
Gain on sale of loans increased $14.7 million or 338.8% from $4.3 million in
1995 to $19.0 million in 1996. The Company sold and securitized $256.7 million
in core loans in 1996. Gain on sale of loans recognized through
securitization, after estimate of default losses was $14.0 million, or a
weighted average gain of 5.5% of the total volume of securitized loans. Prior
to the second quarter of 1996, the Company sold loans only on a whole loan
servicing released basis. In 1996 and 1995, the Company sold a total of $287.7
million and $165.4 million, respectively, in both core and non-core loans on a
whole loan servicing release basis.
In 1996, as a result of the high level of whole loan sales to investors, the
Company recorded as a reduction to net gain on sale $1.0 million in general
loan loss allowance against possible repurchases as a result of standard
representations and warranties made in connection with such sales. The Company
does not typically engage in whole loan sales on a recourse basis. There were
no similar allowances in 1995 because of the limited amount of whole loan
sales during that period and the insignificant volume of losses. The Company
does not expect to establish similar allowances in future periods because it
anticipates an insignificant volume of whole loan sales in such future
periods.
29
<PAGE>
The following table sets forth certain data with respect to the two
securitizations the Company closed during 1996:
<TABLE>
<CAPTION>
1996-
1996-1 2(2) TOTAL
------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loans sold....................................... $39,995 $210,123 $250,118
Overcollaterization.............................. 1,451 5,123 6,574
------- -------- --------
Total loans securitized.......................... $41,446 $215,246 $256,692
======= ======== ========
Net interest receivable.......................... $ 5,938 $ 40,164 $ 46,102
Cost on sale of securities....................... (1,254) (13,978) (15,232)
Discounted allowance for default losses.......... (2,597) (14,238) (16,835)
------- -------- --------
Net gain on sale of loans........................ $ 2,087 $ 11,948 $ 14,035
======= ======== ========
Net gain on sale of loans as a % of total loans
securitized and sold............................ 5.0% 5.6% 5.5%
Weighted average maturity of certificates sold
(yrs)........................................... 4.47 4.37 4.39
Weighted average FICO score...................... 681 678 678
Weighted average coupon rate..................... 13.3% 13.5% 13.5%
Percentage of loans originated through:
Retail/consumer direct......................... 5.4% 7.2% 6.9%
Wholesale brokers.............................. 94.6% 22.8% 34.4%
Correspondent purchases........................ -- 6.8% 5.7%
Bulk acquisition(1)............................ -- 63.2% 53.0%
</TABLE>
- --------
(1) Represents a single $136.0 million bulk acquisition of core loans acquired
from CSFB Mortgage in December 1996. These loans had previously been
originated by the Company and sold to CSFB Mortgage pursuant to a whole
loan sale facility between the Company and CSFB Mortgage. See "--Liquidity
and Capital Resources" and "Certain Transactions."
(2) $210.1 million of the $280.0 million securitization was funded in December
1996.
Net gain on sale of loans of the following components (in thousands):
<TABLE>
<S> <C>
NIR recognized................................................... $ 29,267
Cost of sale of securities....................................... (15,232)
Cash gains on sale of loans...................................... 6,035
Provision for losses............................................. (1,016)
--------
$ 19,054
========
</TABLE>
At December 31, 1996, the Company included in its trading portfolio the
residual interests in securitization.
Interest income increased $6.8 million or 513% from $1.3 million in 1995 to
$8.1 million in 1996. This increase was primarily due to a higher average
balance of loans held for sale during 1996 resulting from the increased loan
origination and purchase volume and a longer holding period for such loans
pending securitization. Interest income also increased as a result of higher
weighted average interest rates on loans held during 1996 compared to 1995.
30
<PAGE>
The following table summarizes the Company's loan originations and
acquisitions for each of the fiscal years shown:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1994 1995 1996
------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Core loans:
Principal balance............................... $ 6,173 $106,411 $496,256(1)
Number of loans................................. 222 3,433 14,440
Average principal balance per loan.............. $ 28 $ 31 $ 34
Non-core loans:
Principal balance............................... $10,296 $ 87,172 $100,623
Number of loans................................. 49 644 890
Average principal balance per loan.............. $ 210 $ 135 $ 113
</TABLE>
- --------
(1) Includes a $136.0 million bulk acquisition of core loans from CSFB
Mortgage in December 1996. These loans had previously been originated by
the Company and sold to CSFB Mortgage pursuant to a whole loan sale
facility between the Company and CSFB Mortgage. See "--Liquidity and
Capital Resources" and "Certain Transactions."
Expenses
The following table sets forth the components of the Company's expenses for
the years ended December 31, 1995 and 1996 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------
1995 1996
------ ------
<S> <C> <C>
Personnel................................................... $ 864 $3,576
Interest.................................................... 1,228 5,051
Provision for loan losses................................... -- 840
General, administrative and other........................... 1,319 4,934
</TABLE>
Total expenses increased $11.0 million or 322.1% from $3.4 million in 1995
to $14.4 million in 1996. The increase in expenses was primarily the result of
increased interest expense arising from the greater dollar volume of loans
held for sale, provision for loan losses, additional personnel costs, added
selling expenses and advertising due to the expansion of the Company's
retail/consumer direct channel, and the related overall operating expenses
required to support the increased loan origination and purchase volume levels
during 1996 as compared with 1995. The Company's loan originations and
purchases increased $403.3 million or 208.3% from $193.6 million in 1995 to
$596.9 million in 1996. This increase also included a bulk acquisition of
$136.0 million.
Personnel expenses increased $2.7 million or 313.9% from $864,000 in 1995 to
$3.6 million in 1996. This increase was mainly due to increased staffing
levels related to the expansion of retail/consumer direct and wholesale
origination channels and the addition of correspondent lending in 1996. As of
December 31, 1996, the Company operated ten offices and employed 217 employees
as compared to operating six offices and 110 employees as of December 31,
1995, primarily due to the additional personnel necessary to support the
Company's higher loan origination and purchase levels and securitization
program. While total revenues during this same period increased from $5.7
million in 1995 to $27.2 million in 1996, the Company earned $125,294 of
revenue per employee during the year ended December 31, 1996 compared to
$51,539 of revenue per employee during the year ended December 31, 1995. Due
to the greater number of employees necessary to service the Company
retail/consumer direct production channel, if the Company successfully
implements its strategy to increase retail volume (both on an aggregate basis
and as a percentage of overall production), the Company expects personnel
expense as a percentage of revenue to increase. No assurance can be given that
the Company will be able to successfully implement this strategy. See
"Business--Loan Production Channels."
31
<PAGE>
Interest expense increased $3.8 million or 311.3% from $1.2 million in 1995
to $5.1 million in 1996. This increase was primarily due to increased
borrowings required to originate and hold the higher average balance of loans
held for sale during 1996 and a longer holding period for such loans pending
securitization, partly offset by reduced average cost of borrowings in 1996.
Included in interest expense in 1996 was $550,000 related to warrants issued
in conjunction with the establishment of new credit facilities. The issuance
of these warrants was accounted for based on Statement of Financial Accounting
Standards No. 123--"Accounting for Stock-Based Compensation." See Note 12 of
Notes to Financial Statements. The value of these warrants ($1.8 million) was
measured based on the fair market value of warrants issued using Black Scholes
option pricing model. Correspondingly, the Company recorded a prepaid
commitment cost of $1.3 million at December 31, 1996. Market value was based
on an independent third party appraiser who regularly conducts such
evaluations in this industry.
Provision for loan losses was $840,000 in 1996. This provision was recorded
for delinquent loans held for sale, of which $243,000 were charged off after
they were deemed uncollectible.
General, administrative and other expenses increased $3.6 million or 274.1%
from $1.3 million in 1995 to $4.9 million in 1996. The increase in general,
administrative and other expenses was primarily the result of the increased
overhead required to support the growth in all three loan production channels.
As noted above, the Company is seeking to increase its retail/consumer direct
production channel. If successful, the Company expects potentially significant
increases in general and administrative expenses to support this production,
both on an overall basis and as a percentage of revenues.
Income Taxes
Prior to June 20, 1996, the Company elected S Corporation status under the
Internal Revenue Code and the corresponding tax laws of the State of
California. On a pro forma basis, applying the C Corporation tax rates to the
Company's earnings during the periods in which it had elected S Corporation
status, net earnings would have been $1.3 million and $7.4 million for 1995
and 1996, respectively, as compared to $2.2 million and $7.1 million for 1995
and 1996, respectively. In 1996, actual tax provisions of $5.7 million
included amounts that would have been deferred had the Company not elected a
change in tax status resulting in a lower net earnings as compared to that
under the pro forma calculation.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
Revenues
The following table sets forth the components of the Company's revenues for
the years ended December 31, 1994 and 1995 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------
1994 1995
---- -----
<S> <C> <C>
Gain on sale of loans, net of origination costs.............. $447 $4,342
Interest Income.............................................. 59 1,327
Other income................................................. 361 --
</TABLE>
Total revenues increased $4.8 million or 553.9% from $867,000 in 1994 to
$5.7 million in 1995. The increase in revenues was primarily the result of
increased loan sales, greater loan originations, and commission income.
The Company began its mortgage banking activities in 1994 and sold loans on
a whole loan basis to investors. Prior to such period the Company originated
loans as a broker for the account of others. Total loans sold, $14.6 million
in 1994 and $165.4 million in 1995, increased 1,032.9% or $150.8 million
during such period. Correspondingly, interest income increased 2,149.2% from
$59,000 in 1994 to $1.3 million in 1995. Longer holding periods of loans held
for sale in 1995 compared to that in 1994 contributed partly to the increase
in interest income. The Company earned $361,000 in net commissions from
brokering mortgage loans to other lenders in 1994.
32
<PAGE>
Expenses
The following table sets forth the components of the Company's expenses for
the years ended December 31, 1994 and 1995 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------
1994 1995
---- ------
<S> <C> <C>
Personnel.................................................... $201 $ 864
Interest..................................................... 31 1,228
General, administrative and other............................ 552 1,319
</TABLE>
Total expenses increased $2.6 million or 335.1% from $784,000 in 1994 to
$3.4 million in 1995. This increase was primarily due to the increase in
origination volume and the addition of core loan products in 1995. Total loan
origination increased 1,075.5% from $16.5 million in 1994 to $193.6 million in
1995.
Income Taxes
In both 1994 and 1995, the Company elected S Corporation status under the
Internal Revenue Code and the corresponding tax laws of the state of
California. On a pro forma basis, applying the C Corporation tax rates to the
Company's reported earnings during the periods in which it had elected S
Corporation status, net earnings would have been $48,000 and $1.3 million for
1994 and 1995, respectively, as compared to $81,000 and $2.2 million for 1994
and 1995, respectively, as reported.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations require continued access to short-term and long-
term sources of cash. The Company's primary cash requirements include the
funding of (i) loan originations and purchases, (ii) premiums paid to
correspondent lenders and wholesale brokers in connection with loan purchases
and loan acquisitions, (iii) interest expense incurred on borrowings under its
warehouse facilities, (iv) investment in residual interests in
securitizations, (v) fees and expenses incurred in connection with its
securitization transactions, (vi) capital expenditures, (vii) income taxes,
and (viii) other operating and administrative expenses. The Company generates
cash flow from loans sold through securitizations, whole loan sales, interest
income on loans held for sale, and loan fee income from originations. If the
Company continues its growth at or near historical levels (as to which no
assurance can be given), the Company will be required from time to time to
access the capital markets for additional financing to meet the cash
requirements of its operating activities.
The Company uses its working capital (primarily the FB Residual Line), gain
on whole loan sales, net interest income and loan fee income to fund its on-
going operations, and relies upon short-term warehouse facilities, whole loan
sales and securitization transactions to continue to fund loan originations
and purchases. While the Company is currently evaluating a number of different
strategies to reduce its cash needs, including modifying the structure of its
securitization transactions and increasing the volume of loans sold on a whole
loan basis, the Company will continue operating on a negative cash flow basis
as long as it continues to sell a significant portion of its loans through
securitization transactions and continues to retain the residual interest in
securitization in the loans sold. This is because securitization transactions
require an initial outlay of cash by the Company, while providing the Company
with a stream of cash flow over the lives of the loans securitized.
In mid-1996, management of the Company believed that the limited number of
whole loan investors for the Company's core loans, combined with the Company's
increasing volume of originations, required the Company to locate a stable
conduit into which it could sell whole loans on a predictable basis. In August
1996, the Company entered into a whole loan sale facility with CSFB Mortgage,
under which the Company is currently obligated to sell not less than $750
million of core loans on a whole loan basis on or prior to December 31, 1998.
If the Company fails to deliver $750 million of core loans by September 30,
1998, the Company will be obligated to pay CSFB Mortgage a non-delivery fee
equal to 1% of the difference between the principal balance
33
<PAGE>
of loans delivered and $750 million. If, on December 31, 1998, the Company has
not satisfied this delivery requirement, the Company will be obligated to pay
CSFB a non-delivery fee equal to 2% of the difference between the principal
balance of loans delivered and $750 million. As of May 31, 1997, the Company
had delivered $190 million to CSFB Mortgage.
To accumulate loans for securitization, the Company borrows money through
various credit facilities. To date, substantially all of the loans that the
Company purchased and originated have been funded through borrowing under these
facilities, which are repaid as the loans are sold. After the loans are sold
and the borrowings repaid, the Company's credit facilities then become
available to fund additional core loan originations. The Company has four
established credit facilities for this purpose.
A primary source of funds for the Company consists of the First Boston
Facility, which was established in October of 1996. Under the First Boston
Facility, the Company has $200 million in financing available for funding of
core loans originated or acquired by the Company and up to an additional $30
million available for the financing of the Company's residual interests in
securitization that are generated in securitization transactions in which First
Boston acts as lead manager. Funds under the FB Warehouse Line are available at
an advance rate of approximately par and accrue interest based on LIBOR. Funds
under the FB Residual Line are available at an advance rate of approximately
50% of the value of the Company's residual interest in securitization and
accrued interest based on LIBOR, determined at the sole discretion of the
lender. At March 31, 1997, $63.6 million was outstanding under the FB Warehouse
Line and $27.4 million was outstanding under the FB Residual Line. The First
Boston Facility expires on December 31, 1997.
In June 1997, the Company established a warehouse line of credit with Nikko
Financial Services, Inc. (the "Nikko Facility") which is currently in the
amount of $150 million. The Nikko Facility may be used to fund core and non-
core loans and is secured by a security interest in the loans funded through
the facility. Interest accrues on outstanding borrowings based upon the LIBOR
rate. If, in any month, the average daily balance of advances under the Nikko
Facility is less than $100 million, the Company must pay a non-usage fee equal
to one-twelfth of one-quarter of one percent (or .0208%) of the difference
between $100 million and the average daily outstanding balance. The advance
rate on loans funded under the Nikko Facility is 98%. The maturity date for the
Nikko Facility is June 30, 1998 and the term of the facility may be extended at
the option of Nikko upon the request of the Company.
Since November 1995, the Company has had a warehouse line of credit with PNC
Mortgage Bank (the "PNC Facility"), which is currently in the amount of $20
million. The PNC Facility may be used to fund core and non-core loans and is
secured by a security interest in the loans funded through the facility.
Interest accrues on outstanding borrowings based on the Federal funds rate. The
Company is obligated to pay a monthly fee on one-quarter of one percent (.25%)
annualized, if the Company has not utilized over 50% of the commitment amount.
The advance rate under the PNC Facility is 98% of the value of the loans that
are subject to a purchase commitment, and 95% on uncommitted loans. The PNC
Facility matures on June 20, 1997 and may continue to be extended at the option
of PNC Mortgage Bank upon the request of the Company.
In March 1997, the Company established a revolving credit facility with La
Salle National Bank (the "La Salle Facility"), which is currently in the amount
of $20 million. The La Salle Facility may be used to fund core and non-core
loans and is secured by a security interest in the loans funded through the
facility. Interest accrues on outstanding borrowings based on LIBOR. The
advance rate on loans funded through the La Salle Facility is 98%. The maturity
date for the La Salle Facility is March 24, 1998, and the term of the facility
may be extended at the option of La Salle National Bank upon the request of the
Company.
As indicated above, the Company's ability to continue to originate and
purchase loans is dependent, in large part, upon its ability to securitize or
sell the loans in the secondary market. The value of and market for the
Company's loans are dependent upon a number of factors, including general
economic conditions, interest rates and government regulations. Adverse changes
in such factors may affect the Company's ability to purchase, securitize or
sell loans for acceptable prices within a reasonable period of time. A
prolonged, substantial reduction in the size of the secondary market for loans
of the type originated or purchased by the Company may
34
<PAGE>
adversely affect the Company's ability to securitize or sell loans in the
secondary market, with a consequent adverse impact on the Company's
profitability and ability to fund future originations and purchases.
As a result of the Company's increasing volume of loan originations and
purchases, and its expanding securitization activities, the Company has
operated, and expects to continue to operate, on a negative operating cash
flow basis for the foreseeable future, which is expected to increase as the
volume of the Company's loan purchases and originations increase and its
securitization program grows. The Company's operating activities used net cash
of $9.7 million in 1996 and provided net cash of $1.4 million in 1995. Net
changes in cash were mainly due to increases in loan fees and gain on sale of
loans from the growth in loan origination and purchases, offset by additions
of residual interest in securitizations, costs that accompany the Company's
securitization strategy (which increases the Gain on Sale of loans but reduces
the amount of cash received on the sale of loans as compared to whole-loan
sales) and increases in costs related to an enlarged infrastructure and
employee base. The Company's investing and financing activities provided cash
in the amount of $13.0 million in 1996 and used $637,000 in 1995.
The increased use of securitization transactions as a funding source by the
Company has resulted in a significant increase in the amount of Gain on Sale
(from securitizations) recognized by the Company. During the year ended
December 31, 1996, the Company recognized Gain on Sale (from securitizations)
in the amount of approximately $14.0 million compared to $0 for the prior
year. This Gain on Sale has a negative impact on the cash flow of the Company
since the Company may be required to pay state and federal income taxes and
must pay securitization costs in the period the income is recognized, although
the Company does not receive the cash representing the gain until later
periods as the related loans are repaid or otherwise collected. The Company
has funded these cash requirements through, among other sources, the FB
Residual Line. Included in cash and cash equivalents is approximately $13.0
million at December 31, 1996 which represents borrowings from the lines of
credit which have been advanced to fund specific mortgage loans.
The primary purposes of this offering are to repay indebtedness under the FB
Residual Line, fund overcollaterization requirements of the Company's future
securitizations, fund loan originations and acquisitions, and for general
working capital purposes. The net proceeds of this offering along with the
Company's current credit facilities, are expected to be sufficient to fund the
Company's liquidity requirement for approximately 12 months. To the extent
that the Company is unable to retain its existing credit facilities or arrange
new credit facilities or successfully obtain additional debt or equity
financing, the Company will most likely have to curtail loan origination and
acquisition activities, which would have a material adverse effect on the
Company's financial position and results of operations. The Company has no
commitments to provide additional debt or equity financing and there can be no
assurance that the Company will be successful in consummating any such
financing transactions in the future on terms the Company would consider to be
favorable.
IMPACT OF INFLATION
Increases in the inflation rate generally result in increased interest
rates. Since the Company borrows funds at a variable rate, increased interest
rates will increase the borrowing costs of the Company. Inflation will also
increase the operating costs of the Company. The Company may not be able to
pass on the effects of inflation and accompanying higher interest rates to its
borrowers due to usury or other regulatory restrictions or competitive
pressures.
RECENT ACCOUNTING STANDARDS
On January 1, 1996, the Company adopted SFAS No. 123 "Accounting for Stock-
Based Compensation," ("SFAS No. 123"), which permits entities to recognize as
expense over the vesting period the fair value of all stock-based awards on
the date of grant. Alternatively, SFAS No. 123 also allows entitles to
continue to apply the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No.
25"), and provide pro forma net earnings and pro forma earnings per share
disclosures for employee stock option grants made in 1996 and future years as
if the fair-value-based method
35
<PAGE>
defined in SFAS No. 123 had been applied. The Company has elected to apply the
provisions of SFAS No. 123 to all stock-based awards granted to non-employees
and continue to apply the provisions of APB Opinion No. 25 for employee stock
option grants and provide the pro forma disclosure provisions of SFAS No. 123.
See Note 13 of Notes to Financial Statements for the pro forma net earnings
and pro forma earnings per share disclosures.
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 125, "Accounting for Transfer
and Servicing of Financial Assets and Extinguishment of Liabilities," ("FASB
No. 125"). FASB No. 125 addresses the accounting for all types of
securitization transactions, securities lending and repurchase agreements,
collateralized borrowing arrangements and other transactions involving the
transfer of financial assets. FASB No. 125 distinguishes transfers of
financial assets that are sales from transfers that are secured borrowings.
FASB No. 125 is effective for transactions that occur after December 31, 1996,
and it is to be applied prospectively. FASB No. 125 will require the Company
to allocate the total cost of mortgage loans sold in a securitization between
the portion of loans sold and those retained such as residential interests in
securitization based on their relative fair values. The Company will be
required to assess the residual interests in securitization for impairment
based upon their fair value. The pronouncement also will require the Company
to provide additional disclosure about the residual interests in
securitization and to account for these assets at fair value in accordance
with FASB No. 125. The adoption of FASB No. 125 did not have a material impact
on the Company's financial position and results of operations.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("FASB No. 128"). FASB No. 128
supersedes APB Opinion No. 15, "Earnings Per Share" ("APB 15") and specifies
the computation, presentation and disclosure requirements for earnings per
share ("EPS") for entities with publicly held common stock or potential common
stock. FASB No. 128 was issued to simplify the computation of EPS and to make
the U.S. standard more compatible with the EPS standards of other countries
and that of the International Accounting Standards Committee. It replaces the
presentation of primary EPS with a presentation of basic EPS and fully diluted
EPS with diluted EPS.
Basic EPS, unlike primary EPS, excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
Diluted EPS is computed similarly to fully diluted EPS under APB No. 15.
FASB No. 128 is effective for financial statements for both interim and
annual periods ending after December 15, 1997. Earlier application is not
permitted. After adoption, all prior-period EPS data presented shall be
restated to conform with FASB No. 128. The Company has determined that this
statement will increase the earnings per share computation under basic EPS as
compared to primary EPS.
FASB No. 129, "Disclosure of Information about Capital Structure," ("FASB
No. 129") is effective for financial statements for periods ending after
December 15, 1997. It is not expected that the issuance of FASB No. 129 will
require significant revision of prior disclosure since the Statement lists
required disclosures that had been included in a number of previously existing
separate statements and opinions.
36
<PAGE>
BUSINESS
OVERVIEW
Preferred Credit Corporation is a specialized consumer finance company
primarily engaged in the origination, purchase, sale and securitization of
non-traditional consumer loans. The Company's principal loan product ("core
loans") consists of second mortgage loans to qualified individuals who
generally have above average to superior credit and satisfy the Company's
underwriting criteria based on income, credit scores and other factors, but
who have limited access to traditional mortgage-related financing generally
because of a lack of equity in their homes. The Company originates and
acquires its core loans on a nationwide basis through three different
production channels including retail offices, wholesale brokers and
correspondent lenders. For the year ended December 31, 1996 and the three
months ended March 31, 1997, 14.5% and 19.1%, respectively, of the Company's
core loan production was originated through its retail/consumer direct loan
channel, 72.8% and 38.2%, respectively, was originated through wholesale
brokers and 12.7% and 42.7%, respectively, was acquired from correspondent
lenders, not including a one-time bulk purchase of $136.0 million in 1996.
During 1996 and the first three months of 1997, the Company originated or
acquired loans in 43 states with only one state, California, accounting for
more than 5% of the Company's total production. During the three months ended
March 31, 1997, California accounted for 37.0% of all core loans originated or
purchased by the Company, as compared to 65.4% for the year ended December 31,
1996.
From 1994 to 1996, the Company's annual loan production volume increased
from $16.5 million to $596.9 million (including $496.3 million of core loans
during 1996). During the first quarter of 1997, the Company originated or
acquired $250.8 million of core loans and brokered a nominal amount of non-
core loans. Based upon available industry data, the Company believes it is one
of the largest companies in the United States specializing in the origination
and purchase of loans similar to the Company's core loans.
The Company sells substantially all of its core loans in securitization
transactions and, to a lesser extent, on a whole loan basis. Since it
commenced its securitization program in June 1996, the Company has sold a
total of $487.3 million of core loans in securitization transactions, $256.7
million during 1996 and $230.6 million during the three months ended March 31,
1997, recognizing a weighted average gain of 5.5% and 8.3%, respectively, on
such sales.
The Company's overall business strategy is to continue its recent growth and
solidify its position as a leading consumer finance lender within its niche
market. The Company intends to achieve this objective by increasing the volume
of core loans originated and purchased, and continuing to seek ways to improve
customer service, risk management and cash flow. The Company's business
strategy focuses on expanding its core loan production on a nationwide basis,
primarily through expansion of its retail production offices and also through
increasing loan production through existing and new wholesale brokers and
correspondent lenders. As a key element of its business strategy, the Company
intends to leverage its increased levels of loan production and increase
profitability and cash flow through a combination of regular sales of loans on
a whole loan basis and the securitization of a substantial portion of core
loans on a quarterly basis. In addition, in order to support the anticipated
increases in loan production levels without degradation of underwriting
standards and to increase operating efficiencies by permitting wholesale
brokers to make online underwriting decisions, the Company has undertaken a
program to enhance and automate its underwriting systems by the end of 1997.
PRODUCT FOCUS
The Company's core loans are typically closed-end (usually 15 year), fixed
rate, fully amortizing loans secured by a first or a second lien on the
borrower's primary residence, and are typically used by consumers to pay-off
credit card and other unsecured indebtedness. The Company believes that its
core loan product represents an attractive alternative to other financial
products because it may allow borrowers to consolidate outstanding
indebtedness into a single loan having a longer repayment term and possibly a
lower interest rate than other forms of unsecured consumer debt, and affords
borrowers the opportunity to lower their overall monthly debt payments.
37
<PAGE>
In addition, the potential for tax deductibility of interest on the core loan
product offers a benefit for many borrowers. The Company also originates a
smaller volume of traditional single family residential mortgage loans,
substantially all of which are sold in the secondary market through programs
sponsored by Freddie Mac, Fannie Mae and others or are brokered to other
lenders.
UNDERWRITING STANDARDS AND BORROWER PROFILE
Because of the limited equity value of the collateral underlying the
Company's core loans, and the Company's typical position as a junior lien
holder on that collateral, the Company relies principally on the borrower's
creditworthiness and ability to repay the loan in making its underwriting
decisions. In order to evaluate the creditworthiness of potential borrowers,
the Company reviews the borrower's overall credit history, including age of
account, number and types of credit references, amount of outstanding debt
obligation and payment patterns. The Company also utilizes the borrower's
"FICO" credit bureau risk score, which is a credit evaluation score methodology
developed by Fair Isaac, as a means to estimate the probability of a borrower's
willingness to repay a loan in accordance with its terms. During 1996 and the
first quarter of 1997, loans securitized by the Company had a weighted average
FICO score of approximately 670 to 680, which is generally classified by Fannie
Mae and Freddie Mac as loans that have acceptable credit risks. The Company
reviews the borrower's employment history, earnings, stability and income
relative to the amount of the loan and other existing debt in evaluating the
repayment ability of the borrower. Additionally, the Company evaluates the
borrower's commitment to home ownership by reviewing the length of home
ownership, current period of residence in subject property and payment history
over the previous 12 months.
DISTRIBUTION CHANNELS
The Company, which began opening retail branch offices in 1995, had, as of
May 31, 1997, 12 retail production offices in seven states (California,
Arizona, Colorado, Florida, Nevada, New Mexico and Oregon) and plans to open
additional offices at the rate of approximately three each quarter during the
remainder of 1997. The Company believes that the retail consumer/direct channel
is the Company's most profitable production channel and is subject to less
competitive pricing pressures than either the wholesale or correspondent
channel. As of May 31, 1997, the Company's broker network included
approximately 900 independent mortgage brokers located in 42 states and its
correspondent network included approximately 160 approved correspondent lenders
located in 27 states. The Company intends to continue to increase its loan
production from correspondents and wholesale brokers by adding new
correspondents and brokers by offering these entities a relatively new product
to diversify their existing product lines and increasing the efficiency and
production of the correspondents and brokers that are a part of the Company's
existing network. The Company believes that its balanced network of production
channels, emphasis on retail production and geographic diversity of loan
production provides it with a competitive advantage in the market for the
Company's core loans.
INFORMATION SYSTEMS
The Company is developing a fully-integrated proprietary loan processing
system to monitor its underwriting process on a real-time basis to insure
consistent application of its underwriting procedures prior to funding. The
Company believes this enables it to process an increasingly greater number of
loans without degradation of its underwriting standards. In addition, the
Company has recently made a significant investment in its information systems
for its main office which are intended to enable it to effectively monitor,
audit and perform quality control review on loans prior to sale or
securitization. The Company continuously reviews its technological needs, and
seeks to add additional applications as its growth and operations require.
MANAGEMENT
The Company has an experienced senior management team with an aggregate of
over 60 years in the lending business. The Company's management team is
particularly experienced in Fannie Mae and Freddie Mac eligibility
requirements, which are significantly focused on an evaluation of the
creditworthiness of borrowers and their ability to repay. In addition, the
Company's underwriting managers have an average of 16 years experience in the
consumer finance business and branch managers have an average of 10 years
experience in the consumer finance business.
38
<PAGE>
COMPANY EVOLUTION
Since commencing operations in 1989 as a mortgage broker (which were
expanded to include mortgage banking in 1994), the Company has focused on
lending to creditworthy borrowers. Until 1995, the Company primarily
originated loans meeting the underwriting guidelines of Freddie Mac and Fannie
Mae. In late 1994, management believed that market conditions (primarily
increasing competition and higher interest rates) were affecting profitability
throughout the lending industry for Freddie Mac and Fannie Mae eligible loans.
As a result, commencing in 1995, the Company decided to expand its loan
products to include core loans. The Company believed that core loans offered a
greater profit margin than non-core loans and, due to the similar credit
characteristics and underwriting approach between core loans and the non-core
loans originated by the Company prior to 1995, permitted the Company to
utilize its existing expertise and personnel to expand its operations. The
successful market reception for the Company's core loan product has resulted
in substantial increases in operating revenues and profitability since that
time. From 1994 to 1996 the Company's annual net revenues increased from
$867,000 to $27.2 million, and its net earnings increased from $81,000 (or
$48,000 on a pro forma basis adjusted for taxes) to $7.1 million. At March 31,
1997, the Company had total assets of $172.2 million, total liabilities of
$152.5 million and stockholders' equity of $19.7 million.
BUSINESS STRATEGY
The Company's business strategies are:
. Enhance Market Position. The Company continuously seeks to maintain its
recent growth and solidify its position as a leading consumer finance
lender within its niche product market.
. Expansion of Retail Production Channel. The Company believes that the
retail/consumer direct channel is the Company's most profitable
production channel and is subject to less competitive pricing pressures
than either the wholesale or correspondent channel. The Company intends
to continue to focus its efforts on the growth of its retail/consumer
direct channel by expanding into new markets through opening up to three
additional retail offices in each quarter of 1997 and hiring additional
qualified personnel to support these operations and by further
penetrating the Company's existing markets through educating prospective
borrowers to the potential advantages of the Company's core loans and
building "brand name" recognition through direct mail, radio and
television advertising.
. Expansion of Correspondent Lender and Wholesale Broker Channel. The
Company intends to continue to increase its loan production from
correspondent lenders and wholesale brokers by adding new correspondents
and brokers, offering these entities a relatively new product to
diversify their existing product lines and increasing the efficiency and
production of the correspondents and brokers that are a part of the
Company's existing network. As part of expanding its relationships with
correspondent lenders, the Company also intends to seek to form
strategic relationships with selected correspondent lenders having large
retail networks through which the Company can offer its core loan
product. The Company believes that its established access to three
different production channels (retail/consumer direct, wholesale brokers
and correspondent lenders) and the geographic distribution of its
production sources will reduce the Company's exposure to large
fluctuations in the volume of the Company's core loans resulting from
increased competitive pressures and the exposure to losses that could
arise due to regional economic downturns.
. Risk Management. The Company intends to continue to emphasize risk
management techniques to improve its originating, underwriting, funding
and servicing decisions. For instance, the Company continues to analyze
the loan characteristics of its delinquent and defaulted loans as a
means to identify specific factors leading to default. Once identified,
the Company can modify its underwriting standards associated with those
factors in order to reduce future default rates. As part of its growth
strategy, the Company intends to implement its fully-integrated
proprietary loan processing system to monitor the underwriting process
on a real-time basis to insure consistent application of underwriting
procedures
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<PAGE>
prior to funding. The Company believes that this will enable it to
process an increasingly greater volume of loans without degradation of
its underwriting standards. The Company will continue to add experienced
personnel to ensure the Company has adequate staffing to handle its
increasing volume of loans, and make additional expenditures of capital
and devote management efforts to develop and refine loan processing,
secondary marketing and administrative operations.
. Enhance Cash Flow Management. The Company intends to leverage its
increased levels of loan production and increase profitability by
regularly securitizing core loans in the secondary market. In the
future, the Company intends to complete a securitization in each
quarter. See "--Loan Securitizations and Sales." In order to increase
its loan production and satisfy the cash requirements associated with
its securitization program, the Company also intends to expand and
diversify its current funding sources, including arranging new credit
facilities and conducting additional equity and/or debt offerings. In
addition, the Company intends to improve its liquidity by (i) engaging
in selective whole loan sales, (ii) working with Advanta to develop and
refine servicing techniques which will maximize the timing and amounts
of cash flows generated from its residual interest in securitization,
and (iii) employing strategies to mitigate the impact of delinquencies
and loan defaults. The Company also believes it will improve its cash
flow by controlling its operating costs through its focus on a small
number of loan products (which limits the staffing requirements of the
Company's marketing, processing and underwriting departments), the
establishment of small retail offices on short term leases with a
limited staff and outsourcing its servicing in order to take advantage
of certain economies of scale not currently available to the Company.
LOAN PRODUCTS
The Company's core loans consist of closed-end, fixed rate, fully amortizing
home loans secured by second mortgage liens on residential properties. The
Company does not make core loans secured by vacation, rental or commercial
properties, or any other type of non-owner occupied property. Second mortgage
liens are subordinated to the rights of the mortgagee under the senior
mortgage or mortgages encumbering the related first mortgage lien property.
The Company's core loan amounts generally range from $10,000 to $75,000, bear
a fixed interest rate ranging from 8.95% to 18.25% and typically have original
terms to stated maturity of 15 or 20 years, such characteristics being
established on the basis of the borrower's credit profile. None of the
Company's core loans are insured or guaranteed by any federal, state or
private agency or insurer.
The Company also originates a small volume of first lien mortgage loans
secured by one-to-four family residences. These mortgage loans are either
government-insured loans conforming with FHA/VA guidelines or conventional
loans conforming with Fannie Mae, Freddie Mac or other investor guidelines.
First lien mortgage loans are either sold on a whole loan basis to investors
or brokered to other lenders. The Company expects that the volume of first
lien mortgage loans originated by the Company will decrease substantially in
the future.
LOAN PRODUCTION CHANNELS
The Company currently originates and acquires loans through three production
channels: retail/consumer direct, independent wholesale brokers and
correspondent lenders. The Company began originating loans through wholesale
brokers in 1994 and commenced its retail/consumer direct lending from its own
offices in 1995. In late 1996, the Company expanded its production channels to
include its correspondent lender program. During 1996, 14.5% of the Company's
core loan production was originated by its retail/consumer direct loan
channel, 72.8% was originated through wholesale brokers and 12.7% was
purchased from correspondent lenders (excluding a one time bulk purchase of
$136.0 million).
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<PAGE>
ANNUAL LOAN PRODUCTION DATA
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
1994 1995 1996
------- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CORE LOANS
Principal Balance:
Retail/Consumer Direct.......................... $ -- $ -- $ 52,225
Wholesale....................................... 6,173 106,411 262,435
Correspondent................................... -- -- 45,617
Bulk Acquisition(1)............................. -- -- 135,979
------- -------- --------
Total......................................... $ 6,173 $106,411 $496,256
======= ======== ========
Number of Loans:
Retail/Consumer Direct.......................... -- -- 1,564
Wholesale....................................... 222 3,433 7,642
Correspondent................................... -- -- 1,237
Bulk Acquisition(1)............................. -- -- 3,997
------- -------- --------
Total......................................... 222 3,433 14,440
======= ======== ========
Average Principal Balance......................... $ 28 $ 31 $ 34
NON-CORE LOANS
Principal Balance................................. $10,296 $ 87,172 $100,623
Number of Loans................................... 49 644 890
Average Principal Balance......................... $ 210 $ 135 $ 113
</TABLE>
- --------
(1) Represents a single bulk acquisition of core loans acquired from CSFB
Mortgage. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" and "Certain
Transactions."
41
<PAGE>
QUARTERLY LOAN PRODUCTION DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1996 1996 1996 1996 1997
--------- -------- ------------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CORE LOANS
Principal Balance:
Retail/Consumer
Direct............... $ 2,232 $ 4,180 $12,683 $ 33,130 $ 47,787
Wholesale............. 70,510 55,822 56,545 79,559 95,851
Correspondent......... -- -- -- 45,617 107,161
Bulk Acquisition(1)... -- -- -- 135,979 --
------- ------- ------- -------- --------
Total............... $72,742 $60,002 $69,228 $294,285 $250,799
======= ======= ======= ======== ========
Number of Loans:
Retail/Consumer
Direct............... 70 138 396 960 1,357
Wholesale............. 1,997 1,680 1,675 2,290 2,693
Correspondent......... -- -- -- 1,237 3,132
Bulk Acquisition(1)... -- -- -- 3,997 --
------- ------- ------- -------- --------
Total............... 2,067 1,818 2,071 8,484 7,182
======= ======= ======= ======== ========
Average Principal
Balance................ $ 35 $ 33 $ 35 $ 35 $ 35
NON-CORE LOANS
Principal Balance....... $40,128 $29,247 $26,923 $ 4,326 $ --
Number of Loans......... 335 264 250 41 --
Average Principal
Balance................ $ 120 $ 111 $ 108 $ 106 $ --
</TABLE>
- --------
(1) Represents a single bulk acquisition of core loans acquired from CSFB
Mortgage. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" and "Certain
Transactions."
Retail/Consumer Direct Loans. Applicants for retail/consumer direct loans
are generated from the Company's branch offices through direct mass mailings
and telemarketing directed to individuals the Company believes are likely
potential customers, followed and supported by local newspaper and radio
advertising to engender and develop name recognition. The Company has 12
retail loan production offices, six of which are located in California, and
one each in Arizona, Colorado, Florida, Nevada, New Mexico and Oregon. The
Company believes that having a strong retail/consumer direct network will
enable it to build relationships and increase its name recognition with
borrowers, thus providing it with a competitive advantage over its competitors
that limit their origination activities to wholesale broker lending. The
Company believes that on the basis of its pricing and cost characteristics,
the retail/consumer direct lending channel is the Company's most profitable
origination channel on a per loan basis. However, the Company believes that,
due to increasing competition the retail/consumer direct lending channel, the
origination points and interest rates the Company charges on retail/consumer
direct loans may decrease in the future. The Company originated approximately
$52.2 million principal amount of retail/consumer direct loans in 1996 and
$47.8 million during the three months ended March 31, 1997.
Each of the Company's retail loan production offices is staffed with loan
officers and processors, typically has underwriters, and is managed by branch
managers who have an average of ten years experience in the consumer finance
industry.
The Company intends to continue to expand its retail/consumer direct loan
origination capabilities. The Company considers the following factors in this
expansion strategy: (i) targeting cities where the population density and
economic indicators are favorable for its core lending products, including a
stable housing and
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<PAGE>
employment market; (ii) testing the target market prior to the establishment
of a branch office, where local regulations permit, via radio, newspaper and
direct mail advertising; (iii) establishing a small branch office where
warranted with a limited staff; and (iv) setting up branch offices in
affordable office space with short-term leases and limited overhead. Prior to
the establishment of a branch office, where local regulations permit, the
Company tests the target market via radio, newspaper and direct mail
advertising. Negative test marketing generally results in a decision not to
expand into the test location, but the Company believes this approach limits
the size of potential losses. If test marketing is positive, the Company opens
an office with a limited staff in affordable office space. An office will
typically be fully operational within approximately 90 days of the date the
Company determines to open an office in a certain location. All advertising,
payment of branch expenses, regulatory disclosure and funding of loans
originated in the Company's branch offices are centralized in the Company's
Irvine, California office. The centralization of these functions allows the
Company to control branch expenses, supervise regulatory compliance and offer
consistent underwriting and processing to its customers.
Wholesale Broker Loans. Since 1994, the Company has offered its products
through independent wholesale brokers. Wholesale broker loans are loans
arranged by Company-approved wholesale brokers who act as intermediaries
between prospective borrowers and the Company. The Company underwrites all
wholesale broker loans. At May 31, 1997, the Company had established a network
of approximately 900 approved independent wholesale brokers in 42 states, who
interface with the Company's in-house staff of wholesale loan representatives
who are assigned to different territories. Within each territory, the
Company's representatives are assigned to brokers with which they have
established relationships and are compensated on the basis of the principal
amount of closed loans submitted by their assigned brokers. In addition, the
Company continually updates wholesale brokers by facsimile of any changes in
the Company's products, pricing or guidelines. Fees received by the Company on
wholesale broker loans are typically minimal, as the Company passes through
the origination fees to the wholesale broker and only retains certain
underwriting and processing fees. The Company originated approximately $262.4
million in core loans through wholesale brokers during 1996. The Company's
largest broker, Pacific Prime Mortgage Corporation, a company founded and
formerly owned by Walter Villaume, the Company's President and one of its
major stockholders, accounted for 35.4% of the wholesale broker loans
originated by the Company in 1996 and 18.7% of the total core loans originated
and acquired by the Company in 1996.
The Company verifies that its wholesale brokers have obtained all necessary
licenses, and performs a background investigation, which may include obtaining
credit reports, accessing certain public data repositories and obtaining
information from local and state governmental agencies and the Better Business
Bureau. In addition, the Company requires the broker to enter into an
agreement with the Company governing its obligations. Wholesale brokers submit
completed loan applications to the Company, and the Company thereafter
processes, underwrites and performs functions such as credit, property review,
and income and employment verification in the same manner as with a
retail/consumer direct loan. Generally, a wholesale broker loan application is
approved or denied within two working days, and funded approximately five
weeks after approval. The Company believes its training, service and
procedures allow brokers ease of entry to the products offered by the Company
and thereby increases the Company's reputation and recognition in the
wholesale broker community.
The Company is actively expanding its wholesale broker network, and seeks to
(i) strengthen its relationships with existing wholesale brokers by providing
an attractive product and responsive service in conjunction with consistent
underwriting, substantial funding sources and competitive prices and (ii)
increase its market share by locating new wholesale brokers in geographic
areas not currently serviced by the Company.
Correspondent Lender Loans. In 1996, the Company implemented a correspondent
lender loan program through which loans are purchased from independent
correspondent lenders with which the Company maintains ongoing relationships.
At May 31, 1997, the Company had approximately 160 approved correspondents in
approximately 27 states. The correspondent loan purchase program offers an
efficient way for the Company to generate loans from additional markets. The
Company considers the following factors in connection with the
43
<PAGE>
expansion of its correspondent operations: (i) increasing its market share by
locating new correspondent lenders in geographic areas not currently serviced
by the Company; (ii) tailoring its marketing strategies and focus on servicing
smaller correspondent lenders; and (iii) strengthening its relationships with
correspondent lenders by providing an attractive product (which permits the
correspondent lenders to diversify its product offerings) at competitive
prices. All of the core loans purchased by the Company are acquired on a
servicing released basis. The Company purchased approximately $45.6 million
from approved correspondent lenders during 1996 (excluding a one time bulk
purchase of $136.0 million) and $107.2 million during the three months ended
March 31, 1997. See "Certain Transactions."
The Company reviews the reputation, consumer finance lending experience and
financial condition of all of its correspondent lenders. Correspondent lenders
tend to be financial institutions, mortgage banks or credit unions that meet
the Company's minimum net worth and other requirements, but lack the capital,
resources or willingness to hold and service portfolios of loans similar to
the Company's core loans. The Company's correspondent lenders are usually
situated in local markets where they are able to contact the borrowers
directly. The correspondent lender prepares the loan application, including
supporting documentation, which is then submitted to the Company's
correspondent loan underwriting personnel who review each loan package and, in
some cases, perform independent employment and credit verifications. The
Company typically approves the loan within two business days. If the loan
package meets the Company's underwriting criteria, the correspondent loan is
closed by the originating lender and purchased by the Company. The originating
lender warrants the validity and enforceability of the purchased loans,
thereby reducing the risk to the Company of claims for fraud or improper
documentation. In the event such warranty is breached, the Company may require
the correspondent lender to repurchase such non-conforming loan.
Geographic Distribution of Loans. Although the Company is licensed or
registered as a finance lender in 43 states, it has historically concentrated
its business in California. While this concentration has declined recently,
the Company remains heavily dependent on the California market, which
contributed approximately 65.4% of the Company's total core loan volume for
the year ended December 31, 1996 and approximately 37.0% during the three
month period ended March 31, 1997. The Company intends to continue to expand
and geographically diversify its loan purchase and origination activities.
The following table shows geographic distribution of core loan purchases and
originations for the periods shown, except for the one time bulk acquisition
of $136.0 million in 1996:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR-ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------ ---------------
1995 1996 1997
-------------- -------------- ---------------
(DOLLARS ARE IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
State:
California.................... $104,745 98.4% $235,523 65.4% $ 92,707 37.0%
Ohio.......................... -- -- 5,570 1.5 12,570 5.0
Washington.................... 53 0.1 7,363 2.0 9,396 3.7
Florida....................... -- -- 1,278 0.4 9,194 3.7
Indiana....................... -- -- 1,861 0.5 8,576 3.4
Other 38 States............... 1,613 1.5 108,682 30.2 118,356 47.2
-------- ----- -------- ----- -------- -----
Total (43 States)........... $106,411 100.0% $360,277 100.0% $250,799 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
MARKETING
The Company's marketing program is designed to establish the Company's core
loans as an attractive source of financing for creditworthy borrowers and to
generate leads for retail/consumer direct loan originations, while at the same
time developing national "brand name" recognition of the "Preferred Credit"
name and core loan product in the retail, wholesale and correspondent markets.
To achieve this objective, the Company has employed an advertising program of
local direct mass mailings and telemarketing, followed and supported by local
newspaper, radio and television advertising to engender and develop name
recognition.
44
<PAGE>
The Company monitors the response it receives to each of the Company's
advertisements to ascertain the effectiveness of its specific programs, which
it then uses to establish advertising budgets and strategies for future
advertising campaigns. The Company relies upon this data to formulate targeted
marketing campaigns directed to borrowers believed to be the most likely
candidates for its products. The Company believes that its continued focus
upon and refinement of its targeted marketing campaign allows it to reduce
overall marketing costs as a percentage of closed loans.
UNDERWRITING
The core loans originated and acquired by the Company typically have been
made to borrowers that have limited access to traditional home equity mortgage
financing for a variety of reasons, such as insufficient home equity value.
The Company considers the underwriting policy under which its core loans are
underwritten to be analogous to credit lending, rather than equity lending,
since its underwriting decisions are based primarily on the borrower's credit
history, capacity to repay and commitment to home ownership, rather than on
the potential value upon foreclosure of the property pledged as collateral to
secure the related core loan.
The Company uses its own underwriting system to evaluate the credit risk of
potential borrowers. Due to the lack of performance history available on the
Company's loan portfolio and the relatively new product the Company
underwrites, the Company determined it was appropriate to utilize a more
technical method of grading credit along with traditional methods.
Accordingly, the Company's system is based in part on the borrowers FICO
credit score, as well as proven traditional underwriting criteria, including
the borrower's debt-to-income ratio, credit history, length of home ownership,
employment history and stability in the community. Because the Company's niche
is to lend to higher creditworthy borrowers, almost all of the Company's loans
are made in excess of the value of the underlying collateral available to
secure such loan. The weighted average combined LTV ratio of the Company's
loans securitized were 90.61%, 110.19% and 115.80% for 1996-1, 1996-2 and
1997-1, respectively. The Company also emphasizes lending to borrowers for the
purpose of debt consolidation which is intended to reduce the borrowers' total
monthly debt service and improve the borrowers' cash flow condition. The
Company underwrites all of its core loans originated through its retail
production offices and wholesale brokers and substantially all loans purchased
from correspondent lenders. Applications for non-core loans are typically
brokered by the Company to third party lenders.
The Company's retail/consumer direct and wholesale broker underwriting
operations are located in the Company's Irvine, California, headquarters,
although certain branch offices perform all or part of the underwriting
function. The Company's correspondent lender underwriting operations are
located in its Arizona branch office. As of May 31, 1997, the Company
maintained a staff of 10 underwriting teams at its corporate headquarters.
Each team consists of three members and is supervised by an underwriting
manager who is responsible for training and updating the team on the Company's
guidelines and procedures. The team consists of an underwriter who reviews the
loan application for conformity with the Company's requirements, an
underwriting coordinator who is responsible for obtaining or fulfilling any
conditions of loan approval imposed by the underwriter and monitoring the loan
documentation process and a customer service representative who is responsible
for monitoring communication between the coordinator and the customer (which,
depending upon the production channel, may be the borrower, the wholesale
broker or the correspondent lender). The Company's underwriters are salaried
employees and are not paid commissions based on the number of loans they
underwrite or approve; however they may be entitled to receive a bonus if they
are eligible to participate in the Company's bonus pool which is calculated
based on loans funded. The Company's senior underwriters have an average of 16
years experience in the consumer finance industry.
The Company's approach to underwriting involves three distinct inquiries
into each borrower: the borrower's credit history, capacity to repay, and
commitment to home ownership:
. Credit History. In evaluating the credit history of borrowers, the
Company utilizes a number of traditional underwriting methodologies. The
Company relies on credit information supplied by "in-file" credit
reports from one of the three national credit repositories, Experian,
Equifax and
45
<PAGE>
Transunion. The Company also conducts a detailed review of the
applicant's revolving and installment consumer debt, including:
-Length of overall credit history
-Number and type of trade references
-Any patterns of delinquent payments
-A comparison of the amount of installment and revolving debt
to gross annual income
-The average balance of "revolving" debt compared to available
credit
-Utilization of recently acquired revolving debt
-Any recent activities that may unduly impact credit bureau
risk scores
-Recent credit inquiries
The Company also requires that its borrowers have been homeowners for at
least one year, that they have not had any late mortgage payments within
the last 12 months and that they have not been a defendant in a mortgage
foreclosure proceeding at any time. Borrowers who have filed
bankruptcies are required to have a period of at least five years elapse
since the date of discharge, and to have re-established a credit history
during that time.
The Company also considers the borrower's FICO credit score. The FICO
credit scores, available from the three national credit repositories,
are calculated by the assignment of weightings to the most predictive
data collected by the credit repositories and range from the 400s to the
800s. FICO credit scores have been calibrated to indicate the same level
of credit risk regardless of which credit repository is used. The
weighted average FICO credit score of loans included in the Company's
securitizations has ranged from 670 to 680. The Company uses FICO scores
to provide a means of analysis to assist in underwriting to estimate the
probability that the proposed loan will be paid in accordance with its
terms based on historical origination and statistical data. The Company
views a FICO credit score as an excellent tool when combined with
traditional underwriting methodology, but not as a replacement of
traditional underwriting methodology. The final decision whether to
approve a loan rests with the Company's underwriting staff.
. Capacity to Repay. The Company evaluates a borrower's repayment capacity
through a number of underwriting methodologies, including (i)
verification of employment and income, which normally includes, for
salaried borrowers, two of the most recent consecutive pay stubs showing
year-to-date earnings and the previous year's W-2 form and for self-
employed borrowers, a minimum of two years of tax returns or other
written or telephone verification with employers, (ii) verification of
the borrower's type of income to insure stability (i.e., commission,
salary, retirement, etc.), (iii) verification of the stated income and
occupation of the borrower to determine the likelihood of re-employment
in case of job loss (for instance, wage earners exceeding median income
levels may suffer delays in re-employment), (iv) assessment of the
borrower's occupation and industry to determine the likelihood of
continued employment, (v) review of maximum debt-to-income ratios based
on the borrower's income levels, (vi) review of the borrower's maximum
disposable income requirements, and (vii) verification of the borrower's
job history.
. Commitment to Home Ownership. The Company evaluates a borrower's
commitment to home ownership by requiring that all borrowers are not
first time buyers, and have previously owned at least one home and have
occupied their current residence for at least six months. In addition,
the borrowers must have made all mortgage payments on a timely basis
over the most recent 12 month period. While these criteria may not be
predictive of the likelihood that the borrower will repay the Company's
loan, the Company believes it may provide some indication of the
borrower's commitment to repay home secured debt.
Following funding, the Company performs a quality control review on a
sampling of 10% of all loans closed and on all loans more than 90 days
delinquent. Loans included in the 10% sample are selected on a random, but
46
<PAGE>
targeted, basis to ensure the sample covers an adequate cross section of the
companies and persons with which the Company does business. The purpose of the
review is to verify the existence of all required loan documentation,
determine the conformity of the loan to the Company's underwriting guidelines
and to determine whether existing delinquencies may be mitigated in future
periods through a modification of the Company's underwriting guidelines. All
underwriting discrepancies are reported to the Company's senior management in
order for appropriate remedial action, training or preventive measures to be
implemented.
In addition, the Company is developing a computerized risk profile score
card that will assist management in the analysis of the Company's loan
portfolio on a loan level basis. The Company expects that this score card
will, in part, utilize the FICO credit score as the basis for the Company's
default analysis and attempt to evaluate the credit risk of each borrower
based upon the conformity of the borrower's credit profile to certain factors
identified by the Company such as income history, median income for similar
occupations, regional median income, regional property valuation trends,
residual income following loan funding, employment type and stability, length
of residency in subject property, mortgage payment history, credit
utilization, borrower motivation (i.e.: monthly savings, occupancy), as well
as many other factors. This scoring method will allow the Company to track
loan defaults by specific borrower characteristics and economic demographics.
Accordingly, as trends are identified, the Company can react by culling high-
risk loans from its portfolio of loans held for sale or by implementing new
underwriting criteria designed to offset the high risk characteristics
identified.
47
<PAGE>
PRIMARY UNDERWRITING GUIDELINES. The following table summarizes the primary
underwriting guidelines used by the Company in evaluating a borrower before
making a core loan.
<TABLE>
<CAPTION>
UNDERWRITING
CHARACTERISTIC COMMENT
- --------------------------------------------------------------------------------------------
<S> <C>
Maximum Loan Amount(1) $75,000-$35,000
- --------------------------------------------------------------------------------------------
Owner-occupied
Occupancy Requirement Primary residence
- --------------------------------------------------------------------------------------------
Residency Minimum 6 months residency in subject property
- --------------------------------------------------------------------------------------------
Minimum 1 year mortgage history
Mortgage History No 1st time homebuyers
- --------------------------------------------------------------------------------------------
Mortgage Payment History 0 x 30 in last 12 months
- --------------------------------------------------------------------------------------------
Credit History Minimum 3 year history
Minimum 4 credit references excluding 1st mortgage
- --------------------------------------------------------------------------------------------
Previous Bankruptcy 5 years since discharge
- --------------------------------------------------------------------------------------------
Previous Foreclosure--Notice of
Default Not allowed
- --------------------------------------------------------------------------------------------
40%/$750
Debt Ratio/Minimum Monthly 45%/$1,000
Disposable Income 50%/$1,500
- --------------------------------------------------------------------------------------------
30 day payroll statement
Income Documentation IRS W-2 form(s)
Federal income tax returns for self-employed
- --------------------------------------------------------------------------------------------
Employment Verification Telephonic verification required prior to funding
- --------------------------------------------------------------------------------------------
Maximum Cash Directly to Borrower(2)
$25,000
</TABLE>
- -------------------------------------------------------------------------------
(1) Maximum loan amount ranges from $75,000 for FICO scores of 700 and above
to $35,000 for FICO scores between 620 and 639.
(2) Maximum cash that the Company will pay directly to borrowers is $25,000,
except in the cases of a previous bankruptcy or a FICO score between 620
and 639, in which case the maximum amount is $5,000.
48
<PAGE>
LOAN SECURITIZATIONS AND SALES
Since June 1996, the Company has sold substantially all of its core loans
through its public securitization program in order to enhance profitability.
In securitization transactions, investors purchase senior pass-through
certificates evidencing undivided beneficial ownership interests in a pool of
loans sold to a trust established for that purpose. The principal and interest
payments on loans included in the trust are distributed by the trust to the
senior pass-through certificate holders after deducting the servicing fee and
certain expenses, and then to the Company as beneficial holder of the residual
interest in securitization. The Company recognizes a gain on the sale of loans
securitized upon the closing of the securitization, but receives payments over
the actual life of the loans securitized. The residual interest in
securitization represents, over the estimated life of the loans, the excess of
the weighted average interest rate on the pool of loans sold over the sum of
the investor pass-through rate, normal servicing fee and the monoline
insurance fee. The net present value of that excess (determined based on
certain prepayment and loss assumptions) less transaction expenses is recorded
as gain on sale at the time of the closing of the securitization.
The Company conducted two securitizations in 1996, referred to as 1996-1 and
1996-2 and one securitization in the first quarter of 1997 referred to as
1997-1. Of the core loans originated or acquired during 1996 and the three
months ended March 31, 1997 by the Company, 51.7% and 100%, respectively, were
sold in securitization transactions. The Company securitized an aggregate of
$256.7 million of loans in 1996, of which $41.5 million were sold in the 1996-
1 private securitization transaction during the second and third quarters of
1996 and $215.2 million were sold in the 1996-2 public securitization
transaction during the fourth quarter of 1996. During the three months ended
March 31, 1997, $230.6 million of core loans were sold in securitization
transactions. Although the Company will not complete a securitization
transaction in the second quarter of 1997, the Company currently intends to
complete regular securitization transactions, either through private
placements or in public offerings; however, there can be no assurance that it
will be able to do so. The Company retains the servicing rights (collecting
loan payments and handling borrower defaults) to all of the loans it
securitizes, and has an agreement with Advanta to subservice its servicing
portfolio. See "--Servicing Operations."
The Company also brokers or sells substantially all of its non-core loans.
The Company does not retain any servicing rights with respect to non-core
loans. During 1996 and the three months ended March 31, 1997, the Company
originated $100.6 million and $0 million, respectively, of non-core loans. The
Company expects that the volume of non-core loans originated or acquired by
the Company will continue to decrease substantially in the future as the
Company continues to focus its efforts and resources on originating and
purchasing core loans.
The Company purchased credit enhancements for the senior interests in the
form of insurance policies provided by a monoline insurance company, and, as a
result, the senior interests in each trust received a rating of "Aaa" from
Moody's Investor Service, Inc. and "AAA" from Standard & Poor's Ratings Group.
In future periods, the Company expects to modify the structure of its
securitizations by eliminating the use of insurance policies as a means of
credit enhancement and providing credit enhancement in the form of a
combination of cash reserve accounts and the retention of additional credit
risk by the Company.
The documents governing the Company's securitization program require that
the Company establish levels of overcollateralization through application of
excess interest spread distributions in order to reduce the principal balances
of the senior interests issued by the related trust. The Company's interest in
the overcollateralized amount is reflected in the Company's Consolidated
Financial Statements as a portion of "residual interest in securitization." To
the extent that borrowers default on the payment of principal or interest on
the loans, default losses will reduce the overcollateralization to the extent
that funds are available and will result in a reduction in the value of the
net interest receivable held by the Company. The overcollateralization account
will thereafter be replenished from excess interest spread distributions, to
the extent required by each securitization pooling and servicing agreement. If
payment defaults exceed the amount of overcollateralization, as applicable,
the monoline insurance company guarantee will pay any further losses
experienced by holders of the senior pass-through certificates. The residual
interest in securitization will not be paid until the insurer and the trust
are repaid for any losses.
49
<PAGE>
The Company may be required either to repurchase or to replace loans that do
not conform to the representations and warranties made by the Company in the
pooling and servicing agreements entered into when the loans are pooled and
securitized. To the extent these nonconforming loans breach a warranty made by
the correspondent lender or wholesale broker, the Company may require the
correspondent lender or wholesale broker to repurchase the nonconforming loan
or indemnify the Company against losses. However, no assurance can be given
that any correspondent lender or broker will be able to repurchase such
nonconforming loan or satisfy its indemnification obligations.
In June 1996, the Company issued its first asset backed security
collateralized by second lien mortgage loans through its subsidiary, Preferred
Mortgage SPC Funding Corp. Preferred Mortgage Asset-Backed Certificates,
Series 1996-1, consisted of several classes of certificates. Class A
Certificates have an initial aggregate principal balance of $41.5 million and
were offered through a private offering. The Certificates were structured
under the REMIC tax treatment, with credit enhancement and
overcollateralization requirement from 3.5% initially to 8.5%. The Company
retained the interest in the overcollateralization.
In December 1996, the Company conducted its second securitization, Series
1996-2, with an initial aggregate principal balance of $280 million through a
public offering. Of the initial $280 million, $210 million was settled
immediately and the remaining $70 million was settled in January and February,
1997. The initial required overcollateralization was 2.38% with a target of
8.8%. The following table provides certain additional details on the
certificates distributed in the second securitization:
<TABLE>
<CAPTION>
% OF WEIGHTED
CLASS CLASS AVERAGE PASS BOND
PRINCIPAL % OF OFFERED PURCHASE PRINCIPAL LIFE THROUGH EQUIVALENT
CLASS/RATING BALANCES CERTIFICATES PRICE BALANCE (YRS) RATES YIELD
- ------------ ------------ ------------ ------------ --------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
A-1/AAA/Aaa............. $ 80,200,000 28.7% $ 80,163,181 100.0% 1.00 6.4% 6.0%
A-2/AAA/Aaa............. 29,800,000 10.6 29,790,755 100.0 2.14 6.3 6.2
A-3/AAA/Aaa............. 43,700,000 15.6 43,685,076 100.0 3.10 6.4 6.3
A-4/AAA/Aaa............. 59,800,000 21.4 59,779,093 100.0 5.02 6.6 6.6
A-5/AAA/Aaa............. 16,300,000 5.8 16,291,208 100.0 7.15 7.0 7.0
A-6/AAA/Aaa............. 50,200,000 17.9 50,165,164 100.0 10.49 7.2 7.2
------------ ----- ------------ ----- --- ---
Total/Wtd. Avg.......... $280,000,000 100.0% $279,874,477 4.37 6.8% 6.8%
============ ===== ============ ===== === ===
</TABLE>
In March 1997, the Company conducted its third securitization, Series 1997-
1, with an initial aggregate principal balance of $200 million through a
public offering. Of the initial $200 million, $154.2 million was settled
immediately and the remaining $45.8 million was settled in April, 1997. The
initial required overcollateralization was 3.0% with a target of 9.6%. The
following table provides certain additional details on the certificates
distributed in the third securitization:
<TABLE>
<CAPTION>
% OF WEIGHTED
CLASS CLASS AVERAGE PASS BOND
PRINCIPAL % OF OFFERED PURCHASE PRINCIPAL LIFE THROUGH EQUIVALENT
CLASS/RATING BALANCES CERTIFICATES PRICE BALANCE (YRS) RATES YIELD
- ------------ ------------ ------------ ------------ --------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
A-1/AAA/Aaa............. $ 47,800,000 23.9% $ 47,598,698 100.0% .96 6.2% 6.3%
A-2/AAA/Aaa............. 29,500,000 14.8 29,485,524 100.0 2.16 6.7 6.6
A-3/AAA/Aaa............. 23,200,000 11.6 23,196,269 100.0 3.08 6.9 6.8
A-4/AAA/Aaa............. 50,600,000 25.3 50,594,722 100.0 4.87 7.2 7.1
A-5/AAA/Aaa............. 11,500,000 5.7 11,494,551 100.0 7.18 7.4 7.4
A-6/AAA/Aaa............. 37,400,000 18.7 37,396,374 100.0 10.65 7.6 7.6
------------ ----- ------------ ----- --- ---
Total/Wtd. Avg.......... $200,000,000 100.0% $199,766,138 4.54 7.3% 7.3%
============ ===== ============ ===== === ===
</TABLE>
50
<PAGE>
The following table provides certain delinquency, bankruptcy, curtailment
and prepayment information for each of the Company's securitization trusts,
prior to any potential recoveries, as of March 31, 1997:
DELINQUENCY TABLE AS OF MARCH 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996-1 1996-2 1997-1
---------------- ---------------- ----------------
% OF % OF % OF
PRINCIPAL TOTAL PRINCIPAL TOTAL PRINCIPAL TOTAL
BALANCE LOANS BALANCE LOANS BALANCE LOANS
--------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Current.................. $37,502 96.17% $274,288 97.94% $156,201 98.65%
======= ====== ======== ====== ======== ======
Delinquency:
30-59 days............. 509 1.31% 2,390 0.85% 1,908 1.20%
60-89 days............. 180 0.46 684 0.24 98 0.06
90+ days............... 370 0.95 1,486 0.53 -- 0.00
------- ------ -------- ------ -------- ------
Total................ 1,059 2.72% 4,560 1.62% 2,006 1.26%
======= ====== ======== ====== ======== ======
Total Pool Balance... $38,993 100.00% $280,068 100.00% $158,345 100.00%
======= ====== ======== ====== ======== ======
</TABLE>
- --------
(1) Cumulative totals since June 1996 for 1996-1 and December 1996 for 1996-2
and March 1997 for 1997-1.
(2) As a percentage of original pool balance.
(3) Including a $511,000 gross default loss during the first quarter of 1997
(14 loans).
Based upon existing performance data reviewed by the Company, management
believes that a majority of all loans more than 90 days delinquent will
eventually become default losses. The documents governing the Company's
securitization transactions generally do not permit the Company to recognize a
default loss on its delinquent loans until the loan is 180 days or more
delinquent. Accordingly, while default losses on loans over 90 days delinquent
are expected, the losses will only be recognized at such time as the loan
becomes 180 days or more contractually delinquent. Of all loans 90 days or
more delinquent at March 31, 1997, $569.9 or 19 loans were from 90 to 119 days
delinquent, $542.8 or 17 loans were from 120 to 149 days delinquent and $743.3
or 19 loans were from 150 to 179 days delinquent.
As of March 31, 1997, the Company had recognized default losses on 14 loans
having an aggregate principal balance of $511,000, all of which were
originally included in the Company's 1996-1 securitization transaction. As the
Company's pools season and the volume of loans originated or purchased by the
Company increases, the Company anticipates that the dollar volume of
delinquencies and default losses (both on an absolute basis and as a
percentage of the principal amount of loans securitized) will increase. Under
the documentation for the Company's securitization transactions, the Company
is required to recognize default losses on 100% of the net principal balance
of any loans 180 days or more delinquent, without regard to any potential
recovery that may be available upon liquidation. While the Company seeks to
liquidate its defaulted loans, any recovery would be reflected in periods
following the period during which the loss is recognized and reduce the
overall losses in the later period. While the Company expects to be able to
realize some recovery on its defaulted loans, the Company does not expect such
recoveries to have a material impact on the Company's financial condition or
results of operations. In calculating the value of its residual interest in
securitization, the Company assumes that recoveries following a default loss
will be zero.
SERVICING OPERATIONS
Servicing. Since March 1996, the Company has retained the servicing rights
(collecting loan payments and handling borrower defaults) to all of the loans
it securitized. On March 8, 1996, the Company entered into a servicing
agreement with Advanta to subservice all of its current and ongoing loan
production in addition to the Pooling and Servicing Agreements which govern
the servicing of loans under securitization. Outsourcing
51
<PAGE>
servicing allows the Company to increase the volume of loans it originates and
acquires without incurring the overhead investment associated with servicing
operations. At March 31, 1997, the Company's servicing portfolio was $570.9
million, consisting of loans sold in securitization transactions and loans held
for sale.
Servicing includes collecting and remitting loan payments, making required
advances, accounting for principal and interest, making required inspections of
the mortgaged property, contacting delinquent borrowers and supervising
foreclosures and property dispositions in the event of unremedied defaults in
accordance with the Company's guidelines. Under the Advanta Agreement, the
Company is obligated to pay Advanta a monthly servicing fee in the amount of
.55% per annum on the declining principal balance of each loan serviced until
such loan is sold in a securitization transaction, and thereafter the servicing
is increased to .65% per annum. In addition, the Company is obligated to pay
Advanta a set-up fee of $15 per loan for servicing. Advanta is required to pay
all expenses related to the performance of its duties under the Advanta
Agreement. Further, Advanta is required to make advances of taxes and required
insurance premiums that are not collected from borrowers with respect to any
mortgage loan, only if it determines that such advances are recoverable from
the mortgagor, insurance proceeds or other sources with respect to such
mortgage loan. If such advances are made, Advanta generally will be reimbursed
prior to the Company receiving the remaining proceeds. Advanta also will be
entitled to reimbursement by the Company for expenses incurred by it in
connection with the liquidation of defaulted mortgage loans and in connection
with the restoration of mortgaged property. If claims are not made or paid
under applicable insurance policies or if coverage thereunder has ceased, the
Company will suffer a loss to the extent that the proceeds from liquidation of
the mortgaged property, after reimbursement of Advanta's expenses in the sale,
are less than the principal balance of the related mortgage loan.
The Company may terminate the Advanta Agreement upon the occurrence of one or
more of the events specified in the Advanta Agreement generally relating to
Advanta's proper and timely performance of its duties and obligations under the
Advanta Agreement. Either the Company or Advanta may terminate the Advanta
Agreement without cause upon 90 days' written notice to the other party. If the
Company terminates the Advanta Agreement without cause, the Company must pay a
termination fee of 1% of the aggregate principal balance of the mortgage loans
being serviced by Advanta at such time. If the Company transfers servicing of
any amount of mortgage loans being serviced by Advanta to another servicer
without terminating the Advanta Agreement, the Company must pay $100 per
mortgage loan transferred. With respect to mortgage loans securitized by the
Company, the Company cannot terminate Advanta without the approval of the other
parties to the securitization transaction.
Advanta is entitled to retain any late payment charges, penalties and
assumption fees collected in connection with the mortgage loans. Advanta
receives any benefit derived from interest earned on collected principal and
interest payments between the date of collection and the date of remittance to
the Company and from interest earned on tax and insurance impound funds.
Advanta is required to remit to the Company no later than the 25th day of each
month all principal and interest collected from borrowers during the monthly
reporting period.
Delinquencies and Foreclosures. Loans originated or acquired by the Company
are secured by mortgages, deeds of trust, security deeds or deeds to secure
debt, depending upon the prevailing practice in the state in which the property
securing the loan is located. Depending on local law, foreclosure is effected
by judicial action or nonjudicial sale, and is subject to various notice and
filing requirements. In general, the borrower, or any person having a junior
encumbrance on the real estate, may cure a monetary default by paying the
entire amount in arrears plus other designated costs and expenses incurred in
enforcing the obligation during a statutorily prescribed reinstatement period.
Generally, state law controls the amount of foreclosure expenses and costs,
including attorneys fees, which may be recovered by a lender. After the
reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan and
may be required to pay the loan in full to prevent the scheduled foreclosure
sale. Where a loan has not yet been sold or securitized, the Company will
generally allow a borrower to reinstate the loan up to the date of foreclosure
sale. Although foreclosure sales are typically public sales, third-party
purchasers rarely bid in excess of the lender's mortgage because of the
difficulty of determining the exact status of title to the property, the
52
<PAGE>
possible deterioration of the property during the foreclosure proceedings and
a requirement that the purchaser pay for the property in cash or by cashier's
check. Thus, the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the sum of the principal amount
outstanding under the loan, accrued and unpaid interest and the expenses of
foreclosure. Depending on market conditions, the ultimate proceeds of the sale
may not equal the lender's investment in the property.
The Company generally has chosen not to pursue foreclosures due to the cost
involved and the likelihood that little or no proceeds would remain to be paid
to the Company after the satisfaction of the first mortgage on the property.
Instead of pursuing foreclosure, the Company and Advanta have adopted an
aggressive preventive policy to attempt to avoid foreclosure proceedings.
Under this policy, Advanta will first call a borrower if the loan payment is
five days late, with late fees being imposed as permitted by law. This first
call is designed to determine the reason the loan payment is late and
encourage borrowers to make payments on time. Advanta continues an aggressive
loan collection policy, including telephone calls and written correspondence
to borrowers, up until the loan payment is more than 90 days delinquent. After
a loan becomes 90 days delinquent, Advanta escalates its collection procedures
and has the option to take steps such as garnishing the borrowers wages.
Because of the high LTV of the Company's products, during this escalated
collection process non-equity collection methods are typically pursued,
instead of foreclosure. The Company's loans are mandatorily charged-off when
they become 180 days delinquent, even though there is still a possibility that
amounts may be recovered.
The following table sets forth the combined delinquency and foreclosure
experience of: (i) loans held for sale or securitization included in the
Company's servicing portfolio and (ii) securitized loans originated by the
Company and serviced by Advanta for the periods indicated.
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1996 1996 1996 1997
-------- ------------- ------------ ---------
<S> <C> <C> <C> <C>
Total loans serviced......... $44,596 $50,965 $330,759 $570,920
------- ------- -------- --------
Loan count................... 1,321 1,533 9,669 16,627
------- ------- -------- --------
30-59 days delinquent........ $ 267 $ 173 $ 2,653 $ 5,089
60-89 days delinquent........ 34 50 980 1,041
90 days or more delinquent... 74 206 1,420 4,572
------- ------- -------- --------
Total delinquencies...... $ 375 $ 429 $ 5,053 $ 10,702
======= ======= ======== ========
Default losses............... $ -- $ -- $ -- $ 511(1)
% of total principal of loans
serviced:
30-59 days delinquent...... 0.599% 0.339% 0.802% 0.891%
60-89 days delinquent...... 0.076 0.098 0.296 0.182
90 days or more
delinquent................ 0.166 0.404 0.429 0.801
------- ------- -------- --------
Total delinquencies...... 0.841% 0.841% 1.527% 1.874%
======= ======= ======== ========
Default losses............... -- % -- % -- % 0.090%
</TABLE>
- --------
(1) At March 31, 1997, the Company recognized default losses on 14 loans
having an aggregate principal balance of $511,000, all of which were
originally included in the Company's 1996-1 securitization.
While information concerning the three securitizations which included loans
originated and acquired by the Company disclose no aggregate default losses
until February 1997, the Company's loans included in these securitizations
have been outstanding for a relatively short period of time. Consequently, the
delinquencies, foreclosures and loss experience to date on any particular loan
pool may not be indicative of results to be experienced in the future on that
particular loan pool or on any of the Company's other loan pools.
53
<PAGE>
COMPETITION
The consumer finance market is highly competitive. One of the primary
distinctions among market participants is type of loan products offered. The
Company competes with a number of finance companies providing financing
programs to individuals who cannot qualify for traditional home equity
financing due to a lack of equity in their homes. To a lesser extent the
Company competes with commercial banks, savings and loan associations, credit
unions, insurance companies and captive finance arms of major manufacturing
companies that apply more traditional lending criteria to the consumer credit
approval process. Many of these competitors or potential competitors are
substantially larger and have significantly greater capital and other resources
than the Company. In the future, the Company may also face competition from
government-sponsored entities, such as Fannie Mae and Freddie Mac.
REGULATION
The operations of the Company are subject to extensive regulation,
supervision and licensing by federal, state and local government authorities.
Regulated matters include, without limitation, loan origination, credit
activities, maximum interest rates and finance and other charges, disclosure to
customers, the terms of secured transactions, the collection, repossession and
claims handling procedures utilized by the Company, multiple qualification and
licensing requirements for doing business in various jurisdictions and other
trade practices.
The Company's loan origination activities are subject to the laws and
regulations in each of the states in which those activities are conducted. The
Company's activities as a lender are also subject to various federal laws
including the Truth in Lending Act, the Real Estate Settlement Procedures Act,
the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act and the Fair
Credit Reporting Act.
The Truth in Lending Act ("TILA") and Regulation Z promulgated thereunder
contain disclosure requirements designed to provide consumers with uniform,
understandable information with respect to the terms and conditions of loans
and credit transactions in order to give them the ability to compare credit
terms. TILA also guarantees consumers a three day right to cancel certain
credit transactions including loans of the type originated by the Company.
Management of the Company believes that it is in substantial compliance in all
material respects with TILA.
The Company is also required to comply with the Equal Credit Opportunity Act
of 1974, as amended ("ECOA"), which prohibits creditors from discriminating
against applicants on the basis of race, color, sex, age or marital status.
Regulation B promulgated under ECOA restricts creditors from obtaining certain
types of information from loan applicants. It also requires certain disclosures
by the lender regarding consumer rights and requires lenders to advise
applicants of the reasons for any credit denial. In instances where the
applicant is denied credit or the rate or charge for loans increases as a
result of information obtained from a consumer credit agency, another statute,
the Fair Credit Reporting Act of 1970, as amended, requires lenders to supply
the applicant with the name and address of the reporting agency. The Company is
also subject to the Real Estate Settlement Procedures Act and is required to
file an annual report with the Department of Housing and Urban Development
pursuant to the Home Mortgage Disclosure Act.
In addition, the Company is subject to various other federal and state laws,
rules and regulations governing, among other things, the licensing of, and
procedures that must be followed by, mortgage lenders and servicers, and
disclosures that must be made to consumer borrowers. Failure to comply with
these laws may result in civil and criminal liability and may, in some cases,
give consumer borrowers the right to rescind their mortgage loan transactions
and to demand the return of finance charges paid to the Company.
In the course of its business, the Company may acquire properties securing
loans that are in default through foreclosure proceedings. There is a risk that
hazardous or toxic waste could be found on such properties. In such event, the
Company could be held responsible for the cost of cleaning up or removing such
waste, and such cost could exceed the value of the underlying properties.
54
<PAGE>
Because the Company's business is highly regulated, the laws, rules and
regulations applicable to the Company are subject to regular modification and
change. There are currently proposed various laws, rules and regulations which,
if adopted, could impact the Company. There can be no assurance that these
proposed laws, rules and regulations, or other such laws, rules or regulations,
will not be adopted in the future which could make compliance much more
difficult or expensive, restrict the Company's ability to originate, broker,
purchase or sell loans, further limit or restrict the amount of commissions,
interest and other charges earned on loans originated, brokered, acquired or
sold by the Company, or otherwise adversely affect the business or prospects of
the Company.
EMPLOYEES
As of May 31, 1997, the Company employed 351 persons. Of the total number of
employees at such date, 207 were located at the Company's headquarters in
Irvine, California and 144 in the Company's branch offices. None of the
Company's employees is subject to a collective bargaining agreement. The
Company believes that its relations with its employees are good.
PROPERTIES
The executive and administrative offices of the Company are located at 3347
Michelson Drive, Irvine, California, and consist of approximately 47,000 square
feet. The lease on these premises extends through March 31, 2002, and the
current annual rental is approximately $1,369,000.
The Company also leases space for its branch offices. The Company has been
able to maintain low overhead expenses by leasing space in office complexes
located in accessible, but non-prime locations. These facilities aggregate
approximately 22,000 square feet, with an annual aggregate base rental of
approximately $342,000. The offices range in size from 1,200 to 4,000 feet with
lease terms typically ranging from three to five years. In general, the leases
expire between 1997 and 2001, and several lease agreements contain options to
extend the term of the lease.
The Company believes that its facilities are adequate for its current needs
and that additional space is available for future expansion.
LEGAL PROCEEDINGS
The Company is involved from time to time in routine litigation arising in
the normal course of its business. The Company believes that it is not a party
to any material pending litigation which, if decided adversely to the Company,
would have a significant adverse effect on the business, income, assets or
operations of the Company. The Company is not aware of any material threatened
litigation that might involve the Company.
55
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Information with respect to the directors and executive officers as of June
18, 1997 is as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Chairman of the Board and Chief Executive
Todd A. Rodriguez.............. 29 Officer
Walter F. Villaume............. 36 President, Secretary and Director
Terrance J. Wolfe.............. 43 Chief Credit Officer
Li-Lin Ko...................... 47 Chief Financial Officer
Executive Vice President--Operations and
Jo Ann Niffenegger............. 33 Director
John B. Shurance............... 35 Chief Information Officer
James T. Heaton(1)(2).......... 42 Director
Robert K. George(1)(2)......... 48 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Todd A. Rodriguez founded the Company in 1989, and he has served as the
Company's Chief Executive Officer and Chairman of the Board since its
incorporation. Mr. Rodriguez has had over 10 years of experience in the
mortgage banking industry.
Walter F. Villaume joined the Company as a Director in 1992 and became its
President in December 1995. Mr. Villaume is an attorney, and has been licensed
to practice law in the State of California since 1985. From 1990 to November
1994, Mr. Villaume had an independent practice specializing in real estate and
corporate law, during which time, he was outside general counsel to the
Company and acting as the Company's secretary since January 1992. Mr. Villaume
is also the founder and former owner of Pacific Prime Mortgage Corporation,
the Company's largest wholesale broker.
Terrance J. Wolfe joined the Company in February 1995 as a consultant, and
became Chief Credit Officer of the Company in December 1996. Prior to joining
the Company, Mr. Wolfe founded, owned and served as president of American Home
Capital from 1989 to 1994. Mr. Wolfe has an extensive background in secondary
marketing, serving as Senior Vice President--Secondary Marketing for Cal Star
Financial Services, Senior Vice President--Secondary Marketing for
BrooksAmerica and Senior Vice President--Secondary Marketing for Century
National Mortgage Corporation.
Li-Lin Ko joined the Company as its Chief Financial Officer in September
1995. Ms. Ko has over eight years of experience as a Chief Financial Officer,
serving from 1994 to 1995 at General American Financial Corporation and from
1988 to 1994 at Plaza Home Mortgage Corp. Prior to 1988, Ms. Ko was the
Director of Internal Audit at Beverly Hills Savings & Loan Association. Ms. Ko
is a certified public accountant.
Jo Ann Niffenegger joined the Company in March 1995 as the Loan Closing
Manager and became a director in June 1997. In 1995, Ms. Niffenegger became
the Company's Executive Vice President--Operations, the position which she
currently holds. From 1992 to February 1995, Ms. Niffenegger was the Assistant
Vice President--Finance for Bankers United Funding Corporation.
John B. Shurance has been the Chief Information Officer since he joined the
Company in 1995. From 1992 to 1995, Mr. Shurance was a Product Specialist--
Productivity Services Group and a Research and Development Manager for Micro-
Frame Technologies Inc. From 1990 to 1995, Mr. Shurance was a Senior Partner
with JB & Associates, a computer software and network consulting business.
James T. Heaton joined the Company as a director in June 1997. Mr. Heaton is
currently serving as Vice President Business Development for Silver America,
Inc., a contract manufacturer. Over the past fifteen years, he has acquired
executive-level experience in the plastic injection molding industry, where
his positions have included Vice President Business Development, Sales
Manager, General Manager, and President/CEO.
56
<PAGE>
Robert K. George joined the Company as a director in June 1997. Mr. George
has for the last five years been Managing Partner of the law firm of George &
Shields, specializing in real estate law, corporate law and financial
transactions. Mr. George has been a Member of the State Bar of California since
1974. Having been in private practice for over twenty years, Mr. George has
also served as a Judge Pro Tem for the Los Cerritos Municipal Court. Mr. George
is a licensed real estate broker and is involved with the California
Association of Mortgage Brokers. He has served as a board member of many
organizations including the Bank of Lakewood, an independent community bank,
and Ergo-Tech International Inc., a manufacturing corporation.
BOARD COMMITTEES
The Company's Board has recently established an Audit Committee and a
Compensation Committee. The Audit Committee's functions include recommending to
the Board the engagement of the Company's independent certified public
accountants, reviewing with those accountants the plan and results of their
audit of the financial statements and determining the independence of the
accountants. The Compensation Committee reviews and makes recommendations with
respect to compensation of officers and key employees, and is responsible for
the grant of options under the Company's Stock Option Plan.
DIRECTOR COMPENSATION
Directors are elected annually to serve until the next annual meeting of
stockholders and until their successors are elected and qualified. Non-employee
directors of the Company are currently paid $2,500 for their personal
attendance at any meeting of the Board and $1,000 for attendance at any
telephonic meeting of the Board or at any meeting of a committee of the Board.
Directors also are reimbursed for their reasonable travel expenses incurred in
attending Board or committee meetings. Pursuant to the terms of the 1996 Plan,
each non-employee director is automatically granted a stock option to purchase
10,000 shares of Common Stock at fair market value on the date such director is
appointed to the Board and 3,500 shares of Common Stock at fair market value
annually thereafter. See "Management--Stock Option Plan."
57
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth both cash and non-cash compensation paid or
to be paid by the Company to, Todd A. Rodriguez, the Chief Executive Officer
of the Company, and the three other most highly compensated executive officers
whose compensation exceeded $100,000 (the "Named Executive Officers"), for the
year ended December 31, 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------- ------------
NUMBER OF
FISCAL YEAR SECURITIES
NAME AND PRINCIPAL ENDED OTHER ANNUAL UNDERLYING
POSITION DECEMBER 31 SALARY BONUS COMPENSATION OPTIONS(1)
------------------ ----------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Todd A. Rodriguez........ 1996 $285,000 -- $164,879(3) 28,452
Chief Executive
Officer(2)
Walter F. Villaume....... 1996 $287,870 -- $117,350(4) 28,452
President(2)
Terrance J. Wolfe........ 1996 $ 20,000(5) -- $172,459(6) 1,138,110
Chief Credit Officer(2)
Li-Lin Ko................ 1996 $104,300 $25,000 -- 59,970
Chief Financial
Officer(2)
</TABLE>
- --------
(1) See "--Stock Option Plan," below.
(2) For a description of the employment contract between this officer and the
Company, see "Employment Agreements" below.
(3) This amount consists of distribution of S Corporation profits in the
amount of $109,650, lease and insurance payments on an automobile equal to
$21,974 and other miscellaneous perquisites equal to $33,255.
(4) This amount consists of distribution of S Corporation profits in the
amount of $105,350 and miscellaneous perquisites equal to $12,000.
(5) This amount represents one month's base salary. On December 1, 1996, Mr.
Wolfe entered into an employment agreement with the Company pursuant to
which he is paid an annual base salary of $240,000.
(6) This amount consists solely of amounts paid to Mr. Wolfe in compensation
for services he provided to the Company as an independent contractor.
EMPLOYMENT AGREEMENTS
The Company and Todd A. Rodriguez have entered into a five year employment
agreement, effective as of September 1, 1996, pursuant to which Mr. Rodriguez
will serve as Chief Executive Officer of the Company, and will be entitled to
an annual base salary of $420,000, subject to increase at the discretion of
the Board. In addition, the employment agreement provides for payment of an
annual bonus to Mr. Rodriguez equal to 2.5% of the Company's earnings before
taxes, as set forth in the Company's annual audited financial statements.
During the term of the employment agreement, the Company is obligated to
maintain officers and directors liability insurance that would cover Mr.
Rodriguez in an amount of no less than $5,000,000. The employment agreement
also provides that the Company shall take action within its powers to include
Mr. Rodriguez among the slate of directors proposed to be nominated by the
Board at any applicable stockholders meeting.
Mr. Rodriguez's employment agreement terminates on August 31, 2001 unless
sooner terminated pursuant to its terms. The Company may terminate the
employment agreement for "cause" effective immediately upon written notice
thereof to Mr. Rodriguez. For "cause" includes an act of fraud, embezzlement
or similar conduct
58
<PAGE>
involving the Company; any arrest for a violation of any criminal statute
constituting a felony if the Board reasonably determines that the continuation
of Mr. Rodriguez's employment after such event would have a adverse impact on
the operations or reputation of the Company in the financial community; or a
continuing, repeated willful failure or refusal of Mr. Rodriguez to perform
his duties. If Mr. Rodriguez's employment is terminated without cause, he will
be entitled to a severance payment equal to three times the greater of (i) the
base salary and bonus received during the immediately preceding year, or (ii)
the base salary and bonus for the current year to be determined on a pro rata
basis. In addition, upon termination without cause, all options granted to Mr.
Rodriguez over the term of the employment agreement become immediately
exercisable and remain exercisable for a period of twelve months. Finally, so
long as Mr. Rodriguez beneficially owns 10% or more of the outstanding shares
of Common Stock of the Company, or, collectively with Walter Villaume,
beneficially owns 20% or more of the outstanding shares of the Company's
Common Stock, the Company may not terminate him under any circumstances.
The Company and Walter F. Villaume have entered into a five year employment
agreement, effective as of September 1, 1996, pursuant to which Mr. Villaume
will serve as President of the Company, and will be entitled to an annual base
salary of $420,000, subject to increase at the discretion of the Board. In
addition, the employment agreement provides for payment of an annual bonus to
Mr. Villaume equal to 2.5% of the Company's earning before taxes, as set forth
in the Company's annual audited financial statements. During the term of the
employment agreement, the Company is obligated to maintain officers and
directors liability insurance that would cover Mr. Villaume in an amount of no
less than $5,000,000. The employment agreement also provides that the Company
shall take action within its powers to include Mr. Villaume among the slate of
directors proposed to be nominated by the Board at any applicable stockholders
meeting. The employment agreement terminates on August 31, 2001 unless sooner
terminated pursuant to its terms. Mr. Villaume's employment contract contains
identical termination provisions as those contained in Mr. Rodriguez'
employment contract which are described above.
The Company and Terrance J. Wolfe have entered into a five year employment
agreement, effective as of December 1, 1996, pursuant to which Mr. Wolfe will
serve as Chief Credit Officer of the Company, and will be entitled to an
annual base salary of $240,000, subject to increase at the discretion of the
Board. The employment agreement terminates on November 31, 2001 unless sooner
terminated pursuant to its terms. The employment agreement contains standard
intellectual property assignment and non-disclosure provisions designed to
safeguard the Company's intellectual property, including its underwriting
system.
The Company and Li-Lin Ko have entered into an employment agreement,
effective as of September 14, 1995, pursuant to which Ms. Ko will serve as
Chief Financial Officer of the Company, and will be entitled to an annual base
salary of $110,000, subject to increase at the discretion of the Board.
The Company and John B. Shurance have entered into a five year employment
agreement, effective as of April 1, 1997, pursuant to which Mr. Shurance will
serve as Chief Information Officer of the Company, and will be entitled to an
annual base salary of $240,000, subject to increase at the discretion of the
Board. The employment agreement terminates on March 31, 2002 unless sooner
terminated pursuant to its terms. The employment agreement contains standard
intellectual property assignment and non-disclosure provisions designed to
safeguard the Company's intellectual property, including its loan management
system.
Other than Mr. Rodriguez, Mr. Villaume, Mr, Wolfe, Ms. Ko and Mr. Shurance,
officers are appointed by and serve at the discretion of the Board.
59
<PAGE>
STOCK OPTION GRANTS
The following table sets forth information regarding stock options granted
in 1996 to the Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
RATES OF STOCK PRICE
APPRECIATION FOR OPTION
INDIVIDUAL GRANTS TERM(3)
------------------------------------------- -----------------------
PERCENT OF
TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO EXERCISE
UNDERLYING EMPLOYEES OR BASE
OPTIONS IN FISCAL PRICE EXPIRATION
NAME GRANTED(1) YEAR(1) ($/SH.)(2) DATE 5% 10%
- ---- ---------- ---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Todd A. Rodriguez....... 28,452 2.0% $1.33 12/20/06 $ 934,933 $ 1,476,659
Walter F. Villaume...... 28,452 2.0 1.33 12/20/06 934,933 1,476,659
Terrance J. Wolfe....... 1,138,110 81.5 2.11 12/20/06 36,510,569 58,180,183
Li-Lin Ko............... 59,970 4.3 .92 12/20/06 1,995,202 3,137,031
</TABLE>
- --------
(1) Options covering an aggregate of 1,397,256 shares were granted to
employees of the Company and its subsidiaries during the year ended
December 31, 1996.
(2) The exercise price and the tax withholding obligations related to exercise
may be paid by delivery of already owned shares, subject to certain
conditions.
(3) The potential realizable value is based on the term of the option at the
time of grant which is ten years for each of the options set forth in the
table. All amounts have been calculated using an initial public offering
price of $21.50 per share and at assumed annual rates of stock
appreciation of 5% and 10% thereafter. The potential realizable value is
not intended to forecast the future appreciation of the Common Stock.
STOCK OPTIONS
The following table summarizes information with respect to the number of
shares of Common Stock underlying stock options held by the Named Executive
Officers at December 31, 1996 and the value of unexercised options at December
31, 1996, based upon the estimated offering price of $21.50 per share less the
exercise price thereof. None of the Named Executive Officers exercised any
options during 1996.
AGGREGATED YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1996 DECEMBER 31, 1996(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Todd A. Rodriguez........... 28,452 -- $ 573,877 $ --
Walter F. Villaume.......... 28,452 -- 573,877 --
Terrance J. Wolfe........... 426,792 711,318 8,275,497 13,792,456
Li-Lin Ko................... 59,970 -- 1,234,183 --
</TABLE>
- --------
(1) Value of unexercised options has been calculated using an initial public
offering price of $21.50 per share.
STOCK OPTION PLAN
In December 1996, the Company adopted its 1996 Plan. Each director, officer,
employee and consultant of the Company or any of its current or future
subsidiaries is eligible to be considered for the grant of awards under the
1996 Plan. The maximum number of shares of Common Stock that may be issued
pursuant to awards granted under the 1996 Plan is 1,707,162, subject to
certain adjustments to prevent dilution. Any shares of Common Stock subject to
an award which for any reason expires or terminates unexercised are again
available for issuance under the 1996 Plan.
60
<PAGE>
The 1996 Plan will be administered by the Compensation Committee or another
committee of two or more non-employee directors appointed by the Board (the
"Committee"). Subject to the provisions of the 1996 Plan, the Committee will
have full and final authority to select the executives and other employees to
whom awards will be granted thereunder, to grant the awards and to determine
the terms and conditions of the awards and the number of shares to be issued
pursuant thereto; provided, however, that under the terms of the 1996 Plan,
non-employee directors are automatically granted Non-Statutory Stock Options to
purchase 10,000 shares of Common Stock upon initial election to the Board and
then 3,500 shares of Common Stock upon each reelection to the Board at its fair
market value on the date of grant.
Awards. The 1996 Plan authorizes the issuance of awards consisting of options
to purchase the Company's Common Stock, which options may be designated either
Incentive Stock Options or Non-Statutory Stock Options. An award may provide
for the issuance of Common Stock for any lawful consideration, including
services rendered or, to the extent permitted by applicable state law, to be
rendered.
An award granted under the 1996 Plan to an employee may include a provision
conditioning or accelerating the receipt of benefits, either automatically or
in the discretion of the Committee, upon the occurrence of specified events,
such as a change of control of the Company, an acquisition of a specified
percentage of the voting power of the Company or a dissolution, liquidation,
merger, reclassification, sale of substantially all of the property and assets
of the Company or other significant corporate transaction.
An award under the 1996 Plan may permit the recipient to pay all or part of
the purchase price of the shares or other property issuable pursuant to the
award, and/or to pay all or part of the recipient's tax withholding obligations
with respect to such issuance, by delivering previously owned shares of capital
stock of the Company or other property, or by reducing the amount of shares or
other property otherwise issuable pursuant to the award. If an option granted
under the 1996 Plan permitted the recipient to pay for the shares issuable
pursuant thereto with previously owned shares, the option may grant the
recipient the right to "pyramid" his or her previously owned shares, i.e., to
exercise the option in successive transactions, starting with a relatively
small number of shares and, by a series of exercises using shares acquired from
each transaction to pay the purchase price of the shares acquired in the
following transaction, to exercise the option for a larger number of shares
with no more investment than the original share or shares delivered.
Plan Duration. The 1996 Plan became effective upon its adoption by the Board
on December 31, 1996, and was approved by the Company's stockholders on
December 31, 1996. As of the date hereof, the Company has granted options
covering 1,397,256 shares of Common Stock to certain executive officers of the
Company, with exercise prices ranging from $.92 to $2.11 per share. No awards
may be granted under the 1996 Plan after December 31, 2006. Although any award
that was duly granted on or prior to such date may thereafter be exercised or
settled in accordance with its terms, no shares of Common Stock may be issued
pursuant to any award made after December 31, 2006.
Amendments. The Committee may amend or terminate the 1996 Plan at any time
and in any manner, subject to the following: (i) no recipient of any award may,
without his or her consent, be deprived thereof or of any of his or her rights
thereunder or with respect thereto as a result of such amendment or
termination; and (ii) if any rule or regulation promulgated by the Securities
and Exchange Commission (the "Commission"), the Internal Revenue Service or any
national securities exchange or quotation system upon which any of the
Company's securities are listed requires that any such amendment be approved by
the Company's stockholders, then such amendment will not be effective until it
has been approved by the Company's stockholders.
Form S-8 Registration. The Company intends to file a registration statement
under the Securities Act to register the 1,707,162 shares of Common Stock
reserved for issuance under the 1996 Plan. Such registration statement is
expected to be filed shortly following the date of this Prospectus and will
become effective immediately upon filing with the Commission. Shares issued
under the 1996 Plan after the effective date of such registration statement
generally will be available for sale to the public without restriction, except
for shares issued to affiliates of the Company, which will remain subject to
the volume and manner of sale limitations of Rule 144 and a 180 day lock-up
agreement. See "Underwriting." Options to purchase 1,417,256 shares of Common
Stock have previously been granted under the 1996 Plan.
61
<PAGE>
401(K) PLAN
Effective for the 1996 fiscal year, the Board adopted a defined contribution
401(k) profit-sharing plan (the "401(k) Plan") intended to qualify under
Section 401 of the Internal Revenue Code of 1986, as amended (the "Code").
Employees of the Company who are at least 18 years of age and who have
completed a six month eligibility period are eligible to participate in the
401(k) Plan by contributing to the plan on the first day of each month. A
participating employee may make pre-tax contributions, subject to limitations
under the Code, of a percentage (not to exceed 20%) of his or her total
compensation and may direct such contributions into one or more investment
options offered by the 401(k) Plan. Employee contributions and the investment
earnings thereon will be fully vested at all times. The Company, at its
discretion, may make matching contributions in an amount equal to a percentage
of employee contributions and additional profit-sharing contributions for the
benefit of eligible participating employees. To date, the Company has not made
matching contributions. Additional employer profit-sharing contributions, if
any, will be allocated to each such eligible participating employee's account
in the same proportion that such eligible participating employee's
compensation bears to all participating employees' compensation. All
contributions are allocated to the employee's individual account.
62
<PAGE>
CERTAIN TRANSACTIONS
The information set forth herein briefly describes certain transaction
between the Company and certain affiliated parties. Future transactions with
affiliated parties will be approved by a majority of the Company's
disinterested directors and will be on terms no less favorable to the Company
than those that could be obtained from unaffiliated parties.
Pacific Prime Mortgage Corporation, an entity formerly owned by Walter F.
Villaume, the President of the Company, is currently the largest producing
wholesale broker of the Company. In 1995 and 1996, Pacific Prime Mortgage
Corporation was paid $1,475,000 and $9,222,400, respectively, by the Company
in connection with its loan origination activities. In October 1996, Mr.
Villaume sold his interest in Pacific Prime Mortgage Corporation to his
partner John Heatly. Prior to such sale the Company had paid Pacific Prime
Mortgage Corporation $5,003,787 for loan origination activities conducted from
January 1, 1996 to September 30, 1996. Mr. Heatly holds a warrant to purchase
47,424 shares of the Company's Common Stock at an exercise price of $2.25.
Such warrant expires on the earlier to occur of December 31, 2006 or the date
on which Pacific Prime Mortgage Corporation ceases to do business with the
Company. The Company anticipates that Pacific Prime Mortgage Corporation will
continue to be one of its largest, if not the largest, producing wholesale
brokers. See "Description of Capital Stock--Warrants."
Pursuant to an employment agreement between the Company and John B.
Shurance, the Company licensed certain loan management software from Mr.
Shurance. In 1996 and 1995, the Company paid Mr. Shurance $171,480 and
$97,020, respectively, in license fees. Additionally, the Company purchased
approximately $36,000 in computer hardware and supplies from Mr. Shurance
during that same two year period. The employment agreement was amended on
April 1, 1997 to eliminate the license fee arrangement. See "Management--
Employment Agreements."
In December 1996, the Company purchased in a bulk acquisition $136.0 million
of core loans from CSFB Mortgage, a warrant holder of the Company, in order to
complete its second securitization transaction. These loans had previously
been originated by the Company and sold to CSFB Mortgage pursuant to a whole
loan sale facility between the Company and CSFB Mortgage. The loans were sold
to CSFB Mortgage at an premium of 4.8% and were repurchased by the Company at
a premium of 6.4%. The Company considers the sale and repurchase as separate
transactions and, although the net result of such transactions was an increase
in the cost basis of the loans sold and repurchased, the Company believes that
such transactions were on terms no less favorable to the Company than those
that could have been obtained from an unaffiliated third party. There was no
obligation on the part of the Company to buy these loans from CSFB Mortgage
and CSFB Mortgage was marketing these loans to third parties generally. For a
description of the various agreements between the Company and CSFB Mortgage,
see "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources" and "Description of Capital
Stock--Warrants."
63
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of May 31, 1997 and as adjusted to
reflect the sale of shares of Common Stock offered hereby, for (i) each person
who is known to the Company to be the beneficial owner of more than 5% of the
outstanding Common Stock, (ii) each of the Company's directors, (iii) each of
the Named Executive Officers, (iv) all directors and executive officers of the
Company as a group, and (v) each Selling Stockholder. The address of each
person listed is in care of the Company, 3347 Michelson, Irvine, California
92012, unless otherwise set forth below such person's name.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO OFFERING(1) THE OFFERING(2)
------------------------ SHARES ------------------------
NUMBER OF PERCENT BEING NUMBER OF PERCENT
NAME OF BENEFICIAL OWNER SHARES OF CLASS OFFERED SHARES OF CLASS
- ------------------------ ------------ -------- ------- ------------ --------
<S> <C> <C> <C> <C> <C>
Todd A. Rodriguez....... 6,028,452(3) 50.1% 6,028,452(3) 35.4%
Walter F. Villaume...... 6,022,452(4) 50.1% 6,022,452(4) 35.4%
Credit Suisse First
Boston Mortgage Capital
Corp................... 1,897,800(5) 13.7% 1,897,800(5) 10.0%
Merrill Lynch Mortgage
Capital, Inc........... 164,898(5) 1.4% 135,000 29,898(5) *
Merrill Lynch, Pierce,
Fenner & Smith
Incorporated........... 109,932(5) * 90,000 19,932(5) *
Terrance J. Wolfe....... 569,058(6) 4.5% 569,058(6) 3.2%
Li-Lin Ko............... 59,970(6) * 59,970(6) *
Jo Ann Niffenegger...... 15,808(7) * 15,808(7) *
James T. Heaton......... -- (8) * -- (8) *
Robert K. George........ -- (8) * -- (8) *
All executive officers
and directors as a
group (8 persons)...... 12,711,548(9) 100% 12,711,548(9) 71.8%
</TABLE>
- --------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission that deem shares to be beneficially
owned by any person who has or shares voting or investment power with
respect to such shares. Unless otherwise indicated, the persons named in
this table have sole voting and sole investment power with respect to all
shares shown as beneficially owned, subject to community property laws
where applicable. In computing the number of shares beneficially owned by
a person and the percentage ownership of that person, shares of Common
Stock subject to options or warrants held by that person that are
currently exercisable or exercisable within 60 days of the date of this
Prospectus are deemed outstanding. Such shares, however, are not deemed
outstanding for the purposes of computing the percentage ownership of each
other person. Accordingly, the beneficial ownership percentages shown
above exceed 100%.
(2) Assumes the exercise by Merrill Lynch Mortgage Capital, Inc. and Merrill
Lynch, Pierce, Fenner & Smith Incorporated (collectively referred to as
"Merrill Lynch"), concurrently with this offering, of warrants to purchase
an aggregate of 225,000 shares of Common Stock and the sale of such shares
in this offering. Also assumes no exercise of the Underwriters' over-
allotment option. If the Underwriters' over-allotment option is exercised
in full, (i) Merrill Lynch will sell an additional 49,830 shares of Common
Stock, (ii) Credit Suisse First Boston Mortgage Capital Corporation will
sell shares of Common Stock and (iii) , , and will sell
, , and shares of Common Stock, respectively.
(3) Includes 28,452 shares of Common Stock underlying stock options that are
currently exercisable.
(4) Includes 28,452 shares of Common Stock underlying stock options that are
currently exercisable.
(5) Consists entirely of shares of Common Stock underlying warrants that are
currently exercisable.
(6) Consists entirely of shares of Common Stock underlying options that are
currently exercisable.
(7) Includes 15,808 shares of Common Stock underlying stock options that are
currently exercisable. Excludes 31,616 shares of Common Stock underlying
stock options that are outstanding, but not exercisable.
(8) Excludes 10,000 shares of Common Stock underlying stock options that are
outstanding, but not exercisable.
(9) Includes 717,548 shares of Common Stock underlying options that are
currently exercisable.
64
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The total number of shares that the Company is authorized to issue is
60,000,000, consisting of 50,000,000 shares of Common Stock, par value $0.001
per share, and 10,000,000 shares of Preferred Stock, par value $0.001 per
share. At March 31, 1997, the Company had two holders of record of the
Company's capital stock. The following statements are brief summaries of
certain provisions relating to the Company's capital stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters on which the holders of Common Stock are entitled to
vote. The holders of Common Stock are entitled to receive ratably dividends
when, as and if declared by the Board out of funds legally available therefor.
In the event of liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled, subject to the rights of holders of
Preferred Stock issued by the Company, if any, to share ratably in all assets
remaining available for distribution to them after payment of liabilities and
after provision is made for each class of stock, if any, having preference
over the Common Stock.
The holders of Common Stock have no preemptive or conversion rights and they
are not subject to further calls or assessments by the Company. There are no
redemption or sinking fund provisions applicable to the Common Stock. The
outstanding shares of Common Stock are, and the Common Stock issuable pursuant
to this Prospectus will be, when issued, fully paid and nonassessable.
PREFERRED STOCK
The Board has the authority to issue the authorized and unissued Preferred
Stock in one or more series with such designations, rights and preferences as
may be determined from time to time by the Board. Accordingly, the Board is
empowered, without stockholder approval, to issue Preferred Stock with
dividend, liquidation, conversion, voting or other rights which adversely
affect the voting power or other rights of the holders of the Company's Common
Stock. In the event of issuance, the Preferred Stock could be utilized, under
certain circumstances, as a way of discouraging, delaying or preventing an
acquisition or change in control of the Company. The Company does not
currently intend to issue any shares of its Preferred Stock.
WARRANTS
In connection with entering into the First Boston Facility, on October 2,
1996, the Company issued warrants to purchase 1,687,554 shares of Common Stock
to CSFB Mortgage at an exercise price of $2.21 per share. The Company issued
warrants to purchase 210,246 additional shares of Common Stock at an exercise
price of $2.21 to CSFB Mortgage on December 17, 1996, in consideration for
amending the First Boston Facility. Such warrants are fully exercisable and
expire on October 2, 2111 and December 17, 2111, respectively.
The Company issued warrants to purchase 274,830 shares of Common Stock to
Merrill Lynch at an exercise price of $2.18 per share on December 6, 1996.
Such warrants are fully exercisable and expire on December 6, 2111.
On December 31, 1996, the Company issued warrants to purchase 47,424 shares
of Common Stock to John Heatly at an exercise price of $2.25 per share. Such
warrants vest in three equal installments on each of June 1, 1997, 1998 and
1999 and expire on December 31, 2106.
ANTI-TAKEOVER PROVISIONS
The Company's Articles of Incorporation and Bylaws include several
provisions which may have the effect of discouraging persons from pursuing
non-negotiated takeover attempts. See "Risk Factors--Effect of Certain Charter
Provisions and Nevada Law."
65
<PAGE>
REGISTRATION RIGHTS
The holders of warrants to purchase 2,172,630 shares of the Common Stock
(including the 225,000 shares being sold by Merrill Lynch in this offering)
have been granted certain registration rights by the Company. Such rights
include one demand registration right and also piggy-back registration rights
which allow the holder to participate, with certain exceptions, in any
registration by the Company of its Common Stock for sale under the Securities
Act of 1933, as amended.
TRANSFER AGENT
The Company's transfer agent and registrar for its Common Stock is U.S.
Stock Transfer Corporation, 1745 Gardena Avenue, Glendale, California 91204-
2991.
66
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 16,994,000 shares of
Common Stock outstanding. Of these shares, the 5,000,000 shares of Common Stock
offered hereby, will be freely tradeable either without restriction under the
Securities Act or without regard to the volume limitations of Rule 144 under
the Securities Act by persons other than "affiliates" of the Company. The
remaining shares of Common Stock (approximately 11,994,000 shares) were
acquired in transactions that were exempt from registration under the
Securities Act and are held by affiliates of the Company. These shares may not
be resold unless they are registered under the Securities Act or are sold
pursuant to an applicable exemption from registration, such as Rule 144 under
the Securities Act.
Rule 144 generally permits an "affiliate" of the Company who owns shares
whose issuance has been registered under the Securities Act (without regard to
the satisfaction of a one-year holding period) and a stockholder of the Company
(including an affiliate) who has beneficially owned restricted shares of Common
Stock for at least one year to sell without registration, within any three-
month period, that number of shares so held equal to the greater of 1% of the
then outstanding shares of Common Stock (approximately 169,940 shares upon the
completion of this offering) or the average weekly trading volume of the Common
Stock during the four calendar weeks immediately preceding such sale. Sales
under Rule 144 also are subject to certain manner of sale provisions, notice
requirements and the availability of current public information regarding the
Company. A person who has not been an "affiliate" of the Company at any time
during the three months preceding a sale, and who has beneficially owned shares
for at least two years, is entitled to sell such shares under Rule 144 without
regard to the volume limitations, manner of sale provisions or notice or
current public information requirements. Affiliates of the Company continue to
be subject to such volume limitations and other requirements regardless of the
period of time they have held their shares. As defined in Rule 144, an
"affiliate" of an issuer is a person who, directly or indirectly through one or
more intermediaries, controls, is controlled by or is under common control with
such issuer and generally includes members of the Board and senior management.
The foregoing is a summary of Rule 144 and is not intended to be a complete
description.
Currently, approximately 339,880 restricted shares of Common Stock are
eligible for resale under Rule 144 (exclusive of restricted shares that have
been held for more than two years by nonaffiliates), with the remaining
restricted shares becoming eligible for sale under Rule 144 at various times
thereafter, including an additional 339,880 restricted shares which will become
eligible for resale under Rule 144 in 1997. The executive officers and
directors of the Company, and substantially all of the Company's stockholders
prior to this offering have agreed not to offer, sell or otherwise dispose of
the shares of Common Stock owned by them prior to the offering for a period of
180-day after the closing of this offering without the prior written consent of
Keefe, Bruyette & Woods, Inc.
The Company intends to file a registration statement under the Securities Act
to register the 1,707,162 shares of Common Stock reserved for issuance under
the 1996 Plan. Such registration statement is expected to be filed shortly
following the date of this Prospectus and will become effective immediately
upon filing with the Commission. Shares issued under the 1996 Plan after the
effective date of such registration statement generally will be available for
sale to the public without restriction, except for shares issued to affiliates
of the Company, which will remain subject to the volume and manner of sale
limitations of Rule 144 and the 180 days lock-up agreement. See "Underwriting."
Options to purchase 1,417,256 shares of Common Stock have previously been
granted under the 1996 Plan.
Prior to this offering, there has been no public market for the Common Stock
and no prediction can be made as to the effect, if any, that market sales of
shares of Common Stock or the availability of such shares for sale to the
public will have on the market price prevailing from time to time. Sales of
substantial amounts of the securities of the Company following this offering
could adversely affect the market price of the securities.
67
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement (the
"Underwriting Agreement"), the underwriters named below (the "Underwriters"),
for whom Keefe, Bruyette & Woods, Inc. and Piper Jaffray Inc. are acting as
representatives (the "Representatives"), have severally agreed to purchase from
the Company the following respective number of shares of Common Stock at the
initial public offering price, less the underwriting discounts and commissions,
set forth on the cover page of the Prospectus.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Keefe, Bruyette & Woods, Inc...................................
Piper Jaffray Inc..............................................
---------
Total........................................................ 5,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, and that the Underwriters will
purchase all of the Common Stock offered hereby if any of such shares are
purchased.
The Company has been advised by the Representatives that the Underwriters
propose initially to offer the Common Stock to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share.
The Underwriters may allow, and such dealer may reallow, a discount not in
excess of $ per share to certain other dealers. After the offering of
the Common Stock, the offering price and other selling terms may be changed by
the Underwriters.
The Selling Stockholders have granted the Underwriters an option, exercisable
not later than 30 days after the date of this Prospectus, to purchase up to an
aggregate of 750,000 additional shares of Common Stock at the initial public
offering price, less the underwriting discounts and commissions, set forth on
the cover page of this Prospectus. The Underwriters may exercise such option
only to cover over-allotments, if any, made in connection with the sale of
shares of Common Stock offered hereby. If purchased, the Underwriters will
offer such additional shares of Common Stock on the same terms as the 5,000,000
shares of Common Stock are being offered. To the extent that the Underwriters
exercise such option, each of the Underwriters will be obligated, subject to
certain conditions, to purchase approximately the same percentage thereof that
the number of shares of Common Stock to be purchased by it shown in the above
table bears to 5,000,000 shares and the Selling Stockholders will be obligated,
pursuant to the option, to sell such shares of Common Stock to the
Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments the Underwriters may be required to make in respect thereof.
68
<PAGE>
The Company, and its directors, executive officers and stockholders have
agreed not to offer, sell or otherwise dispose of any shares of Common Stock or
any securities convertible into or exchangeable for shares of Common Stock of
the Company now or hereafter held by them for a period of 180 days after the
date of this Prospectus without the prior written consent of the
Representatives except for: (i) the issuance by the Company of Common Stock
pursuant to the exercise of options under the Company's Option Plan disclosed
in the Prospectus; (ii) the granting by the Company of stock options after the
date of this Prospectus under the Option Plan; or (iii) as a bona fide gift to
a third party or as a distribution to the partners or stockholders of a Company
stockholder, provided that the recipient(s) thereof agree in writing to be
bound by the terms of the lock-up agreement to which such individual is bound.
In connection with the offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the offering than
they are committed to purchase from the Company, and in such case may purchase
Common Stock in the open market following completion of the offering to cover
all or a portion of such short position. The Underwriters may also cover all or
a portion of such short position up to 750,000 shares of Common Stock, by
exercising the Underwriters' over-allotment option referred to above. In
addition, Keefe, Bruyette & Woods, Inc., on behalf of the Underwriters, may
impose "penalty bids" under contractual arrangements with the Underwriters
whereby it may reclaim from an Underwriter (or dealer participating in the
offering) for the account of other Underwriters, the selling concession with
respect to Common Stock that is distributed in the offering but subsequently
purchased for the account of the Underwriters in the open market. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the Common Stock at a level above that which might otherwise prevail
in the open market. None of the transactions described in this paragraph is
required, and, if they are undertaken, they may be discontinued at any time.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of, or any effect that the
transactions described above may have on, the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or,
once commenced, will not discontinue such transactions without notice.
Prior to the offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price of the Common Stock was
determined by negotiations between the Company and the Representative. Among
the factors considered in such negotiations were the history of, and prospects
for the Company and the industry in which it competes, an assessment of
management, the Company's past and present operations, its past and present
earnings and the trend of such earnings, the prospects for future earnings of
the Company, the general condition of the securities markets at the time of the
offering and the market prices of publicly-traded common stocks of comparable
companies in recent periods.
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
69
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Troop Meisinger Steuber & Pasich, LLP, Los Angeles, California.
Certain legal matters will be passed upon for the Underwriters by Brobeck,
Phleger & Harrison LLP, Newport Beach, California. Troop Meisinger Steuber &
Pasich, LLP and Brobeck, Phleger & Harrison LLP will rely as to matters of
Nevada law on the opinion of .
EXPERTS
The financial statements of the Company as of December 31, 1996 and 1995, and
for each of the years in the three-year period ended December 31, 1996, have
been included herein and in the registration statement in reliance upon the
report of KPMG Peat Marwick LLP, independent auditors, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission in Washington, D.C., a Registration
Statement under the Securities Act with respect to the shares offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits thereto. Statements contained in this
Prospectus as to the contents of any contract or any other document referred to
are not necessarily complete, and with respect to any contract or other
document filed as an exhibit to the Registration Statement, reference is made
to the exhibit for a more complete description of the matter involved, and each
such statement is qualified in its entirety by such reference. For further
information with respect to the Company and the shares offered hereby,
reference is hereby made to the Registration Statement and exhibits thereto. A
copy of the Registration Statement, including the exhibits thereto, may be
inspected without charge at the Commission's principal office in Washington,
D.C., and copies of all or any part thereof may be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of certain prescribed rates. The Commission maintains a
World Wide Web Site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The address of the site is http://www.sec.gov.
Upon consummation of this offering, the Company will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
and, in accordance therewith, will file reports and other information with the
Commission in accordance with its rules. Such reports and other information
concerning the Company may be inspected and copied at the public reference
facilities referred to above as well as certain regional offices of the
Commission.
REPORTS TO STOCKHOLDERS
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by independent auditors and quarterly
reports containing unaudited financial information for the first three quarters
of each fiscal year.
70
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
REFERENCE
---------
<S> <C>
Independent Auditors' Report........................................ F-2
Balance Sheets as of December 31, 1995 and 1996..................... F-3
Statements of Earnings for the years ended December 31, 1994, 1995
and 1996........................................................... F-4
Statements of Stockholders' Equity for the years ended December 31,
1994, 1995 and 1996................................................ F-5
Statements of Cash Flows for the years ended December 31, 1994, 1995
and 1996........................................................... F-6
Notes to Financial Statements for the years ended December 31, 1994,
1995 and 1996...................................................... F-7
Condensed Balance Sheets (unaudited) as of December 31, 1996 and
March 31, 1997..................................................... F-20
Condensed Statements of Earnings (unaudited) for the three months
ended March 31, 1996 and 1997...................................... F-21
Condensed Statements of Cash Flows (unaudited) for the three months
ended March 31, 1996 and 1997...................................... F-22
Notes to Condensed Financial Statements (unaudited) for the three
months ended March 31, 1996 and 1997............................... F-23
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Preferred Credit Corporation:
We have audited the accompanying balance sheets of Preferred Credit
Corporation (formerly T.A.R. Preferred Mortgage Corporation) (the Company) as
of December 31, 1995 and 1996 and the related statements of earnings,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Preferred Credit
Corporation (formerly T.A.R. Preferred Mortgage Corporation) as of December
31, 1995 and 1996 and the results of its operations and its cash flows for
each of the years in the three-year period ended December 31, 1996 in
conformity with generally accepted accounting principles.
Orange County, California KPMG PEAT MARWICK LLP
May 7, 1997, except
as to Note 15 to
the Financial
Statements, which
is as of June 24,
1997
F-2
<PAGE>
PREFERRED CREDIT CORPORATION
(FORMERLY T.A.R. PREFERRED MORTGAGE CORPORATION)
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
ASSETS ----------- -------------
<S> <C> <C>
Cash and cash equivalents (note 1)................... $ 1,283,829 $ 4,572,926
Mortgage loans held for sale, net (note 2)........... 30,019,990 76,032,211
Accrued interest receivable.......................... -- 737,000
Residual interests in securitization, net (note 3)... -- 36,878,989
Furniture and equipment (note 4)..................... 85,539 350,472
Other assets (note 12)............................... 726,033 3,158,465
----------- -------------
$32,115,391 $ 121,730,063
=========== =============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Short-term notes payable (note 5).................... $28,548,714 $ 88,135,636
Short-term residual financing (note 5)............... -- 14,258,371
Due to stockholders (note 14)........................ -- 255,796
Income taxes payable (note 6)........................ 30,866 2,838,784
Accounts payable and accrued expenses................ 989,083 2,708,917
Other liabilities (note 8)........................... 270,550 1,027,825
Deferred income taxes (note 6)....................... -- 2,490,059
----------- -------------
Total liabilities................................ 29,839,213 111,715,388
----------- -------------
Stockholders' equity:
Preferred stock, no par. Authorized 5,000,000
shares; none issued and outstanding (note 15)
Common stock, no par. Authorized 50,000,000 shares;
issued and
outstanding 11,994,000 shares (note 15)........... 1,000 1,000
Additional paid-in capital (note 12)............... 229,400 2,072,400
Retained earnings, substantially restricted (note
5)................................................ 2,045,778 7,941,275
----------- -------------
Total stockholders' equity....................... 2,276,178 10,014,675
Commitments and contingencies (notes 7 and 8)
Subsequent events (note 15)
----------- -------------
$32,115,391 $ 121,730,063
=========== =============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
PREFERRED CREDIT CORPORATION
(FORMERLY T.A.R. PREFERRED MORTGAGE CORPORATION)
STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
--------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Gain on sale, net of origination costs of
$3,277,179, $906,979 and $36,958,
respectively (note 3)....................... $ 446,707 4,342,208 19,054,272
Interest income.............................. 58,574 1,327,108 8,134,473
Commission, net.............................. 361,498 -- --
--------- ---------- ----------
Total revenues............................. 866,779 5,669,316 27,188,745
--------- ---------- ----------
Expenses:
Personnel.................................... 201,324 864,077 3,576,345
Interest (note 12)........................... 30,913 1,228,176 5,050,793
Provision for loan losses (note 2)........... -- -- 839,565
General, administrative and other (note 9)... 458,694 1,100,534 4,508,117
Occupancy.................................... 92,905 218,817 425,705
--------- ---------- ----------
Total expenses............................. 783,836 3,411,604 14,400,525
--------- ---------- ----------
Earnings before income taxes............... 82,943 2,257,712 12,788,220
Income taxes (note 6).......................... 1,500 34,866 5,706,928
--------- ---------- ----------
Net earnings............................... $ 81,443 2,222,846 7,081,292
========= ========== ==========
Primary and fully diluted earnings per
share..................................... $ 0.01 0.19 0.47
========= ========== ==========
Weighted average number of shares.......... 6,000,000 11,994,000 15,179,080
========= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
PREFERRED CREDIT CORPORATION
(FORMERLY T.A.R. PREFERRED MORTGAGE CORPORATION)
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
RETAINED
NUMBER OF ADDITIONAL EARNINGS,
SHARES COMMON PAID-IN SUBSTANTIALLY
OUTSTANDING STOCK CAPITAL RESTRICTED TOTAL
----------- ------ ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1993................... 1,000 $1,000 122,316 382,724 506,040
Net earnings............ -- -- -- 81,443 81,443
Dividends paid.......... -- -- -- (79,693) (79,693)
---------- ------ --------- ---------- ----------
Balance, December 31,
1994................... 1,000 1,000 122,316 384,474 507,790
New shares issued....... 999 -- 107,084 -- 107,084
Net earnings............ -- -- -- 2,222,846 2,222,846
Dividends paid.......... -- -- -- (561,542) (561,542)
---------- ------ --------- ---------- ----------
Balance, December 31,
1995................... 1,999 1,000 229,400 2,045,778 2,276,178
Stock warrants issued
(note 12).............. -- -- 1,843,000 -- 1,843,000
Additional shares in
6,000 for one stock
split effected (note
15).................... 11,992,001 -- -- -- --
Net earnings............ -- -- -- 7,081,292 7,081,292
Dividends paid.......... -- -- -- (1,185,795) (1,185,795)
---------- ------ --------- ---------- ----------
Balance, December 31,
1996................... 11,994,000 $1,000 2,072,400 7,941,275 10,014,675
========== ====== ========= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
PREFERRED CREDIT CORPORATION
(FORMERLY T.A.R. PREFERRED MORTGAGE CORPORATION)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings....................... $ 81,443 2,222,846 7,081,292
Adjustments to reconcile net
earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization.... 9,045 13,900 1,191,592
Deferred income taxes............ -- -- 2,490,059
Gain on sale of loans............ -- -- (29,268,759)
Provision for loan losses........ -- -- 839,565
Provision for recourse and
repurchase losses............... -- -- 1,016,393
Stock warrant expense............ -- -- 550,000
Changes in operating assets and
liabilities:
Mortgage loans originated and
purchased, net................ (16,408,668) (193,583,000) (596,879,272)
Proceeds from mortgage loans
sold, net..................... 14,530,663 165,400,849 550,027,486
Residual interests in
securitization................ -- -- (8,704,471)
Increase in accrued interest
receivable.................... -- -- (737,000)
Increase in notes payable...... 1,837,839 26,710,875 59,586,922
Increase (decrease) in income
taxes payable................. (7,185) -- 2,807,918
Other assets and liabilities... 8,195 597,264 321,284
------------ ------------ ------------
Net cash provided by (used
in) operating activities.... 51,332 1,362,734 (9,676,991)
------------ ------------ ------------
Cash flows from investing activity -
purchases of furniture and
equipment........................... -- (75,698) (362,284)
------------ ------------ ------------
Cash flows from financing
activities:
Increase in residual financing... -- -- 14,258,371
Accounts payable to affiliate.... 107,084 -- --
Due to stockholders.............. -- -- 255,796
Dividends paid................... (79,693) (561,542) (1,185,795)
------------ ------------ ------------
Net cash provided by (used in)
financing activities.......... 27,391 (561,542) 13,328,372
------------ ------------ ------------
Increase in cash and cash
equivalents................... 78,723 725,494 3,289,097
Cash and cash equivalents at
beginning of year................... 479,612 558,335 1,283,829
------------ ------------ ------------
Cash and cash equivalents at end of
year................................ $ 558,335 1,283,829 4,572,926
============ ============ ============
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest......................... $ 30,913 959,786 4,441,006
Income taxes..................... 8,685 4,000 404,819
============ ============ ============
Noncash operating and financing
activity - issuance of stock
warrants............................ $ -- -- 1,843,000
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
PREFERRED CREDIT CORPORATION
(FORMERLY T.A.R. PREFERRED MORTGAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Preferred Credit Corporation (formerly T.A.R. Preferred Mortgage
Corporation) (the Company) is a California corporation conducting a mortgage
banking operation. The Company maintains the status as a nonsupervised
mortgagee with the Department of Housing and Urban Development (HUD).
Effective January 1, 1997, the Company changed its name from T.A.R. Preferred
Mortgage Corporation to Preferred Credit Corporation. During the year, the
Company incorporated two special purpose corporations, Preferred Mortgage SPC
Funding Corporation I (PSPCFC I) and Preferred Mortgage SPC Funding
Corporation II (PSPCFC II) to facilitate the issuance of asset backed
certificates.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with original maturities of three months or
less to be cash equivalents. Cash equivalents consist of cash on hand and in
banks and money market accounts. Included in cash and cash equivalents is
approximately $13 million at December 31, 1996 which represent borrowings from
the lines of credit which have been advanced to fund specific mortgage loans.
MORTGAGE LOANS HELD FOR SALE
Interest on mortgage loans held for sale is credited to income as earned.
Interest is accrued only if deemed collectible.
Mortgage loans held for sale are stated at the lower of cost or market in
the aggregate as determined by outstanding commitments from investors or
current investor yield requirements.
ALLOWANCE FOR LOAN LOSSES
On an ongoing basis, management monitors the mortgage loans held for sale
and evaluates the adequacy of the allowance for loan losses. In determining
the adequacy of the allowance for loan losses, management considers such
factors as historical loan loss experience, underlying collateral values,
known problem loans, assessment of economic conditions and other appropriate
data to identify the risks in the mortgage loans held for sale. Loan losses
are charged to the allowance for loan losses. Recoveries on loans previously
charged off are credited to the allowance. Provisions for loan losses are
charged to expense and credited to the allowance in amounts deemed appropriate
by management based upon its evaluation of the known and inherent risks in the
mortgage loans held for sale.
ALLOWANCE FOR REPURCHASE LOSSES
The allowance for losses on loans sold relates to costs incurred due to the
repurchase of loans or indemnification of losses which may be alleged to have
had violations of standard representations and warranties customary to the
mortgage banking industry. The allowance represents the Company's estimate of
losses expected to occur. Provisions for losses are charged to gains on sale
of loans and credited to the allowance and are determined to be adequate by
management based upon the Company's evaluation of the potential exposure
related to the loan sale agreements.
F-7
<PAGE>
PREFERRED CREDIT CORPORATION
(FORMERLY T.A.R. PREFERRED MORTGAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives or lives of the
respective leases of the respective assets which range from three to seven
years.
ADVERTISING
The Company accounts for its advertising costs as nondirect response
advertising. Accordingly, advertising costs are expensed as incurred.
INCOME TAXES
Prior to June 20, 1996, the Company elected S Corporation status under the
Internal Revenue Code and the corresponding tax laws of the state of
California. Accordingly, income was taxed directly to the stockholders for
Federal income and state franchise tax purposes. In addition, the California
Franchise Tax Board imposed a corporate level tax of approximately 1 1/2%
which adjusts annually. The Company converted its tax filing status from S
Corporation to C Corporation on June 20, 1996.
Income taxes are provided by the Company based on taxable income and are
adjusted for the change in deferred tax assets and liabilities which are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
SALES OF MORTGAGE LOANS
Gains or losses resulting from sales or securitization of mortgage loans are
recognized at the date of settlement and are based on the difference between
the selling price of the sales or securitization and the allocated carrying
value of the related loans sold and related transaction costs. Nonrefundable
fees and direct costs associated with the origination or purchase of mortgage
loans are deferred and recognized when the loans are sold.
RESIDUAL INTERESTS IN SECURITIZATION
Residual interests in securitizations (residuals) of real estate mortgage
investment conduits (REMIC Trust) are recorded as a result of the sale of
loans through securitization. At the closing of each securitization, the
Company removes from its balance sheet the mortgage loans held for sale and
adds to its balance sheet (i) the cash received, (ii) the estimated fair value
of the residuals from the securitizations which consists of (a) an over-
collateralization amount (OC) and (b) a net interest receivable (NIR). The
excess of the assets retained by the Company over the carrying value of the
loans sold equals the gain on sale recorded by the Company.
The Company allocates their basis in the mortgage loans between the portion
of the mortgage loans sold (the certificates) and the portion retained (the
residuals) based on the relative fair values of those portions on the date of
the sale.
The Company may recognize gains or losses attributable to the change in the
fair value of the residuals, which are recorded at estimated fair value and
accounted for as "held-for-trading" securities. The Company is
F-8
<PAGE>
PREFERRED CREDIT CORPORATION
(FORMERLY T.A.R. PREFERRED MORTGAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
not aware of an active market for the purchase or sale of residuals,
accordingly, the Company estimates fair value of the residuals by calculating
the present value of the estimated expected future cash flows using a discount
rate commensurate with the risks involved. The Company has utilized an
effective discount rate, net of estimated credit losses of approximately
14.6%.
NIRs are determined by calculating the amount of the excess of the weighted
average coupon on the loans sold over the sum of: (1) the coupon on the senior
interests, (2) a base servicing fee paid to servicer of the loans, (3)
expected losses to be incurred on the portfolio of loans sold over the lives
of the loans and (4) insurance and other expenses. The significant assumptions
used by the Company to estimate NIR cash flows are anticipated prepayments and
estimated credit losses. The Company estimates prepayments by evaluating
historical prepayment performance of comparable loans and the impact of trends
in the industry. The Company's prepayment estimates have resulted in estimated
average lives of its mortgage loans of approximately 5 years. The Company
estimates default losses using available historical loss data for comparable
loans and the specific characteristics of the loans purchased or originated by
the Company. The Company estimates that default losses as a percentage of the
original principal balance will total approximately 8.7%. The Company
discounts the estimated default losses using a risk free rate.
The OC represents the portion of the loans which are held by the trust as
over-collateralization for the certificates sold which along with a
certificate guarantor insurance policy provided by MBIA serves as credit
enhancement. The OC initially consists of the excess of the principal balance
of the mortgage loans sold to the trust less the principal balance of the
certificates sold to investors. The OC is required to be maintained at a
specified target level of the principal balance of the certificates, which can
be increased in the event delinquencies and or losses exceed certain specified
levels. Cash flows received by the trust in excess of the obligations of the
trust are deposited into the over-collateralization account which are used to
pay certificate holders until the target OC is reached. To the extent that
cash in excess of the predetermined target levels are generated, such cash is
released to the Company.
USE OF ESTIMATES
Management of the Company has made certain estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
accordance with generally accepted accounting principles. Actual results could
differ from these estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123 (SFAS No. 123), Accounting for Stock-Based Compensation,
which permits entities to recognize as expense over the vesting period the
fair value of all stock-based awards on the date of grant. Alternatively, SFAS
No. 123 also allows entities to continue to apply the provisions of Accounting
Principles Board (APB) Opinion No. 25 (APB Opinion No. 25), Accounting for
Stock Issued to Employees, and provide pro forma net earnings and pro forma
earnings per share disclosures for employee stock option grants made in 1996
and future years as if the fair-value-based method defined in SFAS No. 123 had
been applied. The Company will apply the provisions of SFAS No. 123 to all
stock-based awards granted to nonemployees and continue to apply the
provisions of APB Opinion No. 25 for employee stock option grants and provide
the pro forma disclosure provisions of SFAS No. 123. See note 13 of notes to
financial statements for the pro forma net earnings and pro forma earnings per
share disclosures.
F-9
<PAGE>
PREFERRED CREDIT CORPORATION
(FORMERLY T.A.R. PREFERRED MORTGAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 125 (FASB No. 125), Accounting
for Transfer and Servicing of Financial Assets and Extinguishment of
Liabilities. FASB No. 125 addresses the accounting for all types of
securitization transactions, securities lending and repurchase agreements,
collateralized borrowing arrangements and other transactions involving the
transfer of financial assets. FASB No. 125 distinguishes transfers of
financial assets that are sales from transfers that are secured borrowings.
FASB No. 125 is effective for transactions that occur after December 31, 1996,
and it is to be applied prospectively. FASB No. 125 will require the Company
to allocate the total cost of mortgage loans sold in a securitization between
the portion of the loans sold and those retained such as residual interests in
securitization based on their relative fair values. The Company will be
required to assess the residual interests in securitization for impairment
based upon their fair value. The pronouncement also will require the Company
to provide additional disclosure about the residual interests in
securitization and to account for these assets at fair value in accordance
with SFAS No. 115.
Management of the Company does not expect that adoption of FASB No. 125 will
have a material impact on the Company's financial position and results of
operations.
EARNINGS PER SHARE
Earnings per share for the years ended December 31, 1994, 1995 and 1996 has
been computed by dividing net earnings by the weighted average number of
shares outstanding. In accordance with a regulation of the Securities and
Exchange Commission, the weighted average number of shares includes all
options and warrants issued below the estimated initial public offering price
within one year prior to the filing of the Registration Statement for the
initial public offering and is calculated using the treasury stock method.
ERRORS AND OMISSIONS POLICY
In connection with the Company's lending activities, the Company has
Fidelity Bond and Errors and Omissions insurance coverage of $300,000 each at
December 31, 1996.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
Financial Statement Presentation--The Company prepares its financial
statements using an unclassified balance sheet presentation as is customary in
the mortgage banking industry. A classified balance sheet presentation would
have aggregated current assets, current liabilities and net working capital as
of December 31, 1996 as follows:
<TABLE>
<CAPTION>
<S> <C>
Current assets.............................................. $ 84,500,602
Current liabilities......................................... 109,225,329
------------
Net working capital......................................... $(24,724,727)
============
</TABLE>
F-10
<PAGE>
PREFERRED CREDIT CORPORATION
(FORMERLY T.A.R. PREFERRED MORTGAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale at the lower of cost or market at December 31,
1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Mortgage loans receivable....................... $30,093,601 $77,448,582
Net deferred origination fees................... (73,611) (819,720)
Allowance for loan losses....................... -- (596,651)
----------- -----------
$30,019,990 $76,032,211
=========== ===========
</TABLE>
A summary of changes in the allowance for the loan losses for the year ended
December 31, 1996 follows:
<TABLE>
<CAPTION>
<S> <C>
Balance at beginning of the year............................... $ --
Provision for loan losses...................................... 839,565
Charge-offs, net of recoveries................................. (242,914)
---------
Balance at end of year......................................... $ 596,651
=========
</TABLE>
Originations and Purchases--During the years ended December 31, 1994, 1995
and 1996, the Company originated and purchased mortgage loans approximating
100.0%, 94.1% and 72.8%, respectively, in the state of California of all loans
originated or purchased during the year.
Significant Customers--The Company has entered into a number of transactions
with customers which each accounted for more than 10% of the Company's loan
sales including affiliates of a major investment banker and financial services
companies. These transactions include whole loan sales agreements, under which
the investment banker and financial services companies agree to periodically
purchase certain loans from the Company. During the years ended December 31,
1994, 1995 and 1996, the Company sold a total of approximately $13.0 million,
$138.7 million and $241.7 million, respectively, of mortgage loans held for
sale under such agreements and recognized gross gains on sales of
approximately $0.4 million, $4.3 million and $8.4 million, respectively.
The Company also securitized loans receivable on a nonrecourse basis with a
real estate mortgage investment conduit affiliated to one of the investment
bankers described above. During the year ended December 31, 1996, the Company
securitized a total of approximately $256.7 million of loans held for sale and
recognized gains on sales of approximately $14 million.
(3) RESIDUAL INTERESTS IN SECURITIZATION
Residual interests in securitization balances consisted of the following
components at December 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Over-collateralization amount............................... $ 8,704,471
Net interest receivable (NIR), net.......................... 28,174,518
------------
$ 36,878,989
============
</TABLE>
NIR, net consisted of the following at December 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
NIR......................................................... $ 45,010,351
Discounted allowance for default losses..................... (16,835,833)
------------
$ 28,174,518
============
</TABLE>
F-11
<PAGE>
PREFERRED CREDIT CORPORATION
(FORMERLY T.A.R. PREFERRED MORTGAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes activity in residual interests in
securitization at December 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Balance, beginning of the year............................... $ --
NIR recognized............................................... 29,268,759
Amortization................................................. (1,094,241)
-----------
Balance, end of year, net.................................... $28,174,518
===========
</TABLE>
Net gain on sale of loans consisted of the following components:
<TABLE>
<CAPTION>
1994 1995 1996
-------- --------- ------------
<S> <C> <C> <C>
NIR recognized................................. $ -- -- $ 29,268,759
Cost on sale of securities..................... -- -- (15,233,478)
Cash loan gains on sale........................ 446,707 4,342,208 6,035,384
Provision for losses........................... -- -- (1,016,393)
-------- --------- ------------
$446,707 4,342,208 $ 19,054,272
======== ========= ============
</TABLE>
At December 31, 1996, the Company included in its trading portfolio the
residual interests in securitization.
(4) FURNITURE AND EQUIPMENT
Furniture and equipment are summarized as follows:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Equipment.............................................. $ 99,690 $420,920
Furniture and fixtures................................. 6,612 13,359
Automobile............................................. 8,500 26,150
Leasehold improvements................................. -- 16,657
-------- --------
114,802 477,086
Accumulated depreciation and amortization.............. 29,263 126,614
-------- --------
$ 85,539 $350,472
======== ========
</TABLE>
F-12
<PAGE>
PREFERRED CREDIT CORPORATION
(FORMERLY T.A.R. PREFERRED MORTGAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) SHORT-TERM NOTES PAYABLE AND RESIDUAL FINANCING
Notes payable and residual financing consist of the following:
<TABLE>
<CAPTION>
1995 1996
----------- ------------
<S> <C> <C>
A $30 million line of credit expired in 1996 and
the entire outstanding amount was repaid....... $19,748,703 $ --
A $6 million line of credit expired in 1996 and
the entire outstanding amount was repaid....... 3,070,309 --
A $15 million line of credit expiring in March
15, 1997 secured by mortgage loans held for
sale, bearing interest based on the Federal
funds rate (7.72% at December 31, 1996). This
line of credit is guaranteed by one of the
Company's stockholders......................... 5,729,702 12,256,062
A $20 million line of credit expiring in April
1997 secured by mortgage loans held for sale,
bearing interest based on the Federal funds
rate or one month LIBOR (8.75% at December 31,
1996) depending on the collateral. This line of
credit is guaranteed by the Company's
stockholders................................... -- 10,106,302
A $100 million master repurchase agreement for
mortgage loans held for sale, bearing interest
rate based on LIBOR rate (7.66% at December 31,
1996).......................................... -- 65,773,272
----------- ------------
28,548,714 88,135,636
=========== ============
A $30 million residual financing line expiring
in December 1997 secured by residual interests
in securitization bearing interest based on
LIBOR rate (8.88% at December 31, 1996)........ -- 14,258,371
----------- ------------
$28,548,714 $102,394,007
=========== ============
</TABLE>
Advances under the residual financing line are made at the sole discretion of
the lender and are based upon the amount of loans securitized.
Included in short-term notes payable are $13 million of borrowings under the
$15 million and $20 million lines of credit which have been advanced to the
Company to fund certain loans in process.
The line of credit agreements contain certain restrictive financial and other
covenants which require the Company to, among other requirements, restrict
dividends, maintain certain levels of net worth, liquidity, debt to net worth
ratios and maintenance of compliance with regulatory and investor requirements.
At December 31, 1996, the Company believes that it was in compliance with these
financial and other covenants.
F-13
<PAGE>
PREFERRED CREDIT CORPORATION
(FORMERLY T.A.R. PREFERRED MORTGAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(6) INCOME TAXES
The provision for income taxes for the years ended December 31, 1994, 1995
and 1996 was as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------- ----------
<S> <C> <C> <C>
Current:
Federal........................................ $ -- $ -- $2,649,506
State.......................................... 1,500 34,866 567,422
------ ------- ----------
1,500 34,866 3,216,928
------ ------- ----------
Deferred:
Federal........................................ -- -- 1,730,000
State.......................................... -- -- 760,000
------ ------- ----------
-- -- 2,490,000
------ ------- ----------
$1,500 $34,866 $5,706,928
====== ======= ==========
</TABLE>
Actual income taxes differs from the amount determined by applying the
statutory Federal rate of 35% for the years ended December 31, 1994, 1995 and
1996 as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- --------- ----------
<S> <C> <C> <C>
Computed "expected" income taxes.......... $ 28,505 $ 790,199 $4,475,877
State tax, net of Federal benefit......... 1,500 33,866 862,824
S Corporation election.................... (28,505) (790,199) --
Other..................................... -- 1,000 368,227
-------- --------- ----------
$ 1,500 $ 34,866 $5,706,928
======== ========= ==========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Allowance for loan losses.................................. $ 274,518
Accruals for tax purposes not deductible................... 216,778
State taxes................................................ 560,508
-----------
1,051,804
-----------
Deferred tax liabilities:
Furniture and equipment.................................... (2,317)
Residual interests in securitization....................... (2,931,088)
Deferred loan fees......................................... (608,458)
-----------
(3,541,863)
-----------
Net deferred income tax liability........................... $(2,490,059)
===========
</TABLE>
F-14
<PAGE>
PREFERRED CREDIT CORPORATION
(FORMERLY T.A.R. PREFERRED MORTGAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1995 and 1996, there was no valuation allowance required as
management believes that the deferred tax asset will more likely than not be
realized due to the reversal of the deferred tax liability and expected future
taxable income.
Deferred tax assets are initially recognized for differences between the
financial statement carrying amount and the tax bases of assets and
liabilities which will result in future deductible amounts and net operating
loss and tax credit carryforwards. A valuation allowance is then established
to reduce that deferred tax asset to the level at which it is more likely than
not that the tax benefits will be realized. Realization of tax benefits of
deductible temporary differences and operating loss or tax credit
carryforwards depends on having sufficient taxable income of an appropriate
character within the carryback and carryforward periods. Sources of taxable
income that may allow for the realization of tax benefits include: (1) taxable
income in the current year or prior years that is available through carryback,
(2) future taxable income that will result from the reversal of existing
taxable temporary differences, (3) future taxable income generated by future
operations and (4) tax planning strategies that, if necessary, would be
implemented to accelerate taxable income into years in which net operating
losses might otherwise expire.
(7) COMMITMENTS
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
instruments include commitments to originate and sell loans and involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the financial statements.
Commitments to originate mortgage loans are agreements to provide financing
at a fixed or variable interest rate subject to specific terms and a
customer's creditworthiness on a case-by-case basis. These commitments have
fixed expiration dates and other termination clauses and may require payment
of a fee.
At December 31, 1994, 1995 and 1996, the Company has commitments to fund
mortgage loans totaling approximately $5 million, $49 million and $71 million,
respectively. This does not necessarily represent future cash requirements, as
some portion of the commitments will expire without being drawn upon or will
be declined for credit or other reasons.
The Company manages its interest rate exposure and market risk related to
commitments to originate loans by entering into mandatory and best efforts
commitments to sell loans to investors and it controls its credit risk through
underwriting and quality control standards that are consistent with that of
its investors. The Company has commitments to deliver mortgage loans to
investors as of December 31, 1994, 1995 and 1996 totaling approximately $1.9
million, $6 million and $72 million, respectively.
In 1996, the Company terminated its agreement with an investment banker to
be the lead underwriter for the Company's future securitization of second lien
mortgage loans. As part of the settlement, the Company issued stock warrants
equal to 2% of all of the outstanding shares of the common stocks and stock
options and will also compensate the investment banker if the Company enters
into securitization transactions in the future. Aggregate compensation, if
payable, shall not exceed $5 million.
As of December 31, 1996, the Company was committed to provide an investment
banking firm with a right to purchase whole loans in an aggregate amount of
$600 million on or prior to December 31, 1997. The Company will be required to
pay "pair-off" penalties equal to 1% and 2% of the unfunded commitments at
September 30, 1997 and December 31, 1997, respectively.
Related Party--The Company is committed to pay compensation in accordance
with an employment contract of approximately $55,000 per annum until August
2002 to an ex-spouse of one of the Company's stockholders as part of a
settlement.
F-15
<PAGE>
PREFERRED CREDIT CORPORATION
(FORMERLY T.A.R. PREFERRED MORTGAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
During the year ended December 31, 1996, the Company entered into employment
agreements with three of its executive officers which expire between August
2001 and November 2001. The Company is committed to pay minimum aggregate
compensation of $1,080,000 per annum. In addition, two of the three executive
officers are each entitled to a bonus equal to 2.5% of the Company's earnings
before income taxes.
Operating Leases--The Company leases certain facilities, furniture and
equipment under noncancelable operating leases which expire through 1999.
Total rental expenditures under these leases were approximately $219,817 and
$422,658 for the years ended December 31, 1995 and 1996, respectively. Minimum
noncancelable future lease payments are approximately as follows:
<TABLE>
<CAPTION>
<S> <C>
Fiscal year:
1997.......................................................... $1,049,896
1998.......................................................... 1,440,873
1999.......................................................... 1,554,287
----------
$4,045,056
==========
</TABLE>
(8) CONTINGENCIES
The Company has entered into whole loan sale agreements with investors in
the normal course of business which include standard representations and
warranties customary to the mortgage banking industry. Violations of these
representations and warranties may require the Company to repurchase loans
previously sold or to reimburse investors for losses incurred. In the opinion
of management, the potential exposure related to the Company's loan sale
agreements will not have a material adverse effect on the financial position
and operating results of the Company. In accordance with these loan sale
agreements, the Company repurchased loans with an outstanding principal
balance of approximately $1.1 million for the year ended December 31, 1996. At
December 31, 1996, included in other liabilities are $1,016,393 in allowances
for potential costs that may be incurred due to the repurchase of loans or
indemnification of losses from possible off-balance sheet violations of
representations and warranties recourse and repurchase agreement provisions.
Litigation--The Company is a party to legal actions arising in the normal
course of business. In the opinion of management, based in part on discussions
with outside legal counsel, resolution of such matters will not have a
material adverse effect on the Company.
(9) GENERAL, ADMINISTRATIVE AND OTHER
A summary of general, administrative and other expenses for the years ended
December 31, 1994, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- ---------- ----------
<S> <C> <C> <C>
Advertising............................... $ 7,986 $ 106,173 $2,799,133
Professional fees......................... 13,852 63,602 380,790
Postage and deliveries.................... 15,399 184,478 327,834
Printing and supplies..................... 27,195 310,153 229,679
Travel and entertainment.................. 66,009 104,123 215,713
Telephone................................. 43,676 184,283 213,374
Other..................................... 284,577 147,722 341,594
-------- ---------- ----------
$458,694 $1,100,534 $4,508,117
======== ========== ==========
</TABLE>
F-16
<PAGE>
PREFERRED CREDIT CORPORATION
(FORMERLY T.A.R. PREFERRED MORTGAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(10)FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments
is made using estimated fair value amounts and have been determined using
available market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that could be realized in
a current market exchange. The use of different market assumptions or
estimation methodologies may have a material impact on the estimated fair value
amounts.
The estimated fair values of the Company's financial instruments as of
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
----------- ----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents........................ $ 4,572,926 4,572,926
Mortgage loans held for sale, net................ 76,032,211 79,987,215
Residual interests in securitization............. 36,878,989 36,878,989
Financial liabilities:
Short-term notes payable......................... 88,135,636 88,135,636
Short-term residual financing.................... 14,258,371 14,258,371
Due to stockholders.............................. 255,796 255,796
Off-balance sheet items:
Mortgage loan applications in process with locked
interest rates.................................. -- 2,301,542
Mandatory forward commitments and options on
forward contracts............................... -- (96,398)
=========== ==========
</TABLE>
The following methods and assumptions were used in estimating the Company's
fair value disclosures for financial instruments.
Cash and cash equivalents: The fair value of cash approximates the carrying
value reported in the balance sheet.
Mortgage loans held for sale: The fair value of mortgage loans held for sale
is determined in the aggregate based on outstanding commitments from investors
or current investor yield requirements.
Residual interests in securitization: The residual interest in securitization
was unrated and as such there was no current established market. Estimates of
the fair value are based on discounted cash flow analysis using assumptions
that a purchaser would use.
Notes payable: The carrying value reported in the balance sheet approximates
fair value as the notes payable are due upon demand and bear interest at a rate
that approximates current market interest rates for similar type notes payable.
Residual financing: The fair value of residual financing is determined by
discounting expected cash flows by the current market interest rate over the
term of the residual financing.
Due to stockholders: The fair value was determined by discounting expected
cash flows by the current market interest rate over the term of the amounts due
to stockholders.
F-17
<PAGE>
PREFERRED CREDIT CORPORATION
(FORMERLY T.A.R. PREFERRED MORTGAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Mortgage loan applications in process with locked interest rates: The fair
value of mortgage loan applications in process with locked interest rates is
determined in the aggregate based on outstanding commitments from investors or
current investor yield requirements.
Mandatory forward commitments and options on forward contracts: The fair
value of mandatory forward commitments is based on quoted market prices of the
related loans and the fair value of options on forward contracts is based on
quoted market prices of the option contracts.
(11) TRANSACTIONS WITH AFFILIATES
During the year ended December 31, 1995 and the period from January 1, 1996
to September 30, 1996, in the normal course of business, the Company paid
$1,475,000 and $5,004,000, respectively in commissions to a brokerage company
which was owned by the Company's stockholders. The stockholders sold its
interest in the brokerage company in October 1996. This brokerage company
continues its business relationship with the Company.
During 1996, in the normal course of business, the Company paid $102,000 in
signing fees to a signing services company which is owned by the Company's
stockholders.
(12) STOCK WARRANTS
In 1996, the Company issued stock warrants to investment banker I and
investment banker II for the purchase of a number of shares of common stock
equivalent to 15.5% and 2%, respectively, of the outstanding shares of common
stock and stock options. These warrants each have a 15-year term and are
immediately exercisable for values of $4.2 million and $600,000, respectively.
The Company believes that the above warrant prices approximate fair market
value of the Company at the time of grant. In accordance with FASB No. 123,
$1,843,000 was determined to be the value of the stock warrants issued on the
measurement date. Included in other assets is prepaid commitment costs of
$1,293,000 at December 31, 1996 and included in interest expense is stock
warrant expense of $550,000 for the year ended December 31, 1996 related to the
stock warrants issued.
(13) STOCK OPTION PLANS
A stock option plan approved by the stockholders in 1996 (1996 Plan) provides
that qualified incentive stock options and nonqualified options covering an
aggregate of 1,397,256 shares of the Company's unissued common stock may be
granted to salaried officers, key employees or directors at prices no less than
the fair market value of such shares at dates of grant. Options granted may be
exercised either immediately or over a period of three to five years.
In 1995, the Company granted 59,970 stock options to an officer.
F-18
<PAGE>
PREFERRED CREDIT CORPORATION
(FORMERLY T.A.R. PREFERRED MORTGAGE CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
A summary of transactions for the years ended December 31, 1995 and 1996
follows:
<TABLE>
<CAPTION>
WEIGHTED-
PRICE AVERAGE
AVAILABLE PER PRICE PER
FOR GRANT OUTSTANDING SHARE SHARE
--------- ----------- -------- ---------
<S> <C> <C> <C> <C>
Shares authorized in 1995......... 59,970 -- $ -- $ --
Options granted................... 59,970 59,970 0.92 0.92
--------- --------- -------- -----
Balance at December 31, 1995.... -- 59,970 0.92 0.92
Shares authorized under the 1996
plan............................. 1,337,286 -- -- --
Options granted................... 1,337,286 1,337,286 1.33 to 1.99
2.11
Options exercised................. -- --
Options canceled.................. -- -- -- --
--------- --------- -------- -----
$0.92 to
Balance at December 31, 1996.... -- 1,397,256 2.11 $1.95
========= ========= ======== =====
</TABLE>
The per share weighted-average fair value of stock options granted during
1995 and 1996 was $0.59 on the date of grant using the Black-Scholes option-
pricing model with the following weighted-average assumptions: 1995, expected
dividend yield 0%, risk-free interest rate 6.6%, an expected life of ten years
and expected volatility of 30%; 1996, expected dividend yield 0%, risk-free
interest rate of 6.6%, an expected life of ten years and expected volatility
of 30%.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based
on the fair value at the grant date for its stock options under SFAS No. 123,
the Company's net earnings would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Net earnings:
As reported.......................................... $2,222,846 $7,081,292
Pro forma............................................ 2,191,033 6,763,156
========== ==========
</TABLE>
(14) DUE TO STOCKHOLDERS
The amount due to stockholders is unsecured, bears interest equivalent to
the interest earned by the Company on its deposits and is payable on demand.
(15) SUBSEQUENT EVENT
Reorganization--In March 1997, the Board of Directors incorporated Preferred
Credit Corporation, a Nevada Corporation, for the purpose of changing the
Company's state of incorporation from California to Nevada. On June 24, 1997,
the Company approved a reorganization to change its state of incorporation
from California to Nevada through a merger of Preferred Credit Corporation, a
California corporation, with and into Preferred Credit Corporation, a Nevada
corporation. The Company has authorized 50,000,000 shares of Common Stock and
5,000,000 shares of Preferred Stock in the Nevada corporation.
Stock Split--On June 24, 1997, the Company authorized a 6,000-for-1 stock
split of its Common Stock to be effective upon the Merger. All references in
the financial statements to numbers of shares, per share amounts and market
prices of the Company's Common Stock have been retroactively restated to
reflect the increased number of common shares outstanding.
F-19
<PAGE>
PREFERRED CREDIT CORPORATION
(FORMERLY T.A.R. PREFERRED MORTGAGE CORPORATION)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
ASSETS ------------ ------------
<S> <C> <C>
Cash and cash equivalents............................ $ 4,572,926 $ 3,830,725
Mortgage loans held for sale, net (note 2)........... 76,032,211 93,496,174
Accrued interest receivable.......................... 737,000 1,110,115
Residual interests in securitization, net (note 3)... 36,878,989 70,280,812
Furniture and equipment.............................. 350,472 625,559
Other assets......................................... 3,158,465 2,855,721
------------ ------------
$121,730,063 $172,199,106
============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Short-term notes payable (note 4).................... $ 88,135,636 $109,080,180
Short-term residual financing (note 4)............... 14,258,371 27,406,725
Due to stockholders.................................. 255,796 264,950
Income taxes Payable................................. 2,838,784 6,057,881
Accounts payable and accrued expenses................ 2,708,917 2,116,614
Other liabilities.................................... 1,027,825 1,284,103
Deferred income taxes................................ 2,490,059 6,286,227
------------ ------------
Total liabilities................................ 111,715,388 152,496,680
------------ ------------
Stockholders' equity:
Preferred stock, no par. Authorized 5,000,000
shares; none issued and outstanding...............
Common stock, no par. Authorized 50,000,000 shares;
issued and outstanding 11,994,000 shares ......... 1,000 1,000
Additional paid-in capital......................... 2,072,400 2,072,400
Retained earnings, substantially restricted (note
5)................................................ 7,941,275 17,629,026
------------ ------------
Total Stockholders' Equity....................... 10,014,675 19,702,426
------------ ------------
Commitments and contingencies note 6)................ --
Subsequent event (note 7)
------------ ------------
$121,730,063 $172,199,106
============ ============
</TABLE>
See accompanying notes to financial statements.
F-20
<PAGE>
PREFERRED CREDIT CORPORATION
(FORMERLY T.A.R. PREFERRED MORTGAGE CORPORATION)
CONDENSED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1996 1997
----------- -------------
<S> <C> <C>
Revenues:
Gain on sale of loans - net of origination
costs of $1,255,004 and
$2,361,179, respectively (note 2)........... $ 979,700 $ 18,967,090
Interest income.............................. 2,010,233 4,221,822
----------- -------------
Total Revenues............................. 2,989,933 23,188,912
Expenses:
Personnel.................................... 552,744 1,050,044
Interest expense............................. 1,305,575 3,022,796
Provision for losses......................... -- --
General, administrative and other............ 513,070 2,292,327
Occupancy.................................... 75,460 120,731
----------- -------------
Total Expenses............................. 2,446,849 6,485,898
----------- -------------
Earnings before income taxes............... 543,084 16,703,014
Income taxes................................... 19,008 7,015,266
----------- -------------
Net earnings............................... $ 524,076 $ 9,687,748
=========== =============
Primary and fully diluted earnings per
share..................................... $ 0.04 $ 0.64
=========== =============
Weighted average number of shares.......... 11,994,000 15,188,385
=========== =============
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE>
PREFERRED CREDIT CORPORATION
(FORMERLY T.A.R. PREFERRED MORTGAGE CORPORATION)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings................................... $ 524,076 $ 9,687,748
Adjustments to reconcile net income to net cash
provided by
(used in) operating activities:
Depreciation and amortization................ 17,758 2,364,808
Deferred income taxes........................ -- 3,796,168
Gain on sale of loans........................ (786,894) (18,346,238)
Changes in operating assets and liabilities:
Mortgage loans originated, net............. (112,870,165) (250,798,877)
Proceeds from mortgage loans sold, net..... 66,786,550 233,334,914
Residual interests in securitization....... -- (16,874,244)
Increase in accrued interest receivable.... (396,479) (373,115)
Net increase in notes payable.............. 48,662,508 20,944,544
Net increase in Income taxes payable....... (15,992) 3,219,097
Other assets and liabilities............... (1,716,554) (482,080)
------------- -------------
Net cash provided by (used in) operating
activities.............................. 204,808 (13,527,275)
------------- -------------
Cash flows from investing activity--purchase of
furniture and equipment......................... (60,165) (372,437)
------------- -------------
Cash flows from financing activities:
Increase in residual financing............... -- 13,148,354
Due to stockholders.......................... 253,517 9,154
Dividends paid............................... (251,312) --
------------- -------------
Net cash provided by financing activities.. 2,205 13,157,508
------------- -------------
Increase in cash and cash equivalents...... 146,848 (742,204)
Cash and cash equivalents at beginning of year... 1,283,829 4,572,926
------------- -------------
Cash and cash equivalents at end of year......... $ 1,430,677 $ 3,830,722
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest..................................... $ 1,178,317 $ 3,060,503
============= =============
</TABLE>
See accompanying notes to financial statements.
F-22
<PAGE>
PREFERRED CREDIT CORPORATION
(FORMERLY T.A.R. PREFERRED MORTGAGE CORPORATION)
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1997
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three month period
ended March 31, 1997 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1997. For further information, refer
to the financial statements and footnotes thereto for the year ended December
31, 1996 included elsewhere herein.
Recent Accounting Developments--In June 1996, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
125 (FASB No. 125), "Accounting for Transfer and Servicing of Financial Assets
and Extinguishment of Liabilities." FASB No. 125 addresses the accounting for
all types of securitization transactions, securities lending and repurchase
agreements, collateralized borrowing arrangements and other transactions
involving the transfer of financial assets. FASB No. 125 distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. FASB No. 125 requires the Company to allocate its basis in the
mortgage loans between the portion of the mortgage loans sold through mortgage
backed securities and the portion retained (the residual interests) based on
the relative fair values of those portions on the date of the sale. The
pronouncement requires the Company to account for the residual interests as
"held-for-trading" securities which are to be recorded at fair value in
accordance with SFAS No. 115. The Company adopted FASB No. 125 on January 1,
1997 and adoption did not have a material impact on the Company's financial
position and results of operations.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, (FASB No. 128), "Earnings
Per Share." FASB No. 128 supersedes APB Opinion No. 15, (APB 15), "Earnings
Per Share" and specifies the computation, presentation, and disclosure
requirements for earnings per share (EPS) for entities with publicly held
common stock or potential common stock. FASB No. 128 was issued to simplify
the computation of EPS and to make the U.S. standard more compatible with the
EPS standards of other countries and that of the International Accounting
Standards Committee (IASC). It replaces the presentation of primary EPS with a
presentation of basic EPS and fully diluted EPS with diluted EPS.
Basic EPS, unlike primary EPS, excludes dilution and is computed by dividing
income available to common stockholders by the weighted-averaged number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
Diluted EPS is computed similarly to fully diluted EPS under APB No. 15.
FASB No. 128 is effective for financial statements for both interim and
annual periods ending after December 15, 1997. Earlier application is not
permitted. After adoption, all prior-period EPS data presented shall be
restated to conform with FASB No. 128. The Company has determined that this
statement will increase the earnings per share computation under Basic EPS as
compared to primary EPS.
FASB No. 129, Disclosure of Information about Capital Structure, is
effective for financial statements for periods ending after December 15, 1997.
It is not expected that the issuance of FASB No. 129 will require significant
revision of prior disclosures since the Statement lists required disclosures
that had been included in a number of previously existing separate statements
and opinions.
F-23
<PAGE>
PREFERRED CREDIT CORPORATION
(FORMERLY T.A.R. PREFERRED MORTGAGE CORPORATION)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND MARCH 31, 1997
2. MORTGAGE LOANS
A summary of mortgage loan held for sale, at the lower of cost or market at
December 31, 1996 and March 31, 1997 follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
<S> <C> <C>
Mortgage loans receivable...................... $77,448,582 $95,273,180
Net deferred origination costs................. (819,720) (1,180,355)
Allowance for loan losses...................... (596,651) (596,651)
----------- -----------
$76,032,211 $93,496,174
=========== ===========
</TABLE>
Gain on Sale of Loans--Gain on sale of loans for the three months ended
March 31, 1996 and 1997 was comprised of the following components:
<TABLE>
<CAPTION>
1996 1997
-------- -----------
<S> <C> <C>
Gain from whole loan sale transactions and
securitization.................................. $979,700 $25,284,697
Unrealized gain on held-for-trading securities... -- 620,852
Cost on sale of securitization................... -- (6,800,150)
Other............................................ -- 111,691
Allowance for losses............................. -- (250,000)
-------- -----------
$979,700 $18,967,090
======== ===========
</TABLE>
3. RESIDUAL INTERESTS IN SECURITIZATION
Residual interest in securitization consists of the following components at
December 31, 1996 and March 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
<S> <C> <C>
Over-collateralization amount................... $ 8,704,471 $20,109,870
Net interest receivable (NIR)................... 28,174,518 50,170,942
----------- -----------
$36,878,989 $70,280,812
=========== ===========
</TABLE>
The following table summarizes activity in NIR interest for the three months
ended March 31, 1997:
<TABLE>
<S> <C>
Balance, beginning of period................................. $28,174,518
NIR recognized............................................... 25,905,549
Additions to discounted estimated default losses............. (2,060,153)
Amortization................................................. (1,848,972)
-----------
Balance, end of period....................................... $50,170,942
===========
</TABLE>
F-24
<PAGE>
PREFERRED CREDIT CORPORATION
(FORMERLY T.A.R. PREFERRED MORTGAGE CORPORATION)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
(4) SHORT-TERM NOTES PAYABLE AND RESIDUAL FINANCING
Notes payable and residual financing consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
<S> <C> <C>
A $20 million line of credit expiring in June
1997 secured by mortgage loans held for sale,
bearing interest based on the Federal funds
rate 7.29% at March 31, 1997. This line of
credit is guaranteed by one of the Company's
stockholders................................. $ 12,256,062 $ 20,607,579
A $25 million line of credit expired in May
1997 secured by mortgage loans held for sale,
bearing interest based on the Federal funds
rate or one month LIBOR (8.69% at March 31,
1997) depending on the collateral. This line
of credit is guaranteed by the Company's
stockholders................................. 10,106,302 24,750,247
A $100 million master repurchase agreement for
mortgage loans held for sale, bearing
interest rate based on LIBOR rate 7.69% at
March 31, 1997............................... 65,773,272 63,607,452
A $20 million line of credit expiring in March
1998 secured by mortgage loans held for sale,
bearing interest based on the Federal funds
rate (7.29% at March 31, 1997). This line of
credit is guaranteed by Company's
stockholders................................. -- 114,902
------------ ------------
88,135,636 109,080,180
A $30 million residual financing line expiring
in December 1997 secured by residual
interests in securitization bearing interest
based on LIBOR rate 8.82% at March 31, 1997.. 14,258,371 27,406,725
------------ ------------
$102,394,007 $136,486,905
============ ============
</TABLE>
Advances under the residual financing line are made at the sole discretion
of the lender and are based upon the amount of loans securitized.
Included in short-term notes payable are $18 million of borrowings under the
$15 million and $20 million lines of credit which have been advanced to the
Company to fund certain loans in process.
The line of credit agreements contain certain restrictive financial and
other covenants which require the Company to, among other requirements,
restrict dividends, maintain certain levels of net worth, liquidity, debt to
net worth ratios and maintenance of compliance with regulatory and investor
requirements. At March 31, 1997, the Company believes that it was in
compliance with these financial and other covenants.
F-25
<PAGE>
PREFERRED CREDIT CORPORATION
(FORMERLY T.A.R. PREFERRED MORTGAGE CORPORATION)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
(5) STOCK OPTION PLANS
A stock option plan approved by the stockholders in 1996 (1996 Plan)
provides that qualified incentive stock options and nonqualified options
covering an aggregate of 1,397,256 shares of the Company's unissued common
stock may be granted to salaried officers, key employees or directors at
prices no less than the fair market value of such shares at dates of grant.
Options granted may be exercised either immediately or over a period of three
to five years.
In 1995, the Company granted 59,970 stock options to an officer.
Stock options activity during the three months ended March 31, 1997 is as
follows:
<TABLE>
<CAPTION>
WEIGHTED-
PRICE AVERAGE
AVAILABLE PER PRICE PER
FOR GRANT OUTSTANDING SHARE SHARE
--------- ----------- -------- ---------
<S> <C> <C> <C> <C>
$0.92 to
Balance at December 31, 1996..... -- 1,397,256 $2.11 $1.95
Options exercised.................. -- -- --
Options canceled................... -- -- -- --
--- --------- -------- -----
$0.92 to
Balance at March 31, 1997........ -- 1,397,256 $2.11 $1.95
=== ========= ======== =====
</TABLE>
In June 1997, the Company's Board of Directors increased the stock options
that may be granted under the 1996 Plan to 1,707,162 shares.
(6) COMMENTS
As of March 31, 1996, the Company was committed to provide an investment
banking firm with a right to purchase whole loans in an aggregate amount of
$600 million on or prior to December 31, 1997. The Company will be required to
pay "pair-off" penalties equal to 1% and 2% of the unfunded commitments at
September 30, 1997 and December 31, 1997, respectively.
(7) SUBSEQUENT EVENTS
Reorganization--In March 1997, the Board of Directors incorporated Preferred
Credit Corporation, a Nevada Corporation for the purpose of changing the
Company's state of incorporation from California to Nevada. On June 24, 1997,
the Company approved a reorganization to change its state of incorporation
from California to Nevada through a merger of Preferred Credit Corporation, a
California corporation with and into Preferred Credit Corporation, a Nevada
corporation. The Company has authorized 50,000,000 shares of Common Stock and
5,000,000 shares of Preferred Stock in the Nevada corporation.
Stock Split--On June 24, 1997, the Company authorized a 6,000-for-1 stock
split of its Common stock to be effective upon the merger. All references in
the condensed financial statements to number of shares, per share amounts and
market prices of the Company's Common Stock have been retroactively restated
to reflect the increased number of common shares outstanding.
F-26
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS IN CONNECTION WITH THE OFFER MADE IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, ANY OF THE UNDERWRITERS OR SELLING STOCKHOLD-
ERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
ANY OFFER TO BUY ANY SHARES OF COMMON STOCK OTHER THAN THE SHARES OF COMMON
STOCK TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION WOULD BE UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UN-
DER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................... 3
Risk Factors............................................................... 8
Use of Proceeds............................................................ 19
Dividend Policy............................................................ 19
Dilution................................................................... 20
Capitalization............................................................. 21
Selected Financial Data.................................................... 22
Management's Discussion and Analysis of
Financial Condition and Results of Operations............................. 24
Business................................................................... 37
Management................................................................. 56
Certain Transactions....................................................... 63
Principal and Selling Stockholders......................................... 64
Description of Capital Stock............................................... 65
Shares Eligible For Future Sale............................................ 67
Underwriting............................................................... 68
Legal Matters.............................................................. 70
Experts.................................................................... 70
Additional Information..................................................... 70
Reports to Stockholders.................................................... 70
Index to Financial Statements.............................................. F-1
</TABLE>
-----------
UNTIL , 1997 (25 DAYS AFTER COMMENCEMENT OF THE OFFERING), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICI-
PATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
5,000,000 SHARES
PREFERRED CREDIT
CORPORATION
COMMON STOCK
-----------
PROSPECTUS
-----------
KEEFE, BRUYETTE & WOODS, INC.
PIPER JAFFRAY INC.
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table itemizes the expenses incurred by the Registrant in
connection with the issuance and distribution of the Securities being
registered, other than underwriting discounts. All the amounts shown are
estimates except the Securities and Exchange Commission registration fee and
the NASD filing fee.
<TABLE>
<CAPTION>
<S> <C>
Registration fee--Securities and Exchange Commission............... $ 40,076
NASD filing fee.................................................... 13,725
NASD National Market listing fee................................... 50,000
Accounting fees and expenses....................................... 200,000
Legal fees and expenses (other than blue sky)...................... 175,000
Blue sky fees and expenses, including legal fees................... 10,000
Printing; stock certificates....................................... 80,000
Transfer agent and registrar fees.................................. 7,500
Miscellaneous...................................................... 23,699
--------
Total............................................................ $600,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Articles of Incorporation and its Bylaws provide for the
indemnification by the Registrant of each director, officer and employee of
the Registrant to the fullest extent permitted by Nevada Law, as the same
exists or may hereafter be amended. The laws of the State of Nevada permit,
and in some cases require, corporations to indemnify officers, directors,
agents and employees who are or have been a party to litigation against
judgments, fines, settlements and reasonable expenses under certain
circumstances.
The Registrant's Articles of Incorporation also provides that a director of
the Registrant shall not be liable to the Registrant or its stockholders for
monetary damages for breach of fiduciary duty as a director. Under the
Registrant's Articles of Incorporation, and as permitted by the laws of the
State of Nevada, a director or officer is not liable to the Registrant or its
stockholders for damages for breach of fiduciary duty. Such limitation of
liability does not affect liability for (i) acts or omissions which involve
intentional misconduct, fraud or a knowing violation of the law, or (ii) the
payment of any unlawful distribution.
The Registrant has entered into separate but identical indemnity agreements
(the "Indemnity Agreements") with each director of the Registrant and certain
of its officers (the "Indemnitees"). Pursuant to the terms and conditions of
the Indemnity Agreements, the Registrant indemnified each Indemnitee against
any amounts which he or she becomes legally obligated to pay in connection
with any claim against him or her based upon any action or inaction which he
or she may commit, omit or suffer while acting in his or her capacity as a
director and/or officer of the Registrant or its subsidiaries, provided,
however, that Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Registrant and, with respect to any criminal action, had no reasonable cause
to believe Indemnitee's conduct was unlawful.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In connection with entering into the First Boston Facility, on October 2,
1996, the Registrant issued warrants to purchase 1,687,554 shares of Common
Stock to CSFB Mortgage at an exercise price of $2.21 per share. The Company
issued warrants to purchase 210,246 additional shares of Common Stock at an
exercise price of $2.21 to CSFB Mortgage on December 17, 1996, in
consideration for amending the First Boston Facility. These warrants were
acquired for investment and not with a view to distribution thereof. No
brokers, underwriters or finders were involved in the issuance of such
warrants. The issuance and sale of these warrants was deemed exempt from the
registration and prospectus delivery requirements of the Securities Act
pursuant to Section 4(2) of the Securities Act as a transaction not involving
any public offering.
II-1
<PAGE>
The Registrant issued warrants to purchase 274,830 shares of Common Stock to
Merrill Lynch at an exercise price of $2.18 per share on December 6, 1996.
These warrants were acquired for investment and not with a view to
distribution thereof. No brokers, underwriters or finders were involved in the
issuance of such warrants. The issuance and sale of these warrants was deemed
exempt from the registration and prospectus delivery requirements of the
Securities Act pursuant to Section 4(2) of the Securities Act as a transaction
not involving any public offering.
On December 31, 1996, the Registrant issued warrants to purchase 47,424
shares of Common Stock to John Heatly at an exercise price of $2.25 per share.
These warrants were acquired for investment and not with a view to
distribution thereof. No brokers, underwriters or finders were involved in the
issuance of such warrants. The issuance and sale of these warrants was deemed
exempt from the registration and prospectus delivery requirements of the
Securities Act pursuant to Section 4(2) of the Securities Act as a transaction
not involving any public offering.
Also on December 31, 1996, pursuant to its 1996 Stock Incentive Plan, the
Registrant granted options covering 1,397,256 shares of Common Stock to
certain executive officers of the Registrant, with exercise prices ranging
from $.92 to $2.11 per share. The Registrant believes that the issuance and
sale of these securities satisfied the exemption provided by Rule 701
promulgated under the Securities Act.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Articles of Incorporation of Registrant.*
3.2 Bylaws of Registrant.*
4.1 Specimen Stock Certificate of Common Stock of Registrant.*
4.2 Warrant Agreement between Registrant and CS First Boston Mortgage
Capital Corp., dated October 2, 1996.
4.3 Warrant Agreement between Registrant and Merrill Lynch Mortgage
Capital, Inc., dated December 6, 1996.
4.4 Warrant Agreement between Registrant and Merrill Lynch, Pierce, Fenner
& Smith Incorporated, dated December 6, 1996.
4.5 Warrant Agreement between Registrant and John Heatly, dated December
31, 1996.
4.6 Warrant Agreement between Registrant and CS First Boston Mortgage
Capital Corp., dated December 17, 1996.*
5.1 Opinion and Consent of Troop Meisinger Steuber & Pasich, LLP.*
10.1 Form of Registrant's 1996 Stock Incentive Plan.
10.2 Stock Option Agreement, dated December 31, 1996, between Terrance J.
Wolfe and the Registrant.
10.3 Agreement of Lease between Registrant, Tenant, and Crow Winthrop
Operating Partnership, Landlord, dated January 1, 1997, for 3347
Michelson Drive, Irvine, California.
10.4 Warehousing Credit and Security Agreement between Registrant and PNC
Mortgage Bank, National Association, dated November 12, 1995.
10.5 Engagement Letter from Nikko Financial Services, Inc., dated June 13,
1997.
10.6 Residential Mortgage Financing Facility, dated June 13, 1997, between
Nikko Financial Services, Inc. and the Registrant.
10.7 Promissory Note, dated as of June 13, 1997, made by Registrant in
favor of Nikko Financial Services, Inc.
10.8 Tri-Party Custody Agreement, dated as of June 13, 1997, among the
Registrant, Nikko Financial Service, Inc. and Bankers Trust Company
of California, N.A.
10.9 Revolving Credit and Security Agreement between Registrant and La
Salle National Bank, dated March , 1997.
10.10 Engagement Letter from CS First Boston Corporation, dated October 2,
1996.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
10.11 Master Repurchase Agreement between Registrant and CS First Boston
Mortgage Capital Corp., dated October 2, 1996.
10.12 Custody Agreement, dated as of October 2, 1996, by and among CS First
Boston Mortgage Capital Corp., Bankers Trust Company of California,
N.A., the Registrant and Advanta Mortgage Corp. USA.
10.13 First Amendment to Whole Loan Repurchase Facility between Registrant
and CS First Boston Mortgage Capital Corp., dated ,
1997.*
10.14 Mortgage Loan Purchase Agreement between Registrant and CS First
Boston Mortgage Capital Corp., dated August 1, 1996.
10.15 Seller's Warranties Agreement between CS First Boston Mortgage Capital
Corp. and Registrant, dated August 1, 1996.
10.16 Custodial Agreement, dated as of August 1, 1996, by and among CS First
Boston Mortgage Capital Corp., the Registrant, Bankers Trust Company
of California, N.A. and Advanta Mortgage Corp. USA.
10.17 First Amendment to Mortgage Loan Purchase Agreement between Registrant
and CS First Boston Mortgage Capital Corp., dated May 8, 1997.
10.18 Termination Agreement, dated as of December 6, 1996, between Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Merrill Lynch Mortgage
Capital Inc., Merrill Lynch Credit Corporation, Todd A. Rodriquez,
Walter Villaume and the Registrant.
10.19 Stockholders Agreement, dated as of December 6, 1996, by and among the
Registrant, Todd A. Rodriguez, Walter Villaume, Merrill Lynch
Mortgage Capital Inc., and Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
10.20 Loan Servicing Agreement between Registrant and Advanta Mortgage Corp.
USA, dated March 8, 1996.
10.21 Loan Servicing Agreement by and among Registrant, CS First Boston
Mortgage Capital Corp. and Advanta Mortgage Corp. USA, dated August
23, 1996.
10.22 First Amendment to Loan Servicing Agreement by and among Registrant,
CS First Boston Mortgage Capital Corp. and Advanta Mortgage Corp.
USA, dated October 1, 1996.
10.23 Employment Agreement between Registrant and Todd A. Rodriguez, dated
September 1, 1996.
10.24 Employment Agreement between Registrant and Walter F. Villaume, dated
September 1, 1996.
10.25 Employment Agreement between Registrant and Terrance Wolfe, dated
December 1, 1996.
10.26 Employment Agreement between Registrant and Li-Lin Ko, dated September
14, 1995.
10.27 Employment Agreement between Registrant and John Shurance, dated April
1, 1997.
21.1 List of Subsidiaries.*
23.1 Consent of Troop Meisinger Steuber & Pasich, LLP (included in its
opinion filed as Exhibit 5.1 hereto).*
23.2 Consent of KPMG Peat Marwick LLP.
24.1 Power of Attorney (included as part of the signature page hereto).
</TABLE>
- --------
* To be filed by Amendment.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required
by the Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer of controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by a controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For the purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this Registration Statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement on Form S-1 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Irvine,
State of California, on June 24, 1997.
Preferred Credit Corporation
By: /s/ TODD A. RODRIGUEZ
------------------------
Todd A. Rodriguez
Chief Executive Officer
II-5
<PAGE>
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Todd
Rodriguez and Li-Lin Ko, and each of them, as his true and lawful attorneys-
in-fact and agents with full power of substitution and resubstitution, for him
and his name, place and stead, in any and all capacities, to sign any or all
amendments (including post effective amendments) to this Registration
Statement and a new Registration Statement filed pursuant to Rule 462(b) of
the Securities Act of 1933 and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or
their substitutes, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES STATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Todd A. Rodriguez Chief Executive Officer and June 24, 1997
____________________________________ Director (Principal
Todd A. Rodriguez Executive Officer)
/s/ Li-Lin Ko Chief Financial Officer June 24, 1997
____________________________________ (Principal Financial and
Li-Lin Ko Accounting Officer)
/s/ Walter F. Villaume President, Secretary and June 24, 1997
____________________________________ Director
Walter F. Villaume
/s/ Jo Ann Niffenegger Executive Vice President-- June 24, 1997
____________________________________ Operations and Director
Jo Ann Niffenegger
/s/ Robert K. George Director June 24, 1997
____________________________________
Robert K. George
/s/ James T. Heaton Director June 24, 1997
____________________________________
James T. Heaton
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Articles of Incorporation of Registrant.*
3.2 Bylaws of Registrant.*
4.1 Specimen Stock Certificate of Common Stock of Registrant.*
4.2 Warrant Agreement between Registrant and CS First Boston Mortgage
Capital Corp., dated October 2, 1996.
4.3 Warrant Agreement between Registrant and Merrill Lynch Mortgage
Capital Inc., dated December 6, 1996.
4.4 Warrant Agreement between Registrant and Merrill Lynch, Pierce, Fenner
& Smith Incorporated, dated December 6, 1996.
4.5 Warrant Agreement between Registrant and John Heatly, dated December
31, 1996.
4.6 Warrant Agreement between Registrant and CS First Boston Mortgage
Capital Corp., dated December 17, 1996.*
5.1 Opinion and Consent of Troop Meisinger Steuber & Pasich, LLP.*
10.1 Form of Registrant's 1996 Stock Incentive Plan.
10.2 Stock Option Agreement, dated December 31, 1996, between Terrance J.
Wolfe and the Registrant.
10.3 Agreement of Lease between Registrant, Tenant, and Crow Winthrop
Operating Partnership, Landlord, dated January 1, 1997, for 3347
Michelson Drive, Irvine, California.
10.4 Warehousing Credit and Security Agreement between Registrant and PNC
Mortgage Bank, National Association, dated November 12, 1995.
10.5 Engagement Letter from Nikko Financial Services, Inc., dated June 13,
1997.
10.6 Residential Mortgage Financing Facility, dated June 13, 1997, between
Nikko Financial Services, Inc. and the Registrant.
10.7 Promissory Note, dated as of June 13, 1997, made by Registrant in
favor of Nikko Financial Services, Inc.
10.8 Tri-Party Custody Agreement, dated as of June 13, 1997, among the
Registrant, Nikko Financial Service, Inc. and Bankers Trust Company
of California, N.A.
10.9 Revolving Credit and Security Agreement between Registrant and La
Salle National Bank, dated March , 1997.
10.10 Engagement Letter from CS First Boston Corporation, dated October 2,
1996.
10.11 Master Repurchase Agreement between Registrant and CS First Boston
Mortgage Capital Corp., dated October 2, 1996.
10.12 Custody Agreement, dated as of October 2, 1996, by and among CS First
Boston Mortgage Capital Corp., Bankers Trust Company of California,
N.A., the Registrant and Advanta Mortgage Corp. USA.
10.13 First Amendment to Whole Loan Repurchase Facility between Registrant
and CS First Boston Mortgage Capital Corp., dated ,
1997.*
10.14 Mortgage Loan Purchase Agreement between Registrant and CS First
Boston Mortgage Capital Corp., dated August 1, 1996.
10.15 Seller's Warranties Agreement between CS First Boston Mortgage Capital
Corp. and Registrant, dated August 1, 1996.
10.16 Custodial Agreement, dated as of August 1, 1996, by and among CS First
Boston Mortgage Capital Corp., the Registrant, Bankers Trust Company
of California, N.A. and Advanta Mortgage Corp. USA.
10.17 First Amendment to Mortgage Loan Purchase Agreement between Registrant
and CS First Boston Mortgage Capital Corp., dated May 8, 1997.
10.18 Termination Agreement, dated as of December 6, 1996, between Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Merrill Lynch Mortgage
Capital Inc., Merrill Lynch Credit Corporation, Todd A. Rodriquez,
Walter Villaume and the Registrant.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
10.19 Stockholders Agreement, dated as of December 6, 1996, by and among the
Registrant, Todd A. Rodriguez, Walter Villaume, Merrill Lynch
Mortgage Capital Inc., and Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
10.20 Loan Servicing Agreement between Registrant and Advanta Mortgage Corp.
USA, dated March 8, 1996.
10.21 Loan Servicing Agreement by and among Registrant, CS First Boston
Mortgage Capital Corp. and Advanta Mortgage Corp. USA, dated August
23, 1996.
10.22 First Amendment to Loan Servicing Agreement by and among Registrant,
CS First Boston Mortgage Capital Corporation and Advanta Mortgage
Corp. USA, dated October 1, 1996.
10.23 Employment Agreement between Registrant and Todd A. Rodriguez, dated
September 1, 1996.
10.24 Employment Agreement between Registrant and Walter F. Villaume, dated
September 1, 1996.
10.25 Employment Agreement between Registrant and Terrance Wolfe, dated
December 1, 1996.
10.26 Employment Agreement between Registrant and Li-Lin Ko, dated September
14, 1995.
10.27 Employment Agreement between Registrant and John Shurance, dated April
1, 1997.
21.1 List of Subsidiaries.*
23.1 Consent of Troop Meisinger Steuber & Pasich, LLP (included in its
opinion filed as Exhibit 5.1 hereto).*
23.2 Consent of KPMG Peat Marwick LLP.
24.1 Power of Attorney (included as part of the signature page hereto).
</TABLE>
- --------
* To be filed by Amendment.
<PAGE>
EXHIBIT 4.2
Warrant No. 1
THIS WARRANT AND THE WARRANT SHARES HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR REGISTERED OR
QUALIFIED UNDER ANY STATE SECURITIES LAWS, AND MAY NOT BE PLEDGED, HYPOTHECATED,
SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS SO REGISTERED OR AN EXCEPTION
THEREFROM IS AVAILABLE
THIS WARRANT AND THE WARRANT SHARES REPRESENTED BY THIS WARRANT ARE SUBJECT TO
TRANSFER RESTRICTIONS AND PURCHASE RIGHTS SET FORTH IN A STOCKHOLDERS AGREEMENT
DATED AS OF OCTOBER 2, 1996. A COPY OF SUCH AGREEMENT IS MAINTAINED ON FILE IN
THE PRINCIPAL OFFICE OF THE COMPANY IN THE STATE OF CALIFORNIA
WARRANT TO PURCHASE COMMON STOCK
OF T.A.R. PREFERRED MORTGAGE CORPORATION
THIS CERTIFIES THAT, for value received, T.A.R. Preferred Mortgage
Corporation, a California corporation (the "Company"), promises to issue to CS
First Boston Mortgage Capital Corp. ("CSFB"), the holder of this Warrant (the
"Holder"), its nominees, successors or assigns nonassessable shares of Common
Stock, $.01 par value, of the Company ("Common Stock") equal to fourteen percent
(14%) of the sum of (i) all shares of Common Stock outstanding as of the date
hereof and (ii) all shares of Common Stock issuable upon (a) exercise of any
rights outstanding as of the date hereof to subscribe for or to purchase, or any
options outstanding as of the date hereof for the purchase of, Common Stock or
Convertible Securities (as defined herein) and (b) conversion of any Convertible
Securities outstanding as of the date hereof, upon the payment by the Holder to
the Company of the Warrant Price set forth herein and to deliver to the Holder a
certificate or certificates representing the Common Stock purchased. The number
of shares of Common Stock purchasable upon exercise of this Warrant and the
Warrant Price shall be subject to adjustment from time to time as provided
herein. The initial Warrant Price per share of Common Stock shall equal the
quotient obtained by dividing $4,200,000.00 (the "Initial Aggregate Warrant
Price") by the aggregate number of shares of Common Stock issuable upon exercise
in full of this Warrant prior to any adjustment thereto.
For the purpose of this Warrant, the term "Common Stock" shall mean
(i) the class of stock designated as the Common Stock of the Company at the date
of this Warrant, or (ii) any other class or classes of stock resulting from
successive changes or reclassifications of such class of stock.
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Section 1. Term of Warrant, Restrictions on Transfer, Exercise of
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Warrant.
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1.1. Term of Warrant. Subject to the terms of this Warrant, the
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Holder shall have the right, at its option, which may be exercised in whole or
in part, at any time commencing at the time of the issuance of this Warrant and
until 5:00 p.m. Eastern Time on September 27, 2011 ("Warrant Expiration Date"),
to purchase from the Company the number of fully paid and nonassessable shares
of Common Stock which the Holder may at the time be entitled to purchase on
exercise of this Warrant ("Warrant Shares"). After such time, this Warrant will
be void.
1.2. Restrictions on Transfer. This Warrant and the Warrant Shares
------------------------
will not be registered or qualified under the Securities Act of 1933, as amended
(the "Act"), or the securities laws of any state or other jurisdiction and
therefore will not be transferable except pursuant to an exemption under or in
accordance with the Act, including Rule 144A adopted under the Act, in
compliance with applicable state securities laws and pursuant to the provisions
of this Warrant. Unless the Warrant or Warrant Shares shall have been duly
registered under the Act pursuant to Section 10 hereof, (a) the certificates
representing the Warrant Shares shall bear a legend comparable to the legend on
the first page of this Warrant regarding restrictions on transfer and (b) no
sale, pledge or other disposition of this Warrant or any Warrant Shares may be
made by any person unless either (i) such sale, pledge or other disposition is
made to a "qualified institutional buyer" that executes a certificate in the
form of Exhibit A attached hereto to the effect that (A) it is a "qualified
institutional buyer" as defined under Rule 144A of the Act, acting for its own
account or the accounts of other "qualified institutional buyers" as defined
under Rule 144A and (B) it is aware that the transferor of this Warrant or any
Warrant Shares intends to rely on the exemption from the registration
requirements under the Act provided by Rule 144A, or (ii) such sale, pledge or
other disposition is otherwise made in a transaction exempt from the
registration requirements under the Act and (A) the prospective transferor and
transferee certify in writing to the Company the facts surrounding such
disposition, which certifications shall be in the form of Exhibits B-1 and B-2
attached hereto and (B) if the disposition is not a transfer under Rule 144A or
a disposition between or among affiliates, the Company may request a written
opinion of counsel reasonably satisfactory to the Company to the effect that
such disposition will not violate the Act. In connection with a sale or other
disposition of the Warrant or the underlying Warrant Shares, the subsequent
holder or holders shall be bound by the provisions of this Agreement.
1.3. Exercise of Warrant. Unless a Termination Event (as defined in
-------------------
Section 8) has occurred, the Holder may exercise this Warrant by delivering to
the Company (i) a written notice specifying the number of shares of Common Stock
to be purchased, of such Holder's election to exercise this Warrant, and (ii)
payment in cash or by a certified or cashier's check. Upon receipt of written
notice, the Company shall as promptly as practicable execute or cause to be
executed and deliver to such Holder a certificate or certificates representing
the aggregate number of shares of Common Stock purchased. Such certificate or
certificates shall be deemed to have been issued to the Holder which shall be
deemed to have become a holder
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of record of such Warrant Shares as of the date of payment of the Warrant Price.
If this Warrant shall have been exercised only in part, the Company shall also
deliver a new Warrant of like tenor evidencing the rights of such Holder to
purchase the remaining shares of Common Stock called for by this Warrant;
provided that the new Warrant shall set forth the new Warrant Price which shall
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equal (A) the Initial Aggregate Warrant Price, as adjusted to that date pursuant
to this Warrant minus the aggregate consideration paid to that date upon
exercise of the Warrant divided by (B) the aggregate number of shares of Common
Stock issuable upon exercise in full of the Warrant then remaining, prior to any
subsequent adjustment thereof.
This Warrant does not entitle the Holder to any voting rights or other
rights as a shareholder of the Company prior to exercise and payment of the
Warrant Price in accordance with this Section 1.3.
Section 2. Exchange of Warrant. Subject to Section 1.2 and Section 3
-------------------
hereof, the Warrant may be exchanged for another Warrant or Warrants entitling
the Holder to purchase a like aggregate number of Warrant Shares as this Warrant
then entitles such Holder to purchase. Any Holder desiring to exchange this
Warrant shall make such request in writing delivered to the Company, and shall
surrender this Warrant, properly endorsed. Thereupon the Company shall execute
and deliver to the person entitled thereto a new Warrant or Warrants, as the
case may be, as so requested.
Section 3. Payment of Taxes. The Company shall pay all documentary
----------------
stamp taxes, if any, attributable to the initial issuance of any Warrant Shares
upon the exercise of this Warrant; provided, however, that the Company shall not
be required to pay any tax or taxes which may be payable in respect of any
transfer involved in the issue or delivery of any Warrant or certificate for
Warrant Shares in a name other than that of the Holder of this Warrant as such
name is then shown on the books of the Company.
Section 4. Mutilated or Missing Warrant. In case this Warrant shall
----------------------------
be mutilated, lost, stolen or destroyed, the Company shall issue in exchange and
substitution for and upon cancellation of the mutilated Warrant, or in lieu of
and substitution for the Warrant lost, stolen or destroyed, a new Warrant of
like tenor and representing an equivalent right or interests, but only upon
receipt of evidence reasonably satisfactory to the Company of such loss, theft
or destruction of this Warrant (provided that an affidavit, containing
appropriate indemnities, of the Holder as to a loss, theft or destruction of the
Warrant shall be deemed to be evidence reasonably satisfactory to the Company of
such loss, theft or destruction for purposes of this Section 4) and indemnity
(which may include a bond), if requested, also reasonably satisfactory to the
Company.
Section 5. Certain Covenants.
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5.1. Reservation of Warrant Shares. There have been reserved
-----------------------------
and the Company shall at all times keep reserved, out of its authorized Common
Stock, a number of
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shares of Common Stock sufficient to provide for the exercise of the rights of
purchase represented by this Warrant. The transfer agent, if any, for the Common
Stock, and every subsequent transfer agent for any shares of the Company's
Common Stock issuable upon the exercise of any of the rights of purchase as set
out in this Warrant, shall be irrevocably authorized and directed at all times
to reserve such number of authorized shares as shall be requisite for such
purpose. The Company shall keep a copy of this Warrant on file with any transfer
agent for the Common Stock and with every subsequent transfer agent for any
shares of the Company's Common Stock issuable upon the exercise of the rights of
purchase represented by this Warrant. Any transfer agent for the Common Stock
and any successor transfer agent for the Common Stock is hereby irrevocably
authorized to cause to be issued from time to time the share certificates
required to honor this Warrant upon its exercise in accordance with the terms
hereof. The Company shall supply any such transfer agent with duly executed
share certificates for such purpose.
5.2. No Impairment. The Company shall not by any action including,
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without limitation, amending its articles of incorporation, any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of this Warrant, but shall at all times in
good faith assist in the carrying out of all such terms and in the taking of all
such action, as may be necessary or appropriate to protect the rights of the
Holder against impairment. Without limiting the generality of the foregoing,
the Company shall (a) take all such action as may be necessary or appropriate in
order that the Company may validly issue fully paid and nonassessable Common
Stock upon the exercise of this Warrant, and (b) obtain all such authorizations,
exemptions or consents from any public regulatory body having jurisdiction
thereof as may be necessary to enable the Company to perform its obligations
under this Warrant; provided, that under no circumstances shall the Company be
obligated hereunder to qualify to do business or consent to service of process
in a particular jurisdiction in order to perform its duties hereunder.
Upon the request of the Holder, the Company shall at any time during the
period this Warrant is outstanding acknowledge in writing, in form satisfactory
to the Holder, the continued validity of this Warrant and the Company's
obligations hereunder.
5.3. Listing. If the Company shall list any of its Common Stock on
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any securities exchange or automated quotation system, it will, at its expense,
list thereon, maintain and, when necessary, increase such listing of, all of its
Common Stock issued or, to the extent permissible under the applicable
securities exchange or quotation system rules, issuable upon the exercise of
this Warrant so long as any of its Common Stock shall be so listed.
5.4. Notice of Certain Corporate Action. In case the Company shall
----------------------------------
propose (a) to pay any dividend or to make any other distribution to the holders
of its Common Stock, or (b) to offer to the holders of its Common Stock rights
to subscribe for or to purchase any shares of Common Stock or shares of stock of
any class or any other securities, rights or
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options, or (c) to effect any reclassification of its Common Stock (other than a
reclassification involving only the subdivision, or combination, of outstanding
shares of Common Stock), or (d) to effect any capital reorganization, or (e) to
effect any consolidation, merger or sale, transfer or other disposition of all
or substantially all of its property, assets or business, or (f) to effect the
liquidation, dissolution or winding up of the Company, then in each such case
(but without limiting the provisions of Section 6), the Company shall give to
each Holder of a Warrant, in accordance with Section 4, a notice of such
proposed action, which shall specify the date on which a record is to be taken
for purposes of such dividend, distribution of offer of rights, or the date on
which such reclassification, reorganization, consolidation, merger, sale,
transfer, disposition, liquidation, dissolution, or winding up is to take place
and the date of participation therein by the holders of Common Stock, if any
such date is to be fixed and shall also set forth such facts with respect
thereto as shall be reasonably necessary to indicate the effect of such action
on the Common Stock. Such notice shall be so given in the case of any action
covered by clause (a) or (b) above at least ten (10) calendar days prior to the
record date for determining holders of the Common Stock for purposes of such
action, and in the case of any other such action, at least ten (10) calendar
days prior to the date of the taking of such proposed action or the date of
participation therein by the holders of Common Stock, whichever shall be the
earlier. No such notice shall be given if (a) any stock of the Company shall
have been registered and (b) the Company reasonably determines that the giving
of such notice would require disclosure of material information which the
Company has a bona fide purpose for preserving as confidential or the disclosure
of which would not be in the best interests of the Company.
Section 6. Adjustment of Warrant Price.
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6.1. Adjustment Price. Except as provided in Section 6.8, if and
----------------
whenever the Company shall issue or sell any shares of its Common Stock for a
consideration per share less than the Adjustment Price (as hereinafter defined)
in effect immediately prior to the time of such issue or sale, then, forthwith
upon such issue or sale, the Adjustment Price shall be reduced to the price
(calculated to the nearest cent) determined by dividing (i) an amount equal to
the sum of (a) the number of shares of all classes of Common Stock outstanding
immediately prior to such issue or sale multiplied by the then existing
Adjustment Price, and (b) the consideration, if any, received by the Company
upon such issue or sale, by (ii) the total number of shares of Common Stock
outstanding immediately after such issue or sale. The Adjustment Price shall be
the Warrant Price or, in the case an adjustment of such price has taken place
pursuant to the provisions of this Section 6, then the Adjustment Price shall be
the price as last adjusted and in effect at the date this Warrant (or any part
thereof) is surrendered for exercise (such price or such price as last adjusted,
if such price shall have been adjusted, being referred to herein as the
"Adjustment Price").
If and whenever the Adjustment Price shall have been adjusted, the Warrant
Price shall be forthwith adjusted to the price (calculated to the nearest cent)
determined by multiplying the Warrant Price as then in effect by a fraction, the
numerator of which shall be the Adjustment Price as so adjusted and the
denominator of which shall be the Adjustment Price as in effect
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<PAGE>
immediately prior to such adjustment.
No adjustment of the Adjustment Price, however, shall be made in an amount
less than $.10 per share, but any such lesser adjustment shall be carried
forward and shall be made at the time and together with the next subsequent
adjustment which together with any adjustments so carried forward shall amount
to $.10 per share or more.
For the purposes of this Section 6.1, the following Sections 6.2 to 6.7,
inclusive, shall also be applicable: except that this Warrant shall be deemed
exercised and outstanding for all purposes and computations under this Section
6.1 and the then current Adjustment Price shall be deemed the Warrant Price per
share.
6.2. Issuance of Rights or Options. In case at any time the Company
-----------------------------
shall in any manner grant (whether directly or by assumption in a merger or
otherwise) any rights to subscribe for or to purchase, or any options for the
purchase of, Common Stock or any stock or securities convertible into or
exchangeable for Common Stock (such convertible or exchangeable stock or
securities being herein called "Convertible Securities") whether or not such
rights or options or the right to convert or exchange any such Convertible
Securities are immediately exercisable, and the price per share for which Common
Stock is issuable upon the exercise of such rights or options or upon conversion
or exchange of such Convertible Securities (determined by dividing (i) the total
amount, if any, received or receivable by the Company as consideration for the
granting of such rights or options, plus the minimum aggregate amount of
additional consideration payable to the Company upon the exercise of all such
rights or options, plus, in the case of such rights or options which relate to
Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable upon the issue or sale of such Convertible
Securities and upon the conversion or exchange thereof, by (ii) the total
maximum number of shares of Common Stock issuable upon the exercise of such
rights or options or upon the conversion or exchange of all such Convertible
Securities issuable upon the exercise of such rights or options) shall be less
than the Adjustment Price in effect immediately prior to the time of the
granting of such rights or options, then the total maximum number of shares of
Common Stock issuable upon the exercise of such rights or options or upon
conversion or exchange of the total maximum amount of such Convertible
Securities issuable upon the exercise of such rights or options shall be (as of
the date of granting of such rights or options) deemed to be outstanding and to
have been issued for such price per share. Except as otherwise provided in
Section 6.4, no adjustment of the Adjustment Price shall be made upon the actual
issue of such Common Stock or of such Convertible Securities upon exercise of
such rights or options or upon the actual issue of such Common Stock upon
conversion or exchange of such Convertible Securities.
6.3. Issuance of Convertible Securities. In case the Company shall
----------------------------------
in any manner issue (whether directly or by assumption in a merger or otherwise)
or sell any Convertible Securities, whether or not the rights to exchange or
convert thereunder are immediately exercisable, and the price per share for
which Common Stock is issuable upon such conversion or exchange (determined by
dividing (i) the total amount received or receivable by
6
<PAGE>
the Company as consideration for the issue or sale of such Convertible
Securities, plus the minimum aggregate amount of additional consideration, if
any, payable to the Company upon the conversion or exchange thereof, by (ii) the
total maximum number of shares of Common Stock issuable upon the conversion or
exchange of all such Convertible Securities) shall be less than the Adjustment
Price in effect immediately prior to the time of such issue or sale determined
as of the date of such issue or sale of such Convertible Securities, as the case
may be, then the total maximum number of shares of Common Stock issuable upon
conversion or exchange of all such Convertible Securities shall (as of the date
of the issue or sale of such Convertible Securities) be deemed to be outstanding
and to have been issued for such price per share, provided that (a) except as
otherwise provided in Section 6.4 below, no adjustment of the Adjustment Price
shall be made upon the actual issue of such Common Stock upon conversion or
exchange of such Convertible Securities, and (b) if any such issue or sale of
such Convertible Securities is made upon exercise of any rights to subscribe for
or to purchase or any option to purchase any such Convertible Securities for
which adjustments of the Adjustment Price have been or are to be made pursuant
to other provisions of this Section 6, no further adjustment of the Adjustment
Price shall be made by reason of such issue or sale.
6.4. Change in Option Price or Conversion Rate. Upon the happening
-----------------------------------------
of any of the following events, namely, if the purchase price provided for in
any right or option referred to in Section 6.2, the additional consideration, if
any, payable upon the conversion or exchange of any Convertible Securities
referred to in Section 6.2 or Section 6.3, or the rate at which any Convertible
Securities referred to in Section 6.2 or Section 6.3 are convertible into or
exchangeable for Common Stock shall change at any time (other than under or by
reason of provisions designed to protect against dilution), the Adjustment Price
in effect at the time of such event shall forthwith be readjusted to the
Adjustment Price which would have been in effect at such time had such rights,
options or Convertible Securities still outstanding provided for such changed
purchase price, additional consideration or conversion rate, as the case may be,
at the time initially granted, issued or sold; and on the expiration of any such
option or right or the termination of any such right to convert or exchange such
Convertible Securities, the Adjustment Price then in effect hereunder shall
forthwith be increased to the Adjustment Price which would have been in effect
at the time of such expiration or termination had such right, option or
Convertible Securities, to the extent outstanding immediately prior to such
expiration or termination, never been issued, and the Common Stock issuable
thereunder shall no longer be deemed outstanding. If the purchase price
provided for in any such right or option referred to in Section 6.2 or if the
rate at which any Convertible Securities referred to in Section 6.2 or Section
6.3 are convertible into or exchangeable for Common Stock shall be reduced at
any time under or by reason of provisions with respect thereto designed to
protect against dilution, then in case of the delivery of Common Stock upon the
exercise of any such right or option or upon conversion or exchange of any such
right or option or upon conversion or exchange of any such Convertible
Securities, the Adjustment Price then in effect hereunder shall forthwith be
adjusted to such respective amount as would have obtained had such right, option
or Convertible Security never been issued as to such Common Stock and had
adjustment been made upon the issuance of the shares of Common Stock delivered
as aforesaid, but only if as a result of such adjustment the
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<PAGE>
Adjustment Price then in effect hereunder is thereby reduced.
6.5. Stock Dividends. In case the Company shall declare a dividend
---------------
or make any other distribution upon any stock of the Company payable in Common
Stock or Convertible Securities, any Common Stock or Convertible Securities, as
the case may be, issuable in payment of such dividend or distribution shall be
deemed to have been issued or sold without consideration, subject to Section 6.
6.6. Consideration for Stock. In case any shares of Common Stock or
-----------------------
Convertible Securities or any rights or options to purchase any such Common
Stock or Convertible Securities shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount received by the
Company therefor, after deduction therefrom of any expenses incurred or any
underwriting commissions or concessions paid or allowed by the Company in
connection therewith. In case any shares of Common Stock or Convertible
Securities or any rights or options to purchase any such Common Stock or
Convertible Securities shall be issued or sold for consideration other than
cash, the amount of the consideration other than cash received by the Company
shall be deemed to be the fair value of such consideration as determined in good
faith by the Board of Directors of the Company, after deduction of any expenses
incurred or any underwriting commissions or concessions paid or allowed by the
Company in connection therewith. In case any shares of Common Stock or
Convertible Securities or any rights or options to purchase such Common Stock or
Convertible Securities shall be issued in connection with any merger in which
the Company is the surviving corporation, the amount of consideration therefor
shall be deemed to be the fair value as determined in good faith by the Board of
Directors of the Company of such portion of the assets business of the non-
surviving corporation as such Board shall determine to be attributable to such
Common Stock, Convertible Securities, rights or options, as the case may be. In
case any rights or options to purchase any shares of Common Stock or Convertible
Securities shall be issued in connection with the issue and sale of other
securities of the Company, together comprising one integral transaction in which
no specific consideration is allocated to such rights or options by the parties
thereto, such rights or options shall be deemed to have been issued without
consideration. In the event of any consolidation or merger of the Company in
which the Company is not the surviving corporation or in the event of any sale
of all or substantially all of the assets of the Company for stock or other
securities of any corporations, the Company shall be deemed to have issued a
number of shares of its Common Stock for stock or securities of the other
corporation computed on the basis of the actual exchange ratio on which the
transaction was predicated and for a consideration equal to the fair market
value on the date of such transaction of such stock or securities of the other
corporation, and if any such calculation results in adjustment of the Adjustment
Price, the determination of the number of shares of Common Stock receivable upon
exercise of this warrant immediately prior to such merger, consolidation or
sale, for purposes of Section 6.9, shall be made after giving effect to such
adjustment of the Adjustment Price.
8
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6.7. Record Date. In case the Company shall take a record of the
-----------
holders of its Common Stock for the purpose of entitling them (i) to receive a
dividend or other distribution payable in Common Stock or in Convertible
Securities, or (ii) to subscribe for or purchase Common Stock or Convertible
Securities, then such record date shall be deemed to be the date of the issue or
sale of the shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution or the
date of the granting of such right of subscription or purchase, as the case may
be.
6.8. Treasury Shares. The number of shares of Common Stock
---------------
outstanding at any given time shall not include shares owned or held by or for
the account of the Company, and the disposition of any such shares shall be
considered an issue or sale of Common Stock for the purposes of this Section 6.
6.9. Subdivision or Combination of Stock. In case the Company shall
-----------------------------------
at any time (i) issue a dividend payable in Common Stock or Convertible
Securities or any rights to subscribe for or to purchase, or any options for the
purchase of, Common Stock or Convertible Securities or (ii) subdivide its
outstanding shares of Common Stock into a greater number of shares or combine
its outstanding shares of Common Stock into a smaller number of shares, the
Adjustment Price and the Warrant Price in effect immediately prior to such
subdivision or combination shall be adjusted to an amount that bears the same
relationship to the Adjustment Price and Warrant Price respectively in effect
immediately prior to such action as the total amount of shares of Common Stock
outstanding immediately prior to such action bears to the total number of shares
of Common Stock outstanding immediately after such action, and the number of
shares of Common Stock purchasable upon the exercise of any Warrant shall be
that mumber of shares of Common Stock obtained by multiplying the number of
shares of Common Stock purchasable immediately prior to such adjustment upon the
exercise of such Warrant by the Warrant Price in effect immediately prior to
such adjustment and dividing the product so obtained by the Warrant Price in
effect after such adjustment.
6.10. Reorganization, Reclassification Consolidation, Merger or Sale.
--------------------------------------------------------------
If any capital reorganization or reclassification of the capital stock of the
Company, or any consolidation or merger of the Company with another corporation,
or the sale of all or substantially all of its assets to another corporation
shall be effected in such a way that holders of Common Stock shall be entitled
to receive stock, securities or assets with respect to or in exchange for Common
Stock, then, as a condition of such reorganization, reclassification,
consolidation, exercise, merger or sale, lawful and adequate provisions shall be
made whereby the holder of this Warrant shall thereafter have the right to
receive upon the basis and upon the terms and conditions specified herein and in
lieu of the shares of Common Stock of the Company immediately theretofore
receivable upon the exercise of this Warrant, such shares of stock, securities
or assets as may be issued or payable with respect to or in exchange for a
number of outstanding shares of such Common Stock equal to the number of shares
of such stock immediately theretofore receivable upon the exercise of this
Warrant had such reorganization, reclassification, consolidation, merger or sale
not taken place, and in any such
9
<PAGE>
case appropriate provision shall be made with respect to the rights and
interests of such holder to the end that the provisions hereof (including
without limitation provisions for adjustments of the Adjustment Price) shall
thereafter be applicable, as nearly as may be, in relation to any shares of
stock, securities or assets thereafter deliverable upon the exercise of such
conversion rights (including an immediate adjustment, by reason of such
consolidation or merger, of the Adjustment Price to the value for the Common
Stock reflected by the terms of such consolidation or merger if the value so
reflected is less than the Adjustment Price in effect immediately prior to such
consolidation or merger). In the event of a merger or consolidation of the
Company with or into another corporation as a result of which a greater or
lesser number of shares of common stock of the surviving corporation are
issuable to holders of Common Stock of the Company outstanding immediately prior
to such merger or consolidation, then the Adjustment Price and Warrant Price in
effect immediately prior to such merger or consolidation shall be adjusted in
the same manner as though there were a subdivision or combination of the
outstanding shares of Common Stock of the Company. The Company will not effect
any such consolidation, merger or sale, unless prior to the consummation thereof
the successor cor poration (if other than the Company) resulting from such
consolidation or merger or the corporation purchasing such assets shall assume,
by written instrument executed and mailed or delivered to the registered holder
hereof at the last address of such holder appearing on the books of the Company,
the obligation to deliver to such holder such shares of stock, securities or
assets as, in accordance with the foregoing provisions, such holder may be
entitled to receive. If a purchase, tender or exchange offer is made to and
accepted by the holders of more than 50% of the outstanding shares of Common
Stock of the Company, the Company shall not effect any consolidation or merger
and the Company shall not consent to or register any transfer or sale with or to
the Person having made such offer or with any affiliate of such Person, unless
prior to the consummation of such consolidation, merger, transfer or sale the
holder hereof shall have been given a reasonable opportunity to then elect to
receive, upon exercise of this Warrant, either the proportionate share of the
stock, securities or assets then issuable with respect to the Common Stock of
the Company or the stock, securities or assets, or the equivalent, issued to
previous holders of the Common Stock, or the consideration paid to such holders,
in the case of a purchase offer, in accordance with such offer.
6.11. Distributions. If at any time after the date hereof the
-------------
Company shall distribute to all holders of its Common Stock evidences of its
indebtedness or assets, the Warrant Price shall be decreased to an amount
determined by multiplying such Warrant Price by a fraction, the numerator of
which is the fair market value, as determined in good faith by the board of
directors of the Company, of each share of Common Stock outstanding (the "Fair
Market Value") prior to giving effect to such distribution less the Fair Market
Value of each share of Common Stock outstanding at the date of distribution of
the assets or evidences of indebtedness so distributed and the denominator of
which is the Fair Market Value of each share of Common Stock outstanding prior
to giving effect to such distribution.
6.12. Notice of Adjustment. Upon any adjustment of the Adjustment
--------------------
Price and the Warrant Price, then and in each such case the Company shall give
written notice thereof,
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which notice shall state the Adjustment Price and the Warrant Price resulting
from such adjustment, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
Section 7. [RESERVED].
Section 8. Certain Buy-Sell Rights.
-----------------------
(a) Upon the occurrence of a Warrant Call Event, as defined in the
letter agreement dated October 2, 1996 among the Company, CSFB and CS First
Boston Corporation, and the termination of such letter agreement as a result
thereof (the "Termination Event") the Company shall have the right to call for
the purchase of such portion of the outstanding Warrant, Warrants or Warrant
Shares (the "Warrant Call") equal to the product of (i) the amount of Warrant
Shares issuable upon the exercise in whole of the outstanding Warrant and (ii)
the Call Percentage. The Call Percentage with respect to any Warrant Call shall
equal 100% minus the percentage equivalent of the fraction the numerator of
which is equal to the number of days elapsed from September 27, 1996 to the date
of the occurrence of the Warrant Call Event (calculated by including September
27, 1996 as the initial date of the term of the Warrant but excluding the date
of such Warrant Call Event) and the denominator of which is equal to 460. The
Company, if it elects to exercise the Warrant Call, must exercise such Warrant
Call in whole and not in part.
(b) In the event the Company intends to exercise the Warrant Call, the
Company shall deliver to the Holder a notice (the "Warrant Call Notice") within
five days following the date of the Termination Event specifying the date on
which the buyout will close (the "Warrant Call Closing Date"), which shall be no
less than twenty (20) days and no more than thirty (30) days after the date of
the Warrant Call Notice.
(c) On the Warrant Call Closing Date, the Holder shall deliver the
Call Percentage of certificates representing the Warrants as to which CSFB is
the Holder to the Company for cancellation. If the Warrant has been exercised,
and the Holder is obligated to turn over any portion of the Call Percentage in
Warrant Shares, the Company shall pay the holder of such shares the Warrant
Price for such shares.
(d) Notwithstanding the foregoing, the Company may not exercise its
right to repurchase any portion of the Warrant or Warrant Shares from the Holder
pursuant to a Warrant Call other than upon a Termination Event as provided in
Section 8(a).
Section 9. Registration.
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9.1. Incidental Registration.
-----------------------
(a) General. If the Company at any time proposes to register on its
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own behalf or behalf of any of its security holders any of its securities (other
than by a Registration on Form S-4, S-8 or any successor or similar short-form
registration statement), whether or not pursuant to registration rights granted
to other holders of its securities, it will each such time give prompt written
notice to all Holders of its intention to do so and of such Holders' rights
under this Section, provided that in any event, such notice shall be given to
all such Holders at least thirty (30) days prior to such proposed registration
(or such shorter period if thirty (30) days notice is not practicable under the
circumstances but in no event not less than fifteen (15) days or, in the case of
a shelf registration on Form S-3, five (5) business days). Such notice shall
set forth the intended method of disposition of the securities proposed to be
registered by the Company. The notice shall offer to include in such filing
such number of shares of Warrant Shares as such Holder may request.
(b) Included Securities. Securities will be included in any such
-------------------
filing upon the written request of any such Holder made within fifteen (15) days
after receipt of any such notice, or five (5) business days in the case of a
shelf registration on Form S-3 (which request shall specify the Warrant Shares
intended to be disposed of by such holder and the intended method of disposition
thereof). The Company shall use its best efforts to effect the registration of
all Warrants and Warrant Shares which the Company has been so requested to
register by the Holders thereof, to the extent necessary to permit the
disposition of the Warrants and Warrant Shares so to be registered; provided
that the Holder shall pay its proportionate share of the underwriting discounts
or commissions.
(c) Priority in Underwritten Offerings. If the Company at any time
----------------------------------
proposes to register any of its securities as contemplated by this Section and
such securities are to be distributed by or through one or more underwriters,
the Company shall, if requested by the Holder or as provided in this Section
9.1, use its best efforts to arrange for such underwriters to include all the
Warrants and Warrant Shares to be offered and sold by such Holder among the
securities to be distributed by such underwriters, provided that if the managing
underwriter of such underwritten offering shall advise the Company in writing
(with a copy to each holder of Warrant Shares or Warrants requesting such
registration) that the number of Warrants and Warrant Shares requested to be
included in such Registration concurrently with the securities by the Company or
any other Person would adversely affect the price, timing or distribution of
such shares or would exceed the number of shares it is advisable to offer to
sell at such time (the "Sales Limit"), then the Company will include in such
registration, to the extent of the number of securities which the Company is so
advised can be sold in such offering, in priority order, first, the securities
that the Company proposes to issue and sell for its own account and, second,
such number of shares of Warrants and Warrants Shares requested to be registered
by the Holders thereof pursuant to this Section 9.1 or on behalf of any other
Person pro rata on the basis of the total number of shares of such securities
requested to be registered by each such Person so that the aggregate number of
Warrants and Warrant Shares and other shares being listed by or on behalf of
another Person does not exceed the difference between the aggregate Sales Limit
and the securities that the Company proposes to issue and sell for its own
account. Any Holder of Warrant Shares to be included in such
12
<PAGE>
Registration may withdraw its request to have its securities so included by
notice to the Company within ten (10) Business Days after receipt of a copy of a
notice from the managing underwriter pursuant to this Section. Any or all of the
conditions precedent to the obligations of such underwriters under such
underwriting agreement shall be conditions precedent to the obligations of such
Holders of Warrant Shares. Except as set forth in this Section 9.1, no Holder of
Warrant Shares shall be required to make any representations or warranties to or
agreements with the Company or the underwriters other than customary
representations, warranties or agreements regarding such Holder, such Holder's
Warrant Shares and such Holder's intended method of distribution and any other
representation required by law.
(d) Abandonment or Suspension. The Company may abandon or suspend any
-------------------------
registration effected pursuant to the provisions of this Section 9.1 at any time
and without any liability to any Holder hereof other than its obligations, to
the extent permitted by applicable law, to pay the expenses of the Company and
the selling security holders in connection therewith; provided, that the Company
--------
does not hereunder undertake to pay any expenses if abandonment or suspension
results, in its good faith judgment, from information or statements provided in
writing by the Holder hereof.
9.2. Demand Registration.
-------------------
(a) General. The Requisite Holders (as defined herein) shall have a
-------
one time right (exclusive of any demand for Registration that the Company
withdraws under Section 9.2(h)) to request that the Company effect the
registration of the Warrant Shares under the Act in a manner which permits the
Holder and holders of the Warrant Shares to sell without restriction all Warrant
Shares in the United States (the "Registration"), specifying the intended method
of disposition thereof, and the Company will promptly give written notice of
such requested Registration to all holders of Common Stock, Convertible
Securities or other interests in the Company that can be converted into Common
Stock, and thereupon the Company shall use its best efforts to effect, as
expeditiously as practicable but, if such request follows the registration of
any Common Stock of the Company, no earlier than any date specified in writing
by the managing underwriter of the offering of such stock as the earliest date
that such Registration shall not adversely affect the Company, the Registration
of
(i) the Warrant Shares which the Company has been so requested by
the Requisite Holders, for disposition in accordance with the intended
method or methods of disposition stated in such request, and
(ii) all other Warrant Shares the holders of which shall have made a
written request to the Company for Registration within twenty (20) days
after the giving of such written notice by the Company (which request shall
specify the intended method or methods of disposition thereof),
all to the extent necessary to permit the disposition (in accordance with the
intended methods
13
<PAGE>
thereof as aforesaid) of the Warrant Shares so to be registered; provided,
--------
however, that any holder of Warrant Shares to be included in any such
- -------
Registration, by written notice to the Company within ten (10) Business Days
after its receipt of a copy of a notice from the managing underwriter delivered
pursuant to Section 9.2(d), may withdraw such request for Registration and, on
receipt of notices from the Holder or the holders of a majority (by number of
shares) of the Warrant Shares (together the "Requisite Holders") requested to be
included in such Registration withdrawing their requests, the Company may elect
not to effect such Registration. The Requisite Holders shall not request a
Registration under this Section 9.2(b) while a notice of Registration pursuant
to Section 9.1 is outstanding. Upon the Company's reasonable request, the
Holder shall execute any reasonable lock-up agreement in connection with a
Registration. The Company and the Holder or holders shall each pay their pro
rata share (based on the proportionate numbers of shares each sells in the
Registration) of all securities registration fees, underwriting discounts and
commissions in connection with a Registration pursuant to this Section 9.2.
(b) Registration Statement Form. Registrations pursuant to this
---------------------------
Section 9.2 shall be on the appropriate registration form or form of prospectus
of the Securities and Exchange Commission (the "Commission") and the securities
covered by the Registration shall be registered or qualified under securities
laws other than the Act or blue sky laws of such jurisdictions (i) as shall be
reasonably selected by the Requisite Holders and as such be reasonably
acceptable to the Company; provided, however, that the Company shall not be
obligated to qualify as a foreign corporation to do business under the laws of
any jurisdiction in which it is not at the time of the Registration qualified,
or to file any general consent to service of process and (ii) as shall permit
the disposition of such Warrant Shares in accordance with the intended method or
methods of disposition specified in the request for their Registration. The
Company agrees to include in any such registration statement or prospectus all
information which any holder of Warrant Shares being registered, upon advice of
counsel, shall reasonably request. Such holder shall furnish to the Company all
information reasonably requested by the Company relating to such holder.
(c) Effective Registration Statement or Prospectus. A Registration
----------------------------------------------
requested pursuant to this Section 9.2 shall not be deemed to have been effected
unless a registration statement with respect thereto has become effective;
provided that a Registration which does not become effective after the Company
- --------
has filed a registration statement or prospectus with respect thereto solely by
reason of the refusal to proceed by the Requisite Holders (other than a refusal
to proceed based upon the advice of counsel relating to a matter with respect to
the Company or the withdrawal of a request for Registration pursuant to the
final proviso of Section 9.2(a)) then the Holders of the Warrant Shares that
were to have been registered shall pay all expenses of Registration in
connection with such Registration. Notwithstanding the foregoing, a
Registration requested pursuant to this Section 9.2 shall not be deemed to have
been effected if either (i) after a registration statement has become effective,
such Registration is interfered with by any stop order, injunction or other
order or requirement of the Commission in the appropriate jurisdiction or other
governmental agency or court for any
14
<PAGE>
reason; or (ii) the conditions to closing specified in the purchase agreement or
underwriting agreement entered into in connection with such Registration are not
satisfied, other than by reason of some act or omission by the Holders of the
Warrant Shares that were to have been registered.
(d) Priority in Requested Registrations. If a requested Registration
-----------------------------------
pursuant to this Section 9.2 involves an underwritten offering and the managing
underwriter shall advise the Company in writing (with a copy to each holder of
Warrant Shares requesting Registration) that the number of shares of Warrant
Shares requested to be included in such Registration concurrently with
securities being registered by the Company or any other person or entity would
adversely affect the price, timing or the distribution of such Warrant Shares or
would exceed the number of shares it is advisable to offer to sell at such time,
in the reasonable and good faith judgment of such managing underwriter, the
Company will include in such Registration, to the extent of the number of
securities which the Company is so advised can be sold in such offering, first,
such number of shares of Warrants and Warrant Shares requested to be registered
by the holders thereof pursuant to clauses (i) and (ii) of Section 9.2(a), pro
rata among such holders on the basis of the total number of shares of such
securities requested to be registered by all such holders, and, second, all
other securities of the Company proposed to be included in such Registration, in
accordance with the priorities, if any, then existing among the Company and the
holders of such securities. No provision hereof shall be construed to limit the
Company's discretion in selection of an underwriter.
(e) Demand Underwritten Offerings. Unless otherwise directed by the
-----------------------------
Majority Holders of Warrant Shares pursuant to a Registration requested under
this Section 9.2, the Company shall use reasonable efforts to enter into a firm
commitment underwriting agreement with the underwriters for such offering, such
agreement to be satisfactory in substance and form to the Company, each such
Holder and the underwriters and to contain such representations and warranties
by the Company and such other terms as are generally prevailing in such
agreements, including, without limitation, conditions precedent to the closing
contemplated by such agreement and customary indemnities. Except as set forth
in this Section 9.2(e), any such Holder of Warrant Shares shall not be required
to make any representations or warranties to or agreements with the Company or
the underwriters other than representations, warranties, customary indemnities
and agreements regarding such Holder, such Holder's Warrant Shares and such
Holder's intended method of distribution and any other representation required
by law.
(f) Amendments and Supplements to Registration Statement and
--------------------------------------------------------
Prospectus. The Company shall prepare and file with the Commission such
- ----------
amendments and supplements to the Company's registration statement and the
prospectus used in connection therewith as may be necessary to keep the
Company's registration statement effective and to comply with the provisions of
the Act with respect to the sale or other disposition of all securities covered
by such registration statement until the earlier of such time as all of such
securities have been disposed of in a public offering or the expiration of 180
days;
15
<PAGE>
(g) Priority of Other Registration Rights. The Company shall not,
-------------------------------------
without the prior written consent of the Requisite Holders, grant to any Person
the right to request or require the Company to register any share of Common
Stock or Convertible Securities, or any rights to subscribe for or to purchase,
or any options for the purchase of, Common Stock or Convertible Securities,
which rights would be senior to the rights of the Holders to request
Registration hereunder pursuant to Sections 9.1 or 9.2.
(h) Refusal, Abandonment or Suspension. If the Company reasonably
----------------------------------
determines that a Registration would require disclosure of confidential
information of the Company and such disclosure would not be in the best
interests of the Company, the Company may refuse to conduct such Registration or
abandon or suspend any Registration effected pursuant to the provisions of this
Section 9.2 at any time and without any liability to any holder hereof other
than its obligations, to the extent permitted by applicable law, to pay the
expenses, if any, of the Company and the selling security holders in connection
therewith.
Section 10. Termination of Restrictions. The restrictions imposed by
---------------------------
Section 1.2 hereof upon the transferability of any Warrant Shares shall cease
and terminate as to any Warrant Shares (a) when such securities shall have been
effectively registered under the Act and disposed of in accordance with the
registration statement covering such securities, (b) when such restrictions are
no longer required pursuant to Rule 144 under the Act or (c) when, in the
opinions of both counsel for the Holder and counsel for the Company, such
restrictions are otherwise no longer required in order to insure compliance with
the Act. Whenever such restrictions shall terminate as to any Warrant Shares,
the Holder shall be entitled to receive from the Company, without expense (other
than transfer taxes, if any), new securities of like tenor not bearing a legend
as to restrictions on transfer.
Section 11. No Rights as a Shareholder; Notice to Holder. Nothing
--------------------------------------------
contained in this Warrant shall be construed as conferring upon the Holder or
its transferees the right to vote or to consent or to receive notice as a
shareholder in respect of any meeting of shareholders for the election of
directors of the Company or any other matter, or any rights whatsoever as a
shareholder of the Company.
Section 12. Representations and Warranties. The Company hereby represents
------------------------------
and warrants to Holder as follows:
(a) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of California and has full power
and lawful authority to carry on its business;
(b) The Company has the full power to execute, deliver and issue this
Warrant and to carry out its obligations hereunder, the execution, delivery and
issuance of this Warrant, and delivery and issuance of Warrant Shares upon
exercise of this Warrant, have been duly and validly authorized by the Company,
no other acts or proceedings on the part of the
16
<PAGE>
Company are necessary to authorize this Warrant or the Warrant Shares; and this
Warrant constitutes a valid and legally binding obligation of the Company,
enforceable against the Company in accordance with its terms;
(c) The Warrant Shares will, when issued pursuant to this Warrant, be
duly authorized and validly issued, fully paid and nonassessable, and not
subject to preemptive rights;
(d) No consent or approval by, or filing with, any governmental
authority is required in connection with the execution, delivery and issuance by
the Company of this Warrant or the delivery and issuance of the Warrant Shares
other than such as have been obtained or made (or as may he required in the
future under applicable securities laws in connection with the transfer or
exercise of this Warrant or the resale of the Warrant Shares);
(e) The execution, delivery, issuance of this Warrant and the delivery
and issuance of the Warrant Shares will not result in the violation of any term
or provision of the charter or bylaws of the Company, or any loan agreement,
indentured note or other instrument, or decree, order, statute, rule or
regulation applicable to the Company (subject, however, to compliance with
applicable securities laws in connection with the transfer or exercise of this
Warrant or the resale of the Warrant Shares);
(f) The entire authorized capital stock of the Company is one million
shares of common stock and no shares of preferred stock. As of the date of this
Warrant, the Company has issued and outstanding (i) 1,999 shares of Common
Stock, (ii) excluding the Warrant Shares, 9.995 shares of Common Stock issuable
upon the exercise of any rights outstanding as of the date hereof including any
right to subscribe for or to purchase, or any options for the purchase of Common
Stock or Convertible Securities and (iii) no shares of preferred stock; and
(g) Other than this Warrant, the Company is not a party to any
agreement regarding registration rights.
Section 13. Delivery Upon Execution of this Warrant. This Warrant shall
---------------------------------------
not be effective until the Holder has executed and delivered to the Company a
certificate in the form of Exhibit B-1 hereto.
Section 14. Notices. Any notice pursuant to this Warrant by the Company
-------
or by the Holder shall be in writing and shall be mailed by certified mail,
return receipt requested, (a) to the Company, at its principal office at 19782
MacArthur Blvd., Irvine, CA 92715. Attention: Todd Rodriguez; or (b) to the
Holder, to CS First Boston Mortgage Capital Corp., 55 East 52nd St., New York,
N.Y. 10055-0186, Attention: Michael Commaroto. Either party may from time to
time change the address to which notices to it are to be delivered or mailed
under this
17
<PAGE>
Warrant by notice in writing to the other party.
Section 15. Applicable Law. This Warrant shall be governed by and
--------------
construed in accordance with the laws of the State of New York, without giving
effect to principles of conflict of laws.
Section 16. Captions. The captions of the Sections and subsections of
--------
this Warrant have been inserted for convenience only and shall have no
substantive effect.
IN WITNESS WHEREOF, the undersigned have executed this Warrant this
2nd day of October, 1996.
T.A.R. PREFERRED CORPORATION
By: s/Todd Rodriguez
----------------
Name: Todd Rodriguez
Title: C.E.O.
Attest: s/
----------------
Secretary
18
<PAGE>
T.A.R. PREFERRED MORTGAGE CORPORATION
PURCHASE FORM
The undersigned irrevocably elects to exercise the right of purchase under
the enclosed Warrant, all of the Warrant Shares provided for in the enclosed
Warrant, and requires that certificates for such shares be issued in the name
of:
________________________________________________________________________
(Please Print Name and Social Security No.)
________________________________________________________________________
(Street Address)
________________________________________________________________________
(City, State and Zip Code)
Dated: __________________, 199_
Name of Warrantholder or Assignee: _____________________________________
(Please Print)
Address: _______________________________________________________________
________________________________________________________________________
Signature: ______________________________________________________
19
<PAGE>
ASSIGNMENT
(To be signed only upon assignment of Warrant)
FOR VALUE RECEIVED, the undersigned sells, assigns and transfers unto
________________________________________________________________________
(Name of Assignee Must be Printed or Typewritten)
________________________________________________________________________
(Street Address)
________________________________________________________________________
(City, State and Zip Code)
the within Warrant, irrevocably constituting and appointing______________
__________________________________________________________________________
Attorney to transfer such Warrant on the books of the Company, with full power
of substitution in the premises.
Dated: _________________________, 199_
___________________________________
Signature of Registered Holder
20
<PAGE>
EXHIBIT 4.3
Warrant No. M-1
THIS WARRANT AND THE WARRANT SHARES HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR REGISTERED OR
QUALIFIED UNDER ANY STATE SECURITIES LAWS, AND MAY NOT BE PLEDGED, HYPOTHECATED,
SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS SO REGISTERED OR AN EXCEPTION
THEREFROM IS AVAILABLE
THIS WARRANT AND THE WARRANT SHARES REPRESENTED BY THIS WARRANT ARE SUBJECT TO
TRANSFER RESTRICTIONS AND PURCHASE RIGHTS SET FORTH IN A STOCKHOLDERS AGREEMENT
DATED AS OF DECEMBER 6, 1996. A COPY OF SUCH AGREEMENT IS MAINTAINED ON FILE IN
THE PRINCIPAL OFFICE OF THE COMPANY IN THE STATE OF
CALIFORNIA
WARRANT TO PURCHASE COMMON STOCK
OF T.A.R. PREFERRED MORTGAGE CORPORATION
THIS CERTIFIES THAT, for value received, T.A.R. Preferred Mortgage Corporation,
a California corporation (the "Company"), promises to issue to Merrill Lynch
Mortgage Capital Inc., the holder of this Warrant (the "Holder"), its nominees,
successors or assigns 27.483 nonassessable shares of Common Stock, $0.1 par
value, of the Company ("Common Stock") (equal to one and two-tenths of one
percent (1.2%) of the sum of (i) all shares of Common Stock outstanding as of
the date hereof and (ii) all shares of Common Stock issuable upon (a) exercise
of any rights outstanding as of the date hereof to subscribe for or to purchase,
or any options outstanding as of the date hereof for the purchase of, Common
Stock or Convertible Securities (as defined herein) and (b) conversion of any
Convertible Securities outstanding as of the date hereof), upon the payment by
the Holder to the Company of the Warrant Price set forth herein and to deliver
to the Holder a certificate or certificates representing the Common Stock
purchased. The number of shares of Common Stock purchasable upon exercise of
this Warrant and the Warrant Price (as defined below) shall be subject to
adjustment from time to time as provided herein. The initial Warrant Price (the
"Warrant Price") per share of Common Stock shall equal $13,099.01 per share,
subject to adjustment as provided herein.
For the purpose of this Warrant, the term "Common Stock" shall mean (i) the
class of stock designated as the Common Stock of the Company at the date of this
Warrant, or (ii) any other class or classes of stock resulting from successive
changes or reclassifications of such class of stock.
1
<PAGE>
Section 1. Term of Warrant, Restrictions on Transfer, Exercise of Warrant.
---------------------------------------------------------------
1.1 Term of Warrant. Subject to the terms of this Warrant, the Holder
----------------
shall have the right, at its option, which may be exercised in whole or in part,
at any time commencing at the time of the issuance of this Warrant and until
5:00 p.m. Eastern Time on December 6, 2011 ("Warrant Expiration Date"), to
purchase from the Company the number of fully paid and nonassessable shares of
Common Stock which the Holder may at the time be entitled to purchase on
exercise of this Warrant ("Warrant Shares"). After such time, this Warrant will
be void.
1.2 Restrictions on Transfer. This Warrant and the Warrant Shares will not
-------------------------
be registered or qualified under the Securities Act of 1933, as amended (the
"Act"), or the securities laws of any state or other jurisdiction and therefore
will not be transferable except pursuant to an exemption under or in accordance
with the Act, including Rule 144A adopted under the Act, in compliance with
applicable state securities laws and pursuant to the provision of this Warrant.
Unless the Warrant or Warrant Shares shall have been duly registered under the
Act pursuant to Section 7 hereof, (a) the certificates representing the Warrant
Shares shall bear a legend comparable to the legend on the first page of this
Warrant regarding restrictions on transfer and (b) no sale, pledge or other
disposition of this Warrant or any Warrant Shares may be made by any person
unless either (i) such sale, pledge or other disposition is made to a "qualified
institutional buyer" that executes a certificate in the form of Exhibit A
attached hereto to the effect that (A) it is a "qualified institutional buyer"
as defined under Rule 144A of the Act, acting for its own account or the
accounts of other "qualified institutional buyers" as defined under Rule 144A
and (B) it is aware that the transferor of this Warrant or any Warrant Shares
intends to rely on the exemption from the registration requirements under the
Act provided by Rule 144A, or (ii) such sale, pledge or other disposition is
otherwise made in a transaction exempt from the registration requirements under
the Act and (A) the prospective transferor and transferee certify in writing to
the Company the facts surrounding such disposition, which certifications shall
be in the form of Exhibits B-1 and B-2 attached hereto and (B) if the
disposition is not a transfer under Rule 144A or a disposition between or among
affiliates, the Company may request a written opinion of counsel reasonably
satisfactory to the Company to the effect that such disposition will not violate
the Act. In connection with a sale or other disposition of the Warrant or the
underlying Warrant Shares, the subsequent holder or holders shall be bound by
the provisions of this Agreement.
1.3 Exercise of Warrant. The Holder may exercise this Warrant in whole
-------------------
only by delivering to the Company (i) a written notice of such Holder's election
to exercise this Warrant, and (ii) payment in cash or by a certified or
cashier's check of the applicable Warrant Price. Upon receipt of written
notice, the Company shall as promptly as practicable
2
<PAGE>
execute or cause to be executed and deliver to such Holder a certificate or
certificates representing the aggregate number of shares of Common Stock
purchased. Such certificate or certificates shall be deemed to have been issued
to the Holder which shall be deemed to have become a holder of record of such
Warrant Shares as of the date of payment of the Warrant Price.
This Warrant does not entitle the Holder to any voting rights or other
rights as a shareholder of the Company prior to exercise and payment of the
Warrant Price in accordance with this Section 1.3.
Section 2. Exchange of Warrant. Subject to Section 1.2 and Section 3
-------------------
hereof, the Warrant may be exchanged for another Warrant or Warrants entitling
the Holder to purchase a like aggregate number of Warrant Shares as this Warrant
then entitles such Holder to purchase. Any Holder desiring to exchange this
Warrant shall make such request in writing delivered to the Company, and shall
surrender this Warrant, properly endorsed. Thereupon the Company shall execute
and deliver to the person entitled thereto a new Warrant or Warrants, as the
case may be, as so requested.
Section 3. Payment of Taxes. The Company shall pay all documentary stamp
----------------
taxes, if any, attributable to the initial issuance of any Warrant Shares upon
the exercise of this Warrant; provided, however, that the Company shall not be
required to pay any tax or taxes which may be payable in respect of any transfer
involved in the issue or delivery of any Warrant or certificate for Warrant
Shares in a name other than that of the Holder of this Warrant as such name is
then shown on the books of the Company.
Section 4. Mutilated or Missing Warrant. In case this Warrant shall be
----------------------------
mutilated, lost, stolen or destroyed, the Company shall issue in exchange and
substitution for and upon cancellation of the mutilated Warrant, or in lieu of
and substitution for the Warrant lost, stolen or destroyed, a new Warrant of
like tenor and representing an equivalent right or interests, but only upon
receipt of evidence reasonably satisfactory to the Company of such loss, theft
or destruction of this Warrant (provided that an affidavit, containing
appropriate indemnities, of the Holder as to a loss, theft or destruction of the
Warrant shall be deemed to be evidence reasonably satisfactory to the Company of
such loss, theft or destruction for purposes of this Section 4) and indemnity
(which may include a bond), if requested, also reasonably satisfactory to the
Company.
Section 5. Certain Covenants.
-----------------
5.1 Reservation of Warrant Shares. There have been reserved and the
-----------------------------
Company shall at all times keep reserved, out of its authorized Common Stock, a
number of shares of Common Stock sufficient to provide for the exercise of the
rights of purchase represented by this Warrant. The transfer agent, if any, for
the Common Stock, and every subsequent transfer agent for any shares of the
Company's Common Stock issuable upon the exercise of
3
<PAGE>
any of the rights of purchase as set out in this Warrant, shall be irrevocably
authorized and directed at all times to reserve such number of authorized shares
as shall be requisite for such purpose. The Company shall keep a copy of this
Warrant on file with any transfer agent for the Common Stock and with every
subsequent transfer agent for any shares of the Company's Common Stock issuable
upon the exercise of the rights of purchase represented by this Warrant. Any
transfer agent for the Common Stock and any successor transfer agent for the
Common Stock is hereby irrevocably authorized to cause to be issued from time to
time the share certificates required to honor this Warrant upon its exercise in
accordance with the terms hereof. The Company shall supply any such transfer
agent with duly executed share certificates for such purpose.
5.2 No Impairment. The Company shall not by any action including, without
-------------
limitation, amending its articles of incorporation, any reorganization, transfer
of assets, consolidation, merger, dissolution, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms of this Warrant, but shall at all times in good faith assist
in the carrying out of all such terms and in the taking of all such action, as
may be necessary or appropriate to protect the rights of the Holder against
impairment. Without limiting the generality of the foregoing, the Company shall
(a) take all such action as may be necessary or appropriate in order that the
Company may validly issue fully paid and nonassessable Common Stock upon the
exercise of this Warrant, and (b) obtain all such authorizations, exemptions or
consents from any public regulatory body having jurisdiction thereof as may be
necessary to enable the Company to perform its obligations under this Warrant;
provided, that under no circumstances shall the Company be obligated hereunder
to qualify to do business or consent to service of process in a particular
jurisdiction in order to perform its duties hereunder.
Upon the request of the Holder, the Company shall at any time during the
period this Warrant is outstanding acknowledge in writing, in form satisfactory
to the Holder, the continued validity of this Warrant and the Company's
obligations hereunder.
5.3 Listing. If the Company shall list any of its Common Stock on any
-------
securities exchange or automated quotation system, it will, at its expense, list
thereon, maintain and, when necessary, increase such listing of, all of its
Common Stock issued or, to the extent permissible under the applicable
securities exchange or quotation system rules, issuable upon the exercise of
this Warrant so long as any of its Common Stock shall be so listed.
5.4 Notice of Certain Corporate Action. In case the Company shall propose
----------------------------------
(a) to pay any dividend or to make any other distribution to the holders of its
Common Stock, or (b) to offer to the holders of its Common Stock rights to
subscribe for or to purchase any shares of Common Stock or shares of stock of
any class or any other securities, rights or options, or (c) to effect any
reclassification of its Common Stock (other than a reclassification involving
only the subdivision, or combination, of outstanding shares of Common Stock), or
(d) to effect any capital reorganization, or (e) to effect any
4
<PAGE>
consolidation, merger or sale, transfer or other disposition of all or
substantially all of its property, assets or business, or (f) to effect the
liquidation, dissolution or winding up of the Company, then in each such case
(but without limiting the provisions of Section 6), the Company shall give to
each Holder of a Warrant, in accordance with Section 4, a notice of such
proposed action, which shall specify the date on which a record is to be taken
for purposes of such dividend, distribution of offer of rights, or the date on
which such reclassification, reorganization, consolidation, merger, sale,
transfer, disposition, liquidation, dissolution, or winding up is to take place
and the date of participation therein by the holders of Common Stock, if any
such date is to be fixed and shall also set forth such facts with respect
thereto as shall be reasonably necessary to indicate the effect of such action
on the Common Stock. Such notice shall be so given in the case of any action
covered by clause (a) or (b) above at least ten (10) calendar days prior to the
record date for determining holders of the Common Stock for purposes of such
action, and in the case of any other such action, at least ten (10) calendar
days prior to the date of the taking of such proposed action or the date of
participation therein by the holders of Common Stock, whichever shall be the
earlier. No such notice shall be given if (a) any stock of the Company shall
have been registered under the Act and (b) the Company reasonably determines
that the giving of such notice would require disclosure of material information
which the Company has a bona fide purpose for preserving as confidential or the
disclosure of which would not be in the best interests of the Company.
Section 6. Adjustment of Warrant Price.
----------------------------
6.1 Adjustment Price. Except as provided in Section 6.8, if and whenever
-----------------
the Company shall issue or sell any shares of its Common Stock for a
consideration per share less than the Adjustment Price (as hereinafter defined)
in effect immediately prior to the time of such issue or sale, then, forthwith
upon such issue or sale, the Adjustment Price shall be reduced to the price
(calculated to the nearest cent) determined by dividing (i) an amount equal to
the sum of (a) the number of shares of all classes of Common Stock outstanding
immediately prior to such issue or sale multiplied by the then existing
Adjustment Price, and (b) the consideration, if any, received by the Company
upon such issue or sale, by (ii) the total number of shares of Common Stock
outstanding immediately after such issue or sale. The Adjustment Price shall be
the Warrant Price or, in the case an adjustment of such price has taken place
pursuant to the provisions of this Section 6, then the Adjustment Price shall be
the price as last adjusted and in effect at the date this Warrant (or any part
thereof) is surrendered for exercise (such price or such price as last adjusted,
if such price shall have been adjusted, being referred to herein as the
"Adjustment Price").
If and whenever the Adjustment Price shall have been adjusted, the Warrant
Price shall be forthwith adjusted to the price (calculated to the nearest cent)
determined by multiplying the Warrant Price as then in effect by a fraction, the
numerator of which shall be the Adjustment Price as so adjusted and the
denominator of which shall be the Adjustment Price as in effect immediately
prior to such adjustment.
5
<PAGE>
No adjustment of the Adjustment Price, however, shall be made in an amount
less than $. 10 per share, but any such lesser adjustment shall be carried
forward and shall be made at the time and together with the next subsequent
adjustment which together with any adjustments so carried forward shall amount
to $. 10 per share or more.
For the purposes of this Section 6.1, the following Sections 6.2 to 6.7,
inclusive, shall also be applicable; except that this Warrant shall be deemed
exercised and outstanding for all purposes and computations under this Section
6.1 and the then current Adjustment Price shall be deemed the Warrant Price per
share.
6.2 Issuance of Rights or Options. In case at any time the Company shall
------------------------------
in any manner grant (whether directly or by assumption in a merger or otherwise)
any rights to subscribe for or to purchase, or any options for the purchase of,
Common Stock or any stock or securities convertible into or exchangeable for
Common Stock (such convertible or exchangeable stock or securities being herein
called "Convertible Securities") whether or not such rights or options or the
right to convert or exchange any such Convertible Securities are immediately
exercisable, and the price per share for which Common Stock is issuable upon the
exercise of such rights or options or upon conversion or exchange of such
Convertible Securities (determined by dividing (i) the total amount, if any,
received or receivable by the Company as consideration for the granting of such
rights or options, plus the minimum aggregate amount of additional consideration
payable to the Company upon the exercise of all such rights or options, plus, in
the case of such rights or options which relate to Convertible Securities, the
minimum aggregate amount of additional consideration, if any, payable upon the
issue or sale of such Convertible Securities and upon the conversion or exchange
thereof, by (ii) the total maximum number of shares of Common Stock issuable
upon the exercise of such rights or options or upon the conversion or exchange
of all such Convertible Securities issuable upon the exercise of such rights or
options) shall be less than the Adjustment Price in effect immediately prior to
the time of the granting of such rights or options, then the total maximum
number of shares of Common Stock issuable upon the exercise of such rights or
options or upon conversion or exchange of the total maximum amount of such
Convertible Securities issuable upon the exercise of such rights or options
shall be (as of the date of granting of such rights or options) deemed to be
outstanding and to have been issued for such price per share. Except as
otherwise provided in Section 6.4, no adjustment of the Adjustment Price shall
be made upon the actual issue of such Common Stock or of such Convertible
Securities upon exercise of such rights or options or upon the actual issue of
such Common Stock upon conversion or exchange of such Convertible Securities.
6.3 Issuance of Convertible Securities. In case the Company shall in any
-----------------------------------
manner issue (whether directly or by assumption in a merger or otherwise) or
sell any Convertible Securities, whether or not the rights to exchange or
convert thereunder are immediately exercisable, and the price per share for
which Common Stock is issuable upon which conversion or exchange (determined by
dividing (i) the total amount received or receivable by the Company as
consideration for the issue or sale of such Convertible Securities, plus the
6
<PAGE>
minimum aggregate amount of additional consideration, if any, payable to the
Company upon the conversion or exchange thereof, by (ii) the total maximum
number of shares of Common Stock issuable upon the conversion or exchange of all
such Convertible Securities) shall be less than the Adjustment Price in effect
immediately prior to the time of such issue or sale determined as of the date of
such issue or sale of such Convertible Securities, as the case may be, then the
total maximum number of shares of Common Stock issuable upon conversion or
exchange of all such Convertible Securities shall (as of the date of the issue
or sale of such Convertible Securities) be deemed to be outstanding and to have
been issued for such price per share, provided that (a) except as otherwise
provided in Section 6.4 below, no adjustment of the Adjustment Price shall be
made upon the actual issue of such Common Stock upon conversion or exchange of
such Convertible Securities, and (b) if any such issue or sale of such
Convertible Securities is made upon exercise of any rights to subscribe for or
to purchase or any option to purchase any such Convertible Securities for which
adjustments of the Adjustment Price have been or are to be made pursuant to
other provisions of this Section 6, no further adjustment of the Adjustment
Price shall be made by reason of such issue or sale.
6.4 Change in Option Price or Conversion Rate. Upon the happening of any
------------------------------------------
of the following events, namely, if the purchase price provided for in any right
or option referred to in Section 6.2, the additional consideration, if any,
payable upon the conversion or exchange of any Convertible Securities referred
to in Section 6.2 or Section 6.3, or the rate at which any Convertible
Securities referred to in Section 6.2 or Section 6.3 are convertible into or
exchangeable for Common Stock shall change at any time (other than under or by
reason of provisions designed to protect against dilution), the Adjustment Price
in effect at the time of such event shall forthwith be readjusted to the
Adjustment Price which would have been in effect at such time had such rights,
options or Convertible Securities still outstanding provided for such changed
purchase price, additional consideration or conversion rate, as the case may be,
at the time initially granted, issued or sold; and on the expiration of any such
option or right or the termination of any such right to convert or exchange such
Convertible Securities, the Adjustment Price then in effect hereunder shall
forthwith be increased to the Adjustment Price which would have been in effect
at the time of such expiration or termination had such right, option or
Convertible Securities, to the extent outstanding immediately prior to such
expiration or termination, never been issued, and the Common Stock issuable
thereunder shall no longer be deemed outstanding. If the purchase price
provided for in any such right or option referred to in Section 6.2 or if the
rate at which any Convertible Securities referred to in Section 6.2 or Section
6.3 are convertible into or exchangeable for Common Stock shall be reduced at
any time under or by reason of provisions with respect thereto designed to
protect against dilution, then in case of the delivery of Common Stock upon the
exercise of any such right or option or upon conversion or exchange of any such
right or option or upon conversion or exchange of any such Convertible
Securities, the Adjustment Price then in effect hereunder shall forthwith be
adjusted to such respective amount as would have obtained had such right, option
or Convertible Security never been issued as to such Common Stock and had
adjustment been
7
<PAGE>
made upon the issuance of the shares of Common Stock delivered as aforesaid, but
only if as a result of such adjustment the Adjustment Price then in effect
hereunder is thereby reduced.
6.5 Stock Dividends. In case the Company shall declare a dividend or make
----------------
any other distribution upon any stock of the Company payable in Common Stock or
Convertible Securities, any Common Stock or Convertible Securities, as the case
may be, issuable in payment of such dividend or distribution shall be deemed to
have been issued or sold without consideration, subject to this Section 6.
6.6 Consideration for Stock. In case any shares of Common Stock or
------------------------
Convertible Securities or any rights or options to purchase any such Common
Stock or Convertible Securities shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount received by the
Company therefor, after deduction therefrom of any expenses incurred or any
underwriting commissions or concessions paid or allowed by the Company in
connection therewith. In case any shares of Common Stock or Convertible
Securities or any rights or options to purchase any such Common Stock or
Convertible Securities shall be issued or sold for consideration other than
cash, the amount of the consideration other than cash received by the Company
shall be deemed to be the fair value of such consideration as determined in good
faith by the Board of Directors of the Company, after deduction of any expenses
incurred or any underwriting commissions or concessions paid or allowed by the
Company in connection therewith. In case any shares of Common Stock or
Convertible Securities or any rights or options to purchase such Common Stock or
Convertible Securities shall be issued in connection with any merger in which
the Company is the surviving corporation, the amount of consideration therefor
shall be deemed to be the fair value as determined in good faith by the Board of
Directors of the Company of such portion of the assets and business of the non-
surviving corporation as such Board shall determine to be attributable to such
Common Stock, Convertible Securities, rights or options, as the case may be. In
case any rights or options to purchase any shares of Common Stock or Convertible
Securities shall be issued in connection with the issue and sale of other
securities of the Company, together comprising one integral transaction in which
no specific consideration is allocated to such rights or options by the parties
thereto, such rights or options shall be deemed to have been issued without
consideration. In the event of any consolidation or merger of the Company in
which the Company is not the surviving corporation or in the event of any sale
of all or substantially all of the assets of the Company for stock or other
securities of any corporation, the Company shall be deemed to have issued a
number of shares of its Common Stock for stock or securities of the other
corporation computed on the basis of the actual exchange ratio on which the
transaction was predicated and for a consideration equal to the fair market
value on the date of such transaction of such stock or securities of the other
corporation, and if any such calculation results in adjustment of the Adjustment
Price, the determination of the number of shares of Common Stock receivable upon
exercise of this Warrant immediately prior to such merger, consolidation or
sale, for purposes of Section 6.9, shall be made after giving effect to such
adjustment of the Adjustment Price.
8
<PAGE>
6.7 Record Date. In case the Company shall take a record of the holders of
------------
its Common Stock for the purpose of entitling them (i) to receive a dividend or
other distribution payable in Common Stock or in Convertible Securities, or (ii)
to subscribe for or purchase Common Stock or Convertible Securities, then such
record date shall be deemed to be the date of the issue or sale of the shares of
Common Stock deemed to have been issued or sold upon the declaration of such
dividend or the making of such other distribution or the date of the granting of
such right of subscription or purchase, as the case may be.
6.8 Treasury Shares. The number of shares of Common Stock outstanding at
----------------
any given time shall not include shares owned or held by or for the account of
the Company, and the disposition of any such shares shall be considered an issue
or sale of Common Stock for the purposes of this Section 6.
6.9 Subdivision or Combination of Stock. In case the Company shall at any
------------------------------------
time (i) issue a dividend payable in Common Stock or Convertible Securities or
any rights to subscribe for or to purchase, or any options for the purchase of,
Common Stock or Convertible Securities or (ii) subdivide its outstanding shares
of Common Stock into a greater number of shares or combine its outstanding
shares of Common Stock into a smaller number of shares, the Adjustment Price and
the Warrant Price in effect immediately prior to such subdivision or combination
shall be adjusted to an amount that bears the same relationship to the
Adjustment Price and Warrant Price respectively in effect immediately prior to
such action as the total amount of shares of Common Stock outstanding
immediately prior to such action bears to the total number of shares of Common
Stock outstanding immediately after such action, and the number of shares of
Common Stock purchasable upon the exercise of any Warrant shall be that number
of shares of Common Stock obtained by multiplying the number of shares of Common
Stock purchasable immediately prior to such adjustment upon the exercise of such
Warrant by the Warrant Price in effect immediately prior to such adjustment and
dividing the product so obtained by the Warrant Price in effect after such
adjustment.
6.10 Reorganization, Reclassification, Consolidation, Merger or Sale. If
----------------------------------------------------------------
any capital reorganization or reclassification of the capital stock of the
Company, or any consolidation or merger of the Company with another corporation,
or the sale of all or substantially all of its assets to another corporation
shall be effected in such a way that holders of Common Stock shall be entitled
to receive stock, securities or assets with respect to or in exchange for Common
Stock, then, as a condition of such reorganization, reclassification,
consolidation, exercise, merger or sale, lawful and adequate provisions shall be
made whereby the holder of this Warrant shall thereafter have the right to
receive upon the basis and upon the terms and conditions specified herein and in
lieu of the shares of Common Stock of the Company immediately theretofore
receivable upon the exercise of this Warrant, such shares of stock, securities
or assets as may be issued or payable with respect to or in exchange for a
number of outstanding shares of such Common Stock equal to the number of shares
of such stock immediately theretofore receivable upon the exercise of this
Warrant had such reorganization,
9
<PAGE>
reclassification, consolidation, merger or sale not taken place, and in any such
case appropriate provision shall be made with respect to the rights and
interests of such holder to the end that the provisions hereof (including
without limitation provisions for adjustments of the Adjustment Price) shall
thereafter be applicable, as nearly as may be, in relation to any shares of
stock, securities or assets thereafter deliverable upon the exercise of such
conversion rights (including an immediate adjustment, by reason of such
consolidation or merger, of the Adjustment Price to the value for the Common
Stock reflected by the terms of such consolidation or merger if the value so
reflected is less than the Adjustment Price in effect immediately prior to such
consolidation or merger). In the event of a merger or consolidation of the
Company with or into another corporation as a result of which a greater or
lesser number of shares of common stock of the surviving corporation are
issuable to holders of Common Stock of the Company outstanding immediately prior
to such merger or consolidation, then the Adjustment Price and Warrant Price in
effect immediately prior to such merger or consolidation shall be adjusted in
the same manner as though there were a subdivision or combination of the
outstanding shares of Common Stock of the Company. The Company will not effect
any such consolidation, merger or sale, unless prior to the consummation thereof
the successor corporation (if other than the Company) resulting from such
consolidation or merger or the corporation purchasing such assets shall assume,
by written instrument executed and mailed or delivered to the registered holder
hereof at the last address of such holder appearing on the books of the Company,
the obligation to deliver to such holder such shares of stock, securities or
assets as, in accordance with the foregoing provisions, such holder may be
entitled to receive. If a purchase, tender or exchange offer is made to and
accepted by the holders of more than 50% of the outstanding shares of Common
Stock of the Company, the Company shall not effect any consolidation or merger
and the Company shall not consent to or register any transfer or sale with or to
the Person having made such offer or with any affiliate of such Person, unless
prior to the consummation of such consolidation, merger, transfer or sale of the
holder hereof shall have been given a reasonable opportunity to then elect to
receive, upon exercise of this Warrant, either the proportionate share of the
stock, securities or assets then issuable with respect to the Common Stock of
the Company or the stock, securities or assets, or the equivalent, issued to
previous holders of the Common Stock, or the consideration paid to such holders,
in the case of a purchase offer, in accordance with such offer.
6.11 Distributions. If at any time after the date hereof the Company shall
--------------
distribute to all holders of its Common Stock evidences of its indebtedness or
assets, the Warrant Price shall be decreased to an amount determined by
multiplying such Warrant Price by a fraction, the numerator of which is the fair
market value, as determined in good faith by the board of directors of the
Company, of each share of Common Stock outstanding (the "Fair Market Value")
prior to giving effect to such distribution less the Fair Market Value of each
share of Common Stock outstanding at the date of distribution of the assets or
evidences of indebtedness so distributed and the denominator of which is the
Fair Market Value of each share of Common Stock outstanding prior to giving
effect to such distribution.
10
<PAGE>
6.12 Notice of Adjustment. Upon any adjustment of the Adjustment Price and
---------------------
the Warrant Price, then and in each such case the Company shall give written
notice thereof, which notice shall state the Adjustment Price and the Warrant
Price resulting from such adjustment, setting forth in reasonable detail the
method of calculation and the facts upon which such calculation is based.
Section 7. Registration.
-------------
7.1 Incidental Registration.
------------------------
(a) General. If the Company at any time proposes to register on its own
--------
behalf or behalf of any of its security holders any of its securities (other
than by a Registration on Form S-4, S-8 or any successor or similar short-form
registration statement), whether or not pursuant to registration rights granted
to other holders of its securities, it will each such time give prompt written
notice to all Holders of its intention to do so and of such Holders' rights
under this Section, provided that in any event, such notice shall be given to
--------
all such Holders at least thirty (30) days prior to such proposed registration
(or such shorter period if thirty (30) days notice is not practicable under the
circumstances but in no event not less than fifteen (15) days or, in the case of
a shelf registration on Form S-3, five (5) business days). Such notice shall set
forth the intended method of disposition of the securities proposed to be
registered by the Company. The notice shall offer to include in such filing
such number of shares of Warrant Shares as such Holder may request.
(b) Included Securities. Securities will be included in any such filing
--------------------
upon the written request of any such Holder made within fifteen (15) days after
receipt of any such notice, or five, (5) business days in the case of a shelf
registration on Form S-3 (which request shall specify the Warrant Shares
intended to be disposed of by such holder and the intended method of disposition
thereof). The Company shall use its best efforts to effect the registration of
all Warrants and Warrant Shares which the Company has been so requested to
register by the Holders thereof, to the extent necessary to permit the
disposition of the Warrants and Warrant Shares so to be registered; provided
--------
that the Holder shall pay its proportionate share of the underwriting discounts
or commissions.
(c) Priority in Underwritten Offerings. If the Company at any time
-----------------------------------
proposes to register any of its securities as contemplated by this Section and
such securities are to be distributed by or through one or more underwriters,
the Company shall, if requested by the Holder or as provided in this Section
7.1, use its best efforts so arrange for such underwriters to include all the
Warrants and Warrant Shares to be offered and sold by such Holder among the
securities to be distributed by such underwriters, provided that if the managing
--------
underwriter of such underwritten offering shall advise the Company in writing
(with a copy to each holder of Warrant Shares or Warrants requesting such
registration) that the number of Warrants and Warrant Shares requested to be
included in such Registration concurrently with the securities by the Company or
any other Person would adversely affect
11
<PAGE>
the price, timing or distribution of such shares or would exceed the number of
shares it is advisable to offer to sell at such time (the "Sales Limit"), then
the Company will include in such registration, to the extent of the number of
securities which the Company is so advised can be sold in such offering, in
priority order, first, the securities that the Company proposes to issue and
sell for its own account and, second, such number of shares of Warrants and
Warrants Shares requested to be registered by the Holders thereof pursuant to
this Section 7.1 or on behalf of any other Person pro rata on the basis of the
total number of shares of such securities requested to be registered by each
such Person so that the aggregate number of Warrants and Warrant Shares and
other shares being listed by or on behalf of another Person does not exceed the
difference between the aggregate Sales Limit and the securities that the Company
proposes to issue and sell for its own account. Any Holder of Warrant Shares to
be included in such Registration may withdraw its request to have its securities
so included by notice to the Company within ten (10) Business Days after receipt
of a copy of a notice from the managing underwriter pursuant to this Section.
Any or all of the conditions precedent to the obligations of such underwriters
under such underwriting agreement shall be conditions precedent to the
obligations of such Holders of Warrant Shares. Except as set forth in this
Section 7.1, no Holder of Warrant Shares shall be required to make any
representations or warranties to or agreements with the Company or the
underwriters other than customary representations, warranties or agreements
regarding such Holder, such Holder's Warrant Shares and such Holder's intended
method of distribution and any other representation required by law.
(d) Abandonment or Suspension. The Company may abandon or suspend any
--------------------------
registration effected pursuant to the provisions of this Section 7.1 at any time
and without any liability to any Holder hereof other than its obligations, to
the extent permitted by applicable law, to pay the expenses of the Company and
the selling security holders in connection therewith; provided, that the Company
---------
does not hereunder undertake to pay any expenses if abandonment or suspension
results, in its good faith judgment, from information or statements provided in
writing by the Holder hereof.
Section 8. Termination of Restrictions. The restrictions imposed by
----------------------------
Section 1.2 hereof upon the transferability of any Warrant Shares shall cease
and terminate as to any Warrant Shares (a) when such securities shall have been
effectively registered under the Act and disposed of in accordance with the
registration statement covering such securities, (b) when such restrictions are
no longer required pursuant to Rule 144 under the Act or (c) when, in the
opinions of both counsel for the Holder and counsel for the Company, such
restrictions are otherwise no longer required in order to insure compliance with
the Act. Whenever such restrictions shall terminate as to any Warrant Shares,
the Holder shall be entitled to receive from the Company, without expense (other
than transfer taxes, if any), new securities of like tenor not bearing a legend
as to restrictions on transfer.
Section 9. No Rights as a Shareholder; Notice to Holder. Nothing contained
----------------------------------------------
in this Warrant shall be construed as conferring upon the Holder or its
transferees the right to vote
12
<PAGE>
or to consent or to receive notice as a shareholder in respect of any meeting of
shareholders for the election of directors of the Company or any other matter,
or any rights whatsoever as a shareholder of the Company.
Section 10. Representations and Warranties. The Company hereby represents
-------------------------------
and warrants to Holder as follows:
(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of California and has full power and
lawful authority to carry on its business;
(b) The Company has the full power to execute, deliver and issue this
Warrant and to carry out its obligations hereunder; the execution, delivery and
issuance of this Warrant, and delivery and issuance of Warrant Shares upon
exercise of this Warrant, have been duly and validly authorized by the Company;
no other acts or proceedings on the part of the Company are necessary to
authorize this Warrant or the Warrant Shares; and this Warrant constitutes a
valid and legally binding obligation of the Company, enforceable against the
Company in accordance with its terms;
(c) The Warrant Shares will, when issued pursuant to this Warrant, be duly
authorized and validly issued, fully paid and nonassessable, and not subject to
preemptive rights;
(d) No consent or approval by, or filing with, any governmental authority
is required in connection with the execution, delivery and issuance by the
Company of this Warrant or the delivery and issuance of the Warrant Shares other
than such as have been obtained or made (or as may be required in the future
under applicable securities laws in connection with the transfer or exercise of
this Warrant or the resale of the Warrant Shares);
(e) The execution, delivery, issuance of this Warrant and the delivery and
issuance of the Warrant Shares will not result in the violation of any term or
provision of the charter or bylaws of the Company, or any loan agreement,
indenture, note or other instrument or decree, order, statute, rule or
regulation applicable to the Company (subject, however, to compliance with
applicable securities laws in connection with the transfer or exercise of this
Warrant or the resale of the Warrant Shares);
(f) The entire authorized capital stock of the Company is one million
shares of common stock and no shares of preferred stock. As of the date of this
Warrant, the Company has issued and outstanding (i) 1,999 shares of Common
Stock, (ii) excluding the Warrant Shares and the Warrant Shares issuable to
Merrill Lynch, Pierce, Fenner & Smith Incorporated pursuant to the Warrant
issued concurrently herewith, 291.20 shares of Common Stock issuable upon the
exercise of any rights outstanding as of the date hereof including any warrant
or other right to subscribe for or to purchase, or any options for the
13
<PAGE>
purchase of Common Stock or Convertible Securities and (iii) no shares of
preferred stock; and
(g) Other than this Warrant, and the Warrant issued to Merrill Lynch,
Pierce, Fenner & Smith Incorporated concurrently herewith, an Option granted to
an employee of the Company to purchase 9.95 shares of Common Stock, and the
Warrant dated October 2, 1996 relating to 281.25 shares of Common Stock, the
Company is not a party to any agreement regarding registration rights.
Section 11. Delivery Upon Execution of this Warrant. This Warrant shall
----------------------------------------
not be effective until the Holder has executed and delivered to the Company a
certificate in the form of Exhibit B-1 hereto.
Section 12. Notices. Any notice pursuant to this Warrant by the Company or
--------
by the Holder shall be in writing and shall be mailed by certified mall, return
receipt requested, (a) to the Company, at its principal office at 19782
MacArthur Blvd., Irvine, CA 92715; Attention: Todd Rodriguez; or (b) to the
Holder, to Merrill Lynch Mortgage Capital Inc., World Financial Center, North
Tower, New York, NY 10281-1310; Attention: Mr. C. J. DeSantis. Either party may
from time to time change the address to which notices to it are to be delivered
or mailed under this Warrant by notice in writing to the other party.
Section 13. Applicable Law. This Warrant shall be governed by and
---------------
construed in accordance with the laws of the State of New York without giving
effect to principles of conflict of laws.
Section 14. Captions. The captions of the Sections and subsections of this
---------
Warrant have been inserted for convenience only and shall have no substantive
effect.
14
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Warrant as of the
6th day of December, 1996.
T.A.R. PREFERRED MORTGAGE
CORPORATION
By: _____________________________
Name: Todd Rodriguez
Title: C.E.O.
Attest:____________________
Secretary
15
<PAGE>
T.A.R. PREFERRED MORTGAGE
CORPORATION PURCHASE FORM
The undersigned irrevocably elects to exercise the right of purchase under
the enclosed Warrant, all of the Warrant Shares provided for in the enclosed
Warrant, and requires that certificates for such shares be issued in the name
of:
Please Print Name and Social Security or Taxpayer ID No.
- -----------------------------------------------
(Street Address)
- -----------------------------------------------
City, State and Zip Code
- -----------------------------------------------
Dated: ____________________, 199____
Name of Warrantholder or Assignee:
(Please Print) ----------------------------------------
Address:
------------------------------------------------------------------
- --------------------------------------------------------------------------
Signature:
------------------------------
16
<PAGE>
EXHIBIT A
FORM OF RULE 144A INVESTMENT REPRESENTATIONS
Description of Rule 144A Securities, including numbers:
[Warrant] [Warrant Shares] of
T.A.R. Preferred Mortgage Corporation
Issued Pursuant to a Warrant Agreement
by T.A.R. Preferred Mortgage Corporation
The undersigned seller, as registered holder (the "Transferor"), intends to
transfer the Rule 144A Securities described above to the undersigned buyer (the
"Buyer").
1. In connection with such transfer and in accordance with the agreements
pursuant to which the Rule 144A Securities were issued, the Transferor hereby
certifies the following facts: Neither the Transferor nor anyone acting on its
behalf has offered, transferred, pledged, sold or otherwise disposed of the Rule
144A Securities, any interest in the Rule 144A Securities or any other similar
security to, or solicited any offer to buy or accept a transfer, pledge or other
disposition of the Rule 144A Securities, or otherwise approached or negotiated
with respect to the Rule 144A Securities, any interest in the Rule 144A
Securities or any other similar security with, any person in any manner, or made
any general solicitation by means of general advertising or in any other manner,
or taken any other action, which would constitute a distribution of the Rule
144A Securities under the Securities Act of 1933, as amended (the "1933 Act"),
or which would render the disposition of the Rule 144A Securities a violation of
Section 5 of the 1933 Act or require registration pursuant thereto, and that the
Transferor has not offered the Rule 144A Securities to any person other than the
Buyer or another "qualified institutional buyer" as defined in Rule 144A under
the 1933 Act.
Terms not defined herein shall have the meanings assigned thereto in
the Warrant dated as of December 6, 1996 by T.A.R. Preferred Mortgage
Corporation.
2. The Buyer warrants and represents to, and covenants with, the
Transferor and the Company pursuant to Section 1.2 of the Warrant as follows:
a. The Buyer understands that the Rule 144A Securities have not been
registered under the 1933 Act or the securities laws of any state.
b. The Buyer considers itself a substantial, sophisticated
institutional investor having such knowledge and experience in financial
and business matters that it is capable of evaluating the merits and risks
of investment in the Rule 144A
17
<PAGE>
Securities.
c. The Buyer has been furnished with all information regarding the
Rule 144A Securities that it has requested from the Company.
d. Neither the Buyer nor anyone acting on its behalf has offered,
transferred, pledged, sold or otherwise disposed of the Rule 144A
Securities, any interest in the Rule 144A Securities or any other similar
security to, or solicited any offer to buy or accept a transfer, pledge or
other disposition of the Rule 144A Securities, any interest in the Rule
144A Securities or any other similar security from, or otherwise approached
or negotiated with respect to the Rule 144A Securities, any interest in the
Rule 144A Securities or any other similar security with, any person in any
manner, or made any general solicitation by means of general advertising or
in any other manner, or taken any other action, which would constitute a
distribution of the Rule 144A Securities under the 1933 Act or which would
render the disposition of the Rule 144A Securities a violation of Section 5
of the 1933 Act or require registration pursuant thereto, nor will it act,
nor has it authorized or will it authorize any person to act, in such
manner with respect to the Rule 144A Securities.
e. The Buyer is a "qualified institutional buyer" as the term is
defined in Rule 144A under the 1933 Act and has completed either of the
forms of certification to that effect attached hereto as Annex 1 or Annex
2. The Buyer is aware that the sale to it is being made in reliance on
Rule 144A. The Buyer is acquiring the Rule 144A Securities for its own
account or the account of other qualified institutional buyers and
understands that such Rule 144A Securities may be resold, pledged or
transferred only (i) to a person reasonably believed to be a qualified
institutional buyer that purchases for its own account or for the account
of a qualified institutional buyer to whom notice is given that the resale,
pledge or transfer is being made in reliance on Rule 144A, or (ii) pursuant
to another exemption from registration under the 1933 Act.
3. The Buyer is not an employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or Section 4975 of
the Internal Revenue Code of 1986, as amended (the "Code"), nor a Person acting,
directly or indirectly, on behalf of any such plan, and understands that
registration of transfer of any of the Rule 144A Securities to any such employee
benefit plan, or to any person acting on behalf of such plan, will not be made
unless such employee benefit plan delivers a certification of facts and an
opinion of its counsel, addressed and satisfactory to the Company to the effect
that such transfer will not result in a violation of Section 406 of ERISA or
Section 4975 of the Code or subject the Company to any obligation in addition to
those undertaken in the Warrant or result in the imposition of an excise tax
under Section 4975 of the Code.
4. This document may be executed in one or more counterparts and by the
18
<PAGE>
different parties hereto on separate counterparts, each of which, when so
executed, shall be deemed to be an original; such counterparts, together, shall
constitute one and the same document.
IN WITNESS WHEREOF, each of the parties has executed this document as of
the date set forth below.
- --------------------------------- -----------------------------------
Print Name of Transferor Print Name of Buyer
By:_____________________________ By:_______________________________
Name: Name:
Title: Title:
Taxpayer Identification: Taxpayer Identification:
No._________________________ No._________________________
Date:_______________________ Date:_______________________
19
<PAGE>
ANNEX 1
-------
QUALIFIED INSTITUTIONAL BUYER STATUS UNDER SEC RULE 144A
--------------------------------------------------------
[For Buyers Other Than Registered Investment Companies]
The undersigned hereby certifies as follows in connection with the Rule
144A Investment Representation to which this Certification is attached:
1. As indicated below, the undersigned is the President, Chief Financial
Officer, Senior Vice President or other executive officer of the Buyer.
2. In connection with purchases by the Buyer, the Buyer is a "qualified
institutional buyer" as that term is defined in Rule 144A ("Rule 144A") under
the Securities Act of 1933, as amended (the "Act") because (i) the Buyer owned
and/or invested on a discretionary basis $___________________ in securities
(except for the excluded securities referred to below) as of the end of the
Buyer's most recent fiscal year (such amount being calculated in accordance with
Rule 144A) and (ii) the Buyer satisfies the criteria in the category marked
below.
--- Corpoporation, etc. The Buyer is a corporation (other than a
------------------
bank, savings and loan association or similar institution),
Massachusetts or similar business trust, partnership, or
organization described in Section 501(c)(3) of the Internal
Revenue Code.
--- Bank. The Buyer (a) is a national bank or banking institution
organized under the laws of any State, territory or the District
of Columbia, the business of which is substantially confined to
banking and is supervised by the State or territorial banking
commission or similar official or is a foreign bank or
equivalent institution, and (b) has an audited net worth of at
least $25,000,000 as demonstrated in its latest annual financial
statements, a copy of which is attached hereto.
----------------------------------
--- Savings and Loan. The Buyer (a) is a savings and loan
----------------
association, building
- ------------------------
/1/ Buyer must own and invest on a discretionary basis acting for its own
account or the account of other qualified institutional investors at least
$100,000,000 in securities unless Buyer is a dealer, in which case, Buyer must
own and invest on a discretionary basis at least $10,000,000 in securities,
except in the case of a buyer who is a dealer acting in a riskless principal
transaction on behalf of a qualified institutional buyer.
20
<PAGE>
and loan association, cooperative bank, homestead association or
similar institution, which is supervised and examined by a State
or Federal authority having supervision over any such
institutions or is a foreign savings and loan association or
equivalent institution and (b) has an audited net worth of at
least $25,000,000 as demonstrated in its latest annual financial
statements, a copy of which is attached hereto.
----------------------------------
--- Dealer. The Buyer is a dealer registered pursuant to Section 15
-------
of the Securities Exchange Act of 1934 (the "Exchange Act").
--- Insurance Company. The Buyer is an insurance company as defined
------------------
in Section 2(13) of the Act whose primary and predominant
business activity is the writing of insurance or the reinsuring
of risks underwritten by insurance companies and which is
subject to supervision by the insurance commissioner or a
similar official or agency of a State, territory or the District
of Columbia.
--- State or Local Plan. The Buyer is a plan established and
--------------------
maintained by a State, its political subdivisions, or any agency
or instrumentality of the State or its political subdivisions,
for the benefit of its employees.
--- ERISA Plan. The Buyer is an employee benefit plan within the
-----------
meaning of Title I of the Employee Retirement Income Security
Act of 1974.
--- Investment Adviser. The Buyer is an investment adviser
-------------------
registered under the Investment Advisors Act of 1940.
--- SBIC. The Buyer is a Small Business Investment Company licensed
-----
by the U.S. Small Business Administration under Section 301(c)
or (d) of the Small Business Investment Act of 1958.
--- Business Development Company. The Buyer is a business
-----------------------------
development company as defined in Section 202(a)(22) of the
Investment Advisers Act of 1940.
--- Trust Fund. The Buyer is a trust fund whose trustee is a bank
-----------
or trust company and whose participants are exclusively (a)
plans established and maintained by a State, its political
subdivisions, or any agency or instrumentality of the State or
its political subdivisions, for the benefit of its employees, or
(b) employee benefit plans within the meaning of Title I of the
Employee Retirement Income Security Act of 1974, but is not a
trust fund that includes as participants individual retirement
accounts or H.R. 10 plans.
21
<PAGE>
3. The term "securities" as used herein does not include (i) securities
------------ -----------------
of issuers that are affiliated with the Buyer, (ii) securities that are part of
an unsold allotment to or subscription by the Buyer as a participant in a public
offering if the Buyer is a dealer, (iii) bank deposit notes and certificates of
deposit, (iv) loan participations, (v) repurchase agreements, (vi) securities
owned but subject to a repurchase agreement and (vii) currency, interest rate
and commodity swaps.
4. For purposes of determining the aggregate amount of securities owned
and invested on a discretionary basis by the Buyer, the Buyer used the cost of
such securities to the Buyer, except where the Buyer reports its securities
holdings in its financial statements on the basis of their market value and
current information with respect to the cost of those securities has been
published, and did not include any of the securities referred to in the
preceding paragraph. Further, in determining such aggregate amount, the Buyer
may have included securities owned by subsidiaries of the Buyer, but only if
such subsidiaries are consolidated with the Buyer in its financial statements
prepared in accordance with generally accepted accounting principles and if the
--
investments of such subsidiaries are managed under the Buyer's direction.
However, such securities were not included if the Buyer is a majority-owned,
consolidated subsidiary of another enterprise and the Buyer is not itself a
reporting company under Section 13 or 15(d) of the Exchange Act.
5. The Buyer acknowledges that it is familiar with Rule 144A and
understands that each of the parties to which this certification is made is
relying and will continue to rely on the statements made herein because one or
more sales to the Buyer may be in reliance on Rule 144A.
6. Will the Buyer be purchasing the Rule 144A Securities only for the
Buyer's own account?
Yes ____ No ____
If the answer to the foregoing question is "no", the Buyer agrees that, in
connection with any purchase of securities sold to the Buyer for the account of
a third party (including any separate account) in reliance on Rule 144A, the
Buyer will only purchase for the account of a third party that at the time is a
"qualified institutional buyer" within the meaning of Rule 144A. In addition,
the Buyer agrees that the Buyer will not purchase securities for a third party
unless the Buyer has obtained a current representation letter from such third
party or taken other appropriate steps contemplated by Rule 144A to conclude
that such third party independently meets the definition of "qualified
institutional buyer" set forth in Rule 144A.
22
<PAGE>
7. The Buyer will notify each of the parties to which this certification
is made of any changes in the information and conclusions herein during the
period between the date of this certification and the date the Buyer purchases
the Rule 144A Securities. Unless such notice is given, the Buyer's purchase of
the Rule 144A Securities will constitute a reaffirmation of this certification
as of the date of such purchase.
------------------------------
Print Name of Buyer
By:
---------------------
Name:
---------------------
Title:
---------------------
Date:
--------------------
23
<PAGE>
ANNEX 2
-------
QUALIFIED INSTITUTIONAL BUYER STATUS UNDER SEC RULE 144A
--------------------------------------------------------
[For Buyers That Are Registered Investment Companies]
The undersigned hereby certifies as follows in connection with the Rule
144A Investment Representation to which this Certification is attached:
1. As indicated below, the undersigned is the President, Chief Financial
Officer or Senior Vice President of the Buyer or, if the Buyer is a "qualified
institutional buyer" as that term is defined in Rule 144A under the Securities
Act of 1933 ("Rule 144A") because Buyer is part of a Family of Investment
Companies (as defined below), is such an executive officer of the Adviser.
2. In connection with purchases by Buyer, the Buyer is a "qualified
institutional buyer" as defined in SBC Rule 144A because (i) the Buyer is an
investment company registered under the Investment Company Act of 1940, and (ii)
as marked below, the Buyer alone, or the Buyer's Family of Investment Companies,
owned at least $100,000,000 in securities (other than the excluded securities
referred to below) as of the end of the Buyer's most recent fiscal year. For
purposes of determining the amount of securities owned by the Buyer or the
Buyer's Family of Investment Companies, the cost of such securities was used.
- --- The Buyer owned $_______________ in securities (other than the excluded
securities referred to below) as of the end of the Buyer's most recent
fiscal year (such amount being calculated in accordance with Rule 144A).
- --- The Buyer is part of a Family of Investment Companies which owned in
the aggregate $________________ in securities (other than the excluded
securities referred to below) as of the end of the Buyer's most recent
fiscal year (such amount being calculated in accordance with Rule 144A).
3. The term "Family of Investment Companies" as used herein means two or
--------------------------------
more registered investment companies (or series thereof) that have the same
investment adviser or investment advisers that are affiliated (by virtue of
being majority owned subsidiaries of the same parent or because one investment
adviser is a majority owned subsidiary of the other registered investment
company adviser).
4. The term "securities" as used herein does not include (i) securities
------------
of issuers that are affiliated with the Buyer or are part of the Buyer's Family
of Investment Companies, (ii) bank deposit notes and certificates of deposit,
(iii) loan participations, (iv) repurchase agreements, (v) securities owned but
subject to a repurchase agreement and (vi) currency, interest rate and commodity
swaps.
24
<PAGE>
5. The Buyer is familiar with Rule 144A and understands that each of the
parties to which this certification is made is relying and will continue to rely
on the statements made herein because one or more sales to the Buyer will be in
reliance on Rule 144A. In addition, the Buyer will only purchase for the
Buyer's own account.
6. The Buyer will notify each of the parties to which this certification
is made of any changes in the information and conclusions herein during the
period between the date of this certification and the date the Buyer purchases
the Rule 144A Securities. Unless such notice is given, the Buyer's purchase of
the Rule 144A Securities will constitute a reaffirmation of this certification
as of the date of such purchase.
-----------------------------------
Print Name of Buyer
By:
---------------------------
Name:
Title:
Date:
---------------------------
IF AN ADVISER:
-----------------------------------
Print Name of Buyer Date:
25
<PAGE>
EXHIBIT B-1
FORM OF INVESTOR REPRESENTATION LETTER
_______________, 19 ____
T.A.R. Preferred Mortgage Corporation
Re: Warrant to Purchase Common Stock of
T.A.R. Preferred Mortgage Corporation
-------------------------------------
Ladies and Gentlemen:
________________________________________ (the "Transferee") intends to
acquire from ________________________________________ (the "Transferor")
_______________________________ [Warrant Shares of T.A.R. Preferred Mortgage
Corporation (the "Securities") issued pursuant to the Warrant] [the Transferor's
right (the "Securities") pursuant to the Warrant] (the "Warrant") dated as of
December 6, 1996 by T.A.R. Preferred Mortgage Corporation. Capitalized terms
used herein and not otherwise defined shall have the meanings assigned thereto
in the Warrant.
In connection with such acquisition, the Transferee hereby certifies and
agrees:
1. The Transferee is acquiring the Securities either (a) for its own
account or for accounts for which it exercises sole investment discretion and
not with a view to or for sale in connection with any distribution thereof,
subject nevertheless to any requirement of law that the disposition of the
Transferee's property shall at all times be and remain within its control, or
(b) for resale to "Qualified Institutional Buyers" within the meaning of Rule
144A under the Securities Act of 1933, as amended (the "1933 Act"), and in
accordance with the provisions of the Warrant.
2. The Transferee has received, and has had an opportunity to review,
such information concerning the Securities and the Company as has been requested
by the Transferee and is relevant to the Transferee's decision to purchase the
Securities. The Transferee has had any questions arising from such review
answered by the Company to the satisfaction of the Transferee.
3. The Transferee has such expertise, knowledge and sophistication in
financial and business matters generally, and in financial and business matters
related to securities similar to the Securities in particular, as to be capable
of evaluating the merits and risks of
26
<PAGE>
an investment in the Securities. The Transferee (or any account referred to
above) is able to bear the economic risks of such an investment.
4. The Transferee will comply with all applicable federal and state
securities laws in connection with any subsequent resale of the Securities by
the Transferee.
5. The Transferee understands that (a) the Securities have not been and
will not be registered under the Securities Act of 1933, as amended (the "1933
Act"), (b) the Company is not required to so register the Securities, (c) the
Securities may be resold only if registered pursuant to the provisions of the
1933 Act, or if an exemption from such registration is available, (d) the
Warrant contains restrictions regarding the transfer of the Securities and (e)
the Securities will bear a legend to the foregoing effect.
6. The Transferee is not an employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or the Internal
Revenue Code of 1986, as amended (the "Code"), nor a Person acting, directly or
indirectly, on behalf of any such plan, and understands that registration of
transfer of any Securities to any such employee benefit plan, or to any person
acting on behalf of such plan, will not be made unless such employee benefit
plan delivers a certification of facts and an opinion of its counsel, addressed
and satisfactory to the Company and to the effect that such transfer will not
result in a violation of Section 406 of ERISA or Section 4975 of the Code or
subject the Company to any obligation in addition to those undertaken in the
Warrant or result in the imposition of an excise tax under Section 4975 of the
Code.
7. The Transferee will not nor has it authorized or will it authorize any
person to (a) offer, pledge, sell, dispose of or otherwise transfer any
Securities, any interest in any Securities or any other similar security to any
person in any manner, (b) solicit any offer to buy or to accept a pledge,
disposition or other transfer of any Securities, any interest in any Securities
or any other similar security from any person in any manner, (c) otherwise
approach or negotiate with respect to any Securities, any interest in any
Securities or any other similar security with any person in any manner, (d) make
any general solicitation by means of general advertising or in any other manner,
or (e) take any other action, that (as to any of (a) through (c) above) would
constitute a distribution of any Securities under the 1933 Act, that would
render the disposition of any Securities a violation of Section 5 of the 1933
Act or any state securities law, or that would require registration or
qualification pursuant thereto. The Transferee will not sell or otherwise
transfer any of the Securities, except in compliance with the provisions of the
Warrant. Without limiting the generality of the foregoing sentence, if the
Transferee sells any of the Securities, the Transferee will comply with any
applicable requirements set forth in Section 1.2 of the Warrant, and if the
Transferee sells any of the Securities, the Transferee will obtain from any
purchaser any representations required pursuant to Section 1.2 of the Warrant.
27
<PAGE>
Very truly yours,
--------------------------
(Transferee)
By:
------------------------
Name:
----------------------
Title:
---------------------
28
<PAGE>
EXHIBIT B-2
FORM OF TRANSFEROR REPRESENTATION LETTER
T.A.R. Preferred Mortgage Corporation
- ----------------------------
- ----------------------------
Re: Warrant to Purchase Common Stock of
T.A.R. Preferred Mortgage Corporation
-------------------------------------
Ladies and Gentlemen:
In connection with the transfer by _____________________________ (the
"Transferor") to ___________________________ (the "Transferee") of [the Warrant
Shares issued pursuant to] [all of the Transferor's rights and obligations
under] the Warrant (the "Securities") dated as of December 6, 1996 by T.A.R.
Preferred Mortgage Corporation (the "Warrant"), the Transferor hereby certifies,
represents and warrants to, and covenants with, the Company that neither the
Transferor nor anyone acting on its behalf has (a) offered, pledged, sold,
disposed of or otherwise transferred any Securities, any interest in any
Securities or any other similar security to any person in any manner, (b)
solicited any offer to buy or to accept a pledge disposition or other transfer
of any Securities, any interest in any Security or any other similar security
from any person in any manner, (c) otherwise approached or negotiated with
respect to any Securities any interest in any Securities or any other similar
security with any person in any manner, (d) made any general solicitation by
means of general advertising or in any other manner, or (e) has taken any other
action, that (as to any of (a) through (e) above) would constitute a
distribution of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), that would render the disposition of any Securities a violation of
Section 5 of the 1933 Act or any state securities law, or that would require
registration or qualification pursuant thereto. The Transferor will not act in
any manner set forth in the foregoing sentence with respect to any Securities.
The Transferor has not and will not sell or otherwise transfer any of the
Securities, except in compliance with the provisions of the Warrant.
29
<PAGE>
Capitalized terms used herein and not otherwise defined shall have the
meanings assigned thereto in the Warrant.
Very truly yours,
------------------------
By:
---------------------
Name:
-------------------
Title:
------------------
30
<PAGE>
EXHIBIT 4.4
Warrant No.M-2
THIS WARRANT AND THE WARRANT SHARES HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR
REGISTERED OR QUALIFIED UNDER ANY STATE SECURITIES LAWS, AND MAY
NOT BE PLEDGED, HYPOTHECATED, SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF UNLESS SO REGISTERED OR AN EXCEPTION THEREFROM IS
AVAILABLE
THIS WARRANT AND THE WARRANT SHARES REPRESENTED BY THIS
WARRANT ARE SUBJECT TO TRANSFER RESTRICTIONS AND PURCHASE RIGHTS
SET FORTH IN A STOCKHOLDERS AGREEMENT DATED AS OF DECEMBER 6,
1996. A COPY OF SUCH AGREEMENT IS MAINTAINED ON FILE IN THE
PRINCIPAL OFFICE OF THE COMPANY IN THE STATE OF
CALIFORNIA
WARRANT TO PURCHASE COMMON STOCK
OF T.A.R. PREFERRED MORTGAGE CORPORATION
THIS CERTIFIES THAT, for value received, T.A.R. Preferred Mortgage Corporation,
a California corporation (the "Company"), promises to issue to Merrill Lynch,
Pierce, Fenner & Smith Incorporated, the holder of this Warrant (the "Holder"),
its nominees, successors or assigns 18.322 nonassessable shares of Common Stock,
$0.1 par value, of the Company ("Common Stock") (equal to eight-tenths of one
percent (.8%) of the sum of (i) all shares of Common Stock outstanding as of the
date hereof and (ii) all shares of Common Stock issuable upon (a) exercise of
any rights outstanding as of the date hereof to subscribe for or to purchase, or
any options outstanding as of the date hereof for the purchase of, Common Stock
or Convertible Securities (as defined herein) and (b) conversion of any
Convertible Securities outstanding as of the date hereof), upon the payment by
the Holder to the Company of the Warrant Price set forth herein and to deliver
to the Holder a certificate or certificates representing the Common Stock
purchased. The number of shares of Common Stock purchasable upon exercise of
this Warrant and the Warrant Price (as defined below) shall be subject to
adjustment from time to time as provided herein. The initial Warrant Price (the
"Warrant Price") per share of Common Stock shall equal $13,099.01 per share,
subject to adjustment as provided herein.
For the purpose of this Warrant, the term "Common Stock" shall mean (i) the
class of stock designated as the Common Stock of the Company at the date of this
Warrant, or (ii) any other class or classes of stock resulting from successive
changes or reclassifications of such class of stock.
1
<PAGE>
Section 1. Term of Warrant, Restrictions on Transfer, Exercise of Warrant.
--------------------------------------------------------------
1.1 Term of Warrant. Subject to the terms of this Warrant, the Holder
---------------
shall have the right, at its option, which may be exercised in whole or in part,
at any time commencing at the time of the issuance of this Warrant and until
5:00 p.m. Eastern Time on December 6, 2011 ("Warrant Expiration Date"), to
purchase from the Company the number of fully paid and nonassessable shares of
Common Stock which the Holder may at the time be entitled to purchase on
exercise of this Warrant ("Warrant Shares"). After such time, this Warrant will
be void.
1.2 Restrictions on Transfer. This Warrant and the Warrant Shares will not
------------------------
be registered or qualified under the Securities Act of 1933, as amended (the
"Act"), or the securities laws of any state or other jurisdiction and therefore
will not be transferable except pursuant to an exemption under or in accordance
with the Act, including Rule 144A adopted under the Act, in compliance with
applicable state securities laws and pursuant to the provision of this Warrant.
Unless the Warrant or Warrant Shares shall have been duly registered under the
Act pursuant to Section 7 hereof, (a) the certificates representing the Warrant
Shares shall bear a legend comparable to the legend on the first page of this
Warrant regarding restrictions on transfer and (b) no sale, pledge or other
disposition of this Warrant or any Warrant Shares may be made by any person
unless either (i) such sale, pledge or other disposition is made to a "qualified
institutional buyer" that executes a certificate in the form of Exhibit A
attached hereto to the effect that (A) it is a "qualified institutional buyer"
as defined under Rule 144A of the Act, acting for its own account or the
accounts of other "qualified institutional buyers" as defined under Rule 144A
and (B) it is aware that the transferor of this Warrant or any Warrant Shares
intends to rely on the exemption from the registration requirements under the
Act provided by Rule 144A, or (ii) such sale, pledge or other disposition is
otherwise made in a transaction exempt from the registration requirements under
the Act and (A) the prospective transferor and transferee certify in writing to
the Company the facts surrounding such disposition, which certifications shall
be in the form of Exhibits B-1 and B-2 attached hereto and (B) if the
disposition is not a transfer under Rule 144A or a disposition between or among
affiliates, the Company may request a written opinion of counsel reasonably
satisfactory to the Company to the effect that such disposition will not violate
the Act. In connection with a sale or other disposition of the Warrant or the
underlying Warrant Shares, the subsequent holder or holders shall be bound by
the provisions of this Agreement.
1.3 Exercise of Warrant. The Holder may exercise this Warrant in whole
-------------------
only by delivering to the Company (i) a written notice of such Holder's election
to exercise this Warrant, and (ii) payment in cash or by a certified or
cashier's check of the applicable Warrant Price. Upon receipt of written
notice, the Company shall as promptly as practicable
2
<PAGE>
execute or cause to be executed and deliver to such Holder a certificate or
certificates representing the aggregate number of shares of Common Stock
purchased. Such certificate or certificates shall be deemed to have been issued
to the Holder which shall be deemed to have become a holder of record of such
Warrant Shares as of the date of payment of the Warrant Price.
This Warrant does not entitle the Holder to any voting rights or other
rights as a shareholder of the Company prior to exercise and payment of the
Warrant Price in accordance with this Section 1.3.
Section 2. Exchange of Warrant. Subject to Section 1.2 and Section 3
-------------------
hereof, the Warrant may be exchanged for another Warrant or Warrants entitling
the Holder to purchase a like aggregate number of Warrant Shares as this Warrant
then entitles such Holder to purchase. Any Holder desiring to exchange this
Warrant shall make such request in writing delivered to the Company, and shall
surrender this Warrant, properly endorsed. Thereupon the Company shall execute
and deliver to the person entitled thereto a new Warrant or Warrants, as the
case may be, as so requested.
Section 3. Payment of Taxes. The Company shall pay all documentary
----------------
stamp taxes, if any, attributable to the initial issuance of any Warrant Shares
upon the exercise of this Warrant; provided, however, that the Company shall not
be required to pay any tax or taxes which may be payable in respect of any
transfer involved in the issue or delivery of any Warrant or certificate for
Warrant Shares in a name other than that of the Holder of this Warrant as such
name is then shown on the books of the Company.
Section 4. Mutilated or Missing Warrant. In case this Warrant shall be
----------------------------
mutilated, lost, stolen or destroyed, the Company shall issue in exchange and
substitution for and upon cancellation of the mutilated Warrant, or in lieu of
and substitution for the Warrant lost, stolen or destroyed, a new Warrant of
like tenor and representing an equivalent right or interests, but only upon
receipt of evidence reasonably satisfactory to the Company of such loss, theft
or destruction of this Warrant (provided that an affidavit, containing
appropriate indemnities, of the Holder as to a loss, theft or destruction of the
Warrant shall be deemed to be evidence reasonably satisfactory to the Company of
such loss, theft or destruction for purposes of this Section 4) and indemnity
(which may include a bond), if requested, also reasonably satisfactory to the
Company.
Section 5. Certain Covenants.
-----------------
5.1 Reservation of Warrant Shares. There have been reserved and the
-----------------------------
Company shall at all times keep reserved, out of its authorized Common Stock, a
number of shares of Common Stock sufficient to provide for the exercise of the
rights of purchase represented by this Warrant. The transfer agent, if any, for
the Common Stock, and every subsequent transfer agent for any shares of the
Company's Common Stock issuable upon the exercise of
3
<PAGE>
any of the rights of purchase as set out in this Warrant, shall be irrevocably
authorized and directed at all times to reserve such number of authorized shares
as shall be requisite for such purpose. The Company shall keep a copy of this
Warrant on file with any transfer agent for the Common Stock and with every
subsequent transfer agent for any shares of the Company's Common Stock issuable
upon the exercise of the rights of purchase represented by this Warrant. Any
transfer agent for the Common Stock and any successor transfer agent for the
Common Stock is hereby irrevocably authorized to cause to be issued from time to
time the share certificates required to honor this Warrant upon its exercise in
accordance with the terms hereof. The Company shall supply any such transfer
agent with duly executed share certificates for such purpose.
5.2 No Impairment. The Company shall not by any action including, without
-------------
limitation, amending its articles of incorporation, any reorganization, transfer
of assets, consolidation, merger, dissolution, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms of this Warrant, but shall at all times in good faith assist
in the carrying out of all such terms and in the taking of all such action, as
may be necessary or appropriate to protect the rights of the Holder against
impairment. Without limiting the generality of the foregoing, the Company shall
(a) take all such action as may be necessary or appropriate in order that the
Company may validly issue fully paid and nonassessable Common Stock upon the
exercise of this Warrant, and (b) obtain all such authorizations, exemptions or
consents from any public regulatory body having jurisdiction thereof as may be
necessary to enable the Company to perform its obligations under this Warrant;
provided, that under no circumstances shall the Company be obligated hereunder
to qualify to do business or consent to service of process in a particular
jurisdiction in order to perform its duties hereunder.
Upon the request of the Holder, the Company shall at any time during the
period this Warrant is outstanding acknowledge in writing, in form satisfactory
to the Holder, the continued validity of this Warrant and the Company's
obligations hereunder.
5.3 Listing. If the Company shall list any of its Common Stock on any
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securities exchange or automated quotation system, it will, at its expense, list
thereon, maintain and, when necessary, increase such listing of, all of its
Common Stock issued or, to the extent permissible under the applicable
securities exchange or quotation system rules, issuable upon the exercise of
this Warrant so long as any of its Common Stock shall be so listed.
5.4 Notice of Certain Corporate Action. In case the Company shall propose
----------------------------------
(a) to pay any dividend or to make any other distribution to the holders of its
Common Stock, or (b) to offer to the holders of its Common Stock rights to
subscribe for or to purchase any shares of Common Stock or shares of stock of
any class or any other securities, rights or options, or (c) to effect any
reclassification of its Common Stock (other than a reclassification involving
only the subdivision, or combination, of outstanding shares of Common Stock), or
(d) to effect any capital reorganization, or (e) to effect any
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consolidation, merger or sale, transfer or other disposition of all or
substantially all of its property, assets or business, or (f) to effect the
liquidation, dissolution or winding up of the Company, then in each such case
(but without limiting the provisions of Section 6), the Company shall give to
each Holder of a Warrant, in accordance with Section 4, a notice of such
proposed action, which shall specify the date on which a record is to be taken
for purposes of such dividend, distribution of offer of rights, or the date on
which such reclassification, reorganization, consolidation, merger, sale,
transfer, disposition, liquidation, dissolution, or winding up is to take place
and the date of participation therein by the holders of Common Stock, if any
such date is to be fixed and shall also set forth such facts with respect
thereto as shall be reasonably necessary to indicate the effect of such action
on the Common Stock. Such notice shall be so given in the case of any action
covered by clause (a) or (b) above at least ten (10) calendar days prior to the
record date for determining holders of the Common Stock for purposes of such
action, and in the case of any other such action, at least ten (10) calendar
days prior to the date of the taking of such proposed action or the date of
participation therein by the holders of Common Stock, whichever shall be the
earlier. No such notice shall be given if (a) any stock of the Company shall
have been registered under the Act and (b) the Company reasonably determines
that the giving of such notice would require disclosure of material information
which the Company has a bona fide purpose for preserving as confidential or the
disclosure of which would not be in the best interests of the Company.
Section 6. Adjustment of Warrant Price.
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6.1 Adjustment Price. Except as provided in Section 6.8, if and whenever
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the Company shall issue or sell any shares of its Common Stock for a
consideration per share less than the Adjustment Price (as hereinafter defined)
in effect immediately prior to the time of such issue or sale, then, forthwith
upon such issue or sale, the Adjustment Price shall be reduced to the price
(calculated to the nearest cent) determined by dividing (i) an amount equal to
the sum of (a) the number of shares of all classes of Common Stock outstanding
immediately prior to such issue or sale multiplied by the then existing
Adjustment Price, and (b) the consideration, if any, received by the Company
upon such issue or sale, by (ii) the total number of shares of Common Stock
outstanding immediately after such issue or sale. The Adjustment Price shall be
the Warrant Price or, in the case an adjustment of such price has taken place
pursuant to the provisions of this Section 6, then the Adjustment Price shall be
the price as last adjusted and in effect at the date this Warrant (or any part
thereof) is surrendered for exercise (such price or such price as last adjusted,
if such price shall have been adjusted, being referred to herein as the
"Adjustment Price").
If and whenever the Adjustment Price shall have been adjusted, the Warrant
Price shall be forthwith adjusted to the price (calculated to the nearest cent)
determined by multiplying the Warrant Price as then in effect by a fraction, the
numerator of which shall be the Adjustment Price as so adjusted and the
denominator of which shall be the Adjustment Price as in effect immediately
prior to such adjustment.
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No adjustment of the Adjustment Price, however, shall be made in an amount
less than $.10 per share, but any such lesser adjustment shall be carried
forward and shall be made at the time and together with the next subsequent
adjustment which together with any adjustments so carried forward shall amount
to $.10 per share or more.
For the purposes of this Section 6.1, the following Sections 6.2 to 6.7,
inclusive, shall also be applicable; except that this Warrant shall be deemed
exercised and outstanding for all purposes and computations under this Section
6.1 and the then current Adjustment Price shall be deemed the Warrant Price per
share.
6.2 Issuance of Rights or Options. In case at any time the Company shall
-----------------------------
in any manner grant (whether directly or by assumption in a merger or otherwise)
any rights to subscribe for or to purchase, or any options for the purchase of,
Common Stock or any stock or securities convertible into or exchangeable for
Common Stock (such convertible or exchangeable stock or securities being herein
called "Convertible Securities") whether or not such rights or options or the
right to convert or exchange any such Convertible Securities are immediately
exercisable, and the price per share for which Common Stock is issuable upon the
exercise of such rights or options or upon conversion or exchange of such
Convertible Securities (determined by dividing (i) the total amount, if any,
received or receivable by the Company as consideration for the granting of such
rights or options, plus the minimum aggregate amount of additional consideration
payable to the Company upon the exercise of all such rights or options, plus, in
the case of such rights or options which relate to Convertible Securities, the
minimum aggregate amount of additional consideration, if any, payable upon the
issue or sale of such Convertible Securities and upon the conversion or exchange
thereof, by (ii) the total maximum number of shares of Common Stock issuable
upon the exercise of such rights or options or upon the conversion or exchange
of all such Convertible Securities issuable upon the exercise of such rights or
options) shall be less than the Adjustment Price in effect immediately prior to
the time of the granting of such rights or options, then the total maximum
number of shares of Common Stock issuable upon the exercise of such rights or
options or upon conversion or exchange of the total maximum amount of such
Convertible Securities issuable upon the exercise of such rights or options
shall be (as of the date of granting of such rights or options) deemed to be
outstanding and to have been issued for such price per share. Except as
otherwise provided in Section 6.4, no adjustment of the Adjustment Price shall
be made upon the actual issue of such Common Stock or of such Convertible
Securities upon exercise of such rights or options or upon the actual issue of
such Common Stock upon conversion or exchange of such Convertible Securities.
6.3 Issuance of Convertible Securities. In case the Company shall in any
----------------------------------
manner issue (whether directly or by assumption in a merger or otherwise) or
sell any Convertible Securities, whether or not the rights to exchange or
convert thereunder are immediately exercisable, and the price per share for
which Common Stock is issuable upon which conversion or exchange (determined by
dividing (i) the total amount received or receivable by the Company as
consideration for the issue or sale of such Convertible Securities, plus the
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<PAGE>
minimum aggregate amount of additional consideration, if any, payable to the
Company upon the conversion or exchange thereof, by (ii) the total maximum
number of shares of Common Stock issuable upon the conversion or exchange of all
such Convertible Securities) shall be less than the Adjustment Price in effect
immediately prior to the time of such issue or sale determined as of the date of
such issue or sale of such Convertible Securities, as the case may be, then the
total maximum number of shares of Common Stock issuable upon conversion or
exchange of all such Convertible Securities shall (as of the date of the issue
or sale of such Convertible Securities) be deemed to be outstanding and to have
been issued for such price per share, provided that (a) except as otherwise
provided in Section 6.4 below, no adjustment of the Adjustment Price shall be
made upon the actual issue of such Common Stock upon conversion or exchange of
such Convertible Securities, and (b) if any such issue or sale of such
Convertible Securities is made upon exercise of any rights to subscribe for or
to purchase or any option to purchase any such Convertible Securities for which
adjustments of the Adjustment Price have been or are to be made pursuant to
other provisions of this Section 6, no further adjustment of the Adjustment
Price shall be made by reason of such issue or sale.
6.4 Change in Option Price or Conversion Rate. Upon the happening of any
-----------------------------------------
of the following events, namely, if the purchase price provided for in any right
or option referred to in Section 6.2, the additional consideration, if any,
payable upon the conversion or exchange of any Convertible Securities referred
to in Section 6.2 or Section 6.3, or the rate at which any Convertible
Securities referred to in Section 6.2 or Section 6.3 are convertible into or
exchangeable for Common Stock shall change at any time (other than under or by
reason of provisions designed to protect against dilution), the Adjustment Price
in effect at the time of such event shall forthwith be readjusted to the
Adjustment Price which would have been in effect at such time had such rights,
options or Convertible Securities still outstanding provided for such changed
purchase price, additional consideration or conversion rate, as the case may be,
at the time initially granted, issued or sold; and on the expiration of any such
option or right or the termination of any such right to convert or exchange such
Convertible Securities, the Adjustment Price then in effect hereunder shall
forthwith be increased to the Adjustment Price which would have been in effect
at the time of such expiration or termination had such right, option or
Convertible Securities, to the extent outstanding immediately prior to such
expiration or termination, never been issued, and the Common Stock issuable
thereunder shall no longer be deemed outstanding. If the purchase price
provided for in any such right or option referred to in Section 6.2 or if the
rate at which any Convertible Securities referred to in Section 6.2 or Section
6.3 are convertible into or exchangeable for Common Stock shall be reduced at
any time under or by reason of provisions with respect thereto designed to
protect against dilution, then in case of the delivery of Common Stock upon the
exercise of any such right or option or upon conversion or exchange of any such
right or option or upon conversion or exchange of any such Convertible
Securities, the Adjustment Price then in effect hereunder shall forthwith be
adjusted to such respective amount as would have obtained had such right, option
or Convertible Security never been issued as to such Common Stock and had
adjustment been
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<PAGE>
made upon the issuance of the shares of Common Stock delivered as aforesaid, but
only if as a result of such adjustment the Adjustment Price then in effect
hereunder is thereby reduced.
6.5 Stock Dividends. In case the Company shall declare a dividend or make
---------------
any other distribution upon any stock of the Company payable in Common Stock or
Convertible Securities, any Common Stock or Convertible Securities, as the case
may be, issuable in payment of such dividend or distribution shall be deemed to
have been issued or sold without consideration, subject to this Section 6.
6.6 Consideration for Stock. In case any shares of Common Stock or
-----------------------
Convertible Securities or any rights or options to purchase any such Common
Stock or Convertible Securities shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount received by the
Company therefor, after deduction therefrom of any expenses incurred or any
underwriting commissions or concessions paid or allowed by the Company in
connection therewith. In case any shares of Common Stock or Convertible
Securities or any rights or options to purchase any such Common Stock or
Convertible Securities shall be issued or sold for consideration other than
cash, the amount of the consideration other than cash received by the Company
shall be deemed to be the fair value of such consideration as determined in good
faith by the Board of Directors of the Company, after deduction of any expenses
incurred or any underwriting commissions or concessions paid or allowed by the
Company in connection therewith. In case any shares of Common Stock or
Convertible Securities or any rights or options to purchase such Common Stock or
Convertible Securities shall be issued in connection with any merger in which
the Company is the surviving corporation, the amount of consideration therefor
shall be deemed to be the fair value as determined in good faith by the Board of
Directors of the Company of such portion of the assets and business of the non-
surviving corporation as such Board shall determine to be attributable to such
Common Stock, Convertible Securities, rights or options, as the case may be. In
case any rights or options to purchase any shares of Common Stock or Convertible
Securities shall be issued in connection with the issue and sale of other
securities of the Company, together comprising one integral transaction in which
no specific consideration is allocated to such rights or options by the parties
thereto, such rights or options shall be deemed to have been issued without
consideration. In the event of any consolidation or merger of the Company in
which the Company is not the surviving corporation or in the event of any sale
of all or substantially all of the assets of the Company for stock or other
securities of any corporation, the Company shall be deemed to have issued a
number of shares of its Common Stock for stock or securities of the other
corporation computed on the basis of the actual exchange ratio on which the
transaction was predicated and for a consideration equal to the fair market
value on the date of such transaction of such stock or securities of the other
corporation, and if any such calculation results in adjustment of the Adjustment
Price, the determination of the number of shares of Common Stock receivable upon
exercise of this Warrant immediately prior to such merger, consolidation or
sale, for purposes of Section 6.9, shall be made after giving effect to such
adjustment of the Adjustment Price.
8
<PAGE>
6.7 Record Date. In case the Company shall take a record of the holders of
-----------
its Common Stock for the purpose of entitling them (i) to receive a dividend or
other distribution payable in Common Stock or in Convertible Securities, or (ii)
to subscribe for or purchase Common Stock or Convertible Securities, then such
record date shall be deemed to be the date of the issue or sale of the shares of
Common Stock deemed to have been issued or sold upon the declaration of such
dividend or the making of such other distribution or the date of the granting of
such right of subscription or purchase, as the case may be.
6.8 Treasury Shares. The number of shares of Common Stock outstanding at
---------------
any given time shall not include shares owned or held by or for the account of
the Company, and the disposition of any such shares shall be considered an issue
or sale of Common Stock for the purposes of this Section 6.
6.9 Subdivision or Combination of Stock. In case the Company shall at any
-----------------------------------
time (i) issue a dividend payable in Common Stock or Convertible Securities or
any rights to subscribe for or to purchase, or any options for the purchase of,
Common Stock or Convertible Securities or (ii) subdivide its outstanding shares
of Common Stock into a greater number of shares or combine its outstanding
shares of Common Stock into a smaller number of shares, the Adjustment Price and
the Warrant Price in effect immediately prior to such subdivision or combination
shall be adjusted to an amount that bears the same relationship to the
Adjustment Price and Warrant Price respectively in effect immediately prior to
such action as the total amount of shares of Common Stock outstanding
immediately prior to such action bears to the total number of shares of Common
Stock outstanding immediately after such action, and the number of shares of
Common Stock purchasable upon the exercise of any Warrant shall be that number
of shares of Common Stock obtained by multiplying the number of shares of Common
Stock purchasable immediately prior to such adjustment upon the exercise of such
Warrant by the Warrant Price in effect immediately prior to such adjustment and
dividing the product so obtained by the Warrant Price in effect after such
adjustment.
6.10 Reorganization, Reclassification, Consolidation, Merger or Sale. If
---------------------------------------------------------------
any capital reorganization or reclassification of the capital stock of the
Company, or any consolidation or merger of the Company with another corporation,
or the sale of all or substantially all of its assets to another corporation
shall be effected in such a way that holders of Common Stock shall be entitled
to receive stock, securities or assets with respect to or in exchange for Common
Stock, then, as a condition of such reorganization, reclassification,
consolidation, exercise, merger or sale, lawful and adequate provisions shall be
made whereby the holder of this Warrant shall thereafter have the right to
receive upon the basis and upon the terms and conditions specified herein and in
lieu of the shares of Common Stock of the Company immediately theretofore
receivable upon the exercise of this Warrant, such shares of stock, securities
or assets as may be issued or payable with respect to or in exchange for a
number of outstanding shares of such Common Stock equal to the number of shares
of such stock immediately theretofore receivable upon the exercise of this
Warrant had such reorganization,
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<PAGE>
reclassification, consolidation, merger or sale not taken place, and in any such
case appropriate provision shall be made with respect to the rights and
interests of such holder to the end that the provisions hereof (including
without limitation provisions for adjustments of the Adjustment Price) shall
thereafter be applicable, as nearly as may be, in relation to any shares of
stock, securities or assets thereafter deliverable upon the exercise of such
conversion rights (including an immediate adjustment, by reason of such
consolidation or merger, of the Adjustment Price to the value for the Common
Stock reflected by the terms of such consolidation or merger if the value so
reflected is less than the Adjustment Price in effect immediately prior to such
consolidation or merger). In the event of a merger or consolidation of the
Company with or into another corporation as a result of which a greater or
lesser number of shares of common stock of the surviving corporation are
issuable to holders of Common Stock of the Company outstanding immediately prior
to such merger or consolidation, then the Adjustment Price and Warrant Price in
effect immediately prior to such merger or consolidation shall be adjusted in
the same manner as though there were a subdivision or combination of the
outstanding shares of Common Stock of the Company. The Company will not effect
any such consolidation, merger or sale, unless prior to the consummation thereof
the successor corporation (if other than the Company) resulting from such
consolidation or merger or the corporation purchasing such assets shall assume,
by written instrument executed and mailed or delivered to the registered holder
hereof at the last address of such holder appearing on the books of the Company,
the obligation to deliver to such holder such shares of stock, securities or
assets as, in accordance with the foregoing provisions, such holder may be
entitled to receive. If a purchase, tender or exchange offer is made to and
accepted by the holders of more than 50% of the outstanding shares of Common
Stock of the Company, the Company shall not effect any consolidation or merger
and the Company shall not consent to or register any transfer or sale with or to
the Person having made such offer or with any affiliate of such Person, unless
prior to the consummation of such consolidation, merger, transfer or sale of the
holder hereof shall have been given a reasonable opportunity to then elect to
receive, upon exercise of this Warrant, either the proportionate share of the
stock, securities or assets then issuable with respect to the Common Stock of
the Company or the stock, securities or assets, or the equivalent, issued to
previous holders of the Common Stock, or the consideration paid to such holders,
in the case of a purchase offer, in accordance with such offer.
6.11 Distributions. If at any time after the date hereof the Company shall
-------------
distribute to all holders of its Common Stock evidences of its indebtedness or
assets, the Warrant Price shall be decreased to an amount determined by
multiplying such Warrant Price by a fraction, the numerator of which is the fair
market value, as determined in good faith by the board of directors of the
Company, of each share of Common Stock outstanding (the "Fair Market Value")
prior to giving effect to such distribution less the Fair Market Value of each
share of Common Stock outstanding at the date of distribution of the assets or
evidences of indebtedness so distributed and the denominator of which is the
Fair Market Value of each share of Common Stock outstanding prior to giving
effect to such distribution.
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6.12 Notice of Adjustment. Upon any adjustment of the Adjustment Price and
---------------------
the Warrant Price, then and in each such case the Company shall give written
notice thereof, which notice shall state the Adjustment Price and the Warrant
Price resulting from such adjustment, setting forth in reasonable detail the
method of calculation and the facts upon which such calculation is based.
Section 7. Registration.
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7.1 Incidental Registration.
------------------------
(a) General. If the Company at any time proposes to register on its own
--------
behalf or behalf of any of its security holders any of its securities (other
than by a Registration on Form S-4, S-8 or any successor or similar short-form
registration statement), whether or not pursuant to registration rights granted
to other holders of its securities, it will each such time give prompt written
notice to all Holders of its intention to do so and of such Holders' rights
under this Section, provided that in any event, such notice shall be given to
--------
all such Holders at least thirty (30) days prior to such proposed registration
(or such shorter period if thirty (30) days notice is not practicable under the
circumstances but in no event not less than fifteen (15) days or, in the case of
a shelf registration on Form S-3, five (5) business days). Such notice shall set
forth the intended method of disposition of the securities proposed to be
registered by the Company. The notice shall offer to include in such filing
such number of shares of Warrant Shares as such Holder may request.
(b) Included Securities. Securities will be included in any such filing
--------------------
upon the written request of any such Holder made within fifteen (15) days after
receipt of any such notice, or five, (5) business days in the case of a shelf
registration on Form S-3 (which request shall specify the Warrant Shares
intended to be disposed of by such holder and the intended method of disposition
thereof). The Company shall use its best efforts to effect the registration of
all Warrants and Warrant Shares which the Company has been so requested to
register by the Holders thereof, to the extent necessary to permit the
disposition of the Warrants and Warrant Shares so to be registered; provided
--------
that the Holder shall pay its proportionate share of the underwriting discounts
or commissions.
(c) Priority in Underwritten Offerings. If the Company at any time
-----------------------------------
proposes to register any of its securities as contemplated by this Section and
such securities are to be distributed by or through one or more underwriters,
the Company shall, if requested by the Holder or as provided in this Section
7.1, use its best efforts so arrange for such underwriters to include all the
Warrants and Warrant Shares to be offered and sold by such Holder among the
securities to be distributed by such underwriters, provided that if the managing
--------
underwriter of such underwritten offering shall advise the Company in writing
(with a copy to each holder of Warrant Shares or Warrants requesting such
registration) that the number of Warrants and Warrant Shares requested to be
included in such Registration concurrently with the securities by the Company or
any other Person would adversely affect
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<PAGE>
the price, timing or distribution of such shares or would exceed the number of
shares it is advisable to offer to sell at such time (the "Sales Limit"), then
the Company will include in such registration, to the extent of the number of
securities which the Company is so advised can be sold in such offering, in
priority order, first, the securities that the Company proposes to issue and
sell for its own account and, second, such number of shares of Warrants and
Warrants Shares requested to be registered by the Holders thereof pursuant to
this Section 7.1 or on behalf of any other Person pro rata on the basis of the
total number of shares of such securities requested to be registered by each
such Person so that the aggregate number of Warrants and Warrant Shares and
other shares being listed by or on behalf of another Person does not exceed the
difference between the aggregate Sales Limit and the securities that the Company
proposes to issue and sell for its own account. Any Holder of Warrant Shares to
be included in such Registration may withdraw its request to have its securities
so included by notice to the Company within ten (10) Business Days after receipt
of a copy of a notice from the managing underwriter pursuant to this Section.
Any or all of the conditions precedent to the obligations of such underwriters
under such underwriting agreement shall be conditions precedent to the
obligations of such Holders of Warrant Shares. Except as set forth in this
Section 7.1, no Holder of Warrant Shares shall be requited to make any
representations or warranties to or agreements with the Company or the
underwriters other than customary representations, warranties or agreements
regarding such Holder, such Holder's Warrant Shares and such Holder's intended
method of distribution and any other representation required by law.
(d) Abandonment or Suspension. The Company may abandon or suspend any
--------------------------
registration effected pursuant to the provisions of this Section 7.1 at any time
and without any liability to any Holder hereof other than its obligations, to
the extent permitted by applicable law, to pay the expenses of the Company and
the selling security holders in connection therewith; provided, that the Company
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does not hereunder undertake to pay any expenses if abandonment or suspension
results, in its good faith judgment, from information or statements provided in
writing by the Holder hereof.
Section 8. Termination of Restrictions. The restrictions imposed by
----------------------------
Section 1.2 hereof upon the transferability of any Warrant Shares shall cease
and terminate as to any Warrant Shares (a) when such securities shall have been
effectively registered under the Act and disposed of in accordance with the
registration statement covering such securities, (b) when such restrictions are
no longer required pursuant to Rule 144 under the Act or (c) when, in the
opinions of both counsel for the Holder and counsel for the Company, such
restrictions are otherwise no longer required in order to insure compliance with
the Act. Whenever such restrictions shall terminate as to any Warrant Shares,
the Holder shall be entitled to receive from the Company, without expense (other
than transfer taxes, if any), new securities of like tenor not bearing a legend
as to restrictions on transfer.
Section 9. No Rights as a Shareholder; Notice to Holder. Nothing contained
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in this Warrant shall be construed as conferring upon the Holder or its
transferees the right to vote
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or to consent or to receive notice as a shareholder in respect of any meeting of
shareholders for the election of directors of the Company or any other matter,
or any rights whatsoever as a shareholder of the Company.
Section 10. Representations and Warranties. The Company hereby represents
-------------------------------
and warrants to Holder as follows:
(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of California and has full power and
lawful authority to carry on its business;
(b) The Company has the full power to execute, deliver and issue this
Warrant and to carry out its obligations hereunder; the execution, delivery and
issuance of this Warrant, and delivery and issuance of Warrant Shares upon
exercise of this Warrant, have been duly and validly authorized by the Company;
no other acts or proceedings on the part of the Company are necessary to
authorize this Warrant or the Warrant Shares; and this Warrant constitutes a
valid and legally binding obligation of the Company, enforceable against the
Company in accordance with its terms;
(c) The Warrant Shares will, when issued pursuant to this Warrant, be duly
authorized and validly issued, fully paid and nonassessable, and not subject to
preemptive rights;
(d) No consent or approval by, or filing with, any governmental authority
is required in connection with the execution, delivery and issuance by the
Company of this Warrant or the delivery and issuance of the Warrant Shares other
than such as have been obtained or made (or as may be required in the future
under applicable securities laws in connection with the transfer or exercise of
this Warrant or the resale of the Warrant Shares);
(e) The execution, delivery, issuance of this Warrant and the delivery and
issuance of the Warrant Shares will not result in the violation of any term or
provision of the charter or bylaws of the Company, or any loan agreement,
indenture, note or other instrument or decree, order, statute, rule or
regulation applicable to the Company (subject, however, to compliance with
applicable securities laws in connection with the transfer or exercise of this
Warrant or the resale of the Warrant Shares);
(f) The entire authorized capital stock of the Company is one million
shares of common stock and no shares of preferred stock. As of the date of this
Warrant, the Company has issued and outstanding (i) 1,999 shares of Common
Stock, (ii) excluding the Warrant Shares and the Warrant Shares issuable to
Merrill Lynch Mortgage Capital, Inc. pursuant to the Warrant issued concurrently
herewith, 291.20 shares of Common Stock issuable upon the exercise of any rights
outstanding as of the date hereof including any warrant or other right to
subscribe for or to purchase, or any options for the purchase of
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Common Stock or Convertible Securities and (iii) no shares of preferred stock;
and
(g) Other than this Warrant, and the Warrant issued to Merrill Lynch
Mortgage Capital Inc. concurrently herewith, an Option granted to an employee of
the Company to purchase 9.95 shares of Common Stock, and the Warrant dated
October 2, 1996 relating to 281.25 shares of Common Stock, the Company is not a
party to any agreement regarding registration rights.
Section 11. Delivery Upon Execution of this Warrant. This Warrant shall
----------------------------------------
not be effective until the Holder has executed and delivered to the Company a
certificate in the form of Exhibit B-1 hereto.
Section 12. Notices. Any notice pursuant to this Warrant by the Company or
--------
by the Holder shall be in writing and shall be mailed by certified mall, return
receipt requested, (a) to the Company, at its principal office at 19782
MacArthur Blvd., Irvine, CA 92715; Attention: Todd Rodriguez; or (b) to the
Holder, to Merrill Lynch, Pierce, Fenner & Smith Incorporated, World Financial
Center, North Tower, New York, NY 10281-1310; Attention: Mr. C. J. DeSantis.
Either party may from time to time change the address to which notices to it are
to be delivered or mailed under this Warrant by notice in writing to the other
party.
Section 13. Applicable Law. This Warrant shall be governed by and
---------------
construed in accordance with the laws of the State of New York without giving
effect to principles of conflict of laws.
Section 14. Captions. The captions of the Sections and subsections of this
---------
Warrant have been inserted for convenience only and shall have no substantive
effect.
14
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Warrant as of the
6th day of December, 1996.
T.A.R. PREFERRED MORTGAGE
CORPORATION
By: _____________________________
Name: Todd Rodriguez
Title: C.E.O.
Attest:____________________
Secretary
15
<PAGE>
T.A.R. PREFERRED MORTGAGE
CORPORATION PURCHASE FORM
The undersigned irrevocably elects to exercise the right of purchase under
the enclosed Warrant, all of the Warrant Shares provided for in the enclosed
Warrant, and requires that certificates for such shares be issued in the name
of:
(Please Print Name and Social Security or Taxpayer ID No.)
- --------------------------------------
(Street Address)
- --------------------------------------
(City, State and Zip Code)
- --------------------------------------
Dated: ____________________, 199____
Name of Warrantholder or Assignee:_____________________________________
(Please Print)
Address: __________________________________________________________________
- ------------------------------------------------------------------------------
Signature: __________________________________________________________________
16
<PAGE>
EXHIBIT A
FORM OF RULE 144A INVESTMENT REPRESENTATIONS
Description of Rule 144A Securities, including numbers:
[Warrant] [Warrant Shares] of
T.A.R. Preferred Mortgage Corporation
Issued Pursuant to a Warrant Agreement
by T.A.R. Preferred Mortgage Corporation
The undersigned seller, as registered holder (the "Transferor"), intends to
transfer the Rule 144A Securities described above to the undersigned buyer (the
"Buyer").
1. In connection with such transfer and in accordance with the agreements
pursuant to which the Rule 144A Securities were issued, the Transferor hereby
certifies the following facts: Neither the Transferor nor anyone acting on its
behalf has offered, transferred, pledged, sold or otherwise disposed of the Rule
144A Securities, any interest in the Rule 144A Securities or any other similar
security to, or solicited any offer to buy or accept a transfer, pledge or other
disposition of the Rule 144A Securities, or otherwise approached or negotiated
with respect to the Rule 144A Securities, any interest in the Rule 144A
Securities or any other similar security with, any person in any manner, or made
any general solicitation by means of general advertising or in any other manner,
or taken any other action, which would constitute a distribution of the Rule
144A Securities under the Securities Act of 1933, as amended (the "1933 Act"),
or which would render the disposition of the Rule 144A Securities a violation of
Section 5 of the 1933 Act or require registration pursuant thereto, and that the
Transferor has not offered the Rule 144A Securities to any person other than the
Buyer or another "qualified institutional buyer" as defined in Rule 144A under
the 1933 Act.
Terms not defined herein shall have the meanings assigned thereto in the
Warrant dated as of December 6, 1996 by T.A.R. Preferred Mortgage Corporation.
2. The Buyer warrants and represents to, and covenants with, the
Transferor and the Company pursuant to Section 1.2 of the Warrant as follows:
a. The Buyer understands that the Rule 144A Securities have not been
registered under the 1933 Act or the securities laws of any state.
b. The Buyer considers itself a substantial, sophisticated
institutional investor having such knowledge and experience in financial
and business matters that it is capable of evaluating the merits and risks
of investment in the Rule 144A
17
<PAGE>
Securities.
c. The Buyer has been furnished with all information regarding the
Rule 144A Securities that it has requested from the Company.
d. Neither the Buyer nor anyone acting on its behalf has offered,
transferred, pledged, sold or otherwise disposed of the Rule 144A
Securities, any interest in the Rule 144A Securities or any other similar
security to, or solicited any offer to buy or accept a transfer, pledge or
other disposition of the Rule 144A Securities, any interest in the Rule
144A Securities or any other similar security from, or otherwise approached
or negotiated with respect to the Rule 144A Securities, any interest in the
Rule 144A Securities or any other similar security with, any person in any
manner, or made any general solicitation by means of general advertising or
in any other manner, or taken any other action, which would constitute a
distribution of the Rule 144A Securities under the 1933 Act or which would
render the disposition of the Rule 144A Securities a violation of Section 5
of the 1933 Act or require registration pursuant thereto, nor will it act,
nor has it authorized or will it authorize any person to act, in such
manner with respect to the Rule 144A Securities.
e. The Buyer is a "qualified institutional buyer" as the term is
defined in Rule 144A under the 1933 Act and has completed either of the
forms of certification to that effect attached hereto as Annex 1 or Annex
2. The Buyer is aware that the sale to it is being made in reliance on
Rule 144A. The Buyer is acquiring the Rule 144A Securities for its own
account or the account of other qualified institutional buyers and
understands that such Rule 144A Securities may be resold, pledged or
transferred only (i) to a person reasonably believed to be a qualified
institutional buyer that purchases for its own account or for the account
of a qualified institutional buyer to whom notice is given that the resale,
pledge or transfer is being made in reliance on Rule 144A, or (ii) pursuant
to another exemption from registration under the 1933 Act.
3. The Buyer is not an employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or Section 4975 of
the Internal Revenue Code of 1986, as amended (the "Code"), nor a Person acting,
directly or indirectly, on behalf of any such plan, and understands that
registration of transfer of any of the Rule 144A Securities to any such employee
benefit plan, or to any person acting on behalf of such plan, will not be made
unless such employee benefit plan delivers a certification of facts and an
opinion of its counsel, addressed and satisfactory to the Company to the effect
that such transfer will not result in a violation of Section 406 of ERISA or
Section 4975 of the Code or subject the Company to any obligation in addition to
those undertaken in the Warrant or result in the imposition of an excise tax
under Section 4975 of the Code.
4. This document may be executed in one or more counterparts and by the
18
<PAGE>
different parties hereto on separate counterparts, each of which, when so
executed, shall be deemed to be an original; such counterparts, together, shall
constitute one and the same document.
IN WITNESS WHEREOF, each of the parties has executed this document as of
the date set forth below.
- ----------------------------------- -----------------------------------
Print Name of Transferor Print Name of Buyer
By:________________________________ By:________________________________
Name: Name:
Title: Title:
Taxpayer Identification: Taxpayer Identification:
No._________________________ No._________________________
Date:_______________________ Date:_______________________
19
<PAGE>
ANNEX 1
-------
QUALIFIED INSTITUTIONAL BUYER STATUS UNDER SEC RULE 144A
--------------------------------------------------------
[For Buyers Other Than Registered Investment Companies]
The undersigned hereby certifies as follows in connection with the Rule
144A Investment Representation to which this Certification is attached:
1. As indicated below, the undersigned is the President, Chief Financial
Officer, Senior Vice President or other executive officer of the Buyer.
2. In connection with purchases by the Buyer, the Buyer is a "qualified
institutional buyer" as that term is defined in Rule 144A ("Rule 144A") under
the Securities Act of 1933, as amended (the "Act") because (i) the Buyer owned
and/or invested on a discretionary basis $____________________/1/ in securities
(except for the excluded securities referred to below) as of the end of the
Buyer's most recent fiscal year (such amount being calculated in accordance with
Rule 144A) and (ii) the Buyer satisfies the criteria in the category marked
below.
Corporation, etc. The Buyer is a corporation (other than a bank,
--- -----------------
savings and loan association or similar institution),
Massachusetts or similar business trust, partnership, or
organization described in Section 501(c)(3) of the Internal
Revenue Code.
Bank. The Buyer (a) is a national bank or banking institution
---- ----
organized under the laws of any State, territory or the District
of Columbia, the business of which is substantially confined to
banking and is supervised by the State or territorial banking
commission or similar official or is a foreign bank or equivalent
institution, and (b) has an audited net worth of at least
$25,000,000 as demonstrated in its latest annual financial
statements, a copy of which is attached hereto.
----------------------------------
Savings and Loan. The Buyer (a) is a savings and loan
---- -----------------
association, building
/1/ Buyer must own and invest on a discretionary basis acting for its own
account or the account of other qualified institutional investors at least
$100,000,000 in securities unless Buyer is a dealer, in which case, Buyer must
own and invest on a discretionary basis at least $10,000,000 in securities,
except in the case of a buyer who is a dealer acting in a riskless principal
transaction on behalf of a qualified institutional buyer.
20
<PAGE>
and loan association, cooperative bank, homestead association or
similar institution, which is supervised and examined by a State or
Federal authority having supervision over any such institutions or is
a foreign savings and loan association or equivalent institution and
(b) has an audited net worth of at least $25,000,000 as demonstrated
in its latest annual financial statements, a copy of which is attached
---------------------------
hereto.
-------
Dealer. The Buyer is a dealer registered pursuant to Section 15
--- -------
of the Securities Exchange Act of 1934 (the "Exchange Act").
Insurance Company. The Buyer is an insurance company as defined
--- ------------------
in Section 2(13) of the Act whose primary and predominant business
activity is the writing of insurance or the reinsuring of risks
underwritten by insurance companies and which is subject to
supervision by the insurance commissioner or a similar official or
agency of a State, territory or the District of Columbia.
State or Local Plan. The Buyer is a plan established and
--- --------------------
maintained by a State, its political subdivisions, or any agency or
instrumentality of the State or its political subdivisions, for the
benefit of its employees.
ERISA Plan. The Buyer is an employee benefit plan within the
--- -----------
meaning of Title I of the Employee Retirement Income Security Act of
1974.
Investment Adviser. The Buyer is an investment adviser
--- -------------------
registered under the Investment Advisors Act of 1940.
SBIC. The Buyer is a Small Business Investment Company licensed
--- -----
by the U.S. Small Business Administration under Section 301(c) or (d)
of the Small Business Investment Act of 1958.
Business Development Company. The Buyer is a business
--- -----------------------------
development company as defined in Section 202(a)(22) of the Investment
Advisers Act of 1940.
Trust Fund. The Buyer is a trust fund whose trustee is a bank
--- -----------
or trust company and whose participants are exclusively (a) plans
established and maintained by a State, its political subdivisions, or
any agency or instrumentality of the State or its political
subdivisions, for the benefit of its employees, or (b) employee
benefit plans within the meaning of Title I of the Employee Retirement
Income Security Act of 1974, but is not a trust fund that includes as
participants individual retirement accounts or H.R. 10 plans.
21
<PAGE>
3. The term "securities" as used herein does not include (i) securities
------------ -----------------
of issuers that are affiliated with the Buyer, (ii) securities that are part of
an unsold allotment to or subscription by the Buyer as a participant in a public
offering if the Buyer is a dealer, (iii) bank deposit notes and certificates of
deposit, (iv) loan participations, (v) repurchase agreements, (vi) securities
owned but subject to a repurchase agreement and (vii) currency, interest rate
and commodity swaps.
4. For purposes of determining the aggregate amount of securities owned
and invested on a discretionary basis by the Buyer, the Buyer used the cost of
such securities to the Buyer, except where the Buyer reports its securities
holdings in its financial statements on the basis of their market value and
current information with respect to the cost of those securities has been
published, and did not include any of the securities referred to in the
preceding paragraph. Further, in determining such aggregate amount, the Buyer
may have included securities owned by subsidiaries of the Buyer, but only if
such subsidiaries are consolidated with the Buyer in its financial statements
prepared in accordance with generally accepted accounting principles and if the
--
investments of such subsidiaries are managed under the Buyer's direction.
However, such securities were not included if the Buyer is a majority-owned,
consolidated subsidiary of another enterprise and the Buyer is not itself a
reporting company under Section 13 or 15(d) of the Exchange Act.
5. The Buyer acknowledges that it is familiar with Rule 144A and
understands that each of the parties to which this certification is made is
relying and will continue to rely on the statements made herein because one or
more sales to the Buyer may be in reliance on Rule 144A.
6. Will the Buyer be purchasing the Rule 144A Securities only for the
Buyer's own account?
Yes ____ No ____
If the answer to the foregoing question is "no", the Buyer agrees that, in
connection with any purchase of securities sold to the Buyer for the account of
a third party (including any separate account) in reliance on Rule 144A, the
Buyer will only purchase for the account of a third party that at the time is a
"qualified institutional buyer" within the meaning of Rule 144A. In addition,
the Buyer agrees that the Buyer will not purchase securities for a third party
unless the Buyer has obtained a current representation letter from such third
party or taken other appropriate steps contemplated by Rule 144A to conclude
that such third party independently meets the definition of "qualified
institutional buyer" set forth in Rule 144A.
22
<PAGE>
7. The Buyer will notify each of the parties to which this certification
is made of any changes in the information and conclusions herein during the
period between the date of this certification and the date the Buyer purchases
the Rule 144A Securities. Unless such notice is given, the Buyer's purchase of
the Rule 144A Securities will constitute a reaffirmation of this certification
as of the date of such purchase.
-----------------------------------
Print Name of Buyer
By: _________________________
Name: _________________________
Title: _________________________
Date: _________________________
23
<PAGE>
ANNEX 2
-------
QUALIFIED INSTITUTIONAL BUYER STATUS UNDER SEC RULE 144A
--------------------------------------------------------
[For Buyers That Are Registered Investment Companies]
The undersigned hereby certifies as follows in connection with the Rule
144A Investment Representation to which this Certification is attached:
1. As indicated below, the undersigned is the President, Chief Financial
Officer or Senior Vice President of the Buyer or, if the Buyer is a "qualified
institutional buyer" as that term is defined in Rule 144A under the Securities
Act of 1933 ("Rule 144A") because Buyer is part of a Family of Investment
Companies (as defined below), is such an executive officer of the Adviser.
2. In connection with purchases by Buyer, the Buyer is a "qualified
institutional buyer" as defined in SBC Rule 144A because (i) the Buyer is an
investment company registered under the Investment Company Act of 1940, and (ii)
as marked below, the Buyer alone, or the Buyer's Family of Investment Companies,
owned at least $100,000,000 in securities (other than the excluded securities
referred to below) as of the end of the Buyer's most recent fiscal year. For
purposes of determining the amount of securities owned by the Buyer or the
Buyer's Family of Investment Companies, the cost of such securities was used.
The Buyer owned $_______________ in securities (other than the
---
excluded securities referred to below) as of the end of the Buyer's most
recent fiscal year (such amount being calculated in accordance with Rule
144A).
The Buyer is part of a Family of Investment Companies which owned in
---
the aggregate $________________ in securities (other than the excluded
securities referred to below) as of the end of the Buyer's most recent
fiscal year (such amount being calculated in accordance with Rule 144A).
3. The term "Family of Investment Companies" as used herein means two or
--------------------------------
more registered investment companies (or series thereof) that have the same
investment adviser or investment advisers that are affiliated (by virtue of
being majority owned subsidiaries of the same parent or because one investment
adviser is a majority owned subsidiary of the other registered investment
company adviser).
4. The term "securities" as used herein does not include (i) securities
------------
of issuers that are affiliated with the Buyer or are part of the Buyer's Family
of Investment Companies, (ii) bank deposit notes and certificates of deposit,
(iii) loan participations, (iv) repurchase agreements, (v) securities owned but
subject to a repurchase agreement and (vi) currency, interest rate and commodity
swaps.
24
<PAGE>
5. The Buyer is familiar with Rule 144A and understands that each of the
parties to which this certification is made is relying and will continue to rely
on the statements made herein because one or more sales to the Buyer will be in
reliance on Rule 144A. In addition, the Buyer will only purchase for the
Buyer's own account.
6. The Buyer will notify each of the parties to which this certification
is made of any changes in the information and conclusions herein during the
period between the date of this certification and the date the Buyer purchases
the Rule 144A Securities. Unless such notice is given, the Buyer's purchase of
the Rule 144A Securities will constitute a reaffirmation of this certification
as of the date of such purchase.
--------------------------------------
Print Name of Buyer
By: _______________________________
Name:
Title:
Date: _______________________________
IF AN ADVISER:
----------------------------------------
Print Name of Buyer Date:
25
<PAGE>
EXHIBIT B-1
FORM OF INVESTOR REPRESENTATION LETTER
_______________, 19 ____
T.A.R. Preferred Mortgage Corporation
Re: Warrant to Purchase Common Stock of
T.A.R. Preferred Mortgage Corporation
-------------------------------------
Ladies and Gentlemen:
________________________________________ (the "Transferee") intends to
acquire from ________________________________________ (the "Transferor")
_______________________________ [Warrant Shares of T.A.R. Preferred Mortgage
Corporation (the "Securities") issued pursuant to the Warrant] [the Transferor's
right (the "Securities") pursuant to the Warrant] (the "Warrant") dated as of
December 6, 1996 by T.A.R. Preferred Mortgage Corporation. Capitalized terms
used herein and not otherwise defined shall have the meanings assigned thereto
in the Warrant.
In connection with such acquisition, the Transferee hereby certifies and
agrees:
1. The Transferee is acquiring the Securities either (a) for its own
account or for accounts for which it exercises sole investment discretion and
not with a view to or for sale in connection with any distribution thereof,
subject nevertheless to any requirement of law that the disposition of the
Transferee's property shall at all times be and remain within its control, or
(b) for resale to "Qualified Institutional Buyers" within the meaning of Rule
144A under the Securities Act of 1933, as amended (the "1933 Act"), and in
accordance with the provisions of the Warrant.
2. The Transferee has received, and has had an opportunity to review,
such information concerning the Securities and the Company as has been requested
by the Transferee and is relevant to the Transferee's decision to purchase the
Securities. The Transferee has had any questions arising from such review
answered by the Company to the satisfaction of the Transferee.
3. The Transferee has such expertise, knowledge and sophistication in
financial and business matters generally, and in financial and business matters
related to securities similar to the Securities in particular, as to be capable
of evaluating the merits and risks of
26
<PAGE>
an investment in the Securities. The Transferee (or any account referred to
above) is able to bear the economic risks of such an investment.
4. The Transferee will comply with all applicable federal and state
securities laws in connection with any subsequent resale of the Securities by
the Transferee.
5. The Transferee understands that (a) the Securities have not been and
will not be registered under the Securities Act of 1933, as amended (the "1933
Act"), (b) the Company is not required to so register the Securities, (c) the
Securities may be resold only if registered pursuant to the provisions of the
1933 Act, or if an exemption from such registration is available, (d) the
Warrant contains restrictions regarding the transfer of the Securities and (e)
the Securities will bear a legend to the foregoing effect.
6. The Transferee is not an employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or the Internal
Revenue Code of 1986, as amended (the "Code"), nor a Person acting, directly or
indirectly, on behalf of any such plan, and understands that registration of
transfer of any Securities to any such employee benefit plan, or to any person
acting on behalf of such plan, will not be made unless such employee benefit
plan delivers a certification of facts and an opinion of its counsel, addressed
and satisfactory to the Company and to the effect that such transfer will not
result in a violation of Section 406 of ERISA or Section 4975 of the Code or
subject the Company to any obligation in addition to those undertaken in the
Warrant or result in the imposition of an excise tax under Section 4975 of the
Code.
7. The Transferee will not nor has it authorized or will it authorize any
person to (a) offer, pledge, sell, dispose of or otherwise transfer any
Securities, any interest in any Securities or any other similar security to any
person in any manner, (b) solicit any offer to buy or to accept a pledge,
disposition or other transfer of any Securities, any interest in any Securities
or any other similar security from any person in any manner, (c) otherwise
approach or negotiate with respect to any Securities, any interest in any
Securities or any other similar security with any person in any manner, (d) make
any general solicitation by means of general advertising or in any other manner,
or (e) take any other action, that (as to any of (a) through (c) above) would
constitute a distribution of any Securities under the 1933 Act, that would
render the disposition of any Securities a violation of Section 5 of the 1933
Act or any state securities law, or that would require registration or
qualification pursuant thereto. The Transferee will not sell or otherwise
transfer any of the Securities, except in compliance with the provisions of the
Warrant. Without limiting the generality of the foregoing sentence, if the
Transferee sells any of the Securities, the Transferee will comply with any
applicable requirements set forth in Section 1.2 of the Warrant, and if the
Transferee sells any of the Securities, the Transferee will obtain from any
purchaser any representations required pursuant to Section 1.2 of the Warrant.
27
<PAGE>
Very truly yours,
----------------------------------
(Transferee)
By:_______________________________
Name:_____________________________
Title:____________________________
28
<PAGE>
EXHIBIT B-2
FORM OF TRANSFEROR REPRESENTATION LETTER
T.A.R. Preferred Mortgage Corporation
- ----------------------------------------
- ----------------------------------------
Re: Warrant to Purchase Common Stock of
T.A.R. Preferred Mortgage Corporation
-------------------------------------
Ladies and Gentlemen:
In connection with the transfer by _____________________________ (the
"Transferor") to ___________________________ (the "Transferee") of [the Warrant
Shares issued pursuant to] [all of the Transferor's rights and obligations
under] the Warrant (the "Securities") dated as of December 6, 1996 by T.A.R.
Preferred Mortgage Corporation (the "Warrant"), the Transferor hereby certifies,
represents and warrants to, and covenants with, the Company that neither the
Transferor nor anyone acting on its behalf has (a) offered, pledged, sold,
disposed of or otherwise transferred any Securities, any interest in any
Securities or any other similar security to any person in any manner, (b)
solicited any offer to buy or to accept a pledge disposition or other transfer
of any Securities, any interest in any Security or any other similar security
from any person in any manner, (c) otherwise approached or negotiated with
respect to any Securities any interest in any Securities or any other similar
security with any person in any manner, (d) made any general solicitation by
means of general advertising or in any other manner, or (e) has taken any other
action, that (as to any of (a) through (e) above) would constitute a
distribution of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), that would render the disposition of any Securities a violation of
Section 5 of the 1933 Act or any state securities law, or that would require
registration or qualification pursuant thereto. The Transferor will not act in
any manner set forth in the foregoing sentence with respect to any Securities.
The Transferor has not and will not sell or otherwise transfer any of the
Securities, except in compliance with the provisions of the Warrant.
29
<PAGE>
Capitalized terms used herein and not otherwise defined shall have the
meanings assigned thereto in the Warrant.
Very truly yours,
-----------------------------------
By:________________________________
Name:______________________________
Title:_____________________________
30
<PAGE>
EXHIBIT 4.5
THE SECURITIES EVIDENCED BY THIS AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, HAVE BEEN TAKEN FOR INVESTMENT AND MAY NOT
BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF
EXCEPT IN ACCORDANCE WITH THE TERMS OF THIS AGREEMENT.
WARRANT AGREEMENT
This Warrant Agreement (the "Agreement") is made and entered into this 20th
day of December, 1996 by and between Preferred Credit Corporation, a California
corporation (the "Company"), and John Heatly ("Holder"). In consideration of
the mutual covenants and agreements hereinafter set forth, the parties to this
Agreement agree as follows:
1. GRANT OF WARRANT. In consideration for the first refusal right granted
to the Company pursuant to Section 9 hereof, and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
Company hereby grants to Holder the right and option (the "Warrant"), upon the
terms and subject to the conditions set forth in this Agreement, to purchase
7.904 shares (the "Warrant Shares") of the Company's Common Stock without par
value (the "Common Stock"), at an exercise price of $13,476.56 per share (the
"Exercise Price"). The number of Warrant Shares and the Exercise Price shall be
subject to adjustment as set forth in Section 5 hereof.
2. TERM OF WARRANT.
2.1 The Warrant shall terminate and expire at 5:00 p.m. (Los Angeles
Time) on December 20, 2006, unless sooner terminated as provided in Section 2.2.
2.2 The Warrant shall terminate and expire immediately if at any time:
(i) Holder fails to deliver 100% of the eligible loan production of
Pacific Prime Mortgage ("Pacific Prime") to the Company in accordance with
Section 9 hereof; or
(ii) Holder no longer owns securities which represent more than 50%
of the outstanding voting power of Pacific Prime; or
(iii) Holder breaches any term or provision of this Warrant; or
(iv) Holder is no longer employed by Pacific Prime.
1
<PAGE>
The term "eligible loan production" as used herein shall mean loans
originated by Pacific Prime which satisfy the Company's then applicable
securitization or underwriting standards. Upon termination, this Warrant and
all Warrant Shares shall be cancelled and terminate, and of no further force or
effect.
3. EXERCISE PERIOD.
3.1 The Warrant will vest or become exercisable as follows: 33% of the
Warrant Shares (rounded up to the nearest whole share) shall vest on June 1,
1997; 33% of the Warrant Shares (rounded up to the nearest whole share) shall
vest on June 1, 1998; and the remaining Warrant Shares shall vest on June 1,
1999. The installments shall be cumulative; i.e., the Warrant may be exercised,
----
as to any or all Warrant Shares covered by an installment, at any time or times
after the installment first becomes exercisable and until the expiration or
termination of the Warrant.
3.2 Notwithstanding anything to the contrary contained in this Warrant
Agreement, the Warrant may not be exercised, in whole or in part, unless and
until any then-applicable requirements of all state and federal laws and
regulatory agencies shall have been fully complied with to the satisfaction of
the Company and its counsel.
4. EXERCISE OF WARRANT. There is no obligation to exercise all or any
portion of the Warrant. The Warrant (or any portion thereof) may be exercised
at any time after the date hereof only by delivery to the Company of:
(i) Written notice of exercise in form and substance identical to
Exhibit "A" attached to this Agreement; and
(ii) Payment of the Exercise Price of the Warrant Shares being
exercised (the "Purchased Shares"), in cash or by check, equal to the Exercise
Price.
Upon receipt of the foregoing, the Company shall promptly issue in the name
of the Holder a stock certificate evidencing the Purchased Shares being
purchased by such exercise and deliver such certificate to the Holder.
5. ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF WARRANT SHARES. The
Exercise Price and number of Warrant Shares shall be subject to adjustment from
time to time as follows:
5.1 In the event the Company should at any time or from time to time
after the date hereof (the "Issuance Date") fix a record date for the
effectuation of a split or subdivision of the outstanding shares of Common Stock
or the determination of holders of Common Stock entitled to receive a dividend
or other distribution payable in additional shares of Common Stock or other
securities or rights convertible into, or entitling the holder thereof to
receive, directly or indirectly, additional shares of Common Stock (hereinafter
referred to as
2
<PAGE>
"Common Stock Equivalents") without payment of any consideration by such holder
for the additional shares of Common Stock or the Common Stock Equivalents
(including the additional shares of Common Stock issuable upon conversion or
exercise thereof), then, as of such record date (or the date of such dividend
distribution, split or subdivision if no record date is fixed), the Exercise
Price shall be appropriately decreased and the number of Warrant Shares shall be
increased in proportion to such increase in the aggregate number of shares of
Common Stock outstanding and those issuable with respect to such Common Stock
Equivalents.
5.2 If the number of shares of Common Stock outstanding at any time
after the Issuance Date is decreased by a combination of the outstanding shares
of Common Stock, then, following the record date of such combination, the
Exercise Price shall be appropriately increased and the number of Warrant Shares
shall be decreased in proportion to such decrease in the aggregate number of
shares of Common Stock outstanding and those issuable with respect to such
Common Stock Equivalents.
5.3 In case of any capital reorganization, any reclassification of the
Common Stock (other than a change in par value or recapitalization described in
Section 5.1 or 5.2 of this Agreement), or the consolidation of the Company with,
or a sale of substantially all of the assets of the Company to (which sale is
followed by a liquidation or dissolution of the Company), or merger of the
Company with, another person, the holder of the Warrant shall thereafter be
entitled upon exercise of the Warrant to purchase the kind and number of shares
of stock or other securities or property of the surviving corporation receivable
upon such event by a holder of the number of shares of the Common Stock which
the Warrant entitles the holder of the Warrant to purchase from the Company
immediately prior to such event; and in any such case, appropriate adjustment
shall be made in the application of the provisions set forth in this Agreement
with respect to the holder's rights and interests thereafter, to the end that
the provisions set forth in this Agreement (including the specified changes and
other adjustments to the Exercise Price) shall thereafter be applicable in
relation to any shares or other property thereafter purchasable upon exercise of
the Warrant.
5.4 The provisions of this Section 5 are intended to be exclusive, and
the holder of the Warrant shall have no other rights upon the occurrence of any
of the events described in this Section 5.
5.5 The grant of the Warrant shall not affect in any way the right or
power of the Company to make adjustments, reclassification, reorganizations or
changes in its capital or business structure, or to merge, consolidate, dissolve
or liquidate, or to sell or transfer all or any part of its business or assets.
6. RESERVATION OF COMMON STOCK. The Company covenants that it will at all
times reserve and keep available out of its authorized but unissued shares of
Common Stock, solely for the purpose of issuance upon exercise of the Warrant,
such number of shares of Common Stock as shall then be issuable upon the
exercise of the Warrant in its entirety.
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<PAGE>
7. REPRESENTATIONS AND WARRANTIES OF THE HOLDER. The Holder has been
advised that the Warrant and the Warrant Shares (collectively, the "Securities")
have not been registered and will not be registered under the Securities Act of
1933, as amended (the "Securities Act"), nor qualified under any state Blue Sky
law, on the ground that no distribution or public offering of any of the
Securities is to be effected, and that in this connection the Company is relying
in part on the representations of the Holder set forth in this Section 7. The
Holder represents and warrants that:
7.1 Investment Intent. The Securities to be purchased by the Holder
-----------------
pursuant to this Agreement are being acquired by the Holder solely for its own
account, for investment purposes only, and with no present intention of
distributing, selling or otherwise disposing of them.
7.2 Economic Risk. The Holder is able to bear the economic risk of an
-------------
investment in the Securities acquired by it pursuant to this Agreement and can
afford to sustain a total loss on such investment.
7.3 Sophistication. The Holder (i) has a preexisting personal or
--------------
business relationship with the Company or its officers and/or directors, or (ii)
is an experienced and sophisticated investor, is able to fend for itself in the
transactions contemplated by this Agreement, and has such knowledge and
experience in financial and business matters that it is capable of evaluating
the risks and merits of acquiring the Securities, or (iii) by reason of the
business or financial experience of its professional advisors who are
unaffiliated with the Company, could be reasonably assumed to have the capacity
to protect its own interests in connection with an investment in the Securities.
The Holder has had, during the course of this transaction and prior to its
purchase of the Securities, the opportunity to ask questions of, and receive
answers from, the Company and its management concerning the Company and the
terms and conditions of this Agreement. The Holder hereby acknowledges that it
or its representatives have received all such information as it considers
necessary for evaluating the risks and merits of acquiring the Securities and
for verifying the accuracy of any information furnished to it or to which it had
access. The Holder represents and warrants that the nature and amount of the
Securities it is purchasing is consistent with its investment objectives,
abilities and resources.
7.4 Illiquidity. The Holder understands that there is no public market
-----------
for any of the Securities and that there may never be such a public market, and
that even if a market develops it may never be able to sell or dispose of any of
the Securities and may thus have to bear the risk of its investment for a
substantial period of time, or forever. The Holder is aware that none of the
Securities may be sold pursuant to Rule 144 ("Rule 144") promulgated by the
Securities Exchange Commission (the "Commission") under the Securities Act
unless certain conditions have been met and until the Holder (or its qualified
transferees) has held the Securities for the applicable holding period.
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7.5 Accredited Investor. The Holder is an "Accredited Investor" for
-------------------
purposes of Regulation D promulgated by the Commission under the Securities Act.
8. RESTRICTIONS ON PURCHASED SHARES. Holder shall not sell, transfer
(with or without consideration), assign, pledge, hypothecate or otherwise
dispose of (collectively, "Transfer") any of the Purchased Shares unless the
Purchased Shares are disposed of pursuant to and in conformity with an effective
registration statement filed with the Securities and Exchange Commission (the
"Commission") pursuant to the Securities Act, or pursuant to an available
exemption from the registration and prospectus delivery requirements of the
Securities Act, and the proposed disposition will not result in a violation of
the securities laws of any state of the United States.
If requested by the Company, Holder shall, prior to the transfer of such
Purchased Shares, deliver to the Company a written opinion of counsel,
satisfactory to the Company and its counsel, that the proposed disposition will
comply with the requirements set forth in this Section 8.
Any attempted Transfer which is not in full compliance with this Section 8
shall be null and void ab initio, and of no force or effect.
---------
The Holder further agrees that any certificate evidencing the Purchased
Shares shall bear the following legend:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, HAVE BEEN TAKEN FOR
INVESTMENT, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED,
HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH THE
TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER
HEREOF, A COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICES
OF THE COMPANY.
The Holder further acknowledges and agrees that the Company may, at its
option, place notations evidencing the foregoing restrictions on transfer in its
shareholders register, and may place appropriate "stop transfer" instructions
with its transfer agent, if any.
9. RIGHT OF FIRST REFUSAL. In consideration of the grant of this
Warrant, Holder hereby agrees to cause Pacific Prime to offer 100% of its
eligible loan production to the Company prior to offering such production to any
other entity.
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10. MISCELLANEOUS.
10.1 Rights of Shareholders. Neither this Agreement, nor the Warrant
----------------------
shall entitle the Holder to any of the rights of a shareholder of the Company.
10.2 Notices. All notices, demands or other communications hereunder
-------
shall be in writing and shall be deemed to have been duly given if delivered in
person, or by United States mail, certified or registered, with return receipt
requested, sent by facsimile transmission, or otherwise actually delivered:
(i) if to Holder, to:
John Heatly
307 Milford
Corona Del Mar, CA 92625
(ii) if to the Company, to:
Preferred Credit Corporation
3347 Michelson, Suite 400
Irvine, California 92715
Attention: President
or at such other address as may have been furnished by such Person in writing to
the other parties. Any such notice, demand or other communication shall be
deemed to have been given on the date actually delivered or as of the date
mailed, as the case may be.
10.3 Severability and Governing Law. Should any Section or any part
------------------------------
of a Section within this Agreement be rendered void, invalid or unenforceable by
any court of law for any reason, such invalidity or unenforceability shall not
void or render invalid or unenforceable any other Section or part of a Section
in this Agreement. THIS AGREEMENT IS MADE AND ENTERED INTO IN THE STATE OF
CALIFORNIA AND THE LAWS OF SAID STATE SHALL GOVERN THE VALIDITY AND
INTERPRETATION HEREOF AND THE PERFORMANCE BY THE PARTIES HERETO OF THEIR
RESPECTIVE DUTIES AND OBLIGATIONS HEREUNDER.
10.4 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
10.5 Captions and Section Headings. Section titles or captions
-----------------------------
contained in this Agreement are inserted as a matter of convenience and for
reference purposes only, and in no way define, limit, extend or describe the
scope of this Agreement or the intent of any provision hereof.
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10.6 Singular and Plural, Etc. Whenever the singular number is used
------------------------
herein and where required by the context, the same shall include the plural, and
the neuter gender shall include the masculine and feminine genders.
10.7 Costs and Attorneys' Fees. In the event that any action, suit,
-------------------------
or other proceeding is instituted concerning or arising out of this Agreement,
the prevailing party shall recover all of such party's costs, and reasonable
attorneys' fees incurred in each and every such action, suit, or other
proceeding, including any and all appeals or petitions therefrom.
10.8 Warrant Non-Transferable. Holder may not sell, transfer, assign
------------------------
or otherwise dispose of the Warrant except by will or the laws of descent and
distribution, and the Warrant may be exercised, during the lifetime of the
Holder by the Holder or by his guardian or legal representative.
10.9 Successors and Assigns. All rights, covenants and agreements of
----------------------
the parties contained in this Agreement shall, except as otherwise provided
herein, be binding upon and inure to the benefit of their respective successors
and assigns.
10.10 Amendments and Waivers. Neither this Agreement nor any term
----------------------
hereof may be changed, waived, discharged or terminated orally or in writing,
except that any term of this Agreement may be amended and the observance of any
such term may be waived (either generally or in a particular instance and either
retroactively or prospectively) with (but only with) the written consent of the
Company and the Holder. Except as specifically otherwise provided herein, no
delay or omission to exercise any right, power or remedy accruing to any party
hereto shall impair any such right, power or remedy of such party nor shall be
construed to be a waiver of any such right, power or remedy nor constitute any
course of dealing or performance hereunder.
10.11 Entire Agreement. This Agreement contain the entire
----------------
understanding of the parties and there are no further or other agreements or
understandings, written or oral, in effect between the parties relating to the
subject matter hereof unless expressly referred to herein.
7
<PAGE>
IN WITNESS WHEREOF, the parties have entered into and executed this Warrant
Agreement as of the date first above written.
PREFERRED CREDIT CORPORATION
By:_______________________________
HOLDER
__________________________________
John Heatly
8
<PAGE>
EXHIBIT "A"
-----------
NOTICE OF EXERCISE
(To be signed only upon exercise of the Warrant)
TO: PREFERRED CREDIT CORPORATION
The undersigned, hereby irrevocably elects to exercise the purchase rights
represented by the Warrant granted to the undersigned on July ____, 1996 and to
purchase thereunder __________* shares of Common Stock of PREFERRED CREDIT
CORPORATION (the "Company") and herewith encloses payment of $____________ in
full payment of the purchase price of such shares being purchased.
Dated: __________, ____
------------------------------
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant)
------------------------------
(Please Print Name)
------------------------------
(Address)
* Insert here the number of shares being exercised, without making any
adjustment for additional Common Stock of the Company, other securities or
property which, pursuant to the adjustment provisions of the Warrant, may be
deliverable upon exercise.
9
<PAGE>
EXHIBIT 10.1
T.A.R. PREFERRED MORTGAGE CORPORATION
1996 STOCK INCENTIVE PLAN
1. PURPOSE OF THE PLAN.
The name of this plan is the T.A.R. Preferred Mortgage Corporation 1996
Stock Incentive Plan (the "Plan"). The purpose of the Plan is to enable T.A.R.
Preferred Mortgage Corporation, a California corporation (the "Company"), and
any parent company of and/or any subsidiary of the Company to obtain and retain
the services of the types of directors, officers, employees and consultants who
will contribute to the Company's long range success and to provide incentives
which are linked directly to increases in share value which will inure to the
benefit of all stockholders of the Company.
2. ADMINISTRATION OF THE PLAN.
The Plan shall be administered by a committee of the Board of Directors of
the Company (the "Committee") consisting of two or more directors, each of whom
shall be both a "Non-Employee Director," as that term is defined in Rule 16b-
3(b) of the Rules and Regulations (the "Rules") of the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and an "outside director" for purposes of Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code") and the regulations of the
Internal Revenue Service adopted thereunder, as such Rule and such Section and
regulations relating thereto may from time to time be amended or interpreted.
Members of the Committee shall serve at the pleasure of the Board of Directors
of the Company.
The Committee shall have all the powers vested in it by the terms of the
Plan, including exclusive authority, (i) to select from among eligible
directors, officers, employees and consultants those persons to be granted
"Awards" (as defined below) under the Plan; (ii) to determine the type, size and
terms of individual Awards (which need not be identical) to be made to each
eligible director, officer, employee and/or consultant selected; (iii) to
determine the time when Awards will be granted and to establish objectives and
conditions (including, without limitation, vesting and performance conditions),
if any, for earning Awards; (iv) to amend the terms or conditions (other than
the Exercise Price) of any outstanding Award, subject to applicable legal
restrictions and to the consent of the other party to such Award; (v) to
determine the duration and purpose of leaves of absences which may be granted
1
<PAGE>
to holders of Awards without constituting termination of their employment for
purposes of their Awards; (vi) to authorize any person to execute, on behalf of
the Company, any instrument required to carry out the purposes of the Plan; and
(vii) to make any and all other determinations which it determines to be
necessary or advisable in the administration of the Plan. The Committee shall
have full power and authority to administer and interpret the Plan and to adopt,
amend and revoke such rules, regulations, agreements, guidelines and instruments
for the administration of the Plan and for the conduct of its business as the
Committee deems necessary or advisable. The Committee's interpretation of the
Plan, and all actions taken and determinations made by the Committee pursuant to
the powers vested in it hereunder, shall be conclusive and binding on all
parties concerned, including the Company, its stockholders, any participants in
the Plan and any other employee of the Company or any parent company or any
subsidiary of the Company.
3. PERSONS ELIGIBLE UNDER THE PLAN.
Any person who is a director, officer, employee or consultant of the
Company, or of any current or future parent company or subsidiary of the Company
(an "Employee"), shall be eligible to be considered for the grant of Awards
under the Plan; provided, however, that Outside Directors who are not expressly
-------- -------
declared to be eligible to participate in the Plan shall only be permitted to
receive the Awards described in Section 5 of the Plan; and provided, further,
-------- -------
that only employees of the Company and of any current or future parent or
subsidiary of the Company shall be eligible to receive Awards in the form of
Incentive Stock Options (as hereinafter defined) under the Plan.
4. AWARDS.
(a) Stock Options. Awards authorized under the Plan shall solely consist
of options to purchase the Company's Common Stock, without par value (the
"Common Stock"), which options may be designated Incentive Stock Options or Non-
Statutory Stock Options hereunder (each as defined below).
(b) Consideration. Common Stock may be issued pursuant to an Award for
any lawful consideration as determined by the Committee, including, without
limitation, services rendered, or to the extent permitted by applicable state
law, to be rendered by the recipient of the Award, or the delivery of a
promissory note or other deferred payment obligation by the Employee. All
Awards granted under this Plan shall be exercisable at an exercise price of no
2
<PAGE>
less than 100% of the Fair Market Value of a share of Stock on the Date of
Grant.
(c) Guidelines. The Committee may adopt, amend or revoke from time to time
written policies implementing the Plan. Such policies may include, but need not
be limited to, the type, size and term of Awards to be made to participants and
the conditions for payment of such Awards.
(d) Terms and Conditions. Subject to Section 4(e) and the other
provisions of the Plan, the Committee, in its sole and absolute discretion,
shall determine all of the terms and conditions of each Award granted pursuant
to the Plan, which terms and conditions may include, among other things:
(i) any provision necessary for such Award to qualify as an incentive
stock option under Section 422 of the Code (an "Incentive Stock Option");
and/or
(ii) a provision permitting the recipient of such Award to pay the
purchase price of the Common Stock or other property issuable pursuant to
such Award, or to pay such recipient's tax withholding obligation with
respect to such issuance, in whole or in part, by delivering previously
owned shares of capital stock of the Company (including "pyramiding") or
other property, or by reducing the number of shares of Common Stock or the
amount of other property otherwise issuable pursuant to such Award;
provided, however, that, unless otherwise expressly determined by the
-------- -------
Committee, all Awards granted to Executive Officers and directors of the
Company shall contain provisions allowing for the payment of the total
amount of Award exercise prices and all tax withholdings obligations by
means of the delivery of shares of capital stock of the Company and/or the
reduction of the number of shares of Common Stock or the amount of other
property otherwise issuable pursuant to an Award; and/or
(iii) a provision conditioning or accelerating the receipt of benefits
pursuant to the Award, or terminating the Award, either automatically or in
the discretion of the Board, upon the occurrence of specified events,
including, without limitation, a change of control of the Company, an
acquisition of a specified percentage of the voting power of the Company,
the dissolution or liquidation of the Company, a sale of substantially all
of the property and assets of the Company or an event of the type described
in Section 9 of the Plan.
(e) Maximum Awards. An Employee may be granted multiple Awards under the
Plan. However, notwithstanding any other provision of the Plan, the maximum
number of shares of Common Stock
3
<PAGE>
with respect to which options or rights or other Awards may be granted under the
Plan to any Employee during any fiscal year shall be 200, subject to adjustment
as provided in Section 9 of the Plan.
(f) Suspension or Termination of Awards. If the Board of Directors of the
Company determines that an Employee has committed an act of embezzlement, fraud,
nonpayment of any obligation owed to the Company or any subsidiary, breach of
fiduciary duty or deliberate disregard of the Company's rules resulting in loss,
damage or injury to the Company, or if an Employee makes an unauthorized
disclosure of a trade secret or confidential information of the Company, engages
in any conduct constituting unfair competition, or induces any customer of the
Company to breach a contract with the Company, the Committee may terminate the
Employee's rights under any then outstanding Award. In making such
determination, the Board of Directors of the Company shall act fairly and shall
give the Employee a reasonable opportunity to appear and present evidence on his
or her behalf at a hearing before a committee of the Board of Directors of the
Company; and if the Employee is an Executive Officer, the determination of the
Board of Directors of the Company shall be subject to the approval of the
Committee.
(g) Repurchase Rights and First Refusal Rights.
(i) Each Award may provide that the Company and/or Todd Rodriguez and
Walter Villaume shall have the right (the "Repurchase Right"), exercisable
following termination of an Employee, to repurchase (1) all of the Common
Stock purchased by the Employee upon exercise of an Award (the "Purchased
Shares") at the Fair Market Value on the date of termination and (2) the
unexercised portion of the Award (to the extent that such Award had vested
prior to the date of termination) at the price equal to the amount by which
the Fair Market Value of the Common Stock underlying such Award (or portion
thereof) exceeds the exercise price of the Award, in each case for cash or
cash equivalents (including the cancellation of any purchase-money
indebtedness). Such Repurchase Right shall terminate to the extent not
exercised by the Company and/or Todd Rodriguez and Walter Villaume within
ninety days following the date of termination.
(ii) Each Award may provide that the Company and/or Todd Rodriguez and
Walter Villaume shall have the right of first refusal (the "First Refusal
Right"), exercisable in connection with any proposed sale, hypothecation or
other disposition of the Purchased Shares; and that in the event the holder
of the Purchased Shares desires to accept a bona fide third-party offer for
any or all of the Purchased Shares, such shares shall first be offered to
the Company and/or Todd Rodiriguez
4
<PAGE>
and Walter Villaume on the same terms and conditions as are set forth in
the bona fide offer. To exercise this First Refusal Right, the Company
and/or Todd Rodriguez and Walter Villaume must elect to purchase such
Purchased Shares within thirty days after receipt of notice of the related
proposed sale, and upon such election the Company and/or Todd Rodriguez and
Walter Villaume must purchase such Purchased Shares within sixty days of
the receipt of notice of the proposed sale.
(iii) Each Award shall provide that the Repurchase Rights and First
Refusal Rights shall lapse and cease to have effect upon the earlier to
occur of (1) the first date on which shares of the Company's Common Stock
are held of record by more than five hundred persons, (2) a determination
by the Company's Board of Directors that a public market exists for the
outstanding shares of the Company's Common Stock or (3) a firm commitment
underwritten public offering pursuant to an effective registration
statement under the Securities Act, covering the offer and sale of the
Company's Common Stock in the aggregate amount of at least five million
dollars ($5,000,000).
5. MANDATORY GRANTS TO OUTSIDE DIRECTORS.
(a) Mandatory Grants to Outside Directors. Notwithstanding any other
provisions of the Plan, the grant of Awards to each Outside Director shall be
subject to the following limitations of this Section 5.
(i) Upon the initial election or appointment of an Outside Director,
the Committee shall grant to such member, at the first meeting of the
Committee following the date of such election or appointment, an award in
the form of a ten year Non-Statutory Stock Option (as hereinafter defined)
to purchase 1.42857 shares of Common Stock.
(ii) The Committee shall grant to each Outside Director, effective as
of each annual meeting of the Company's stockholders at the conclusion of
which the Outside Director still serves as a director of the Company, an
award in the form of a ten year Non-Statutory Stock Option to purchase .5
shares of Common Stock.
(iii) All Awards granted to Outside Directors under this Section 5
shall be exercisable at an exercise price equal to 100% of the Fair Market
Value of a share of Stock on the Date of Grant.
5
<PAGE>
(iv) All Awards granted to Outside Directors under this Section 5 will
vest or become exercisable as follows: 33% of the Award (rounded up to the
nearest whole share) shall vest on the first anniversary of the Date of
Grant of the Award, and 33% of the Award (rounded up to the nearest whole
share) shall vest on the second anniversary of the Date of Grant of the
Award, and the remaining portion of the Award shall vest on the third
anniversary of the Date of Grant of the Award.
(v) Unless otherwise provided in the Plan, all provisions regarding
the terms of Awards, other than those pertaining to the vesting of Awards,
the number of shares covered by Awards, term and Exercise Price of Awards
shall be applicable to the Award granted to Outside Directors under this
Section 5.
(b) Prohibition of Other Grants to Outside Directors. Notwithstanding any
other provisions in this Plan, the mandatory grants described in this Section 5
shall constitute the only Awards under the Plan permitted to be made to Outside
Directors unless such persons are designated eligible persons by the Board of
Directors of the Company.
6. SHARES AVAILABLE FOR AWARDS.
The aggregate number of shares of Common Stock that may be issued or
issuable pursuant to all Awards under the Plan shall not exceed an aggregate of
284.527 shares of Common Stock, subject to adjustment as provided in Section 9
of the Plan. Shares of Common Stock subject to the Plan may consist, in whole or
in part, of authorized and unissued shares or treasury shares. Any shares of
Common Stock subject to an Award which for any reason expires or is terminated
unexercised as to such shares shall again be available for issuance under the
Plan. For purposes of this Section 6, the aggregate number of shares of Common
Stock that may be issued at any time pursuant to Awards granted under the Plan
shall be reduced by: (i) the number of shares of Common Stock previously issued
pursuant to Awards granted under the Plan, other than shares of Common Stock
subsequently reacquired by the Company pursuant to the terms and conditions of
such Awards and with respect to which the holder thereof received no benefits of
ownership, such as dividends; and (ii) the number of shares of Common Stock
which were otherwise issuable pursuant to Awards granted under this Plan but
which were withheld by the Company as payment of the purchase price of the
Common Stock issued pursuant to such Awards or as payment of the recipient's tax
withholding obligation with respect to such issuance.
6
<PAGE>
7. PAYMENT OF AWARDS.
Subject to the provisions of Section 4(d)(ii) of the Plan, the Committee
shall determine the extent to which Awards shall be payable in cash, shares of
Common Stock or any combination thereof. The Committee may, upon request of a
participant, determine that all or a portion of a payment to that participant
under the Plan, whether it is to be made in cash, shares of Common Stock or a
combination thereof, shall be deferred. Deferrals shall be for such periods and
upon such terms as the Committee may determine in its sole discretion.
8. VESTING.
Subject to Section 5 of the Plan, the Committee may determine that all or a
portion of an Award granted to a participant under the Plan, whether it is to be
made in cash, shares of Common Stock or a combination thereof, shall be vested
at such times and upon such terms as may be selected by the Committee in its
sole discretion; provided, however, that, unless otherwise expressly determined
-------- -------
by the Committee, all Awards granted to Executive Officers shall provide for
vesting in three annual installments commencing on the first anniversary of the
date of the Date of Grant of such Award.
9. DILUTION AND OTHER ADJUSTMENTS.
In the event of any change in the outstanding shares of the Common Stock or
other securities then subject to the Plan by reason of any stock split, reverse
stock split, stock dividend, recapitalization, merger, consolidation,
combination or exchange of shares or other similar corporate change, or if the
outstanding securities of the class then subject to the Plan are exchanged for
or converted into cash, property or a different kind of securities, or if cash,
property or securities are distributed in respect of such outstanding securities
(other than a regular cash dividend), then, unless the terms of such transaction
shall provide otherwise, such equitable adjustments shall be made in the Plan
and the Awards thereunder (including, without limitation, appropriate and
proportionate adjustments in (i) the number and type of shares or other
securities or cash or other property that may be acquired pursuant to Incentive
Stock Options and other Awards (including mandatory grants to Outside Directors
made pursuant to Section 5 of the Plan) theretofore granted under the Plan, (ii)
the maximum number and type of shares or other securities that may be issued
pursuant to Incentive Stock Options and other Awards (including mandatory grants
to Outside Directors made pursuant to Section 5 of the Plan) thereafter granted
under the Plan and (iii) the maximum
7
<PAGE>
number of securities with respect to which Awards (including mandatory grants to
Outside Directors made pursuant to Section 5 of the Plan) may thereafter be
granted to any Employee in any fiscal year) as the Committee determines are
necessary or appropriate, including, if necessary, any adjustments in the
maximum number of shares referred to in Section 6 of the Plan. Such adjustments
shall be conclusive and binding for all purposes of the Plan.
10. MISCELLANEOUS PROVISIONS.
(a) Definitions. As used herein, (i) "subsidiary" means any current or
future corporation which would be a "subsidiary corporation," as that term is
defined in Section 424(f) of the Code, of the Company; (ii) "Executive Officer"
means a person holding one of the offices enumerated in Rule 16a-1(f) of the
Rules; (iii) "Date of Grant" means the date on which the Committee adopts a
resolution expressly granting an Award to an eligible participant in the Plan,
or if a different date is set forth in such resolution as the Date of Grant,
then such date as set forth in such resolution (iv) "Fair Market Value" per
share at any date shall mean (a) if the Common Stock is listed on an exchange or
exchanges, or admitted for trading in a market system which provides last sale
data under Rule 11Aa3-1 of the General Rules and Regulations of the Securities
and Exchange Commission under the Exchange Act (a "Market System"), the last
reported sales price per share on the last business day prior to such date on
the principal exchange on which it is traded, or in a Market System, as
applicable, or if no sale was made on such day on such principal exchange or in
such a Market System, as applicable, the last reported sales price per share on
the most recent day prior to such date on which a sale was reported on such
exchange or such Market System, as applicable; or (b) if the Stock is not then
traded on an exchange or in a Market System, the average of the closing bid and
asked prices per share for the Stock in the over-the-counter market as quoted on
NASDAQ on the day prior to such date; or (c) if the Stock is not listed on an
exchange or quoted on NASDAQ, an amount determined in good faith by the
Committee; (v) "Outside Director" means a Director who is not (a) a current
employee of the Company (or any related entity), (b) a former employee of the
Company (or any related entity) who is receiving compensation for prior services
(other than benefits under a tax-qualified retirement plan), (c) a former
officer of the Company (or any related entity), or (d) a consultant or person
otherwise receiving compensation or other remuneration, either directly or
indirectly, in any capacity other than as a Director; (vi) "Non-Statutory Stock
Option" means an Award in the form of a stock option that is not an Incentive
Stock Option; and (vii) the term "or" means "and/or."
8
<PAGE>
(b) Conditions on Issuance. Securities shall not be issued pursuant to
Awards unless the grant and issuance thereof shall comply with all relevant
provisions of law and the requirements of any securities exchange or quotation
system upon which any securities of the Company are listed, and shall be further
subject to approval of counsel for the Company with respect to such compliance.
Inability of the Company to obtain authority from any regulatory body having
jurisdiction, which authority is determined by Company counsel to be necessary
to the lawful issuance and sale of any security or Award, shall relieve the
Company of any liability in respect of the nonissuance or sale of such
securities as to which requisite authority shall not have been obtained.
(c) Rights as Stockholder. A participant under the Plan shall have no
rights as a holder of Common Stock with respect to Awards hereunder, unless and
until certificates for shares of such stock are issued to the participant.
(d) Assignment or Transfer. Subject to the provisions of the Code
concerning Incentive Stock Options, at the discretion of the Committee, Awards
under the Plan and rights or interests therein may be assignable or transferable
by a participant.
(e) Agreements. All Awards granted under the Plan shall be evidenced by
written agreements in such form and containing such terms and conditions (not
inconsistent with the Plan) as the Committee shall from time to time adopt.
(f) Withholding Taxes. Subject to Section 4(d)(ii) of the Plan, the
Company shall have the right to deduct from all Awards hereunder paid in cash
any federal, state, local or foreign taxes required by law to be withheld with
respect to such awards and, with respect to awards paid in stock, to require the
payment (through withholding from the participant's salary or otherwise) of any
such taxes. The obligation of the Company to make delivery of Awards in cash or
Common Stock shall be subject to currency or other restrictions imposed by any
government authorities.
(g) No Rights to Award. No Employee or other person shall have any right
to be granted an Award under the Plan. Neither the Plan nor any action taken
hereunder shall be construed as giving any Employee any right to be retained in
the employ of the Company or any of its subsidiaries or shall interfere with or
restrict in any way the rights of the Company or any of its subsidiaries, which
are hereby reserved, to discharge the Employee at any time for any reason
whatsoever, with or without good cause.
(h) Costs and Expenses. The costs and expenses of administering the Plan
shall be borne by the Company and not charged to any Award nor to any Employee
receiving an Award.
9
<PAGE>
(i) Funding of Plan. The Plan shall be unfunded. The Company shall not be
required to establish any special or separate fund or to make any other
segregation of assets to assure the payment of any Award under the Plan.
11. AMENDMENTS AND TERMINATION.
(a) Amendments. The Committee may at any time terminate or from time to
time amend the Plan in whole or in part, but no such action shall adversely
affect any rights or obligations with respect to any Awards theretofore made
under the Plan. However, with the consent of the Employee affected, the
Committee may amend outstanding agreements evidencing Awards under the Plan in a
manner not inconsistent with the terms of the Plan.
(b) Stockholder Approval. To the extent that Rule 16b-3 of the Rules,
Section 422 of the Code, other applicable law, or the rules, regulations,
procedures or listing agreement of any national securities exchange or quotation
system, requires that any such amendment to the Plan be approved by the
stockholders of the Company, no such amendment shall be effective unless and
until it is approved by the stockholders in such a manner and to such a degree
as is required.
(c) Termination. Unless the Plan shall theretofore have been terminated as
above provided, the Plan (but not the awards theretofore granted under the Plan)
shall terminate on and no awards shall be granted after December 31, 2006.
12. EFFECTIVE DATE.
The Plan shall be effective as of December 31, 1996 (the "Effective Date").
13. GOVERNING LAW.
The corporate law of California shall govern issues related to the validity
and issuance of Common Stock. The Plan and any agreements entered into
thereunder shall be construed and governed by the laws of the State of
California applicable to contracts made within, and to be performed wholly
within, such state.
10
<PAGE>
EXHIBIT 10.2
OPTION CERTIFICATE
(Non-Statutory Stock Option)
THIS IS TO CERTIFY that T.A.R. Preferred Mortgage Corporation, a California
corporation (the "Corporation"), has granted to the person named below (the
"Optionee") a non-statutory stock option (the "Option") to purchase shares of
the Corporation's Common Stock, without par value (the "Shares"), under its 1996
Stock Incentive Plan, as follows:
Name of Optionee: Terrance J. Wolfe
Address of Optionee: ____________________________________
____________________________________
____________________________________
____________________________________
Number of Shares: 189.685
Option Exercise Price: $12,652.57 per share
Option Expiration Date: December 31, 2006
Exercise Schedule: Subject to the terms and conditions of this Agreement,
the Option will vest or become exercisable as follows: 37.5% of the Option
(rounded up to the nearest whole share) is fully vested and can be exercised in
full as of the date of grant of the Option; 12.5% of the Option (rounded up to
the nearest whole share) shall vest on June 1, 1997; 15.625% of the Option
(rounded up to the nearest whole share) shall vest on June 1, 1998; 15.625% of
the Option (rounded up to the nearest whole share) shall vest on June 1, 1999;
and the remaining portion of the Option shall vest on June 1, 2000.
Summary of Other Terms: This Option is defined in the Stock Option
Agreement (Non-Statutory Stock Option) (the "Option Agreement") which is
attached to this Option Certificate (the "Certificate") as Annex I. This
Certificate summarizes certain of the provisions of the Option Agreement for
your information, but is not complete. Your rights are governed by the Option
Agreement, not by this Certificate. The Company strongly suggests that you
---
carefully review the full Option Agreement prior to signing this Certificate or
exercising the Option.
Among the terms of the Option Agreement are the following:
<PAGE>
Termination of Employment: While the Option terminates on the Option
Expiration Date, it may terminate earlier (and stop vesting) if you cease to be
employed by the Company. If your employment ends due to death or permanent
disability, the Option stops vesting on the date of death or disability and
begins to terminate one year after the date of death or disability. In all
other cases, the Option stops vesting on the date of termination of employment
and begins to terminate 90 days after the date of termination of employment;
provided, however, if you are terminated "for cause," the Option stops vesting
- -------- -------
on the date of termination of your employment and begins to terminate 30 days
after the date of termination of your employment; provided, further, however, if
-------- ------- -------
you are terminated other than "for cause" or if you terminate your employment
for good cause, the Option shall remain in effect without any modification and
accordingly, will continue to vest and be exercisable. See Section 5 of the
attached Option Agreement.
Transfer: The Option is personal to you, and cannot be sold, transferred,
assigned or otherwise disposed of to any other person, except on your death or
as otherwise provided in the Option Agreement. See Section 15(d) of the Option
Agreement.
Exercise: You can exercise the Option (once it is exercisable), in whole
or in part, by delivering to the Company a Notice of Exercise identical to
Exhibit "A" attached to the Option Agreement, accompanied by payment of the
Exercise Price for the Shares to be purchased. The Company will then issue a
certificate to you for the Shares you have purchased. You are under no
obligation to exercise the Option. See Section 4 of the Option Agreement.
Adjustments upon Recapitalization: The Option contains provisions which
adjust your Option to reflect stock splits, stock dividends, mergers and other
major corporate reorganizations which would change the nature of the Shares
underlying your Option. See Section 7 of the Option Agreement.
Waiver: By signing this Certificate, you will be agreeing to all of the
terms of the Option Agreement, including those not summarized in this
Certificate. You will waive your rights to any other options or stock which may
have been promised to you. See Section 8 of the Option Agreement.
Withholding: The Company may require you to make any arrangements
necessary to insure the proper withholding of any amount of tax, if any,
required to be withheld by the Company as a result of the exercise of the
Option. See Section 13 of the Option Agreement.
2
<PAGE>
AGREEMENT
T.A.R. Preferred Mortgage Corporation, a California corporation (the
"Company"), and the above-named person (the "Optionee") each hereby agrees to be
bound by all of the terms and conditions of the Stock Option Agreement (Non-
Statutory Stock Option) which is attached hereto as Annex I and incorporated
herein by this reference as if set forth in full in this document.
DATED: December 31, 1996
T.A.R. PREFERRED MORTGAGE CORPORATION
By:________________________________
Its:_______________________________
OPTIONEE
___________________________________
(Signature)
___________________________________
(Please print your name exactly
as you wish it to appear on any
stock certificates issued to you
upon exercise of the Option)
BY SIGNING ABOVE, THE OPTIONEE REPRESENTS AND WARRANTS THAT HE OR SHE (A) HAS A
PREEXISTING PERSONAL OR BUSINESS RELATIONSHIP WITH THE COMPANY, AND (B) BY
REASON OF HIS OR HER BUSINESS OR FINANCIAL EXPERIENCE IS ABLE TO PROTECT HIS OR
HER OWN INTERESTS IN CONNECTION WITH RECEIVING THE OPTION.
3
<PAGE>
STOCK OPTION AGREEMENT
(Non-Statutory Stock Option)
This Stock Option Agreement (this "Option Agreement") is made and
entered into on the execution date of the Option Certificate to which it is
attached (the "Certificate"), by and between T.A.R. Preferred Mortgage
Corporation, a California corporation (the "Company"), and the person named in
the Certificate (the "Optionee").
Pursuant to the 1996 Stock Incentive Plan of the Company (the "Plan"),
the Board of Directors of the Company (the "Board") has authorized the grant to
Optionee of a Non-Statutory Stock Option to purchase shares of the Company's
Common Stock, without par value (the "Common Stock"), upon the terms and subject
to the conditions set forth in this Option Agreement and in the Plan.
The Company and Optionee agree as follows:
1. Grant of Option.
The Company hereby grants to Optionee the right and option (the
"Option"), upon the terms and subject to the conditions set forth in this Option
Agreement, to purchase all or any portion of that number of shares of the Common
Stock (the "Shares") set forth in the Certificate, at the Option exercise price
set forth in the Certificate (the "Exercise Price").
2. Term of Option.
The Option shall terminate and expire on the Option Expiration Date
set forth in the Certificate, unless sooner terminated as provided herein.
3. Exercise Period.
(a) Subject to the provisions of Section 5 of this Option Agreement,
the Option shall become exercisable (in whole or in part) upon and after the
dates set forth under the caption "Exercise Schedule" in the Certificate. The
installments shall be cumulative; i.e., the Option may be exercised, as to any
----
or all Shares covered by an installment, at any time or times after the
installment first becomes exercisable and until the expiration or termination of
the Option.
(b) Notwithstanding anything to the contrary contained in this Option
Agreement, the Option may not be exercised, in whole
<PAGE>
or in part, unless and until any then-applicable requirements of all state and
federal laws and regulatory agencies shall have been fully complied with to the
satisfaction of the Company and its counsel. The grant of the Option is exempt
from qualification and registration under federal and state securities laws.
The Company agrees to use its reasonable commercial efforts to comply with all
applicable requirements of all state and federal laws and regulatory agencies in
order to allow the exercise of the Option.
4. Exercise of Option.
There is no obligation to exercise the Option, in whole or in part.
The Option may be exercised, in whole or in part, only by delivery to the
Company of:
(a) written notice of exercise in form and substance identical to
Exhibit "A" attached to this Option Agreement stating the number of shares of
Common Stock then being purchased (the "Purchased Shares"); and
(b) payment of the Exercise Price of the Purchased Shares, either in
cash, by check, by cancellation of any indebtedness of the Company to Optionee
for accrued and unpaid salary or, with the consent of the Board, by transfer to
the Company of issued and outstanding shares of Common Stock or by reducing the
number of shares of Common Stock issuable hereunder, or by any combination of
the above methods of payment. If payment is made, in whole or in part, by
transfer to the Company of issued and outstanding shares of Common Stock or by
reducing the number of shares of Common Stock issuable hereunder, the value of
such shares shall be determined as follows: (i) if the Stock is listed on an
exchange or exchanges, or admitted for trading in a market system which provides
last sale data under Rule 11Aa3-1 of the General Rules and Regulations of the
Securities and Exchange Commission under the Securities and Exchange Act of
1934, as amended (a "Market System"), the last reported sales price per share on
the last business day prior to such date on the principal exchange on which it
is traded, or in such a Market System, as applicable, or if no sale was made on
such day on such principal exchange or in such a Market System, as applicable,
the last reported sales price per share on the most recent day prior to such
date on which a sale was reported on such exchange or such Market System, as
applicable; or (ii) if the Common Stock is not then traded on an exchange or in
such a Market System, the average of the closing bid and asked prices per share
for the Common Stock in the over-the-counter market as quoted on NASDAQ on the
day prior to such date; or (iii) if the Common Stock is not listed on an
exchange or quoted on NASDAQ, an amount determined in good faith by the Board.
2
<PAGE>
Following receipt of the notice and payment referred to above, the
Company shall issue and deliver to Optionee a stock certificate or stock
certificates evidencing the Purchased Shares; provided, however, that the
Company shall not be obligated to issue a fraction or fractions of a share of
its Common Stock, and may pay to Optionee, in cash or by check, the fair market
value of any fraction or fractions of a share exercised by Optionee, which fair
market value shall be determined as set forth in the preceding paragraph.
5. Termination of Employment.
(a) If Optionee shall cease to be an officer, director, consultant or
employee of the Company, or any Subsidiary or Parent of the Company, for any
reason other than death or permanent disability (a "Terminating Event"),
Optionee shall have the right, subject to the provisions of Section 5(c) and
5(d) below, to exercise the Option, with respect to all shares fully vested and
exercisable as of the date of the Terminating Event:
(i) at any time during the 90 day period following the Terminating
Event; or
(ii) in the event the shares exercisable under the Option are
subject to a lock-up agreement or a Company imposed blackout at any time during
the 90 day period referred to in (i), above, then the period referred to in (i),
above, shall be extended by the number of days that the Optionee is subject to
any lock-up or blackout; provided, however, that such period shall not expire
-------- -------
prior to 20 days after the expiration of any lock-up or blackout period.
Upon the expiration of the applicable period referred in (i) or (ii)
above, and at the end of each successive 90 day period thereafter (each of which
is subject to extension as provided for in (ii), above), until the Option is
either exercised in full or completely terminated, the Optionee shall lose the
right to exercise the Option and the Option shall terminate with respect to that
number of shares which equals (A) one percent of the total number of shares of
the Company's Common Stock outstanding as of the day prior to such terminating
date, less (B) the number of shares previously acquired pursuant to the exercise
of the Option after the Terminating Event; provided, that each share referred to
--------
in (B), above, may only be used once to offset a share referred to in (A),
above. Notwithstanding the foregoing, in no case shall the right to exercise
the Option extend beyond the Expiration Date. The Board, in its sole and
absolute discretion, shall determine whether or not authorized leaves of absence
shall constitute termination of employment for purposes of this Option
Agreement.
3
<PAGE>
(b) If, by reason of death or disability (a "Special Terminating
Event"), Optionee shall cease to be an officer, director, consultant or employee
of the Company or any Subsidiary or Parent of the Company, then Optionee,
Optionee's executors or administrators or any person or persons acquiring the
Option directly from Optionee by bequest or inheritance, shall have the right to
exercise the Option, with respect to all shares fully vested and exercisable as
of the date of the Terminating Event:
(i) at any time during the one year period following the Special
Terminating Event; or
(ii) in the event the shares exercisable under the Option are
subject to a lock-up agreement or a Company imposed blackout at any time during
the one year period referred to in (i), above, then the period referred to in
(i), above, shall be extended by the number of days that the Optionee is subject
to any lock-up or blackout; provided, however, that such period shall not
-------- -------
expire prior to 20 days after the expiration of any lock-up or blackout period.
Upon the expiration of the applicable period referred in (i) or (ii)
above, and at the end of each successive 90 day period thereafter (each of which
is subject to extension as provided for in (ii), above), until the Option is
either exercised in full or completely terminated, the Optionee shall lose the
right to exercise the Option and the Option shall terminate with respect to that
number of shares which equals (A) one percent of the total number of shares of
the Company's Common Stock outstanding as of the day prior to such terminating
date, less (B) the number of shares previously acquired pursuant to the exercise
of the Option after the Special Terminating Event; provided, that each share
--------
referred to in (B), above, may only be used once to offset a share referred to
in (A), above. Notwithstanding the foregoing, in no case shall the right to
exercise the Option extend beyond the Expiration Date. For purposes of this
Option Agreement, "disability" shall mean total and permanent disability as
defined in Section 22(e)(3) of the Code. Optionee shall not be considered
permanently disabled unless he furnishes proof of such disability in such form
and manner, and at such times, as the Board may from time to time require.
(c) If Optionee shall be terminated "for cause" by the Company, any
Subsidiary or any Parent, Optionee shall have the right to exercise the Option,
with respect to all shares fully vested and exercisable as of the date of such
termination "for cause":
(i) at any time during the 30 day period following the date of
termination; or
4
<PAGE>
(ii) in the event the shares exercisable under the Option are
subject to a lock-up agreement or a Company imposed blackout at any time during
the one year period referred to in (i), above, then the period referred to in
(i), above, shall be extended by the number of days that the Optionee is subject
to any lock-up or blackout; provided, however, that such period shall not expire
-------- -------
prior to 10 days after the expiration of any lock-up or blackout period.
To the extent not previously exercised, upon the expiration of the
applicable 30 day period referred in (i) or (ii) above, the Option shall
terminate. Notwithstanding the foregoing, in no case shall the right to
exercise the Option extend beyond the Expiration Date. For purposes of this
Option Agreement, "for cause" shall mean:
(1) the willful habitual neglect by Optionee of or the willful
repeated failure or refusal by Optionee to perform such duties for the Company
as are consistent with his position and job description contained in that
certain employment agreement between the Company and Optionee (the "Employment
Agreement") or any subsequent employment or consulting agreement between
Optionee and the Company; provided, that Optionee had at least one notice in
--------
writing from the Company prior to such termination, concerning the neglect or
failure to perform such duties; or
(2) Optionee's willful disobedience of any orders or directives of
the Board or any officers thereof acting under the authority thereof that are
consistent with his duties as contemplated by the Employment Agreement or any
subsequent employment or consulting agreement between Optionee and the Company
or Optionee's deliberate interference with the compliance by other employees of
the Company with any such orders or directives; or
(3) the willful repeated failure or refusal of Optionee to abide
by or comply with the written policies, standard procedures or regulations of
the Company, which the Board in good faith determines has a material detrimental
effect on the Company or the business, operations, affairs or financial position
thereof; or
(4) any willful repeated act or course of conduct by Optionee
which the Board in good faith determines has a material detrimental effect on
the Company or the business, operations, affairs or financial position thereof;
provided, that Optionee had at least one notice in writing from the Company
- --------
prior to such termination, concerning the act or course of conduct; or
5
<PAGE>
(5) the committing by Optionee of any fraud, theft, embezzlement or
other materially dishonest act against the Company; or
(6) any material breach of the Employment Agreement or any subsequent
employment or consulting agreement between Optionee and the Company; provided,
--------
that Optionee had at least one notice in writing from the Company prior to such
termination, concerning the breach.
Notwithstanding Section 4(f) of the Plan, the provisions of this Section
5(c) control the rights of the Optionee with respect to exercising the Option
upon termination "for cause." Accordingly, the Company shall have no right under
Section 4(f) of the Plan to terminate Optionee's right to exercise that portion
of the Option which was exercisable at the date of termination.
(d) Notwithstanding the foregoing, if Optionee shall be terminated other
than "for cause" by the Company, any Subsidiary or any Parent, or if Optionee
terminates his employment agreement for good cause pursuant to Section 6(c) of
the Employment Agreement, the Option shall remain in effect without any
modification and accordingly, will continue to vest as provided in Section 3 and
be exercisable prior to the Option Expiration Date pursuant to the terms of
Section 4.
(e) Nothing in the Plan, the Certificate or this Option Agreement shall
confer upon Optionee any right to continue in the service and/or employ of the
Company or any Affiliate (as defined in the Plan) or shall affect the right of
the Company or any Affiliate to terminate the relationship or employment of
Optionee, with or without cause.
6. Restrictions on Purchased Shares.
None of the Purchased Shares shall be transferred (with or without
consideration), sold, offered for sale, assigned, pledged, hypothecated or
otherwise disposed of (each a "Transfer") and the Company shall not be required
to register any such Transfer and the Company may instruct its transfer agent
not to register any such Transfer, unless and until all of the following events
shall have occurred:
(a) the Purchased Shares are Transferred pursuant to and in conformity
with (i) (x) an effective registration statement filed with the Securities and
Exchange Commission (the "Commission") pursuant to the Securities Act of 1933,
as amended
6
<PAGE>
(the "Act"), or (y) an exemption from registration under the Act, and (ii) the
securities laws of any state of the United States; and
(b) Optionee has, prior to the Transfer of such Purchased Shares, and
if requested by the Company, provided all relevant information to Company's
counsel so that upon Company's request, Company's counsel is able to, and
actually prepares and delivers to the Company a written opinion that the
proposed Transfer (i) (x) is pursuant to a registration statement which has been
filed with the Commission and is then effective, or (y) is exempt from
registration under the Act as then in effect, and the Rules and Regulations of
the Commission thereunder, and (ii) is either qualified or registered under any
applicable state securities laws, or exempt from such qualification or
registration. The Company shall bear all reasonable costs of preparing such
opinion.
Any attempted Transfer which is not in full compliance with this
Section 6 shall be null and void ab initio, and of no force or effect.
---------
7. Adjustments upon Recapitalization.
(a) Subject to the provisions of Section 7(b), if any change is made
in the Common Stock, without receipt of consideration by the Company (through
merger, consolidation, reorganization, recapitalization, reincorporation, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or other transaction not involving the receipt of consideration by the
Company) the Option will be appropriately adjusted in the class(es) and number
of shares and price per share of stock subject to the Option. Such adjustments
shall be made by the Board, the determination of which shall be final, binding
and conclusive. The conversion of any convertible securities of the Company
shall not be treated as a "transaction not involving the receipt of
consideration by the Company."
(b) In the event of: (1) a dissolution, liquidation or sale of
substantially all of the assets of the Company; (2) a merger or consolidation in
which the Company is not the surviving corporation; or (3) a reverse merger in
which the Company is the surviving corporation but the shares of the Common
Stock outstanding immediately preceding the merger are converted by virtue of
the merger into other property, whether in the form of securities, cash or
otherwise, the Option shall continue in full force and effect and, if
applicable, the surviving corporation or an Affiliate of such surviving
corporation shall assume the Option and/or shall substitute a similar option or
award in place of the Option. Notwithstanding the foregoing, if the Board
accelerates
7
<PAGE>
the vesting of options held by other officers of the Company in connection with
an aforementioned transaction, the vesting of the Option will similarly
accelerate to the same extent as such other options.
(c) To the extent that the foregoing adjustments relate to stock or
securities of the Company, such adjustments shall be made by the Board, and its
determination shall be final, binding and conclusive.
(d) The provisions of this Section 7 are intended to be exclusive, and
Optionee shall have no other rights upon the occurrence of any of the events
described in this Section 7.
(e) The grant of the Option shall not affect in any way the right or
power of the Company to make adjustments, reclassifications, reorganizations or
changes in its capital or business structure, or to merge, consolidate, dissolve
or liquidate, or to sell or transfer all or any part of its business or assets.
8. Waiver of Rights to Purchase Stock.
By signing this Option Agreement, Optionee acknowledges and agrees
that neither the Company nor any other person or entity is under any obligation
to sell or transfer to Optionee any option or equity security of the Company,
other than the shares of Common Stock subject to the Option and any other right
or option to purchase Common Stock which was previously granted in writing to
Optionee by the Board. By signing this Option Agreement, Optionee specifically
waives all rights which he or she may have had prior to the date of this Option
Agreement to receive any option or equity security of the Company.
9. Investment Intent.
Optionee represents and agrees that if he or she exercises the Option
in whole or in part and if at the time of such exercise the Plan and/or the
Purchased Shares have not been registered under the Act, he or she will acquire
the Shares upon such exercise for the purpose of investment and not with a view
to the distribution of such Shares, and that upon each exercise of the Option he
or she will furnish to the Company a written statement to such effect.
10. Legend on Stock Certificates.
Optionee agrees that all certificates representing the Purchased
Shares will be subject to such stop transfer orders and other restrictions (if
any) as the Company may deem advisable under the rules, regulations and other
requirements of the Commission,
8
<PAGE>
any stock exchange upon which the Common Stock is then listed and any applicable
federal or state securities laws, and the Company may cause a legend or legends
to be put on such certificates to make appropriate reference to such
restrictions.
11. No Rights as Shareholder.
Except as provided in the Plan, Optionee shall have no rights as a
shareholder with respect to the Shares until the date of the issuance to
Optionee of a stock certificate or stock certificates evidencing such Shares.
Except as may be provided in Section 7 of this Option Agreement, no adjustment
shall be made for dividends (ordinary or extraordinary, whether in cash,
securities or other property) or distributions or other rights for which the
record date is prior to the date such stock certificate is issued.
12. Modification.
Subject to the terms and conditions and within the limitations of the
Plan, the Board may modify, extend or renew the Option or accept the surrender
of, and authorize the grant of a new option in substitution for, the Option (to
the extent not previously exercised).
13. Withholding.
(a) The Company shall be entitled to require as a condition of
delivery of any Purchased Shares upon exercise of this Option that the Optionee
agree to remit, at the time of such delivery or at such later date as the
Company may determine, an amount sufficient to satisfy all federal, state and
local withholding tax requirements relating thereto, and Optionee agrees to take
such other action required by the Company to satisfy such withholding
requirements.
(b) With the consent of the Board, and in accordance with any rules
and procedures from time to time adopted by the Board, Optionee may elect to
satisfy his or her obligations under Section 13(a) above by (i) directing the
Company to withhold a portion of the Shares otherwise deliverable; or (ii)
tendering other shares of the Common Stock of the Company which are already
owned by Optionee which in all cases have a fair market value on the date as of
which the amount of tax to be withheld is determined (the "Tax Date") equal to
the amount of taxes to be paid by such method (each, a "Withholding Right").
Notwithstanding anything in this Option Agreement or the Plan to the contrary,
Optionee shall have the absolute right, with or without the consent of the
Board, to satisfy the tax withholding requirements described herein by any of
the methods described in this Section 13(b) if the Optionee is
9
<PAGE>
exercising any portion of this Option after his termination for cause.
(c) To exercise a Withholding Right, the Optionee must follow the
election procedures set forth below, together with such additional procedures
and conditions set forth in this Option Agreement or otherwise adopted by the
Board:
(1) the Optionee must deliver to the Company his or her written
notice of election (the "Election") and specify whether all or a stated
percentage of the applicable taxes will be paid in accordance with Section 13(b)
above and whether the amount so paid shall be made in accordance with the "flat"
withholding rates for supplemental wages or as determined in accordance with
Optionee's form W-4 (or comparable state or local form);
(2) unless disapproved by the Board as provided in Subsection (3)
below, the Election once made will be irrevocable; and
(3) no Election is valid unless the Board approves such Election,
and such Election may be disapproved by the Board, in its sole discretion, with
or without cause or reason therefor; provided, if the Board has not approved or
disapproved the Election on or prior to the Tax Date, the Election will be
deemed approved.
14. Character of Option.
The Option is not intended to qualify as an "incentive stock
---
option" as that term is defined in Section 422 of the Code.
15. General Provisions.
(a) Further Assurances. Optionee and the Company shall promptly take
all actions and execute all documents requested by the Company which the Company
deems to be reasonably necessary to effectuate the terms and intent of this
Option Agreement.
(b) Notices. All notices, requests, demands and other communications
under this Option Agreement shall be in writing and shall be given to the
parties hereto as follows:
i. If to the Company, to:
T.A.R. Preferred Mortgage Corporation
3347 Michelson, Suite 400
Irvine, California 92715
ii. If to Optionee, to the address set
forth in the records of the Company,
10
<PAGE>
or at such other address or addresses as may have been furnished by such party
in writing to the other party hereto. Any such notice, request, demand or other
communication shall be effective (i) if given by mail, 72 hours after such
communication is deposited in the mail by first-class certified mail, return
receipt requested, postage prepaid, addressed as aforesaid, or (ii) if given by
any other means, when delivered at the address specified in this Section.
(c) Transfer of Rights under this Option Agreement. The Company may
at any time transfer and assign its rights and delegate its obligations under
this Option Agreement to any corporation into which the Company may be merged or
consolidated.
(d) Option Non-Transferable. Optionee may not sell, transfer, assign
or otherwise dispose of the Option except by will or the laws of descent and
distribution, and the Option may be exercised, during the lifetime of Optionee
by Optionee or by his guardian or legal representative. Notwithstanding the
foregoing, the Option may be transferred without consideration by Optionee,
subject to such rules as the Board may adopt to preserve the purposes of the
Plan, to (A) a member of Optionee's immediate family, or (B) a trust solely for
the benefit of Optionee and his immediate family, provided that the Board is
notified in advance in writing of the terms and conditions of any proposed
transfer and it determines that the proposed transfer complies with the
requirements and does not contravene the purposes of the Plan. "Immediate
Family" means Optionee's spouse, children, grandchildren, siblings or the
children or grandchildren of siblings (including in all cases adopted and
stepchildren). Any purported assignment, alienation, pledge, attachment, sale,
transfer or encumbrance that does not qualify hereunder shall be void and
unenforceable against the Company.
(e) Successors and Assigns. Except to the extent specifically limited
by the terms and provisions of this Option Agreement, this Option Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors, assigns, heirs and personal representatives.
(f) Governing Law. THIS OPTION AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO
CONTRACTS MADE IN, AND TO BE PERFORMED WITHIN, THAT STATE.
(g) The Plan. This Option Agreement is made pursuant to the Plan, and
it is intended, and shall be interpreted in a manner, to comply therewith. Any
provision of this Option Agreement inconsistent with the Plan shall be
superseded and governed by the Plan, except as provided in Section 5(c) of this
Option Agreement.
11
<PAGE>
(h) Representation, Warranties and Covenants of the Company. The
Company hereby represents and warrants to Optionee that the Plan has been duly
adopted by the Company and that this Option Agreement, and the grant of the
Option hereunder, has been duly authorized by the Company. The Company hereby
covenants that, shortly after the effective date of its initial public offering,
it will register the Shares issuable upon exercise of the Option pursuant to a
registration statement on Form S-8 and that it shall use reasonable commercial
efforts to keep such registration statement effective until this Option expires
or is exercised in full.
(i) Administration by Committee. As provided in the Plan,
administration of the Plan and this Option Agreement has been delegated to a
committee (the "Committee") of the Board. Accordingly, all references in this
Option Agreement to the "Board" shall be interpreted to mean the Board and/or
the Committee and/or any other entity which is delegated the power to administer
the Plan.
(j) Miscellaneous. Titles and captions contained in this Option
Agreement are inserted for convenience of reference only and do not constitute a
part of this Option Agreement for any other purpose. Except as specifically
provided herein, neither this Option Agreement nor any right pursuant hereto or
interest herein shall be assignable by any of the parties hereto without the
prior written consent of the other party hereto.
The Signature Page to this Option Agreement consists of the last page
of the Certificate.
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<PAGE>
Exhibit "A"
NOTICE OF EXERCISE
(To be signed only upon exercise of the Option)
TO: T.A.R. Preferred Mortgage Corporation
The undersigned, the holder of the enclosed Stock Option Agreement
(Non-Statutory Stock Option), hereby irrevocably elects to exercise the purchase
rights represented by the Option and to purchase thereunder _________ * shares
of Common Stock of T.A.R. Preferred Mortgage Corporation (the "Company"), and
herewith encloses payment of $_______ and/or _________ shares of the Company's
Common Stock in full payment of the purchase price of such shares being
purchased.
Dated: _______________
______________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Option)
______________________________
(Please Print Name)
______________________________
(Address)
* Insert here the number of shares called for on the face of the Option
(or, in the case of a partial exercise, the number of shares being exercised),
in either case without making any adjustment for additional Common Stock of the
Company, other securities or property which, pursuant to the adjustment
provisions of the Option, may be deliverable upon exercise.
13
<PAGE>
EXHIBIT 10.3
- --------------------------------------------------------------------------------
AGREEMENT OF LEASE
BETWEEN
CROW WINTHROP OPERATING PARTNERSHIP,
LANDLORD
and
T.A.R. PREFERRED MORTGAGE CORPORATION,
TENANT
- --------------------------------------------------------------------------------
<PAGE>
BASIC LEASE INFORMATION
PARK PLACE LEASE
1. LEASE DATE: As of January __, 1997.
2. LANDLORD: Crow Winthrop Operating Partnership, a Maryland general
partnership
3. ADDRESS OF LANDLORD: 3333 Michelson Drive, Suite 210
Irvine, California 92612
Attention: Ms. Janine R. Padia
4. TENANT: T.A.R. Preferred Mortgage Corporation, a California
corporation.
dba: Preferred Mortgage
5. ADDRESS OF TENANT:
(Prior to Term Commencement Date) (After Term Commencement Date)
19782 MacArthur Boulevard, 3355 Michelson Drive,
Suite 250 Suite 300
Irvine, California 92612 Irvine, California 92612
Attention: Mr. Walter F. Villaume Attention: Mr. Walter F. Villaume
6. PREMISES: Suite 400, deemed to contain approximately 46,911 rentable square
feet and 41,884 useable square feet located on the fourth (4th) floor of the
Building at 3347 Michelson Drive, Irvine, California as depicted on Exhibit B-
---------
1 attached hereto, and subject to adjustment as provided in the Lease and
-
Suite 300, deemed to contain approximately 31,760 rentable square feet and
28,357 useable square feet located on the third (3rd) floor of the Building at
3355 Michelson Drive, Irvine, California, as depicted on Exhibit B-2 attached
-----------
hereto, and subject to adjustment as provided in the Lease.
7. SCHEDULED TERM COMMENCEMENT DATE: January 15, 1997
8. SCHEDULED LENGTH OF TERM: approximately sixty-two (62) months
9. SCHEDULED TERM EXPIRATION DATE: March 31, 2002
10. RENT: Basic Rent: The Basic Rent shall be paid according to the following
schedule:
(a) for the period commencing on the Term Commencement Date and terminating
on the day immediately prior to the thirty (30) month anniversary of the Rent
Commencement Date (the "Rent Increase Date"), One Million Three Hundred Sixty-
Eight Thousand Eight Hundred Fifty-Eight and 00/100 ($1,368,858.00) Dollars per
annum, payable in equal monthly installments of One Hundred Fourteen Thousand
Seventy-One and 50/100 ($114,071.50) Dollars each; and
(b) for the period commencing on the Rent Increase Date and terminating on
the Term Expiration Date, One Million Four Hundred Sixty-Three Thousand Two
Hundred Sixty-Two and 00/100 ($1,463,262.00) Dollars per annum, payable in equal
monthly installments of One Hundred Twenty-One Thousand Nine Hundred Thirty-
Eight and 50/100 ($121,938.50) Dollars each.
Notwithstanding anything to the contrary hereinabove set forth, provided this
Lease is in full force and effect and Tenant is not in default under this Lease,
Tenant shall be entitled to a credit against the Basic Rent (i) for the entire
Premises for the period commencing on the Term Commencement Date and ending on
(and including) March 31, 1997, and (ii) for a portion of the Premises
constituting 16,911 rentable square feet of space in the Building at 3347
Michelson Drive, Irvine, California (the "Rent Credit Space") for the period
commencing on April 1, 1997 and ending on (and including) March 31, 1998, in the
aggregate amount of Two Hundred Ninety-Four Thousand Two Hundred Fifty-One and
40/100 ($294,251.40) Dollars, which credit shall be applied in twelve (12) equal
monthly installments of Twenty-Four Thousand Five Hundred Twenty and 95/100
($24,520.95) Dollars each.
11. RENT COMMENCEMENT DATE: April 1, 1997, subject to the terms of paragraph
10 above.
12. BASE YEAR: calendar year 1997
13. TENANT'S OPERATING EXPENSES: Tenant shall pay as additional rent in each
calendar year of the Term, the difference between (a) the actual amount of
Tenant's Share of Operating Expenses for the subject calendar year, and (b) the
actual amount of Tenant's Share of Operating Expenses for the Base Year (the
"Base Year Operating Expenses"). The difference between (a) and (b) is referred
to in this Lease as "Tenant's Operating Expenses." Tenant shall pay monthly
installments of Tenant's Operating Expenses as provided in Article XXV.
14. TENANT'S SHARE: four and seven-tenths percent (4.7%), subject to adjustment
as provided in the Lease.
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15. PERMITTED USE: General Offices
16. PARKING SPACES: Two Hundred Eighty (280) non-exclusive, unreserved
parking spaces and eight (8) non-exclusive, reserved
unreserved parking spaces and surface parking spaces
17. SECURITY DEPOSIT: $125,478.65, to be increased as provided in Section 4.03
hereof.
18. GUARANTORS: Todd Rodriguez, Walter Villaume and Cynthia Villaume
19. BROKERS: Equis of California
The foregoing Basic Lease Information is incorporated into and made a part of
this Lease. Each reference in this Lease to any of the Basic Lease Information
shall mean the respective information above set forth and shall be construed to
incorporate all of the terms provided under the particular Lease paragraph
pertaining to such information. In the event of any conflict between the Basic
Lease Information and this Lease, the provisions of the Lease shall control.
INITIAL: LANDLORD_________ TENANT_________
ii
<PAGE>
PARK PLACE OFFICE LEASE
-----------------------
THIS LEASE ("Lease") is made as of this ____ day of January, 1997, between Crow
Winthrop Operating Partnership, a Maryland general partnership ("Landlord"), and
T.A.R. Preferred Mortgage Corporation, a California corporation ("Tenant").
R E C I T A L S :
- - - - - - - -
A. Landlord is the owner of a complex of buildings and improvements known
by street numbers as 3333-3355 Michelson Drive in the City of Irvine, County of
Orange, State of California, and referred to herein as the "Facility", which
Facility is located on the tract of real property more fully described in
Exhibit A attached hereto and incorporated herein by this reference. The
- ---------
Facility and the Project within which the Facility is located is depicted on the
Site Plan attached hereto as Exhibit A-1.
-----------
B. Landlord desires to lease to Tenant and Tenant desires to hire from
Landlord, the Premises, within the Facility, as designated on the Site Plan of
the Premises attached hereto as Exhibit B-1 and Exhibit B-2 incorporated herein
----------- -----------
by reference.
NOW, THEREFORE, in consideration of the rents and covenants provided for below,
Landlord and Tenant do hereby agree as follows:
ARTICLE I - DEFINITIONS
The defined terms for this Lease are set forth on Exhibit C attached hereto and
---------
incorporated herein by reference. A defined term is identified by initial
capital letters throughout all provisions of this Lease, including, without
limitation, the Basic Lease Information, the Recitals and the Exhibits.
Reference should be made to Exhibit C for the meaning of a defined term.
---------
ARTICLE II - PREMISES
2.01 LEASE OF PREMISES. Landlord hereby leases to Tenant and Tenant
hereby hires from Landlord the Premises. Landlord and Tenant agree that the
letting and hiring of the Premises is upon and subject to the terms, covenants
and conditions contained in this Lease and each party covenants as a material
part of the consideration of this Lease to keep and perform their respective
obligations under this Lease. Tenant acknowledges that this Lease is subject to
all existing liens, encumbrances, deeds of trust, reservations, restrictions and
other matters whether or not of record affecting the Premises and to all
Applicable Laws; provided, however, Landlord represents and warrants to Tenant
that to Landlord's actual knowledge, after no independent inquiry, the
provisions of such liens, encumbrances, deeds of trust, reservations and
restrictions known to Landlord do not preclude Landlord from leasing the
Premises to Tenant as herein provided.
2.02 CALCULATIONS OF AREAS. Throughout the Term, the Facility may
change in size as a result of additional development. In such event, appropriate
adjustments relating to Tenant's Share of Operating Expenses and other
calculations based on areas of the Facility shall be made by Landlord pursuant
to the terms and conditions of this Lease. Tenant shall execute and return to
Landlord an appropriate certificate reasonably provided by Landlord when
necessitated because of any change in or recalculation of the Premises or the
Facility or any redesignation of the Common Area within fifteen (15) days of
receipt from Landlord; it being agreed, however, that any such certificate which
is consistent with the terms of this Lease, shall be binding upon Tenant
notwithstanding Tenant's failure to timely execute and return same to Landlord.
2.03 COMMON AREA. Throughout the Term of this Lease, Tenant shall
have the non-exclusive right to the use, in common with others, of the Common
Area and the Facility Common Area subject to the provisions of this Lease, all
Applicable Laws and the Rules and Regulations referred to in Article XVII and
incorporated herein by reference. Tenant's right to use the Common Area and the
Facility Common Area shall terminate upon the termination of this Lease.
Landlord reserves for itself and for all other owner(s) and operator(s) of the
Common Area, the Facility Common Area and the balance of the Facility, the right
from time to time, without the same constituting an actual or constructive
eviction and without incurring any liability to Tenant therefor, to: (i)
install, use, maintain, repair, replace and relocate pipes, ducts, conduits,
wires and appurtenant meters and equipment above the ceiling surfaces, below the
floor surfaces, within the walls and in the central core areas of the Building,
provided, however, nothing contained herein shall be deemed or construed to
impose upon Landlord any obligation, responsibility or liability whatsoever for
the care, supervision or repair of the Building, the Facility or any part
thereof, other than as herein expressly provided; (ii) make changes to the
design and
<PAGE>
layout of the Facility, including, without limitation, changes to buildings,
driveways, entrances, passageway, doors and doorways, corridors, elevators,
stairs, toilets and other public parts of the Facility, loading and unloading
areas, direction of traffic, landscaped areas, walkways and parking spaces and
parking areas; and (iii) use or close temporarily the Common Area, the Facility
Common Area and/or other portions of the Facility or the Project while engaged
in making improvements, repairs or alterations to the Building, the Common Area,
the Facility Common Area, the Facility, or any portion thereof, and (iv) change
the name and numbers of designation by which the Building and the Facility are
commonly known. In connection with the performance of any of the foregoing,
Landlord shall use its reasonable efforts to perform same in a manner intended
to minimize material interference with Tenant's use of the Premises; provided
however, Landlord shall not be obligated to use overtime or premium-pay labor in
connection therewith. To the extent the location or amount, or both, of Common
Area changes or the Facility Common Area changes in or during any calendar year
Landlord shall include the Common Area and the Facility Common Area, as so
adjusted and calculated, for purposes of calculating Operating Expenses for such
portion of the calendar year as such change was in and all subsequent calendar
years.
2.04 ACCESS. Subject to the terms of this Lease, Tenant shall have
continuous access twenty-four (24) hours per day, seven (7) days per week to the
Premises. Landlord reserves the right to require Tenant to comply with
Landlord's security procedures and practices as may be established from time to
time by Landlord.
ARTICLE III - TERM AND POSSESSION
3.01 TERM COMMENCEMENT. The Term of this Lease shall be for the
period designated in the Basic Lease Information and, except as otherwise
provided herein, shall continue in full force and effect until the Term
Expiration Date. Promptly following the Term Commencement Date, Landlord shall
deliver to Tenant a declaration in the form attached hereto as Exhibit D and
---------
incorporated herein by reference (the "Commencement Memorandum"). The
Commencement Memorandum shall specify the Term Commencement Date, the Term
Expiration Date, the rentable and useable square footage deemed to be in the
Premises and Tenant's Share and shall be binding upon Tenant as to the matters
therein stated unless Tenant objects thereto within five (5) days of Tenant's
receipt of the Commencement Memorandum. Unless otherwise provided herein,
Tenant's obligation to pay Basic Rent and its other obligations for payment
under this Lease shall commence upon the Term Commencement Date.
3.02 DELIVERY OF POSSESSION. Landlord agrees to deliver possession of
the Premises to Tenant in accordance with terms of this Lease. Notwithstanding
the foregoing, Landlord will not be obligated to deliver possession of the
Premises to Tenant until Landlord has received from Tenant all of the following:
(i) a copy of this Lease fully executed by Tenant and the guaranty of Tenant's
obligations under this Lease, executed by the Guarantors; (ii) the Security
Deposit and the first installment of Basic Rent; (iii) executed copies of
policies of insurance or certificates thereof as required under Section 10.04 of
this Lease; (iv) copies of all governmental permits and authorizations, if any,
required in connection with Tenant's operation of its business within the
Premises; and (v) if Tenant is a corporation or partnership, such evidence of
due formation, valid existence and authority as Landlord may reasonably require,
which may include, without limitation, a certificate of good standing,
certificate of secretary, articles of incorporation, statement of partnership or
other similar documentation.
3.03 CONDITION OF PREMISES. Landlord represents and warrants that, as
of the date hereof, to Landlord's actual knowledge, without any additional
inquiry (i) except as is disclosed in that certain Proposition 65 Compliance
Notification which Landlord has delivered to Tenant (A) Landlord has received no
written notice of any alleged violation of any Applicable Law at the Premises
with respect to Hazardous Materials; and (B) the Building is in compliance with
all Applicable Laws regulating the handling, transportation, storage, treatment,
use and disposal of Hazardous Materials; and (ii) Landlord has or will exercise
its good faith efforts to cause the Building (other than the Premises and other
space leased or available for leasing to tenants in the Building) to be in
compliance with the provisions of Title III of the Americans with Disabilities
Act of 1990 ("ADA"); provided, however, Tenant shall be responsible, at Tenant's
sole cost and expense, for compliance with ADA to the extent pertaining to any
repairs, improvements or Alterations performed by or on behalf of Tenant in the
Premises. Subject to the foregoing representations and covenants, Tenant agrees
to accept possession of the Premises in the condition which shall exist on the
Term Commencement Date "as is" except for the performance of the Preliminary
Tenant Improvements in accordance with the Preliminary Tenant Improvement
Agreement attached hereto as Exhibit E-1 and incorporated herein by reference
-----------
and except for the performance of the Subsequent Tenant Improvements in
accordance with and subject to the terms of the Subsequent Tenant Improvement
Agreement attached hereto as Exhibit E-2 and incorporated herein by reference;
-----------
Tenant further agrees that Landlord shall have no other obligation to perform
any work, make any installations or incur any expense in order to prepare the
Premises for Tenant's occupancy. Taking possession of the Premises, shall be
deemed to be conclusive evidence as against Tenant that, at the time such
possession was so taken, the Premises, the Building, the Facility and the
Project were in good and satisfactory condition. Tenant acknowledges that
neither Landlord nor any agent of Landlord has made any representation or
warranty with respect to the Premises, the Building, the Facility, the Project
or any portions thereof or with respect to the suitability of same for the
conduct of
2
<PAGE>
Tenant's business and Tenant further acknowledges that Landlord will
have no obligation to construct or complete any additional buildings or
improvements within the Facility or the Project.
ARTICLE IV - RENT
4.01 BASIC RENT. Tenant shall pay to Landlord throughout the Term,
Basic Rent as specified in the Basic Lease Information, payable in equal monthly
installments in advance commencing on the Term Commencement Date and continuing
on the first day of each calendar month during every year of the Term in lawful
money of the United States, without deduction or offset whatsoever; provided,
however, that Tenant shall pay the first full month's Basic Rent to Landlord
upon Tenant's execution of this Lease. Basic Rent shall be paid to Landlord at
the address specified in the Basic Lease Information or to such other firm or to
such other place as Landlord may from time to time designate in writing by
notice given as herein provided. If payment of Basic Rent is to begin on a day
other than the first day of a calendar month as provided in this Section 4.01,
then Basic Rent shall be prorated on a per diem basis, and the prorated on a per
diem basis installment shall be paid on the first day of the calendar month next
succeeding the Term Commencement Date. If the Term terminates on other than the
last day of a calendar month, then the Basic Rent shall be prorated as well and
the prorated installment shall be paid on the first day of the calendar month
next preceding the date of termination.
4.02 OPERATING EXPENSES. In addition to Basic Rent, Tenant shall pay
as additional rent, Tenant's Operating Expenses as provided in Article XXV,
without abatement or offset.
4.03 SECURITY DEPOSIT. On execution of this Lease, Tenant shall
deposit with Landlord the security deposit set forth in the Basic Lease
Information. On the Expansion Date, Tenant shall deposit with Landlord an
additional security deposit in an amount equal to the product of (i) the first
month's rent for the Expansion Space (as hereinafter defined), multiplied by
------------
(ii) One Hundred Ten (110%) percent (the product thereof being hereinafter
referred to as the "Additional Security Deposit"; the security deposit set forth
in the Basic Lease Information, together with the Additional Security Deposit
are herein collectively referred to as the "Security Deposit"). The Security
Deposit shall be held as security for the full and faithful performance by
Tenant of all of its covenants and obligations under this Lease, including,
without limitation, the surrender of possession of the Premises to Landlord as
herein provided. If Tenant fails to pay Rent or other charges due hereunder, or
otherwise defaults with respect to any provision of this Lease, Landlord may
use, apply or retain all or any portion of the Security Deposit for the payment
of any Rent or other charge in default, or for the payment of any other sum
which Landlord may expend or be required to expend in connection with Tenant's
default, or to compensate Landlord for any loss or damage sustained by Landlord
in connection with Tenant's default including, but not limited to, any damages
or deficiency in the reletting of the Premises, whether such damages or
deficiency accrue or accrues before or after summary proceedings or other re-
entry by Landlord. If Landlord uses or applies all or any portion of the
Security Deposit, Tenant shall immediately on demand pay Landlord in cash or
readily available funds, a sum equal to the portion of the Security Deposit
expended or applied by Landlord as provided in this Section so as to restore the
Security Deposit to its original amount. Tenant's failure to deposit the
Security Deposit or maintain the Security Deposit in its original amount, shall
constitute an Event of Default under Article XIX of this Lease. If Tenant shall
fully and faithfully comply with all of the terms, provisions, covenants and
conditions of this Lease, Landlord shall return the Security Deposit to Tenant
after the Term Expiration Date and after delivery of the entire possession of
the Premises to Landlord in accordance with the terms of this Lease. Landlord
shall not be deemed to be a trustee with respect to the Security Deposit, and
shall not be required to keep the Security Deposit separate from its general
funds. Tenant shall be entitled to no interest on the Security Deposit. Should
Landlord transfer its interest in the Premises during the Term hereof and
deposit with the transferee thereof the unappropriated Security Deposit funds,
Landlord's obligations with respect to the Security Deposit will be discharged
and Tenant shall look solely to the new landlord for the return of the Security
Deposit.
4.04 PAYMENT; LATE CHARGES. Tenant shall pay Landlord all amounts due
from Tenant to Landlord hereunder, whether for Rent or otherwise, in lawful
money of the United States, without deduction or offset whatsoever and without
notice or demand except as otherwise provided herein. Tenant acknowledges that
late payment by Tenant of any payment owed to Landlord under this Lease will
cause Landlord to incur costs not contemplated by this Lease, the exact amount
of such costs being extremely difficult and impracticable to fix. Therefore, if
any installment of Rent due from Tenant is not received by Landlord within five
(5) days after the date when such payment is due, Tenant shall pay to Landlord,
in addition to such installment of Rent or such additional rent, as the case may
be, as a late charge and as additional rent, interest on such late amount at the
Interest Rate accruing from the date such amount becomes due until the date such
amount is paid. In addition, Tenant shall pay to Landlord an additional sum of
ten percent (10%) of the overdue Rent as a late charge. Payment of interest and
the late charge is not an alternative means of performance of Tenant's
obligation to pay Rent when due, and acceptance of interest and the late charge
shall not cure or waive Tenant's default, nor prevent Landlord from exercising,
before or after such acceptance, any rights or remedies for a default provided
by this Lease. The parties agree that such interest and late charge represent a
fair and reasonable estimate of the detriment that Landlord will suffer by
reason of late payment by Tenant. If Tenant is subject to late charges more than
three (3) times in any period of twelve (12) months during the Term, Landlord
shall have the right to
3
<PAGE>
require Tenant thereafter to pay all installments of Rent quarterly in advance
throughout the remainder of the Term.
4.05 ALL PAYMENTS AS RENT. Any and all payments of Basic Rent,
Tenant's Operating Expenses and any and all taxes, fees, charges, costs,
expenses, insurance obligations and all other payments, disbursements or
reimbursements which are attributable to, payable by or the responsibility of
Tenant under and by reason of this Lease are payable as additional rent and
shall constitute "rent" within the meaning of California Civil Code Section
1951(a).
ARTICLE V - RESTRICTIONS ON USE/COMPLIANCE WITH LAWS
5.01 USE. Tenant shall use the Premises for the Permitted Use and for
no other use or purpose. Nothing in this Lease shall be deemed to give Tenant
any exclusive right to such use in the Building, the Facility or the Project.
Tenant shall not do or permit to be done in or about the Premises nor bring,
keep or permit to be brought or kept therein, anything which is prohibited by
the attached Exhibit G or which is in conflict with or will invalidate any
---------
insurance policy covering the Building, the Facility, the Project or any part
thereof or which will in any way increase the existing rate of, or affect, any
fire or other insurance upon the building or its contents, or which will cause a
weight load or stress on the floor or any other portion of the Premises in
excess of the weight load or stress which the floor or other portion of the
Premises is designed to bear. Tenant, at Tenant's sole expense, shall comply
with all Applicable Laws affecting the Premises, and the requirements of any
board of fire underwriters or other similar body, now or hereafter instituted,
and shall also comply with any order, directive or certificate of occupancy
issued pursuant to any Applicable Laws, which affect the condition, use or
occupancy of the Premises, including but not limited to, any requirements of
structural changes or other alterations related to or affected by Tenant's acts,
occupancy, use or alteration of the Premises. The judgment of any court of
competent jurisdiction or the admission of Tenant in any action against Tenant,
whether or not Landlord is a party to such action, shall be conclusive as
between Landlord and Tenant in establishing such violation. If by reason of
Tenant's failure to comply with the provisions of this Article, the fire
insurance rate shall at the beginning of this Lease or at any time thereafter be
higher than it otherwise would be, then Tenant shall reimburse Landlord, as
additional rent hereunder, for that part of all fire insurance premiums
thereafter paid by Landlord which shall have been charged because of such
failure of Tenant, and shall make such reimbursement upon the first day of the
month following such outlay by Landlord. In any action or proceeding wherein
Landlord and Tenant are parties, a schedule or "make up" of rates for the
Facility, the Building or the Premises issued by the California Fire Insurance
Rating Organization, or other body fixing such fire insurance rates, shall be
conclusive evidence of the facts therein stated and of the several items and
charges in the fire insurance rates then applicable to the Premises.
ARTICLE VI - ALTERATIONS
6.01 TENANT ALTERATIONS. Tenant shall not make or perform or permit
the making or performance of any alterations, additions or improvements
(collectively, "Alterations") to the Premises without Landlord's prior written
consent, which consent Landlord may grant or withhold in its sole and absolute
discretion. Notwithstanding the foregoing, (i) Landlord shall not unreasonably
withhold or delay its consent to any Non-Structural Alterations and (ii) Tenant
shall have the right to make Cosmetic Alterations without Landlord's prior
written consent, provided that in both cases, Tenant shall provide to Tenant, at
least ten (10) days prior to the commencement of such Alterations, notice of the
Alterations to be performed and the terms, conditions and provisions of this
Lease regarding Alterations are otherwise fully complied with. If Landlord
consents to the making of any Alterations by Tenant, the same shall be made by
Tenant, at Tenant's sole cost and expense, and all such Alterations shall be
done in strict compliance with the provisions of this Article VI.
Notwithstanding the foregoing, with respect to Cosmetic Alterations only, Tenant
shall not be required to cause drawings, plans and specifications to be prepared
with respect to such Cosmetic Alterations if such drawings, plans and
specifications are not otherwise required to be prepared in order to obtain any
permit or other required governmental or quasi-governmental approval, but Tenant
shall furnish Landlord with copies of any existing drawings, plans and
specifications actually prepared with respect to such Cosmetic Alterations, if
any.
6.02 INSTALLATION OF ALTERATIONS. Any Alterations installed by or on
behalf of Tenant within the Premises shall be done in strict compliance with all
of the following:
(a) No such work shall proceed without (i) Landlord's prior approval of
Tenant's contractor(s) and subcontractor(s); (ii) Landlord's receipt of
duplicate original policies of comprehensive public liability (including
property damage coverage) insurance and worker's compensation insurance
(covering all persons to be employed by Tenant and Tenant's contractors and
subcontractors in connection with such Alteration) in such form, with such
companies, for such periods and in such amounts as Landlord may reasonably
require, naming Landlord, its property manager and their respective agents as
additional insureds; (iii) Landlord's receipt and approval of detailed plans and
specifications (including layout, architectural, mechanical and structural
drawings stamped by a
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professional engineer or architect licensed in the State of California) for each
proposed Alteration, subject to the terms of Section 6.01 above; (iv) Tenant
paying to Landlord all out of pocket costs and expenses incurred by Landlord in
connection with Landlord's review of Tenant's plans and specifications; it being
understood and agreed that Landlord shall not engage any third party consultant
to review the named Tenant's plans and specifications unless Landlord in its
sole and absolute discretion deems such review necessary because of the nature
or complexity of named Tenant's proposed Alterations; and (v) Tenant obtaining,
at its expense, all permits, approvals and certificates required by any
governmental or quasi-governmental bodies.
(b) All such work shall be performed: (i) in accordance with the plans and
specifications submitted to and approved by Landlord, subject to the terms of
Section 6.01 above; (ii) in a lien-free and first-class and workmanlike manner,
(iii) in compliance with all Applicable Laws including, without limitation, ADA,
a valid building permit and/or all other permits or licenses when and where
required, copies of which shall be furnished to Landlord before the work is
commenced; (iv) in such a manner so as not to interfere with the occupancy and
enjoyment of any other tenant or occupant in the Facility and not to impose any
additional expense upon or delay Landlord in the maintenance and operation of
the Facility and (v) in such a manner so as not to affect any part of the
Building or the Facility other than the Premises. Any work not acceptable to
any governmental authority or agency having or exercising jurisdiction over such
work, or not reasonably satisfactory to Landlord, shall be promptly replaced
and/or corrected at Tenant's expense. Landlord's approval or consent to any
such work shall not impose any liability upon Landlord as to completeness,
design sufficiency or compliance with Applicable Laws. In approving any
Alterations, Landlord reserves the right to require Tenant to increase its
Security Deposit to provide Landlord with additional reasonable security for the
removal of such Alterations by Tenant as required by this Lease; it being
agreed, that Landlord shall act in good faith in connection with increasing the
Security Deposit as aforesaid.
(c) All materials and equipment to be incorporated in the Premises (i)
shall be first quality and (ii) shall not be subject to any lien, encumbrance,
chattel mortgage or title retention or security agreement.
(d) Tenant shall immediately reimburse Landlord for any expense incurred by
Landlord in connection with the performance of any Alteration by Tenant,
including, without limitation, expenses incurred in connection with any
substandard work performed by Tenant or Tenant's contractors, by reason of
delays caused by such work and by reason of inadequate cleanup following
completion of such work.
(e) Tenant or its contractors will in no event be allowed to make
Alterations which: (i) affect the plumbing, mechanical, electrical, sanitary,
life safety, heating, ventilation or air conditioning or other systems or
services of the Facility or the proper functioning thereof, (ii) affect the
structural integrity of the Facility; (iii) affect any area outside the Premises
including the exterior appearance of the Facility or any of the Common Areas;
(iv) in Landlord's reasonable opinion, lessen the value or utility of the
Facility; or (v) will violate or require a change in any occupancy certificate
or permit applicable to the Premises.
(f) All work by Tenant shall be scheduled through Landlord and shall be
diligently and continuously pursued from the date of its commencement through
its completion. If Tenant's Alterations have not been completed within a
reasonable time after the commencement of such Alterations, Landlord may, after
ten (10) days prior notice to Tenant (other than in event of an emergency),
cause such Alterations to be completed, in which event Tenant shall reimburse
Landlord for Landlord's reasonable costs of completing such work upon
Landlord's demand, and the amount of Landlord's completion costs to be
reimbursed by Tenant, together with interest thereon at the Interest Rate shall
constitute additional rent under this Lease and shall be paid by Tenant with the
next due monthly Basic Rent payment after Landlord's demand.
(g) Tenant shall obtain any bonds required by Landlord.
(h) Upon completion of any Alteration, Tenant, at Tenant's expense, shall
(i) obtain certificates of final approval of such Alteration required by any
governmental or quasi-governmental bodies and shall furnish Landlord with copies
thereof and (ii) furnish Landlord with "as-built" drawings showing such
Alterations.
(i) Tenant shall not, at any time prior to or during the Term, directly or
indirectly employ, or permit the employment of, any contractor, mechanic or
laborer in the Premises whether in connection with any Alteration or otherwise,
if, in Landlord's sole discretion, such employment will interfere or cause any
conflict with other contractors, mechanics or laborers engaged in the
construction, maintenance or operation of the Facility or the Project by
Landlord, Tenant or others. In the event of any such interference or conflict,
Tenant upon demand of Landlord, shall cause all contractors, mechanics or
laborers causing such interference or conflict to leave the Facility or the
Project, as the case may be, immediately.
6.03 REMOVAL OF ALTERATIONS. The Tenant Improvements, including,
without limitation, all affixed sinks, dishwashers, microwave ovens and other
fixtures and all Alterations made by Tenant (but excluding Tenant's trade
fixtures and personal property) shall become the property of Landlord
immediately upon installation within the Premises and shall remain on and be
surrendered with the Premises upon expiration or termination of the Term, except
that Landlord reserves the right to require that Tenant remove all Alterations
upon the expiration or termination of the Term. Notwithstanding the foregoing,
Tenant, at the time of its initial submission of plans and specifications to
Landlord for its review and approval, may request in writing that Landlord waive
its right to compel Tenant to remove the Alterations identified on such plans
and specifications.
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If Landlord waives such right to compel Tenant to remove such Alterations, in
whole or in part, Landlord shall notify Tenant at the time of the approval of
such plans and specifications of those Alterations which Tenant may be required
to remove in accordance with the terms of this Section prior to the expiration
of the Term or upon the occurrence of a termination of this Lease and Tenant
shall, upon the expiration of the Term or upon such termination, unless
instructed otherwise by Landlord, be required to remove only such Alterations
specified in Landlord's notice. If Landlord requires Tenant to remove any
Alterations, Tenant, at its cost, shall repair and restore in a good and
workmanlike manner any damage caused to the Premises, the Building or the
Facility resulting in connection with the removal of any of its Alterations,
trade fixtures and/or personal property and shall restore the Premises, the
Building or the Facility, as applicable, to the condition same were in when the
Premises were received by Tenant, ordinary wear and tear excepted.
6.04 PAYMENT OF LANDLORD'S FEES AND COSTS. Tenant agrees to pay
Landlord, as additional rent, within ten (10) business days after Tenant's
receipt of invoices either from Landlord or Landlord's consultants, the
reasonable fees and costs for professional services and costs for general
conditions for review of all plans, specifications and working drawings for any
Alterations; it being understood and agreed, however, that Landlord shall not
engage any third party to provide such professional services to review the named
Tenant's plans, specifications and working drawings unless Landlord, it its sole
and absolute discretion, deems such engagement necessary because of the nature
or complexity of the named Tenant's proposed Alterations; it being further
agreed, however, that any person or entity other than the Tenant named herein
shall also pay Landlord, within ten (10) business days after completion of any
Alterations, Landlord's fee for supervising and administering the installation
of such Alterations.
6.05 REMOVAL OF PERSONAL PROPERTY. All articles of personal property
owned by Tenant or installed by Tenant at its expense in the Premises (including
Tenant's business and trade fixtures, furniture, movable partitions and
equipment such as telephones, copy machines, computer terminals, refrigerators
and facsimile machines) will be and remain the property of Tenant, and must be
removed by Tenant from the Premises, at Tenant's sole cost and expense, on or
before the expiration or sooner termination of this Lease. Tenant agrees to
repair any damage caused by such removal at its cost on or before the expiration
or sooner termination of this Lease.
6.06 FAILURE TO REMOVE ITEMS. If Tenant fails to remove by the
expiration or sooner termination of this Lease all of its personal property,
trade fixtures, equipment or any Alterations identified by Landlord for removal,
Landlord may, at its option, treat such failure as a hold-over pursuant to
Article XV, and/or Landlord may (without liability to Tenant for loss thereof)
treat such personal property and/or Alterations as abandoned and, at Tenant's
sole cost and in addition to Landlord's other rights and remedies under this
Lease, at law or in equity: (a) remove and store such items; and/or (b) upon ten
(10) days' prior notice to Tenant, sell, discard or otherwise dispose of all or
any such items at private or public sale for such price as Landlord may obtain
or by other commercially reasonable means. Tenant shall be liable for all costs
of disposition of Tenant's abandoned property and Landlord shall have no
liability to Tenant with respect to any such abandoned property. Landlord
agrees to apply the proceeds of any sale of any such property to any amounts due
to Landlord under this Lease from Tenant (including Landlord's attorneys' fees
and other costs incurred in the removal, storage and/or sale of such items),
with any remainder to be paid to Tenant.
ARTICLE VII - REPAIRS
7.01 LANDLORD'S OBLIGATIONS. Landlord agrees to repair and maintain
in good order and condition the structural portions of the Building, the roof,
the foundations, exterior surfaces of exterior walls of the Building and the
Facility and the plumbing, heating, ventilating, air conditioning, elevator and
electrical systems installed or furnished by Landlord, unless such maintenance
and repairs are (i) attributable to items installed in Tenant's Premises which
are above standard interior improvements (such as, for example, custom lighting,
special HVAC and/or electrical panels or systems, kitchen or restroom facilities
and appliances constructed or installed within Tenant's Premises) or (ii) caused
in part or in whole by the act, neglect or omission of any duty by Tenant, its
agents, servants, employees or invitees or (iii) Tenant's responsibility
pursuant to the terms of this Lease, in any which case Tenant will pay to
Landlord, as additional rent, the reasonable cost of such maintenance and
repairs. Tenant shall promptly notify Landlord of the necessity of any repairs
which Tenant may have knowledge of and which Landlord is responsible for under
the provisions of this Lease. Except as provided in Article XX concerning damage
by fire and casualty, Tenant will not be entitled to any abatement of rent and
Landlord will not have any liability by reason of any injury to or interference
with Tenant's business arising from the making, or failure to make, any repairs,
alterations or improvements in or to any portion of the Building, the Facility
or the Premises or in or to fixtures, appurtenances and equipment therein.
Notwithstanding anything to the contrary contained herein, the cost of any
repair and maintenance which Landlord is obligated to perform pursuant to the
terms of this Lease shall be deemed to constitute Operating Expenses except as
otherwise expressly set forth in the definition of Operating Expenses on
Exhibit C attached hereto. Tenant waives the right to make repairs at
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Landlord's expense under any Applicable Laws (including, without limitation, the
provisions of California Civil Code Sections 1941 and 1942 and any successor
statutes or laws of a similar nature).
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7.02 TENANT'S OBLIGATIONS. Except for Landlord's repair obligations
described in Section 7.01 above, Tenant agrees to keep, maintain and preserve
all portions of the Premises including any Tenant Improvements installed by or
on behalf of Tenant and Tenant's furniture, fixtures, equipment and personal
property, in good order and condition and repair and, when and if needed, at
Tenant's sole cost and expense, to make all repairs to the Premises and every
part thereof. Any such maintenance and repairs will be performed by Landlord's
contractor, or at Landlord's option, by such contractor or contractors as Tenant
may choose from an approved list to be submitted by Landlord; it being agreed,
however, that Landlord shall not unreasonably withhold or delay its consent to
approval of any reputable, licensed and insured contractor. Tenant agrees to
pay all costs and expenses incurred in such maintenance and repair within seven
(7) days after billing by Landlord or such contractor or contractors. Tenant
agrees to cause any mechanics' liens or other liens arising as a result of work
performed by Tenant or at Tenant's direction to be eliminated as provided in
Article VIII below. Except as expressly provided in Section 7.01 above and
except for any alterations or repairs required to be made solely and directly as
a result of the grossly negligent acts or omissions of Landlord or Landlord's
employees and agents, Landlord has no obligation to alter, remodel, improve,
repair, decorate or paint the Premises or any part thereof.
7.03 TENANT'S FAILURE TO REPAIR. If Tenant refuses or neglects to
repair and maintain the Premises properly as required hereunder, Landlord, at
any time following ten (10) days from the date on which Landlord makes a written
demand on Tenant to effect such repair and maintenance, may enter upon the
Premises and make such repairs and/or maintenance, and upon completion thereof,
Tenant agrees to pay to Landlord as additional rent, Landlord's costs for making
such repairs plus an amount not to exceed ten percent (10%) of such costs for
overhead, within ten (10) days of receipt from Landlord of a written itemized
bill therefor. Any amounts not reimbursed by Tenant within such ten (10) day
period will bear interest at the Interest Rate until paid by Tenant.
ARTICLE VIII - LIENS
Tenant agrees not to permit any mechanic's, materialmen's or other liens to
be filed against all or any part of the Project, the Facility, the Building or
the Premises, nor against Tenant's leasehold interest in the Premises, by reason
of or in connection with any repairs, Alterations, improvements or other work
contracted for or undertaken by or on behalf of Tenant or materials or supplies
furnished to or obligations incurred by or on behalf of Tenant, or by reason of
any other act or omission of Tenant or Tenant's agents, employees, contractors,
licensees or invitees. Tenant agrees to indemnify, protect, defend and hold
Landlord harmless from and against any and all claims for any such liens. At
Landlord's request, Tenant agrees to provide Landlord with enforceable,
conditional and final lien releases (or other evidence reasonably requested by
Landlord to demonstrate protection from liens) from all persons furnishing labor
and/or materials at the Premises. Landlord will have the right at all reasonable
times to post on the Premises and record any notices of non-responsibility which
it deems necessary for protection from such liens. If any such liens are filed,
Tenant will, at its sole cost, promptly cause such liens to be released of
record or bonded so that it no longer affects title to the Project, the
Facility, the Building or the Premises. If Tenant fails to cause any such liens
to be so released or bonded within ten (10) days after filing thereof, such
failure will be deemed an Event of Default under Article XIX without the benefit
of any additional notice or cure period, and Landlord may, without waiving its
rights and remedies based on such breach, and without releasing Tenant from any
of its obligations, cause such liens to be released by any means it shall deem
proper, including payment in satisfaction of the claims giving rise to such
liens. Tenant agrees to pay to Landlord as additional rent within ten (10) days
after receipt of invoice from Landlord, any sum paid by Landlord to remove such
liens, together with interest at the Interest Rate from the date of such payment
by Landlord.
ARTICLE IX - ASSIGNMENT AND SUBLETTING
9.01 RIGHT TO ASSIGN, SUBLEASE AND ENCUMBER. Landlord and Tenant
recognize and specifically agree that this Article IX is an economic provision,
like Rent, and that Landlord's right to recapture, and to receive any excess
consideration, has been granted by Tenant to Landlord in consideration for other
economic concessions granted by Landlord to Tenant in this Lease. Except as
expressly provided in Section 9.12 below, Tenant may not assign or encumber its
interest in this Lease or in the Premises, or sublease all or any part of the
Premises, or allow any other person or entity to occupy or use all or any part
of the Premises (any such assignment, encumbrance, sublease, or the like shall
sometimes be referred to herein as a "Transfer"), without first obtaining
Landlord's prior written consent, which consent Landlord will not unreasonably
withhold. Any Transfer without Landlord's prior written prior consent shall be
voidable, at Landlord's election, and shall constitute an Event of Default under
Article XIX. No consent to any Transfer shall constitute a further waiver of
the provisions of this Section.
9.02 TRANSFER NOTICE. If Tenant desires to effect a Transfer, then at
least thirty (30) days prior to the date when Tenant desires the Transfer to be
effective (the "Transfer Date"), Tenant agrees to give Landlord a
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notice (the "Transfer Notice"), stating the name, address and business of the
proposed assignee, sublessee or other transferee (sometimes referred to
hereinafter as "Transferee") and its proposed use of the Premises, reasonable
information (including references) concerning the character, ownership and
financial condition of the proposed Transferee (including, without limitation,
its most recent financial reports), the Transfer Date, any ownership or
commercial relationship between Tenant and the proposed Transferee, and the
consideration and all other material terms and conditions of the proposed
Transfer, all in such detail as Landlord may reasonably require and such
additional information related to the proposed Transfer or Transferee as
Landlord may reasonably request. If Landlord reasonably requests additional
detail or information, the Transfer Notice will not be deemed to have been
received and Landlord may withhold consent to such Transfer until Landlord
receives such additional detail or information.
9.03 LANDLORD'S OPTIONS. Within fifteen (15) days of Landlord's
receipt of any Transfer Notice and any additional information requested by
Landlord, Landlord will elect to do one of the following:
(a) consent to the proposed Transfer;
(b) refuse such consent, which refusal shall be on reasonable grounds
including, without limitation, those set forth in Section 9.04 below; or
(c) terminate this Lease as to all or such portion of the Premises
which is proposed to be sublet or assigned and recapture all or such
portion of the Premises for reletting by Landlord.
9.04 REASONABLE DISAPPROVAL. Landlord and Tenant hereby acknowledge
that Landlord's disapproval of any proposed Transfer pursuant to Section 9.03(b)
will be deemed reasonably withheld if based upon any reasonable factor,
including, without limitation, any or all of the following factors: (i) if the
net effective rent payable by the Transferee (adjusted on a rentable square foot
basis) is less than the net effective rent then being quoted by Landlord for new
leases in the Building for comparable size space for a comparable period of
time, taking into consideration whether such proposed Transfer is an assignment
or sublease, as applicable, the length of the remaining Term and the incentives
given to the subtenant or assignee, as the case may be (i.e., improvements made
to prepare the premises demised under the sublease or assignment, as applicable,
for such subtenant's or assignee's occupancy and free rent); (ii) the proposed
Transferee is a Governmental Entity, if the proposed Transferee is entitled,
directly or indirectly, to diplomatic or sovereign immunity or shall not be
subject to the service of process in, and the jurisdiction of, the courts of the
State of California; (iii) the portion of the Premises to be sublet or assigned
is irregular in shape with inadequate means of ingress and egress; (iv) the use
of the Premises by the Transferee (A) is not permitted by the use provisions in
Article V hereof, or (B) violates any exclusive use granted by Landlord to
another tenant in the Project or the Facility; (v) the Transfer would likely
result in an increase (other than to a de minimus extent) in the use of the
Parking Facilities or Common Area by the Transferee's employees or visitors,
and/or increase (other than to a de minimis extent) the demand upon utilities
and services to be provided by Landlord to the Premises or the Facility; (vi)
the Transferee is not a reputable person or entity or does not have the
financial capability to fulfill the obligations imposed by the Transfer and this
Lease (or has not furnished Landlord with reasonable proof thereof); or (vii)
the proposed Transferee is engaged in a business or activity, or the Premises or
the relevant part thereof, will be used in a manner, which is not in keeping
with the then standards of the Building or the Facility; (viii) there shall be
more than three (3) subtenants of the Premises; (ix) Tenant shall have
advertised or publicized in any form of media the availability of the Premises
without prior notice to and approval by Landlord, or if any such advertisement
shall state the name (as distinguished from the address) of the Facility, the
Building or the proposed rental; it being understood and agreed that Landlord's
approval of any such media advertisement shall not be unreasonably withheld or
delayed provided that any such media advertisement shall be prepared in a first-
class manner consistent with Landlord's professional standards; or (x) the form
of the proposed sublease or instrument of assignment (A) shall not be in form
reasonably satisfactory to Landlord, or (B) shall not comply with the applicable
provisions of this Article IX.
9.05 ADDITIONAL CONDITIONS. A condition to Landlord's consent to any
Transfer of this Lease will be the delivery to Landlord of a true copy of the
fully executed instrument of assignment, sublease, transfer or hypothecation,
and, in the case of an assignment, the delivery to Landlord of an agreement
executed by the Transferee in form and substance reasonably satisfactory to
Landlord, whereby the Transferee assumes and agrees to be bound by all of the
terms and provisions of this Lease and to perform all of the obligations of
Tenant hereunder. As a condition for granting its consent to any assignment or
sublease, Landlord may require that the assignee or sublessee remit directly to
Landlord on a monthly basis, all monies due to Tenant by said assignee or
sublessee. As a condition to Landlord's consent to any sublease, such sublease
must provide that it is subject and subordinate to this Lease and to all
mortgages; that Landlord may enforce the provisions of the sublease, including
collection of rent; that in the event of a default by the sublessee or
termination of this Lease for any reason, including, without limitation, a
voluntary surrender by Tenant, or in the event of any reentry or repossession of
the Premises by Landlord, Landlord may, at its option, either (i) terminate the
sublease, or (ii) take over all of the right, title and interest of Tenant, as
sublessor, under such sublease, in which case such sublessee will attorn to
Landlord, but that nevertheless Landlord will not (1) be liable for any previous
act or omission of Tenant under such sublease, (2) be subject to any
counterclaim, defense or offset previously accrued in favor of the sublessee
against Tenant, or (3) be bound by any previous modification of any sublease
made
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without Landlord's written consent, or by any previous prepayment by sublessee
of more than one month's rent.
9.06 EXCESS RENT. If Landlord consents to any assignment of this
Lease, Tenant agrees to pay to Landlord, as additional rent, fifty percent (50%)
of all sums and other consideration payable to and for the benefit of Tenant by
the assignee on account of the assignment, as and when such sums and other
consideration are due and payable by the assignee to or for the benefit of
Tenant (or, if Landlord so requires, and without any release of Tenant's
liability for the same, Tenant agrees to instruct the assignee to pay such sums
and other consideration directly to Landlord). If for any proposed sublease
Tenant receives rent or other consideration, either initially or over the term
of the sublease, in excess of the rent fairly allocable to the portion of the
Premises which is subleased based on square footage, Tenant agrees to pay to
Landlord as additional rent fifty percent (50%) of the excess of each such
payment of rent or other consideration received by Tenant promptly after its
receipt. In calculating excess rent or other consideration which may be payable
to Landlord under this Section 9.06, Tenant will be entitled to deduct
commercially reasonable third party brokerage commissions and attorneys' fees
and other amounts reasonably and actually expended by Tenant in connection with
such assignment or subletting if acceptable written evidence of such
expenditures is provided to Landlord.
9.07 RECAPTURE RIGHTS. If Tenant requests Landlord's consent to any
assignment of this Lease, any subletting all or substantially all of the
Premises, any subletting of all or substantially all of Suite 400 or any
subletting of all or substantially all of Suite 300, Landlord will have the
right, as provided in Section 9.03(c), to terminate this Lease as to all or such
portion of the Premises which is proposed to be sublet or assigned effective as
of the date Tenant proposes to sublet or assign all or less than all of the
Premises. Landlord's right to terminate this Lease as to less than all of the
Premises proposed to be sublet or assigned will not terminate as to any future
additional subletting or assignment as a result of Landlord's consent to a
subletting of less than all of the Premises or Landlord's failure to exercise
its termination right with respect to any subletting or assignment. Landlord
will exercise such termination right, if at all, by giving written notice to
Tenant within thirty (30) days of receipt by Landlord of the financial
responsibility information required by this Article IX. Tenant understands and
acknowledges that the option, as provided in this Article IX, to terminate this
Lease as to all or such portion of the Premises which is proposed to be sublet
or assigned rather than approve the subletting or assignment of all or a portion
of the Premises, is a material inducement for Landlord's agreeing to lease the
Premises to Tenant upon the terms and conditions herein set forth. In the event
of any such termination with respect to less than all of the Premises, the cost
of segregating the recaptured space from the balance of the Premises will be
paid by Tenant and Tenant's future monetary obligations under this Lease will be
reduced proportionately on a square footage basis to correspond to the balance
of the Premises which Tenant continues to lease.
9.08 NO RELEASE. No Transfer will release Tenant of Tenant's
obligations under this Lease or alter the primary liability of Tenant to pay the
Rent and to perform all other obligations to be performed by Tenant hereunder.
Landlord may require that any Transferee remit directly to Landlord on a
monthly basis, all monies due Tenant by said Transferee. However, the
acceptance of Rent by Landlord from any other person will not be deemed to be a
waiver by Landlord of any provision hereof. Consent by Landlord to one Transfer
will not be deemed consent to any subsequent Transfer. In the event of default
by any Transferee of Tenant or any successor of Tenant in the performance of any
of the terms hereof, Landlord may proceed directly against Tenant without the
necessity of exhausting remedies against such Transferee or successor. Landlord
may consent to subsequent assignments of this Lease or sublettings or amendments
or modifications to this Lease with assignees of Tenant, without notifying
Tenant, or any successor of Tenant, and without obtaining its or their consent
thereto and any such actions will not relieve Tenant of liability under this
Lease. If Landlord shall decline to give its consent to any proposed Transfer,
or if Landlord shall exercise any of its options under Section 9.03, Tenant
shall indemnify, defend and hold harmless Landlord against and from any and all
loss, liability, damages, costs and expenses (including reasonable counsel fees)
resulting from any claims that may be made against Landlord by the proposed
Transferee or by any brokers or other persons claiming a commission or similar
compensation in connection with the proposed Transfer.
9.09 ADMINISTRATIVE AND ATTORNEYS' FEES. If Tenant effects a Transfer
or requests the consent of Landlord to any Transfer (whether or not such
Transfer is consummated), then, upon demand, Tenant agrees to pay Landlord a
non-refundable administrative fee of One Thousand Five Hundred Dollars
($1,500.00), plus any reasonable attorneys' and paralegal fees incurred by
Landlord in connection with such Transfer or request for consent or the
reasonable value thereof (whether attributable to Landlord's in-house attorneys
or paralegals or otherwise). Acceptance of the One Thousand Five Hundred Dollars
($1,500.00) administrative fee and/or reimbursement of Landlord's attorneys' and
paralegal fees will in no event obligate Landlord to consent to any proposed
Transfer.
9.10 EFFECTIVENESS CONDITIONED UPON ASSUMPTION. Any Transfer shall be
made only if, and shall not be effective until, the Transferee shall execute,
acknowledge and deliver to Landlord an agreement in form and substance
satisfactory to Landlord whereby the Transferee shall assume the obligations of
this Lease on the part of Tenant to be performed or observed and whereby the
Transferee shall agree that the provisions in Section 9.01 shall,
notwithstanding such Transfer, continue to be binding upon it in respect of all
future Transfers. The original named Tenant covenants that, notwithstanding any
Transfer, whether or not in violation of the provisions of this Lease, and
notwithstanding the acceptance of Rent and/or additional rent by Landlord from
an assignee, transferee or any other party, the original named Tenant shall
remain fully liable for the payment of the Rent and additional rent and for the
other obligations of this Lease on the part of Tenant to be performed or
observed.
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9.11 LIABILITY OF TENANT. The joint and several liability of Tenant
and any immediate or remote successor in interest of Tenant and the due
performance of the obligations of this Lease on Tenant's part to be performed or
observed shall not be discharged, released or impaired in any respect by any
agreement or stipulation made by Landlord extending the time, or modifying any
of the obligations, of this Lease, or by any waiver or failure of Landlord to
enforce any of the obligations of this Lease.
9.12 RELATED CORPORATION. Tenant may, without Landlord's consent,
permit any Related Corporation to sublet all or part of the Premises or take an
assignment of this Lease for any of the purposes permitted to Tenant, provided
and upon the condition that Tenant has given Landlord not less than thirty (30)
days prior written notice thereof, Tenant shall utilize a form of sublease or
assignment, as the case may be, reasonably acceptable to Landlord and meeting
the requirements of this Lease, including, without limitation this Article IX.
Such subletting shall not be deemed to vest in any such Related Corporation any
right or interest in this Lease or the Premises nor shall it relieve, release,
impair or discharge any of Tenant's obligations hereunder. Furthermore, such
sublease or assignment, as the case may be, shall be subject to Tenant
furnishing Landlord, prior to the commencement of the term thereof, with (i)
adequate proof that such Related Corporation has been duly organized or formed,
as the case may be, and is in good standing in the jurisdiction of its
incorporation or formation, as the case may be, and (ii) resolutions of its
Board of Directors certified by the appropriate corporate officer or partnership
consents, as applicable, authorizing such sublease or assignment, as the case
may be.
ARTICLE X - INSURANCE AND INDEMNIFICATION
10.01 LIMITATION ON LANDLORD'S LIABILITY. Neither Landlord nor
Landlord's agents or employees shall be liable to Tenant and Tenant hereby
waives all claims against Landlord, its agents and employees for any injury or
damage to any person or property in, upon or about the Premises, the Building or
the Facility, by or from any cause whatsoever (other than due to gross
negligence or willful misconduct of the Landlord, or its agents or employees)
and, without limiting the generality of the foregoing, whether caused by water
leakage of any character from the roof, walls, basement or other portion of the
Premises, the Building or the Facility, or caused by gas, fire, steam, oil or
electricity in, upon or about the Premises or Facility. Landlord and Landlord's
agents and employees shall not be liable for any damage to any of Tenant's
personal property entrusted to Landlord, and its employees, nor for loss of or
damage to any of Tenant's personal property by theft or otherwise except when
caused by Landlord's gross negligence or willful misconduct. Landlord and
Landlord's agents and employees shall not be liable for any latent or patent
defect in the Premises or the Facility or for any consequential damages arising
out of any loss of use of the Premises. Tenant shall give prompt written notice
to Landlord in case of damage caused by fire or accident on the Premises. Tenant
shall look solely to Landlord to enforce Landlord's obligations hereunder and
shall not seek any damages against any of Landlord Indemnified Parties (as
hereinafter defined). The liability of Landlord for Landlord's obligations under
this Lease shall not exceed and shall be limited to Landlord's interest in the
Building and Tenant shall not look to any other property or assets in seeking
either to enforce Landlord's obligations under this Lease to satisfy a judgment
for Landlord's failure to perform such obligations. Notwithstanding the
foregoing, Tenant shall have recourse against Landlord to the extent of the net
proceeds realized by Landlord on the sale of the Building.
10.02 INDEMNIFICATION OF LANDLORD. Tenant hereby agrees to indemnify,
protect, defend and hold Landlord and its partners, shareholders, officers,
directors, employees, agents and representatives ("Landlord Indemnified
Parties") harmless from and against any and all claims, damages, costs, losses
or liability (i) for any death, injury or damage to any person or property
whatsoever, (A) occurring in, on or about the Premises or any portion thereof,
or (B) occurring in, on or about the Premises, the Facility or the Project or
any portion thereof, when such injury or damage shall be caused in part or in
whole by the act, neglect, fault or omission of any duty with respect to the
same by Tenant, its agents, servants, employees, guests, licensees or invitees
excluding therefrom any injury or damage caused by or resulting solely from the
gross negligence or willful misconduct of Landlord (ii) of whatever nature
against Landlord arising from any act, omission or negligence of Tenant, its
contractors, licensees, agents, servants, employees, invitees or visitors
including any claims arising from any act, omission or negligence of Landlord
and Tenant. Tenant hereby agrees to indemnify, protect, defend and hold
harmless Landlord and all Landlord Indemnified Parties from and against any and
all claims, damages, costs, liability or losses by or on behalf of any person,
firm or corporation arising from the conduct or management of any work,
alteration, addition, improvement or thing whatsoever done by or on behalf of
Tenant in or about the Premises or arising from transactions of Tenant,
concerning the Premises and hereby agrees to indemnify, protect, defend and
hold Landlord and all Landlord Indemnified Parties harmless from and against any
and all liens or claims arising from any breach or default on the part of Tenant
in the performance of any covenant or agreement on the part of Tenant to be
performed pursuant to the terms of this Lease or arising from any act or
negligence of Tenant, or any of its agents, contractors, subcontractors,
material men, servants, employees or licensees, and from and against all costs,
reasonable attorney's fees, expenses and liabilities incurred in connection with
any such claim or action or proceeding brought thereon. In case any action or
proceeding is brought against Landlord or any Landlord Indemnified Parties by
reason of any claims or liability within the limits of the foregoing
indemnities, Tenant shall defend such action or proceeding at Tenant's sole
expense by counsel reasonably satisfactory to Landlord. In the event Tenant
does not provide such a defense against any and all claims, demands, actions or
causes of action, threatened or actual, then Tenant shall in addition to the
above, pay to Landlord the reasonable attorneys' fees, legal expenses and costs
incurred by Landlord in providing or
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preparing such defense, and Tenant agrees to cooperate with Landlord in such
defense, including, without limitation, the providing of affidavits and
testimony upon request of Landlord. Landlord agrees to cooperate with Tenant in
such defense in the event that Tenant and not Landlord undertakes such defense.
10.03 LANDLORD'S INDEMNITY. Notwithstanding anything to the contrary
contained in Sections 10.01 or 10.02 above, Tenant shall not be required to
protect, defend, save harmless or indemnify Landlord from any liability for
injury, loss, accident or damage to any person or property resulting solely and
directly form Landlord's grossly negligent acts or omissions or willful
misconduct or that of Landlord's agents or employees in connection with
Landlord's activities on or about the Premises, the Building or the Facility,
and, subject to the terms of Section 10.06 below, Landlord hereby indemnifies
and agrees to protect, defend and hold Tenant harmless from and against any
liability for injury, loss, accident or damage to any person or property
resulting solely and directly from Landlord's grossly negligent acts or
omissions or willful misconduct or that of Landlord's agents and employees in
connection with Landlord's activities in or about the Building or the Facility.
Such exclusion from Tenant's indemnity and such agreement by Landlord to so
indemnify and hold Tenant harmless are not intended to and shall not relieve any
insurance carrier of its obligations under policies required to be carried by
Tenant pursuant to the provisions of this Lease to the extent that such policies
cover (or, if such policies would have been carried as required, would have
covered) the result of grossly negligent acts or omissions or willful misconduct
of Landlord or those of its agents or employees.
10.04 SURVIVAL OF INDEMNITIES. The provisions of Sections 10.01, 10.02
and 10.03 together with any other indemnification provisions in this Lease shall
survive the expiration or termination of this Lease with respect to any claims,
expenses or liability occurring prior to such expiration or termination.
Tenant's covenants, agreements and indemnification obligations in Sections 10.01
and 10.02 above and not intended to and shall not relieve any insurance carrier
of its obligations under policies required to be carried by Tenant pursuant to
the provisions of this Lease.
10.05 TENANT'S INSURANCE. Tenant shall purchase, at its own expense,
and keep in force during the Term, the following insurance:
(a) "All Risks" property insurance including at least the following
perils: fire and extended coverage, smoke damage, vandalism, malicious
mischief, sprinkler leakage (including earthquake sprinkler leakage). This
insurance policy must be upon all property owned by Tenant, for which
Tenant is legally liable, or which is installed at Tenant's expense, and
which is located in the Building including, without limitation, any tenant
improvements which satisfy the foregoing qualification and any Alterations,
and all furniture, fittings, installations, fixtures and any other personal
property of Tenant, in an amount not less than the full replacement cost
thereof.
(b) One (1) year insurance coverage for business interruption and loss
of income and extra expense insuring the same perils described in Section
10.05(a) above, in such amounts as will reimburse Tenant for any direct or
indirect loss of earnings attributable to any such perils including
prevention of access to the Premises, Tenant's parking areas or the
Facility as a result of any such perils.
(c) Commercial General Liability Insurance or Comprehensive General
Liability Insurance (on an occurrence form) insuring bodily injury,
personal injury and property damage including the following divisions and
extensions of coverage: Premises and Operations; Owners and Contractors
protective; blanket contractual liability (including coverage for Tenant's
indemnity obligations under this Lease); products and completed operations;
liquor liability (if Tenant serves alcohol on the Premises); and fire and
water damage legal liability in an amount sufficient to cover the
replacement value of the Premises, including tenant improvements, that are
rented under the terms of this Lease. Such insurance must have the
following minimum limits of liability: bodily injury, personal injury and
property damage - $1,000,000 each occurrence, provided that if liability
coverage is provided by a Commercial General Liability policy the general
aggregate limit shall apply separately and in total to this location only
(per location general aggregate), and provided further, such minimum limits
of liability may be adjusted from year to year to reflect increases in
coverages as recommended by Landlord's insurance carrier as being prudent
and commercially reasonable for tenants of first class office complexes
comparable to the Facility, rounded to the nearest five hundred thousand
dollars.
(d) Comprehensive Automobile Liability insuring bodily injury and
property damage arising from all owned and hired vehicles, if any, with
minimum limits of liability of $1,000,000 per accident.
(e) Worker's Compensation as required by the laws of the State of
California with the following minimum limits of liability: Coverage A -
statutory benefits; Coverage B - $1,000,000 per accident and disease.
(f) Any other form or forms of insurance as Tenant or Landlord or any
mortgagees of Landlord may reasonably require from time to time in form, in
amounts, and for insurance risks against which, a prudent tenant would
protect itself, but only to the extent coverage for such risks and amounts
are available in the insurance market at commercially acceptable rates.
Landlord makes no representation that the limits of liability required to
be carried by Tenant under the terms of this Lease are adequate to protect
Tenant's interests and Tenant should obtain such additional insurance or
increased liability limits as Tenant deems
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appropriate. Tenant's insurance policies shall in all events: (i) name
Landlord, Landlord's property manager and any party holding an interest in
this Lease or to which this Lease may be subordinated, as additional
insureds; (ii) provide that said insurance shall not be canceled or altered
unless thirty (30) days' prior written notice shall have been given to
Landlord and such cancellation or alteration shall not be effective until
such notice shall have been given to Landlord; and (iii) be issued by
companies licensed to do business in the State of California and have a
Best key rating of at least "A" "X" or better. All liability insurance
under this Section 10.05 shall be primary and noncontributing with any
insurance which may be carried by Landlord. The limits of said insurance
shall not, however, limit the liability of Tenant under Sections 10.01 and
10.02. Tenant shall deliver to Landlord original certificates from the
issuing insurance companies evidencing that said insurance is in full force
and effect and complies with the requirements of this Section 10.05.
10.06 WAIVER OF SUBROGATION. To the extent permitted by law and
without affecting the coverage provided by insurance required to be maintained
hereunder, Landlord and Tenant each waive any right to recover against the other
for (i) damages for injury to or death of persons, (ii) damage to property,
(iii) damage to the Premises or the Facility or any part thereof, (iv) claims
arising by reason of the foregoing, but only to the extent that any of the
foregoing damage or damages and/or claims referred to above are covered (and
only to the extent of such coverage) by insurance actually carried by either
Landlord or Tenant. This provision is intended to waive fully, and for the
benefit of each party, any rights and or claims which might give rise to a right
of subrogation on any insurance carrier. The coverage obtained by each party
pursuant to this Lease shall include, without limitation, a waiver of
subrogation by the carrier which conforms to the provisions of this Article X.
ARTICLE XI - SERVICES AND UTILITIES
11.01 MAINTENANCE BY LANDLORD. Landlord shall cause to be maintained
the Facility Common Area, including lobbies, stairs, elevators, corridors and
restrooms, the windows in the Facility, the mechanical, plumbing and electrical
equipment serving the Premises or the Facility, and the structure itself, in
good order and condition, except for damage occasioned by the act of Tenant,
which damage Landlord shall cause to be repaired, at Tenant's expense.
11.02 DELIVERY OF SERVICES AND UTILITIES. Subject to other provisions
in this Lease and to the Facility rules and regulations promulgated by Landlord
from time to time, Landlord shall cause to be furnished to the Premises during
the periods from 7:00 A.M. to 6:00 P.M., Monday through Friday and 8:00 A.M. to
1:00 P.M., Saturday (but exclusive, in any event, of New Year's Day, Memorial
Day, Independence Day, Labor Day, Thanksgiving and Christmas) (collectively,
"Normal Business Hours"), heat and air conditioning required, in Landlord's
judgment, for the comfortable use and occupation for the Permitted Use of the
Premises. Landlord shall provide water and electricity suitable for the
Permitted Use of the Premises on a twenty-four (24) hour per day, seven (7) days
per week basis. Landlord shall have no obligation to provide additional or
after-hours heating or air conditioning, except as provided in Section 11.05.
Tenant also agrees at all times to cooperate fully with Landlord and to abide by
all the regulations and requirements which Landlord may prescribe for the proper
function and protection of heating, ventilating and air conditioning systems.
Wherever heat-generating machines, excess lighting or equipment are used in the
Premises which affect the temperature otherwise maintained by the air
conditioning system, Landlord reserves the right to install supplementary air
conditioning units in the Premises, and the cost thereof, including the cost of
installation, operation and maintenance thereof, shall be paid by Tenant to
Landlord within ten (10) days after written notice by Landlord. Landlord shall
provide janitorial services sufficient to keep the Premises in a clean
condition, provided that Tenant shall leave the Premises in a reasonably tidy
condition at the end of each business day.
11.03 EQUIPMENT REQUIRING EXCESSIVE UTILITIES. Landlord acknowledges
that Tenant, without Landlord's consent, shall have the right to install and
operate equipment and machinery normal for modern office purposes including,
without limitation, calculators, typewriters, word processors, personal
computers, copying machines and computer terminals. Landlord's review and
approval hereunder shall be principally directed for determining the adequacy of
the existing HVAC system to accommodate Tenant's intended uses. Tenant shall
not, without the prior written consent of Landlord, use (except as provided in
the first sentence of this Section 11.03) any apparatus or device in the
Premises using excess lighting or using current in excess of that which is
determined by Landlord as reasonable and normal for the Permitted Use or which
will in any way increase the amount of electricity or water usually furnished or
supplied for the Permitted Use of the Premises.
11.04 RIGHT TO CURTAIL SERVICES AND UTILITIES. Landlord shall have the
sole discretion to reduce or cease any services or utilities to the Premises or
the Facility by reason of (i) the installation, use or interruption of use of
any equipment in connection with the furnishing of any of the foregoing
utilities and services, (ii) failure to furnish or delay in furnishing any such
utilities or services when such failure or delay is caused by acts of God or the
elements, labor disturbances of any character or any other accidents or breakage
or other conditions beyond the reasonable control of Landlord, (iii) the
limitation, curtailment, rationing or restriction on use of water, electricity,
gas or any other form of energy or any other services or utilities whatsoever
serving the Premises or the Facility, necessary to comply with Applicable Law or
any governmental energy conservation program, and (iv) the making of any
repairs, additions, alterations or improvements to the Facility or the
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Premises until such repairs, additions, alterations, or improvements have been
completed. No such reduction or cessation of services or utilities shall
constitute an eviction or disturbance of Tenant's use or possession of the
Facility, or a breach by Landlord of any of its obligations hereunder, or render
Landlord liable for damages, including but not limited to any damages,
compensation or claims arising from any reduction or cessation of services or
entitle Tenant to any compensation or to any abatement or diminution of Rent or
relieve Tenant of any of its obligations under this Lease. Notwithstanding the
foregoing, in the exercise of its rights set forth in this Section 11.04,
Landlord shall use reasonable efforts to minimize material interference with
Tenant's use of the Premises, which reasonable efforts shall not require
Landlord to employ overtime or premium-pay labor. Landlord shall use reasonable
diligence to cause such services to be restored where it is within Landlord's
reasonable control to do so.
11.05 AFTER HOURS AND ADDITIONAL SERVICES. The Rent does not include
any charge to Tenant for the furnishing of any additional service of heat,
cooled air or mechanical ventilation or elevator service to the Premises during
periods other than during Normal Business Hours (hereinafter referred to as "
Overtime Periods"). Accordingly, if Landlord shall furnish any (i) passenger
elevator facilities to Tenant during Overtime Periods or freight elevator
facilities or (ii) heat, cooled air or ventilation to the Premises during
Overtime Periods, then Tenant shall pay Landlord additional rent for such
facilities or services (A) during the first sixty-two (62) months of the Term,
at the standard rates then fixed by Landlord for the Facility or, if no such
rates are then fixed, at reasonable rates, and (B) at any time thereafter, at
the standard rates then fixed by Landlord for the Facility plus a ten percent
(10%) administrative fee or, if no such rates are then fixed, at reasonable
rates. Tenant may use one (1) freight elevator for Tenant's initial move into
the Premises at no charge provided that (i) Tenant shall have previously
requested Landlord's approval of Tenant's use of the freight elevator on such
date and Landlord shall have approved same, (ii) Tenant shall have previously
furnished to Landlord evidence of the insurance required to be obtained and
maintained by Tenant pursuant to Article X hereof, (iii) such move shall be
effectuated at a time satisfactory to Landlord, and (iv) Tenant shall pay for
any security reasonably required by Landlord in connection therewith. Neither
the facilities nor the services referred to in this Section 11.05 shall be
furnished to Tenant or the Premises if Landlord has not received advance notice
from Tenant specifying the particular facilities or services requested by Tenant
at least twenty-four (24) hours prior to the date on which the facilities or
services are to be furnished (other than if Tenant is requesting the use of HVAC
during periods other than during Normal Business Hours, hereinafter referred to
as "Extra HVAC Use", in which case Tenant must give Landlord a minimum of two
(2) hours advance notice specifying the times of Extra HVAC Use, which notice
must be given to Landlord during Normal Business Hours); or if Tenant is in
default under or in breach of any of the terms, covenants or conditions of this
Lease; or if Landlord shall determine, in its sole and exclusive discretion,
that such facilities or services are requested in connection with, or the use
thereof shall create or aid in a default under or a breach of any term, covenant
or condition of this Lease. If more than one tenant in the Building shall
request Extra HVAC Use then the cost thereof chargeable to Tenant shall be
determined by dividing the cost of such Extra HVAC Use among Tenant and all
other requesting tenants so that Tenant shall not pay more than its pro rata
share of the charges imposed for such Extra HVAC Use. All of the facilities and
services referred to in this Section 11.05 are conveniences and are not and
shall not be deemed to be appurtenances to the Premises, and the failure of
Landlord to furnish any or all of such facilities or services shall not
constitute or give rise to any claim of an actual or constructive eviction, in
whole or in part, or entitle Tenant to any abatement or diminution of Rent, or
relieve Tenant from any of its obligations under this Lease, or impose any
liability upon Landlord or its agents by reason of inconvenience or annoyance to
Tenant, or injury to or interruption of Tenant's business or otherwise.
11.06 SATELLITE ANTENNA. During the term of this Lease, Tenant shall
have the non-exclusive right, at its sole cost and expense, to install a
satellite dish on the roof of the 3347 Building, provided as a condition to
Tenant's right to install, use, operate and maintain such roof top equipment,
Tenant shall enter into a written license agreement in substantially the form of
Exhibit I attached hereto.
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ARTICLE XII - ESTOPPEL CERTIFICATE
Within (10) days following any written request which Landlord may make from
time to time, Tenant shall execute and deliver to Landlord an estoppel
certificate substantially in the form attached hereto as Exhibit F and
---------
incorporated herein by reference, indicating thereon any exceptions thereto
which may exist at that time. Failure by Tenant to execute and deliver such
certificate shall constitute an acknowledgment by Tenant that the statements
included in Exhibit F are true and correct without exception. Landlord and
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Tenant intend that any statement delivered pursuant to this Article XII may be
relied upon by any mortgagee, beneficiary, purchaser or prospective purchaser of
the Project, the Facility or any interest therein. Tenant agrees to indemnify
and protect Landlord from and against any and all claims, damages, losses,
liabilities and expenses (including attorneys' fees and costs) attributable to
any failure by Tenant to timely deliver any such estoppel certificate to
Landlord as required by this Article XII. Landlord shall have the right to
substitute for the attached Exhibit F a certificate in form required by
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Landlord's mortgagee, provider of financing or purchaser of property.
ARTICLE XIII - PARKING
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13.01 SPACES. Subject to the terms of the REA, during the Term of this
Lease Landlord shall provide Tenant with or cause Tenant to be provided with (i)
the number of non-exclusive, unreserved parking spaces designated in the Summary
of Basic Lease Information and (ii) the number of non-exclusive, reserved
surface parking spaces designated in the Summary of Basic Lease Information.
Notwithstanding the foregoing, Tenant shall have the option to relinquish its
right to use any of such non-exclusive, reserved surface parking spaces or non-
exclusive, unreserved parking spaces upon not less than sixty (60) days prior
written notice to Landlord, following which Tenant shall have no obligation to
use or pay for any of such relinquished parking spaces. Tenant acknowledges that
if Tenant elects to relinquish all or any of the non-exclusive, reserved surface
parking spaces or the non-exclusive, unreserved parking spaces, as the case may
be, Landlord shall have no further obligation under this Lease at any time
during the Term to make such non-exclusive, reserved surface parking spaces or
non-exclusive, unreserved parking spaces, as the case may be, available to
Tenant.Tenant's use of parking spaces within the Parking Facilities may be
subject to any sticker or permit system implemented by Landlord at any time.
Landlord or the operator of the Parking Facilities shall have the right to
change the location of parking from time to time.
13.02 CONTROL. Subject to the terms of the REA, Landlord shall have
the sole and exclusive control of the Parking Facilities. Landlord may, at any
time and from time to time during the Term exclude any person from use or
occupancy thereof who is not a tenant or occupant of the Facility or an
employee, invitee, subtenant, guest or licensee of Tenant. Tenant shall not
cause or permit any obstruction to the free and clear use of the Parking
Facilities. Tenant shall not use or allow any of its employees or invitees to
use any parking spaces which have been specifically assigned by Landlord to
other tenants or occupants or for other uses such as visitor or short-term
parking or which have been designated by any Governmental Entity as being
restricted to certain uses. Landlord shall have no liability to Tenant, nor
shall Tenant's obligations under this Lease be in any way excused or modified,
if Tenant's parking privilege under this Lease is affected or impaired in any
way by reason of any moratorium, initiative, referendum, statute, regulation or
other governmental decree or action or pursuant to the terms of the REA or by
virtue of any act of the owner or operator of the Parking Facilities. Any
governmental charges, surcharges or other monetary obligations which may be
imposed in connection with parking privileges appurtenant to this Lease or with
the operation of the Parking Facilities shall be included as Rent. Tenant and
its invitees, subtenants, employees, agents and guests shall faithfully observe
and comply with all Applicable Laws relating to the trafficking, operation,
occupancy or use of the parking and the Parking Facilities.
13.03 GENERAL PROVISIONS. Landlord reserves the right to set and
increase monthly fees and/or daily and hourly rates for parking privileges from
time to time during the Term of this Lease; it being agreed that the current
charge for each non-exclusive, reserved surface parking space is seventy dollars
($70.00) per month, which charge is subject to increase from time to time.
Notwithstanding the foregoing, Tenant's use of the number of non-exclusive,
unreserved surface parking spaces designated in the Summary of Basic Lease
Information shall be free of charge (other than Tenant's Operating Expenses
attributable to the Parking Facilities) for the initial sixty (60) months of the
Term. Landlord may assign any unreserved and unassigned parking spaces and/or
make all or any portion of such spaces reserved, if Landlord reasonably
determines that it is necessary for orderly and efficient parking or for any
other reasonable reason. If Tenant shall fail to pay the rent for any particular
parking space or if Tenant shall fail to comply with any of the terms and
conditions of this Lease applicable to parking, Landlord may elect to recapture
all of Tenant's parking spaces and revoke any or all of Tenant's privileges with
respect to parking for the balance of the Term of this Lease if Tenant does not
cure such failure within the applicable cure period set forth in Article XIX of
this Lease. Tenant's parking rights and privileges described herein are personal
to Tenant and may not be assigned or transferred, or otherwise conveyed, without
Landlord's prior written consent, which consent Landlord may withhold in its
sole and absolute discretion. In any event, under no circumstance may Tenant's
parking rights and privileges be transferred, assigned or otherwise conveyed
separate and apart from Tenant's interest in this Lease.
13.04 COOPERATION WITH TRAFFIC MITIGATION MEASURES. Tenant agrees to
use its reasonable, good faith efforts to cooperate in traffic mitigation
programs which may be undertaken by Landlord independently, or in cooperation
with local municipalities or GOVERNMENTAL agencies or other property owners in
the vicinity of the Facility. Such programs may include, but will not be limited
to, carpools, vanpools and other ridesharing programs, public and private
transit, flexible work hours, preferential assigned parking programs and
programs to coordinate tenants within the Facility and the Project with existing
or proposed traffic mitigation programs.
13.05 PARKING RULES AND REGULATIONS. Tenant shall comply with all
rules and regulations regarding parking set forth in Exhibit G attached hereto
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and Tenant agrees to cause its employees, subtenants, assignees, contractors,
suppliers, customers and invitees to comply with such rules and regulations.
Landlord reserves the right from time to time to modify and/or adopt such other
reasonable and non-discriminatory rules and regulations for the Parking
Facilities as it deems reasonably necessary for the operation of the Parking
Facilities.
ARTICLE XIV - SUBSTITUTION
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At any time after execution of this Lease, Landlord reserves the right,
without Tenant's consent first being obtained, to relocate Tenant for all or a
portion of the Premises, to other premises in the Facility (the "New Premises")
upon not less than ninety (90) days prior written notice, in which event the New
Premises shall be deemed to be the Premises for all purposes hereunder, provided
however, that:
(a) The New Premises shall (i) be similar in area to the Premises,
(ii) be reasonably satisfactory to Tenant, and (iii) shall satisfy Tenant's
purposes and requirements herein;
(b) If Tenant is occupying the Premises at the time of such
substitution, Landlord shall pay the expenses of moving Tenant, its
property and equipment (including installation and connection of equipment)
to the New Premises and shall, at its sole cost, improve the New Premises
with improvements comparable in quality to those which then exist in the
Premises and those which Landlord has committed to provide or has provided
in the Premises.
ARTICLE XV - SURRENDER OF PREMISES; HOLDING OVER
15.01 SURRENDER OF PREMISES. Subject to the provisions of Article VI
regarding Alterations, at the end of the Term or other sooner termination of
this Lease, Tenant shall peaceably deliver up to Landlord possession of the
Premises, broom clean and in good order and condition, together with all
improvements, fixtures or additions thereto by whomsoever made, in the same
condition as received, or first installed, damage by fire, earthquake,
reasonable wear and tear, act of God or the elements alone excepted. Tenant may,
upon the termination of this Lease, remove all movable furniture and equipment
belonging to Tenant, at Tenant's sole cost, title to which shall be in Tenant
until such termination, and shall repair any damage caused by such removal.
Property not so removed, upon termination, shall be deemed abandoned by Tenant,
and title to the same shall thereupon pass to Landlord, but the foregoing shall
not be deemed to relieve Tenant of responsibility for the cost of removal of any
such property.
15.02 NO MERGER. The voluntary or other surrender of this Lease by
Tenant, or a mutual cancellation thereof, shall not work a merger and shall, at
Landlord's option, terminate all or any existing subleases or subtenancies or
may, at Landlord's option, operate as an assignment to it of any or all such
subleases or subtenancies.
15.03 HOLDING OVER. If Tenant shall retain possession of the Premises
or any part thereof without Landlord's consent following the expiration of the
Term or sooner termination of this Lease for any reason, then, Tenant shall pay
to Landlord for each day of such retention Basic Rent at a rate which is the
greater of (i) one hundred fifty percent (150%) of the rate of daily Basic Rent
for the last period prior to the date of such expiration or termination
("Existing Basic Rent"); or (ii) one hundred fifty percent (150%) of the then
prevailing monthly rental rate for similar office space, determined by Landlord.
Tenant shall also be liable for one hundred fifty percent (150%) of Tenant's
Share of Operating Expenses and all other items of additional rent and for the
performance of all other Lease obligations for any holdover period. Tenant shall
indemnify, protect, defend and hold Landlord harmless from any loss or liability
resulting from delay by Tenant in surrendering the Premises, including, without
limitation, any claims made by any succeeding tenant founded on such delay.
Acceptance of Rent and/or any other consideration by Landlord following
expiration or termination shall not constitute a renewal of this Lease, and
nothing contained in this Article XV shall waive Landlord's right of reentry or
any other right. Tenant shall be only a tenant at sufferance, whether or not
Landlord accepts any Rent and/or other consideration from Tenant while Tenant is
holding over without Landlord's written consent.
ARTICLE XVI - SUBORDINATION AND QUIET ENJOYMENT
16.01 SUBORDINATION. Without the necessity of any additional
subordination document being executed by Tenant, at the election of Landlord or
any mortgagee or beneficiary under a deed of trust which covers the Premises, or
any lessor or a ground or any underlying lease with respect to the Facility,
this Lease shall be subject and subordinate at all times to: (i) all ground
leases, master leases or underlying leases and covenants, conditions and
restrictions, reciprocal easement agreements, and parking agreements relating to
the operation, management and development of the Facility which may now exist
and provided any such instruments which may be created or modified after the
date of this Lease do not materially and adversely impact Tenant's use and
enjoyment of the Premises, then this Lease shall be subject and subordinate to
any such instruments which may hereafter be executed affecting the Facility, and
all amendments, renewals, modifications, consolidations, supplements and
extensions thereof, and (ii) the lien of any and all mortgages or deeds of trust
which may now exist or hereafter be executed in any amount or amounts for which
the Facility, the Premises, ground leases or underlying leases, or any portion
thereof or Landlord's interest or estate in any such items, is specified as
security and to any and all advances made on the security thereof and to all
renewals, modifications, consolidations, replacements and extensions thereof and
the rights of the parties in all such leases, agreements and instruments
(collectively, the "Superior Interests"). Notwithstanding the foregoing,
Landlord shall have the
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unconditional right to subordinate or cause to be subordinated any such Superior
Interests which may now exist or hereafter be executed in any amount or amounts
for purposes stated hereinabove to this Lease. If any such Superior Interest
shall terminate or be foreclosed upon, for any reason, then, at the election of
Landlord's successor in interest, Tenant shall, notwithstanding any
subordination, attorn to and become the Tenant of the successor in interest to
Landlord, subject to and in accordance with the terms of this Lease and any
modifications hereto. The provisions of this Section 16.01 shall be self-
operative upon any election by Landlord or any mortgagee or beneficiary and no
further instrument shall be required to give effect to said provisions. Tenant,
however, upon demand of Landlord or any such mortgagee or beneficiary, agrees to
execute, from time to time, instruments in confirmation of the foregoing
provisions of this Section 16.01, satisfactory to Landlord or any mortgagee or
beneficiary, acknowledging such attornment and setting forth the terms and
conditions of its tenancy. Nothing contained in this Section 16.01 shall be
construed to impair any right otherwise exercisable by Landlord or any such
mortgagee or beneficiary.
16.02 QUIET ENJOYMENT. Subject to the provisions of Section 16.01,
Landlord covenants and agrees that, if and so long as no Event of Default shall
occur, Tenant may peaceably and quietly hold and enjoy the Premises for the Term
of this Lease, without hindrance from Landlord or persons claiming, by, through
or under Landlord. Tenant's right to use the Premises and the Common Area as
provided in this Lease shall be subject to all Applicable Laws now in force or
which may hereafter be in force and no such Applicable Laws shall in any way
affect this Lease, abate Rent, relieve Tenant of any liabilities or obligations
under this Lease, or give rise to any claims whatsoever against Landlord.
16.03 NON-DISTURBANCE. Notwithstanding anything to the contrary
contained in Sections 16.01 and 16.02 above, Landlord shall use reasonable
efforts to obtain a non-disturbance agreement from any current mortgagee or
beneficiary under a deed of trust which covers the Premises on such mortgagee's
or beneficiary's standard form and Landlord shall request a non-disturbance
agreement from any future mortgagee or beneficiary under a deed of trust which
covers the Premises on such mortgagee's or beneficiary's standard form; it being
agreed that the foregoing shall not require the expenditure or payment by
Landlord of any sum whatsoever. Landlord and Tenant acknowledge and agree that
Landlord's failure to obtain any such non-disturbance agreement shall in no way
relieve Tenant of any of its obligations hereunder or affect the subordination
of this Lease as provided in this Article.
ARTICLE XVII - RULES AND REGULATIONS
Tenant shall comply with all of the rules and regulations contained on
Exhibit G attached hereto and incorporated herein by reference, as such rules
- ---------
and regulations may be revised from time to time by Landlord. To the extent
reasonably practicable, Landlord shall endeavor to provide Tenant with thirty
(30) days prior notice of the adoption of new rules and regulations or any
changes or additions to existing rules and regulations. Landlord shall not
enforce the rules and regulations in a discriminatory manner against Tenant.
ARTICLE XVIII - ENTRY
Landlord reserves the right to enter the Premises at all reasonable hours
upon reasonable prior notice (except in cases of emergency) by means of a master
key for any reasonable purpose. If Tenant shall not be personally present to
open and permit entry into the Premises at any time, Landlord may enter by means
of a master key without liability to Tenant and without affecting the Lease.
Tenant understands and agrees that all parts (except surfaces facing the
interior of the Premises) of all walls, windows and doors bounding the Premises
(including exterior Building walls, core corridor walls, doors and entrances),
all balconies, terraces and roofs adjacent to the Premises, all space in or
adjacent to the Premises used for shafts, stacks, stairways, chutes, pipes,
conduits, ducts, fan rooms, heating, air cooling, plumbing and other mechanical
facilities, service closets and other Building facilities are not part of the
Premises, and Landlord shall have the use thereof, as well as access thereto,
through the Premises for the purposes of cooperation, maintenance, alteration
and repair.
ARTICLE XIX - DEFAULT BY TENANT
19.01 EVENTS OF DEFAULT. The occurrence of any of the following and
the expiration of the applicable cure period shall constitute an "Event of
Default" on the part of Tenant:
(a) Failure to pay any installment of Basic Rent, Operating Expenses
or any other item of Rent due and payable hereunder within five (5) days
after Tenant's receipt of written notice from Landlord that said payment
has not been received.
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(b) Failure to perform or breach of any obligations, agreement or
covenant under this Lease other than as specified in Subsection (a), where
such failure or breach continues for fifteen (15) days after Tenant's
receipt of written notice of such failure, provided, however, that if the
default cannot be cured within fifteen (15) days, Tenant shall not be in
default of the Lease if Tenant promptly after notice from Landlord
commences to cure the default within the fifteen (15) day period and
thereafter diligently prosecutes the same to completion. Such notice shall
be in lieu of and not in addition to any notice required under Section 1161
of the California Code of Civil Procedure.
(c) Any attempted assignment of this Lease or subletting of the
Premises in violation of the provisions of Article IX.
(d) A general assignment by Tenant for the benefit of creditors.
(e) The filing of any voluntary petition by Tenant under the
Bankruptcy Code, or the filing of an involuntary petition by Tenant's
creditors, which involuntary petition remains undischarged for a period of
sixty (60) days. If under Applicable Laws the trustee in bankruptcy or
Tenant may affirm this Lease and continue to perform Tenant's obligations
hereunder, such trustee or Tenant shall, in such time period as may be
permitted by the bankruptcy court having jurisdiction, cure all defaults of
Tenant hereunder outstanding as of the date of the affirmance of this Lease
and provide to Landlord such adequate assurances as may be necessary to
ensure Landlord of the continued performance of Tenant's obligations under
this Lease.
(f) The employment of a trustee, receiver, liquidator, assignee,
custodian, examiner, sequestrator (or similar official) in all cases to
take possession of substantially all of Tenant's assets located at the
Premises or of Tenant's interest in this Lease or the Premises, if such
receivership remains undissolved for a period of ten (10) business days
after creation thereof.
(g) The attachment, execution or other judicial seizure or non-
judicial seizure of all or substantially all of Tenant's assets located at
the Premises or of Tenant's interest in this Lease or the Premises, if such
attachment or other seizure remains undismissed or undischarged for a
period of ten (10) business days after the levy thereof.
(h) Tenant's admission in writing of its inability to pay its debts as
they become due, Tenant's filing of a petition seeking any reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under any present or future statute, law or regulation, Tenant's
filing of an answer admitting or failing timely to contest a material
allegation of such a petition filed against Tenant in any such proceeding
or, if within sixty (60) days after the commencement of any proceeding
against Tenant seeking any reorganization or arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any present
or future statute, law or regulation, such proceeding shall not have been
dismissed.
If, at any time, (i) Tenant shall be comprised of two (2) or more persons, or
(ii) Tenant's obligations under this Lease shall have been guaranteed by any
person other than Tenant, or (iii) Tenant's interest in this Lease shall have
been assigned, the word "Tenant" as used in clauses (d), (e), (f), (g) and (h),
shall be deemed to mean any one or more of the persons primarily or secondarily
liable for Tenant's obligations under this Lease. Any monies received by
Landlord from or on behalf of Tenant during the pendency of any proceeding of
the types referred to in said clauses (d), (e), (f), (g) and (h) shall be deemed
paid as compensation for the use and occupation of the Premises and the
acceptance of any such compensation by Landlord shall not be deemed an
acceptance of Rent or a waiver on the part of Landlord of any rights under this
Section 19.01.
19.02 REMEDIES UPON DEFAULT OR TERMINATION.
(a) Any failure to pay Basic Rent, Operating Expenses and any other
monetary obligation to be paid by Tenant under this Lease which is
specifically designated as additional rent in this Lease shall be construed
as failure to perform the obligation for payment of Rent.
(b) In the event of the occurrence of any Event of Default, Landlord
shall have the right immediately to terminate this Lease, and at any time
thereafter to recover possession of the Premises or any part thereof and
expel and remove therefrom Tenant and any other person occupying the same,
pursuant to the order of any court of competent jurisdiction entered after
notice to Tenant and an opportunity for Tenant to be heard, and again
repossess and enjoy the Premises without prejudice to any of the remedies
that Landlord may have under this Lease, at law or equity by reason of
Tenant's default or of such termination.
(c) Even though Tenant has breached this Lease and/or abandoned the
Premises, this Lease shall continue in effect for so long as Landlord does
not terminate Tenant's right to possession under Section 19.02(b) hereof,
and Landlord may enforce all its rights and remedies under this Lease,
including, without limitation, the right to recover Rent as it becomes due;
and Landlord, without terminating this Lease, may exercise all of the
rights and remedies of a landlord under Section 1951.4 of the Civil Code of
the State of California or any successor code section. Acts of maintenance,
preservation or efforts to lease the Premises or the appointment of a
receiver upon application of Landlord to protect Landlord's interests under
this Lease shall not constitute Landlord's election to terminate Tenant's
right to possession.
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19.03 DAMAGES UPON TERMINATION. Should Landlord terminate this Lease
pursuant to the provisions of Section 19.02(b) hereof, Landlord shall have all
the rights and remedies of a landlord provided by Section 1951.2 of the Civil
Code of the State of California, or successor code section. Upon such
termination, in addition to any other rights and remedies to which Landlord may
be entitled under Applicable Laws, Landlord shall be entitled to recover from
Tenant: (i) the worth at the time of award of the unpaid Rent and other amounts
which had been earned at the time of termination; (ii) the worth at the time of
award of the amount by which the unpaid Rent which would have been earned after
termination until the time of award exceeds the amount of such Rent loss that
the Tenant proves could have been reasonably avoided; (iii) the worth at the
time of award of the amount by which the unpaid Rent for the balance of the term
after the time of award exceeds the amount of such Rent loss that the Tenant
proves could be reasonably avoided; and (iv) any other amount necessary to
compensate Landlord for all the detriment proximately caused by Tenant's failure
to perform its obligations under this Lease or which, in the ordinary course of
things, would be likely to result therefrom including, without limitation,
attorneys' fees and costs; brokers' commissions; the costs of refurbishment,
alterations, renovations and repair of the Premises, as well as the unamortized
value of free rent, reduced rent, tenant improvement allowance amounts and any
other economic concessions provided, paid for or incurred by Landlord. The
"worth at the time of award" of the amounts referred to in subsections (i) and
(ii) shall be computed with interest at the Interest Rate. The "worth at the
time of award" of the amount referred to in subsection (iii) shall be computed
by discounting such amount at the discount rate of the Federal Reserve Bank of
San Francisco at the time of award, plus one percent (1%).
19.04 OPERATING EXPENSES. For purposes of computing unpaid Rent which
would have accrued and become payable under this Lease pursuant to the
provisions of Section 19.03, for the calendar year of the default and each
future calendar year in the Term shall be deemed to be equal to Tenant's Share
of Operating Expenses for the calendar year prior to the year in which default
occurs compounded at a per annum rate equal to the mean average rate of increase
of Operating Expenses for the preceding three (3) calendar years.
19.05 PERFORMANCE BY LANDLORD. All covenants and agreements to be
performed by Tenant under any of the terms of this Lease shall be performed by
Tenant at Tenant's sole cost and expense and without any abatement of Rent. If
Tenant shall fail to pay any sum of money, other than Rent, required to be paid
by it hereunder or shall fail to perform any other act on its part to be
performed hereunder, and such failure shall continue for fifteen (15) days after
notice thereof by Landlord, Landlord may, but shall not be obligated to do so,
and without waiving or releasing Tenant from any obligations of the Tenant, make
any such payment or perform any such act on the Tenant's part to be made or
performed. All sums so paid by Landlord and all necessary incidental costs
together with interest thereon at the Interest Rate, accruing from the date of
such payment by Landlord until the date of repayment by Tenant shall be payable
as additional rent to Landlord on demand, if such sums are specifically
designated to be payable as additional rent in this Lease, and Tenant covenants
to pay such sums, and Landlord shall have, in addition to any other right or
remedy of Landlord, the same right and remedies in the event of the nonpayment
thereof by Tenant as in the case of default by Tenant in the payment of the
Rent.
19.06 Intentionally Deleted.
19.07 REMEDIES CUMULATIVE. All rights, privileges and elections or
remedies of the parties are cumulative and not alternative to the extent
permitted by law except as otherwise provided herein.
Initial: Landlord________ Tenant________
ARTICLE XX - DAMAGE BY FIRE OR OTHER CASUALTY
20.01 NOTICE OF LOSS. If the Premises shall be damaged by fire or
other casualty, the damages shall be repaired by and at the expense of Landlord
promptly following notice thereof by Tenant and the Rent until such repairs
shall be made shall be reduced in the proportion which the area of the part of
the Premises which is not useable by Tenant bears to the total area of the
Premises; provided, however, should Tenant reoccupy a portion of the Premises
for the conduct of its business prior to the date such repairs are made, the
Rent shall be reinstated with respect to such reoccupied portion of the Premises
and shall be payable by Tenant from the date of such occupancy. Landlord shall
have no obligation to repair any damage to, or to replace, any fixtures,
furniture, furnishings, equipment or other property or effects of Tenant.
20.02 SUBSTANTIAL OR TOTAL DAMAGE. Anything in subsection 20.01 of
this Article XX to the contrary notwithstanding, if the Premises are totally
damaged or are rendered wholly untenantable, and if Landlord shall decide not to
restore the Premises, or if the Building or the Facility shall be so damaged by
fire or other casualty that, in Landlord's opinion, either substantial
alteration, demolition or reconstruction of the Building or the Facility shall
be required (whether or not the Premises shall have been damaged or rendered
untenantable) or the Building or the Facility, after its repair, alteration or
restoration shall not be economically viable as an office complex, then in any
of such events, Landlord, at Landlord's option, may, not later than thirty (30)
days following the damage, give Tenant a notice in writing terminating this
Lease. If Landlord elects to
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terminate this Lease, the Term shall expire upon the tenth (10th) day after such
notice is given, and Tenant shall vacate the Premises and surrender the same to
Landlord. If Tenant shall not be in default under this Lease, then upon the
termination of this Lease under the conditions provided for in the preceding
sentence, Tenant's liability for Rent shall cease as of the day of such damage.
20.03 LOSS CAUSED BY TENANT OR TENANT'S EMPLOYEES. Notwithstanding
anything to the contrary contained in this Article XX, if the Premises, the
Building or the Facility are wholly or partially damaged or destroyed as a
result of the negligence or willful misconduct or omission of Tenant or Tenant's
employees, Tenant shall forthwith diligently undertake to repair or restore all
such damage or destruction at Tenant's sole cost and expense, and this Lease
shall continue in full force and effect without any abatement or reduction in
Rent or other payments owed by Tenant; provided however, that Tenant shall be
relieved of its obligation pursuant to this Section 20.03 to the extent that
insurance proceeds sufficient to complete repairs are actually received by
Landlord.
20.04 DESTRUCTION DURING FINAL YEAR. Notwithstanding anything to the
contrary contained in this Lease, if the Premises, the Building or the Facility
are wholly or partially damaged or destroyed within the final twelve (12) months
of the Term of this Lease, Landlord may, at its option, by giving Tenant notice
within thirty (30) days after notice to Landlord of the occurrence of such
damage or destruction, elect to terminate the Lease. Tenant shall have the
option to terminate this Lease if the Premises are wholly damaged, or damaged to
the extent that Tenant's use thereof is materially impaired for a period in
excess of one (1) month, within the last twelve (12) months of the Term, such
option to be exercised by Tenant delivering Landlord written notice thereof
within thirty (30) days of such damage.
20.05 DESTRUCTION OF TENANT'S PERSONAL PROPERTY, TENANT'S EXTRA
IMPROVEMENTS OR PROPERTY OF TENANT'S EMPLOYEES. In the event of any damage to
or destruction of the Premises, the Building or the Facility, under no
circumstances shall Landlord be required to repair any injury, or damage to, or
make any repairs to or replacements of, Tenant's personal property or any
improvements or Alterations installed in the Premises by or on behalf of Tenant,
and Tenant shall repair and restore all such personal property, improvements and
Alterations at Tenant's sole cost and expense. Landlord shall have no
responsibility for any contents placed or kept in or on the Premises, the
Building or the Facility by Tenant or Tenant's Employees.
20.06 EXCLUSIVE REMEDY. This Article XX shall be Tenant's sole and
exclusive remedy in the event of damage or destruction to the Premises, the
Facility or the Project, and Tenant, as a material inducement to Landlord
entering into this Lease, irrevocably waives and releases Tenant's rights under
California Civil Code Sections 1932(2) and 1933(4) or any successor statute or
laws of a similar nature. Subject to the terms of this Article XX, no damages,
compensation or claims shall be payable by Landlord for any inconvenience, any
interruption or cessation of Tenant's business, or any annoyance, arising from
any damage to or destruction of all or any portion of the Premises or any of
Tenant's property.
20.07 DELAYS. Landlord shall not be liable for reasonable delays which
may arise by reason of adjustment of fire insurance on the part of Landlord
and/or Tenant, and for reasonable delays on account of "labor troubles" or any
other cause beyond Landlord's control.
20.08 PROPERTY DAMAGE. Any Facility employee to whom any property
shall be entrusted by or on behalf of Tenant shall be deemed to be acting as
Tenant's agent with respect to such property and neither Landlord nor its agents
shall be liable for any damage to property of Tenant or of others entrusted to
employees of the Facility, nor for the loss of or damage to any property of
Tenant by theft or otherwise. Neither Landlord nor its agents shall be liable
for any injury or damage to persons or property or interruption of Tenant's
business resulting from fire, explosion, falling plaster, steam, gas,
electricity, water, rain or snow or leaks from any part of the Facility or from
the pipes, appliances or plumbing works or from the roof, street or subsurface
or from any other place or by dampness or by any other cause of whatsoever
nature; nor shall Landlord or its agents be liable for any such damage caused by
other tenants or persons in the Facility or caused by construction of any
private, public or quasi-public work; nor shall Landlord be liable for any
latent defect in the Premises or in the Facility. Anything in this Article XX to
the contrary notwithstanding, nothing in this Lease shall be construed to
relieve Landlord from responsibility directly to Tenant for any loss or damage
caused directly to Tenant wholly or in part by the gross negligence or willful
misconduct of Landlord. Nothing in the foregoing sentence shall affect any right
of Landlord to the indemnity from Tenant to which Landlord may be entitled.
Tenant shall reimburse and compensate Landlord as additional rent within five
(5) days after rendition of a statement for all expenditures made by, or damages
or fines sustained or incurred by, Landlord due to nonperformance or
noncompliance with or breach or failure to observe any term, covenant or
condition of this Lease upon Tenant's part to be kept, observed, performed or
complied with. Tenant shall give immediate notice to Landlord in case of fire or
accident in the Premises, the Building or the Facility.
ARTICLE XXI - EMINENT DOMAIN
21.01 TOTAL OR SUBSTANTIAL TAKING. If more than twenty-five percent
(25%) of the Premises are taken or appropriated under the power of eminent
domain or conveyed in lieu thereof, either party shall have the
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right to terminate this Lease at its option, and if any part of the Facility
shall be taken or appropriated under power of eminent domain or conveyed in lieu
thereof, Landlord may terminate this Lease at its option, provided Landlord also
terminates the Leases of other tenants of the Building which are leasing
comparably sized space for comparable lease terms; provided, however, that
notwithstanding any other provision to the contrary, such termination shall be
effective only to terminate Tenant's rights of possession and Tenant's
obligations to pay Rent. This Lease shall remain in effect in the event that and
to the extent that the effectiveness of the Lease is necessary under Applicable
Laws to allow the parties to obtain or receive any award of compensation in
connection with the exercise of such power of eminent domain. In either of such
events, Landlord shall receive (and Tenant shall assign to Landlord upon demand
from Landlord) any income, rent, award or any interest therein which may be paid
in connection with the exercise of such power of eminent domain except as
otherwise provided herein, and Tenant shall have no claim against Landlord for
any part of the sums paid by virtue of such proceedings; provided, however,
Tenant will have the right to recover from the condemning authority (but not
from Landlord) any compensation as may be separately awarded or recoverable by
Tenant for the taking of Tenant's furniture, fixtures, equipment and other
personal property taken, if any, for Tenant's relocation expenses, and for any
loss of goodwill or other compensable damage to Tenant's business and if and
only if such award shall not reduce Landlord's award, Tenant will also have the
right to recover from the condemning authority (but not from Landlord) any
compensation as may be separately awarded or recoverable by Tenant for the value
of Tenant's leasehold interest.
21.02 PARTIAL TAKING. If less than all of the Premises is taken and
neither party shall have elected to terminate this Lease pursuant to its right
to do so under Section 21.01, and the Premises have been damaged as a
consequence of such partial taking or appropriation or conveyance, Landlord
shall restore the Premises continuing under this Lease, at Landlord's cost and
expense; provided, however, that Landlord shall not be required to repair or
restore any injury or damage to the property of Tenant or to make any repairs or
restoration of any Alterations, additions, fixtures or improvements installed on
the Premises by or at the expense of Tenant, except to the extent that Landlord
has been compensated for such damage. Thereafter, the Rent for the remainder of
the Term shall be proportionately reduced in the proportion which the area of
the part of the Premises which is taken, appropriated or conveyed bears to the
total area of the Premises.
21.03 TEMPORARY TAKING. Notwithstanding anything to the contrary
contained in this Article XXI, if the temporary use or occupancy of any part of
the Premises shall be taken or appropriated under the power of eminent domain
during the Term, this Lease shall be and remain unaffected by such taking or
appropriation and Tenant shall continue to pay in full all Rent payable
hereunder by Tenant during the Term; in the event of any such temporary
appropriation or taking, Tenant shall be entitled to receive that portion of any
award which represents compensation for the use of or occupancy of the Premises
during the Term, and Landlord shall be entitled to receive that portion of any
award which represents the cost of restoration of the Premises and the use and
occupancy of the Premises after the end of the Term.
ARTICLE XXII - SALE BY LANDLORD
The obligations of Landlord under this Lease shall not be binding upon
Landlord named herein after the sale, conveyance, assignment or transfer by such
Landlord (or upon any subsequent landlord after the sale, conveyance, assignment
or transfer by such subsequent landlord) of its interest in the Facility or this
Lease, as the case may be, and in the event of any such sale, conveyance,
assignment or transfer, Landlord shall be and hereby is entirely freed and
relieved of all covenants and obligations of Landlord hereunder, and it shall be
deemed and construed without further agreement between the parties or their
successors in interest or between the parties and the purchaser, grantee,
assignee or other transferee that such purchaser, grantee, assignee or other
transferee has assumed and agreed to carry out all covenants of Landlord
hereunder. Neither the shareholders , directors or officers of Landlord, if
Landlord is a corporation, nor the partners comprising Landlord (nor any of the
shareholders, directors or officers of such partners), if Landlord is a
partnership (collectively, the "Parties"), shall be liable for the performance
of Landlord's obligations under this Lease. Tenant shall look solely to Landlord
to enforce Landlord's obligations hereunder and shall not seek any damages
against any of the Parties. This Lease shall not be affected by any such sale
and Tenant agrees to attorn to the purchaser or assignee.
ARTICLE XXIII - WAIVER
If either Landlord or Tenant waives the performance of any term, covenant
or condition contained in this Lease, such waiver shall not be deemed to be a
waiver of any subsequent breach of the same or of any other term, covenant or
condition contained herein. Landlord's acceptance of any item of Rent shall not
constitute a waiver of any preceding breach by Tenant of any term, covenant or
condition of this Lease, regardless of Landlord's knowledge of such preceding
breach at the time Landlord accepted such Rent. Failure by Landlord to enforce
any of the terms, covenants or conditions of this Lease for any length of time
shall not be deemed to waive Landlord's right to insist thereafter upon strict
performance by Tenant. Waiver by Landlord of any term, covenant or condition
contained in this Lease may only be made by a written document signed by
Landlord.
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ARTICLE XXIV - NOTICES
All notices and demands which may be required to be given by either party
to the other hereunder shall be in writing and shall be deemed to have been
fully given, made and delivered when: (i) sent by United States certified or
registered mail, return receipt requested, postage prepaid, or (ii) sent via a
professional courier service addressed to the noticed party at the address
specified in the Basic Lease Information, or to such other firm or to such other
place as Landlord or Tenant may from time to time designate in a notice to the
other party hereto, except that notice to Tenant delivered to the Premises shall
be adequate for all purposes of this Lease.
ARTICLE XXV - OPERATING EXPENSES
In addition to Basic Rent provided to be paid hereunder, Tenant shall pay
as additional rent, Tenant's Share of Operating Expenses in the manner set forth
below.
25.01 GENERAL. During and for each calendar year of the Term, Tenant
shall pay the difference between (i) the actual amount of Tenant's Share of
Operating Expenses for the subject calendar year, and (ii) the actual amount of
Tenant's Share of Operating Expenses for the Base Year, in monthly installments
along with its installment payments of Basic Rent. The difference between (i)
and (ii) in the preceding sentence shall be referred to in this Lease as
"Tenant's Operating Expenses."
25.02 PAYMENT OF OPERATING EXPENSES. Prior to the Term Commencement
Date, and during December of each calendar year thereafter during the Term, or
as soon thereafter as practicable, Landlord shall give Tenant written notice of
the estimated Operating Expenses for the ensuing calendar year and the
calculated estimated Tenant's Operating Expenses for the ensuing year ("Tenant's
Estimated Operating Expenses") (failure to deliver such notice shall not excuse
Tenant's obligation to pay Tenant's Operating Expenses). Tenant shall thereafter
pay equal monthly installments of Tenant's Estimated Operating Expenses for the
calendar year to which the estimate applies on the first day of each calendar
month during such calendar year, in advance, and continuing thereafter on the
first day of each subsequent month of such calendar year. All such payments
shall be construed to be payments of Rent for all purposes hereof. If Tenant's
Share changes at any time then, Tenant's monthly payments of Operating Expenses
under this Section 25.02 shall be modified commencing on the date of such change
to reflect Tenant's Share as modified. If at any time during the course of the
calendar year, Landlord reasonably determines that Tenant's Operating Expenses
will vary from Tenant's Estimated Operating Expenses by more than five percent
(5%), Landlord may, by written notice to Tenant, revise Tenant's Estimated
Operating Expenses for the balance of such calendar year and Tenant shall
thereafter pay Tenant's Estimated Operating Expenses as so revised for the
balance of the then current calendar year on the first day of each subsequent
month of such calendar year.
25.03 COMPUTATION OF OPERATING EXPENSES ADJUSTMENT. Within one hundred
twenty (120) days after the end of each calendar year or as soon thereafter as
practicable, Landlord shall deliver to Tenant a statement of the actual
Operating Expenses for the year just ended. If such statement shows that
Tenant's Operating Expenses amounted to less than Tenant's Share of actual
Operating Expenses for the calendar year just ended, then Tenant shall pay the
difference within thirty (30) days after receipt of such statement, such payment
to constitute additional rent hereunder. If such statement shows that Tenant's
Operating Expenses amounted to more than Tenant's Share of actual Operating
Expenses for the calendar year just ended, then (provided that no Event of
Default has occurred and remains uncured) Tenant shall receive a credit for the
amount of such payment against Tenant's obligation for payment of Rent next
becoming due hereunder. If this Lease has been terminated or the Term hereof has
expired before the date of such statement, then any adjustment to Tenant's
Operating Expenses shall be paid by the appropriate party within twenty (20)
days after the date of delivery of the statement. Any statement of Landlord sent
to Tenant under this Article XXV shall be conclusively binding upon Tenant
unless, within thirty (30) days after such statement is sent, Tenant shall (i)
pay to Landlord the amount set forth in such statement, without prejudice to
Tenant's right to dispute the same, and (ii) send a written notice to Landlord
objecting to such statement and specifying the respects in which such statement
is claimed to be incorrect.
25.04 MINIMUM RENT. Anything in this Article XXV to the contrary
notwithstanding, under no circumstances shall the Rent payable under this Lease
be less than the Rent set forth on the Basic Lease Information page.
25.05 PRORATION. Operating Expenses which cover a period of time not
within the Term of this Lease shall be appropriately prorated.
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ARTICLE XXVI - TAXES PAYABLE BY TENANT
26.01 PERSONALTY. Tenant shall pay before delinquency any and all
taxes levied or assessed and which become payable by Landlord during the Term,
whether or not now customary or within the contemplation of the parties hereto,
which are based upon, measured by or otherwise calculated with respect to: (i)
the value of Tenant's equipment, furniture, fixtures or other personal property
located in the Premises; (ii) the value of any leasehold improvements,
alterations, or additions made in or to the Premises, regardless of whether
title to such improvements, alterations or additions shall be in the name of
Tenant or Landlord; or (iii) this transaction or any document to which Tenant is
a party creating or transferring an interest or an estate in the Premises.
26.02 TAXES AS RENT. If it shall not be lawful for Tenant so to
reimburse Landlord, the Rent shall be revised to net Landlord the same net Rent
after imposition of any such tax upon Landlord as would have been payable to
Landlord prior to the imposition of any such tax, unless such additional rent
payment is unlawful.
ARTICLE XXVII - LANDLORD'S DEFAULT
27.01 NOTICE. Landlord shall not be deemed to be in default in the
performance of any obligation required of it under this Lease unless and until
it has failed to perform such obligation within thirty (30) days after written
notice by Tenant to Landlord and Landlord specifying when and how Landlord has
failed to perform such obligation; provided, that if the nature of Landlord's
obligation is such that more than thirty (30) days are required for its
performance, Landlord shall not be in default if Landlord commences to cure the
default within such thirty (30) day period and thereafter diligently prosecutes
the same to completion.
27.02 REMEDY FOR BREACH. Notwithstanding anything to the contrary in
this Lease, Tenant's remedy for any breach of this Lease by Landlord shall be
limited to an action for damages or specific performance, and Landlord's
liability to Tenant for damages resulting from Landlord's breach of any
provision or provisions of this Lease shall not exceed the value of Landlord's
interest in the Facility. Landlord, its partners whether general or limited,
shall never be personally liable for any such judgment.
ARTICLE XXVIII - FORCE MAJEURE
Landlord shall be chargeable with, or liable to Tenant for anything or in
any amount for any failure to perform or delay caused by any of the following
(herein "Force Majeure Delays"): fire; earthquake; explosion; flood; hurricane;
the elements; acts of God or the public enemy; actions, restrictions,
limitations or interference of governmental authorities or agents; enforcement
of Applicable Laws; war; invasion; insurrection; rebellion; riots; strikes or
lockouts; inability to perform, control or prevent which is beyond the
reasonable control of Landlord ; and any such failure or delay due to said
causes or any of them shall not be deemed a breach of or default in the
performance of this Lease by Landlord; provided, however, lack of funds shall
not be deemed a Force Majeure Delay.
ARTICLE XXIX - LANDLORD'S MORTGAGEES AND LESSORS
29.01 MODIFICATIONS. If, in connection with Landlord's obtaining or
entering into any financing or ground lease for any portion of the Building or
the Facility, the lender or ground lessor requests modifications to this Lease,
Tenant, within ten (10) days after request therefor, agrees to execute an
amendment to this Lease incorporating such modifications, provided such
modifications are reasonable and do not materially increase the obligations of
Tenant under this Lease or adversely affect the leasehold estate created by this
Lease.
29.02 CURE RIGHTS. In the event of any default on the part of
Landlord, Tenant will give notice by registered or certified mail to any
beneficiary of a deed of trust or mortgage covering the Premises or ground
lessor of Landlord whose address has been furnished to Tenant, and Tenant agrees
to offer such beneficiary, mortgagee or ground lessor a reasonable opportunity
to cure the default (including with respect to any such beneficiary or
mortgagee, time to obtain possession of the Premises, subject to this Lease and
Tenant's rights hereunder, by power of sale or a judicial foreclosure, if such
should prove necessary to effect a cure).
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ARTICLE XXX - SIGNS
Subject to the terms of this Article XXX, the Tenant named herein shall
have the right to have one (1) corporate name sign on the top of the Building
parapet located at 3355 Michelson Drive in a location designated by Landlord
(the "Parapet Sign"); it being agreed that such sign shall be visible from the
San Diego/405 Freeway. Tenant agrees that Landlord shall install and maintain
such sign in accordance with this Article at XXX at Tenant's sole cost and
expense. In addition, subject to the sign program adopted for the Facility from
time to time, the Tenant named herein shall have the right to have one (1)
listing of Tenant's corporate name in all directories of the Building(s) which
the Tenant named herein occupies from time to time during the Term and to have
up to four (4) listings of Tenant's name and listings of Related Corporations on
interior signage in all of the Buildings(s) which the Tenant named herein
occupies, from time to time during the Term. Except as expressly provided
herein, Tenant has no right to install Tenant identification or other signs in
any other location in, on or about the Premises or the Facility and will not
display or erect any other signs, displays or other advertising materials that
are visible from the exterior of the Building or the Facility or from within the
Building or the Facility in any interior or exterior Common Area or Facility
Common Area. The size, design, color and other physical aspects of any and all
sign will be subject to (a) Landlord's written approval prior to installation,
which approval may be withheld in Landlord's sole discretion; (b) the sign
program for the Facility and any covenants, conditions or restrictions
applicable to the Premises and all Applicable Laws; and (c) any applicable
municipal or governmental permits and approvals. Tenant will be responsible for
all costs for installation, maintenance, repair and removal of any Tenant sign.
If Tenant fails to remove Tenant's sign upon termination of this Lease and
repair any damage caused by such removal, or if prior to termination of this
Lease Tenant shall default hereunder beyond the expiration of any applicable
grace or cure period, Landlord may remove Tenant's signage at Tenant's sole
expense. Tenant agrees to reimburse Landlord for all costs incurred by Landlord
to effect any installation, maintenance or removal on Tenant's account, which
amount will be deemed additional rent hereunder and may include, without
limitation, all sums disbursed, incurred or deposited by Landlord including
Landlord's costs, expenses and attorney's fees with interest thereon from the
date of Landlord's demand until paid by Tenant. Any sign rights granted to
Tenant under this Lease are personal to Tenant and may not be assigned,
transferred or otherwise conveyed, whether voluntarily or involuntarily, to any
assignee or subtenant of Tenant or any other person or entity other than the
Tenant named herein without Landlord's prior written consent, which consent
Landlord may withhold in its sole and absolute discretion. Subject to the terms
set forth in this Article XXX, the Parapet Sign may be in Tenant's name or the
name of Preferred Credit Corporation provided and upon the condition that (i)
Tenant shall have changed its name to Preferred Credit Corporation without any
change in the ownership or Control of Tenant or (ii) Tenant shall be doing
business as Preferred Credit Corporation in compliance with all Applicable Laws
without any change in the ownership or Control of Tenant.
ARTICLE XXXI - FINANCIAL STATEMENTS
Prior to the execution of this Lease by Landlord and at any time during the
Term of this Lease upon ten (10) days prior written notice from Landlord, Tenant
agrees to provide Landlord with a current financial statements for Tenant and
any guarantors of Tenant including Guarantors and financial statements for the
two (2) years prior to the current financial statement year for Tenant and any
guarantors of Tenant including Guarantors; it being agreed, however, if at the
time of such notice from Landlord, Tenant shall not then be and shall not have
been in default under this Lease, Landlord may not request financial statements
for the same person or entity more than twice in any twelve (12) month period
during the Term unless an event shall have occurred which could reasonably
affect any such financial statement(s). Such statements are to be prepared in
accordance with generally accepted accounting principles and, if such is the
normal practice of Tenant, audited by an independent certified public
accountant.
ARTICLE XXXII - EXPANSION OF PREMISES
32.01 EXERCISE OF EXPANSION. At any time on or after May 15, 1997,
Landlord may give Tenant a notice (the "Expansion Notice") stating that
effective on the date set forth in such Expansion Notice (the "Expansion Date"),
the Expansion Space (as hereinafter defined) shall be added to and become a part
of the Premises; it being agreed that the Expansion Date shall not occur earlier
than forty-five (45) days following Tenant's receipt of the Expansion Notice. As
used herein, the "Expansion Space" shall mean one-half of the fourth (4th) floor
of the Building (containing approximately 26,340 rentable square feet and
approximately 23,518 useable square feet) at 3355 Michelson Drive, Irvine,
California as shown on the floor plan annexed hereto as Exhibit H and made a
---------
part hereof, or such other comparable space in the Facility determined by
Landlord as identified in the Expansion Notice.
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32.02 EFFECT OF EXERCISE. If Landlord shall send Tenant an Expansion
Notice as aforesaid, Landlord and Tenant shall enter into an amendment of this
Lease acceptable to Landlord and Tenant to provide for (i) the inclusion of the
Expansion Space in the Premises; (ii) if and only if the Expansion Date shall
occur on or before the Rent Increase Date, an increase in the Basic Rent (due to
the addition of the Expansion Space to the Premises) payable for the period
commencing on the Expansion Date and terminating on the day preceding the Rent
Increase Date, in an amount equal to the product of (A) $1.45 multiplied by, (B)
-------------
the number of rentable square feet of space deemed to be in the Expansion Space;
(c) whether the Expansion Date occurs prior to or after the Rent Increase Date,
an increase in the Basic Rent payable for the period commencing on the later of
the Expansion Date or the Rent Increase Date and terminating on the Term
Expiration Date,in an amount equal to the product of (A) $1.55 multiplied by (B)
-------------
the number of rentable square feet of space deemed to be in the Expansion Space;
(d) a modification of the definition of Tenant's Share to accurately represent
the percentage that the useable area deemed to be in the Premises, together with
the useable area deemed to be in the Expansion Space, bears to the total useable
area deemed to be in the Facility and (e) subject to the terms of Article XXX, a
modification of Article XXX to provide for one (1) additional listing of a
Related Corporation on the interior signage in all directories of the
Building(s) which the Tenant named herein occupies. In addition, on or prior to
the Expansion Date, Tenant shall furnish Landlord with the Additional Security
Deposit. For purposes of this Article, the rentable square area of any premises
in question shall be determined by multiplying the useable area thereof by a
twelve percent (12%) load factor.
32.03 TENANT IMPROVEMENTS. If Landlord shall send an Expansion Notice
as aforesaid, Landlord shall perform the Preliminary Tenant Improvements therein
subject to and in accordance with the terms of Exhibit E-1, annexed hereto,
-----------
except that Exhibit E-1 shall be modified as follows:
-----------
(a) the amount of the Preliminary Allowance shall be calculated by:
(I) multiplying (A) the number of useable square feet of space deemed
to be in the Expansion Premises by (B) $3.00; and
--
(II) multiplying the product of (I) above by a fraction, the numerator
of which shall be equal to the number of full months remaining in the Lease
Term from the Expansion Date to the Term Expiration Date, and the
denominator of which shall be sixty-three (63). By way of illustration, if
Landlord shall send the Expansion Notice on March 31, 1998 with respect to
25,000 useable square feet of space, the Preliminary Allowance for the
Expansion Space shall be equal to $57,143.00.
$3.00 X 25,000 = $75,000
$75,000 X 48/63 = $57,143
(b) paragraphs 7, 8 and 9 of Exhibit E-1 shall be deleted in their
-----------
entirety;
(c) all references to the Premises shall be deemed to be references to the
Expansion Space; and
(d) In all other respects, the terms and conditions contained in
Exhibit E-1 shall apply to the Expansion Space and shall remain unmodified.
- -----------
Provided that Tenant shall not then be, or at any time during the Term have
been, in default under this Lease, Landlord shall also perform the Subsequent
Tenant Improvements in the Expansion Space. The performance of the Subsequent
Improvements shall be performed subject to and in accordance with the terms of
Exhibit E-2 annexed hereto, except that Exhibit E-2 shall be modified as
- ----------- -----------
follows:
(a) the amount of the Subsequent Allowance will be calculated by:
(I) multiplying (A) the number of useable square feet of space deemed
to be in the Expansion Premises, by (B) $7.00; and
(II) multiplying the product of (I) above by a fraction, the numerator
of which shall be equal to the number of full months remaining in the
Lease Term from the date of commencement of the Subsequent Tenant
Improvements to the Term Expiration Date and the denominator of which
shall be sixty-three (63);
(b) all references to the Premises shall be deemed to be references to the
Expansion Space; and
(c) Paragraph 7 shall be deleted in its entirety and the following shall be
inserted in lieu thereof:
7. CONVERSION OF SUBSEQUENT ALLOWANCE.
----------------------------------
(a) DEFINITIONS. As used in this Paragraph, the following defined terms
-----------
shall have the following meanings ascribed thereto:
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(i) The term "Rent Conversion Date" shall mean the date
identified by Tenant in the Conversion Notice as the date for the
conversion of the Unapplied Allowance to a credit against the Basic Rent
due under the Lease, which Rent Conversion Date shall be on the first day
of a calendar month, shall occur no earlier than thirty (30) days
following Landlord's receipt of the Conversion Notice and shall in no
event occur prior to the Expansion Date.
(ii) The term "Unapplied Allowance" shall mean the difference
between (A) the Subsequent Allowance, and (B) the aggregate amount which
Landlord determines, in its sole but reasonable judgment, has not been
incurred by or on behalf of Tenant in connection with the performance of
the Subsequent Tenant Improvements attributable to the Expansion Space.
(b) CONVERSION. Provided that (i) the Lease is in full force and
----------
effect and Tenant is not and has not been in default under the Lease, and
(ii) Tenant is in occupancy of the entire Premises and Tenant shall not
have assigned the Lease or sublet all or any part of the Premises, Tenant
shall have the right, exercisable by written notice to Landlord (the
"Conversion Notice"), to convert the Unapplied Allowance to a credit
against the Basic Rent due under the Lease. If Tenant shall exercise the
Conversion Option as aforesaid, on the Rent Conversion Date, the
Unapplied Allowance shall be converted to a credit against the Basic Rent
due under the Lease, which credit will be applied against subsequent
payments of Basic Rent due under the Lease in twenty-four (24) equal
monthly installments provided and upon the condition that on the Rent
Conversion Date and on the date of each subsequent installment of such
credit, Tenant shall not be or have been in default under the Lease.
(c) LANDLORD'S OBLIGATIONS CEASE. Notwithstanding anything to the
----------------------------
contrary contained herein or otherwise, upon Landlord's receipt of the
Conversion Notice, Landlord shall have no further obligation to perform
the Subsequent Improvements or to take any act of any kind required
hereunder in connection therewith, other than as expressly set forth in
Subparagraph 7(b) above.
(d) In all other respects, the terms and conditions contained in Exhibit E-
---------
2 shall apply to the Expansion Space and shall remain unmodified.
- -
ARTICLE XXXIII - RIGHT OF FIRST OFFER
33.01 EXERCISE OF RIGHT. If at any time during the Term, Landlord shall
desire to lease any space on the second (2nd) or third (3rd) floors of the
Building at 3347 Michelson Drive, Irvine, California, consisting of twenty
thousand (20,000) useable square feet or more (the "ROFO Space") to a third
party other than the existing tenant in any such space or to any other person or
entity now having any preexisting rights in such space, Landlord shall first
give Tenant notice ("Landlord's Notice") of the terms and conditions upon which
Landlord is willing to lease such portion of the ROFO Space.
33.02 EFFECT OF EXERCISE. Provided this Lease shall be in full force and
effect and Tenant shall not be in default hereunder, Tenant shall have the
right, exercisable by notice to Landlord given within ten (10) days of the date
of Landlord's Notice, the time of giving of such notice to be of the essence of
this agreement, to lease such portion of the ROFO Space upon the terms and
conditions contained in Landlord's Notice, in which event Landlord and Tenant
shall enter into an amendment of this Lease acceptable to Landlord and Tenant to
provide for (i) the inclusion of such portion of the ROFO Space in the Premises;
(ii) an increase in the Rent by an amount equal to the fair market thereof as
determined by Landlord in its sole but reasonable judgment; and (iii) a
modification of the definition of Tenant's Share to accurately represent the
percentage that the rentable area deemed to be in the Premises, together with
the rentable area deemed to be in the ROFO Space, bears to the total rentable
area deemed to be contained in the Facility. In all other respects, the terms
and conditions contained in this Lease (including escalations and base years)
shall remain unmodified. In the event that Tenant fails to exercise its right
as aforesaid within ten (10) days of the date of Landlord's Notice or, in the
event Tenant shall have exercised its right and Landlord and Tenant shall not
have executed an amendment of this Lease as aforesaid within twenty (20) days
from the date of Landlord's Notice or within ten (10) days of Landlord's
providing the amendment to Tenant for execution, whichever is later, Tenant
shall be deemed to have waived its rights under this Article XXXIII, Landlord
shall have the absolute right to lease such portion or any other portion of the
ROFO Space to any other person or entity and Tenant shall have no further rights
under this Article XXXIII.
33.03 OPTIONS PERSONAL. The right of first offer granted to Tenant under
this Article XXXIII is personal to the named Tenant executing this Lease and may
be exercised only by the named Tenant executing this Lease, while occupying the
entire Premises and without the intent of thereafter assigning this Lease or
subletting the Premises and may not be exercised or be assigned, voluntarily or
involuntarily, by any person or
25
<PAGE>
entity other than the named Tenant executing this Lease. The right of first
offer granted to Tenant under this Lease is not assignable separate and apart
from this Lease, nor may the right of first offer be separated from this Lease
in any manner, either by reservation or otherwise.
ARTICLE XXXIV - MISCELLANEOUS
34.01 SUCCESSORS AND ASSIGNS. Subject to the provisions of Article IX,
the terms, covenants and conditions contained herein shall be binding upon and
inure to the benefit of the heirs, successors, executors, administrators and
assigns of the parties hereto.
34.02 ATTORNEYS' FEES. If any action or proceeding is brought to enforce
any term, covenant or condition of this Lease on the part of Landlord or Tenant,
the prevailing party in such litigation shall be entitled to its fees and costs,
including, but not limited to, reasonable attorneys' fees to be fixed by the
court in such action or proceeding, both at trial and on appeal.
34.03 LIGHT AND AIR. No diminution of light, air or view by any
structure which may hereafter be erected (whether or not by Landlord) shall
entitle Tenant to any reduction of Rent, result in any liability of Landlord to
Tenant, or in any other way affect this Lease or Tenant's obligations hereunder.
34.04 PUBLIC TRANSPORTATION. Tenant shall encourage use of public
transportation by personnel of Tenant employed on the Premises and shall
distribute to such employees written materials provided by or through Landlord
explaining the convenience and availability of public transportation facilities
adjacent or proximate to the Facility, Tenant shall in good faith consider
establishing staggered working hours of employees which will not interrupt
Tenant's business.
34.05 HEADINGS. The Article and Section headings herein are for
convenience of reference and shall in no way define, increase, limit or describe
the scope or intent of any provision of this Lease.
34.06 USE OF PRONOUNS. Any pronoun used in place of a noun shall
indicate and include the masculine or feminine, the singular or plural number,
individuals, firms or corporations, and their and each of their respective
successors, executors, administrators, assigns, according to the context hereof.
34.07 TIME OF THE ESSENCE. Time is of the essence of this Lease.
34.08 GOVERNING LAW. This Lease shall in all respects to the maximum
extent legally permissible be governed by the laws of the State of California.
34.09 BROKERS. The parties acknowledge that the only broker who
negotiated this Lease is stated in the Basic Lease Information. Landlord agrees
to pay any commission due to the broker stated in the Basic Lease Information
pursuant to a separate written agreement between Landlord and such broker. Each
party represents and warrants to the other, that, to its knowledge, no other
broker, agent or finder (a) negotiated or was instrumental in negotiating or
consummating this Lease on its behalf, and (b) is or might be entitled to a
commission or compensation in connection with this Lease. Landlord and Tenant
each agree to promptly indemnify, protect, defend and hold harmless the other
from and against any and all claims, damages, judgments, suits, causes of
action, losses, liabilities, penalties, fines, expenses and costs (including
attorneys' fees and court costs) resulting from any breach by the indemnifying
party of the foregoing representation, including, without limitation, any claims
that may be asserted by any broker, agent or finder undisclosed by the
indemnifying party. The foregoing mutual indemnity shall survive the expiration
or earlier termination of this Lease.
34.10 MODIFICATIONS. This Lease may not be modified except by a written
instrument by the parties hereto.
34.11 UNENFORCEABLE PROVISIONS. If for any reason whatsoever any of the
provisions hereof shall be unenforceable or ineffective, all of the other
provisions shall be and remain in full force and effect.
34.12 COVENANTS AND CONDITIONS. All provisions, whether covenants or
conditions, on the part of Tenant and Landlord herein shall be deemed and
construed to be both covenants and conditions as though the words specifically
expressing or imparting covenants and conditions were used in each separate
provision hereof.
34.13 INCORPORATION. Exhibits A-1, B-1, B-2, C, D, E -1, E-2, F, G, H
------------ ---- ---- -- -- ----- ---- -- -- -
and I and any other Exhibits, Addenda and Riders attached to this Lease are
-
hereby incorporated by this reference and made a part of this Lease.
34.14 RECORDATION OF MEMORANDUM; QUITCLAIM AND RELEASE AGREEMENT.
Landlord and Tenant agree that in no event and under no circumstances shall this
Lease be recorded. A short-form memorandum may be recorded at Landlord's or
Tenant's election. Tenant represents, warrants and covenants to Landlord that
upon the expiration or termination of this Lease, Tenant at its sole cost and
expense shall at Landlord's request, deliver
26
<PAGE>
to Landlord a fully executed quitclaim and release agreement in recordable form
wherein Tenant quitclaims, conveys, assigns and releases to Landlord any and all
of Tenant's interest in this Lease and the Premises and the Facility.
34.15 ADDITIONAL INSTRUMENTS. Upon the request of either party at any
time, the other party shall execute and file any additional instruments and take
any actions as may be reasonably necessary or desirable to carry out the intent
and to fulfill the provisions of this Lease.
34.16 ENTIRE LEASE BETWEEN PARTIES. This Lease and all exhibits and
attachments to this Lease and any written modifications or amendments to all of
the foregoing entered into by the parties after the date of this Lease,
constitutes the entire lease between the parties with respect to the subject
matter of this Lease and supersedes all prior and contemporaneous leases and
understandings, whether oral or written. Each party to this Lease acknowledges
that no representations, inducements, promises or leases, orally or otherwise,
have been made by any party, or anyone acting on behalf of any party, which are
not embodied in this Lease and that no other lease, statement or promise not
contained in this Lease shall be valid or binding. The parties intend by this
Lease to establish the relationship of landlord and tenant only, and do not
intend to create a partnership, joint venture, joint enterprise, or any business
relationship other than that of landlord and tenant.
34.17 NONDISCLOSURE OF LEASE TERMS. Tenant acknowledges and agrees that
the terms of this Lease are confidential and constitute proprietary information
of Landlord. Disclosure of the terms could adversely affect the ability of
Landlord to negotiate other leases and impair Landlord's relationship with other
tenants. Accordingly, Tenant agrees that it, and its partners, officers,
directors, employees and attorneys, shall not intentionally and voluntarily
disclose the terms and conditions of this Lease to any newspaper or other
publication or any other tenant or apparent prospective tenant of the Building
or other portion of the Facility, or real estate agent, either directly or
indirectly, without the prior written consent of Landlord, provided, however,
that Tenant may disclose the terms to prospective subtenants or assignees under
this Lease.
34.18 JOINT AND SEVERAL OBLIGATIONS. If more than one person executes
this Lease as Tenant, their execution of this Lease will constitute their
covenant and agreement that (i) each of them is jointly and severally liable for
the keeping, observing and performing of all of the terms, covenants,
conditions, provisions and agreements of this Lease to be kept, observed and
performed by Tenant, and (ii) the term "Tenant" as used in this Lease means and
includes each of them jointly and severally. The act of or notice from, or
notice or refund to, or the signature of any one or more of them, with respect
to the tenancy of this Lease, including, but not limited to, any renewal,
extension, expiration, termination or modification of this Lease, will be
binding upon each and all of the persons executing this Lease as Tenant with the
same force and effect as if each and all of them had so acted or so given or
received such notice or refund or so signed.
34.19 TENANT AS CORPORATION OR PARTNERSHIP. If Tenant executes this
Lease as a corporation or partnership, then Tenant and the persons executing
this Lease on behalf of Tenant represent and warrant that such entity is duly
qualified and in good standing to do business in California and that the
individuals executing this Lease on Tenant's behalf are duly authorized to
execute and deliver this Lease on its behalf, and in the case of a corporation,
in accordance with a duly adopted resolution of the board of directors of
Tenant, a copy of which is to be delivered to Landlord on execution hereof, if
requested by Landlord, and in accordance with the by-laws of Tenant, and, in the
case of a partnership, in accordance with the partnership agreement and the most
current amendments thereto, if any, copies of which are to be delivered to
Landlord on execution hereof, if requested by Landlord, and that this Lease is
binding upon Tenant in accordance with its terms. In addition, if Tenant is a
partnership or if Tenant's interest in this Lease shall be assigned to a
partnership, (i) the liability of each of the parties comprising the partnership
Tenant shall be joint and several, (ii) each of the parties comprising the
partnership Tenant hereby consents in advance to, and agrees to be bound by, any
written instrument which may hereafter be executed, changing, modifying or
discharging this Lease, in whole or in part, or surrendering all or any part of
the Premises to Landlord and by any notices, demands, requests or other
communications which may hereafter be given by a partnership Tenant, (iii) any
bills, statements, notices, demands, requests or other communications given or
rendered to a partnership Tenant and to all such parties shall be binding upon a
partnership Tenant and all such parties, (iv) if a partnership Tenant shall
admit new partners, all of such new partners shall, by their admission to a
partnership Tenant shall be deemed to have assumed performance of all of the
terms, covenants and conditions of this Lease on Tenant's part to be observed
and performed, and (v) a partnership Tenant shall give prompt notice to Landlord
of the admission of any such new partners, and upon demand of Landlord, shall
cause each such new partner to execute and deliver to Landlord an agreement in
form satisfactory to Landlord, wherein each such new partner shall assume
performance of all of the terms and conditions of this Lease on Tenant's part to
be observed and performed (but neither Landlord's failure to request any such
agreement nor the failure of any such new partner to execute or deliver any such
agreement shall vitiate the provisions of subdivision (iv) of this Section
34.19).
34.20 EXAMINATION OF LEASE. Submission of this instrument by Landlord to
Tenant for examination or signature by Tenant does not constitute a reservation
of or option for lease, and it is not effective as a lease or otherwise until
execution by and delivery to both Landlord and Tenant.
34.21 LANDLORD'S AUTHORITY. If Landlord executes this Lease as a
corporation or partnership, then Landlord and the persons executing this Lease
on behalf of Landlord represent and warrant that such entity has full power and
authority to execute this Lease.
27
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the day
and year first above written.
LANDLORD:
CROW WINTHROP OPERATING PARTNERSHIP,
a Maryland general partnership
By: Winthrop California Investors Limited Partnership,
a Delaware limited partnership,
its General Partner
By: Three Winthrop Properties, Inc.,
a Massachusetts corporation,
its General Partner
By:________________________________________
Janine R. Padia
Its Vice President
TENANT:
T.A.R. PREFERRED MORTGAGE CORPORATION
a California corporation
By:_______________________________________
Print Name:____________________________
Print Title:___________________________
28
<PAGE>
EXHIBIT A
---------
LEGAL DESCRIPTION OF LAND COMPRISING THE FACILITY
-------------------------------------------------
[To Be Supplied]
<PAGE>
EXHIBIT A-1
-----------
SITE PLAN OF THE FACILITY AND THE PROJECT
-----------------------------------------
<PAGE>
EXHIBIT B-1
-----------
FLOOR PLAN OF THE PREMISES AT 3347 MICHELSON DRIVE
--------------------------------------------------
[To Be Supplied]
<PAGE>
EXHIBIT B-2
-----------
FLOOR PLAN OF THE PREMISES AT 3355 MICHELSON DRIVE
--------------------------------------------------
[To Be Supplied]
<PAGE>
EXHIBIT C
---------
DEFINITIONS
-----------
The following terms shall be defined as set forth below. A term is identified
by initial capital letters throughout all provisions of this Lease, including,
without limitation, the Recitals and the Exhibits.
"Anniversary Date" means the anniversary of the Term Commencement Date.
----------------
"Applicable Laws" means any law, statute, directive, regulation, rule, order
---------------
or ordinance of any governmental or quasi-public entity or authority and any
covenants, conditions and restrictions, reciprocal easement agreements,
operating agreements, ground leases or master leases which are applicable to the
Premises or the Facility or the use or occupancy thereof, and which are now in
effect or are hereafter promulgated.
"Article" means an article of this Lease.
-------
"Bankruptcy Code" means 11 U.S.C. (S)(S) 101 et seq. or such similar laws or
--------------- -- ---
amendments thereto which may be enacted from time to time.
"Base Year" means the twelve (12) month period set forth in the Basic Lease
---------
Information Section of this Lease.
"Base Year Operating Expenses" means the Operating Expenses incurred for the
----------------------------
Base Year.
"Basic Rent" means the portion of the Rent payable as determined pursuant to
----------
Section 4.01 and net of Tenant's Operating Expenses to be paid by Tenant
pursuant to Article XXV.
"Building" means the complex of buildings located at 3333-3355 Michelson
--------
Drive, Irvine, California.
"Control" means ownership of not less than fifty percent (50%) of all of the
-------
voting stock of any corporation in question or not less than fifty percent (50%)
of all of the legal and equitable interests in any other business entity in
question.
"Common Area" means the total of all areas now or at any time hereafter which,
-----------
based on Landlord's reasonable discretion, are or become within or part of the
Project but outside of the Facility which are made available for general non-
exclusive use, convenience and benefit of Landlord, Tenant and all other owners,
landlords, tenants and permitted occupants of the Project as now or hereafter
improved and configured and their respective employees and invitees and which
are neither occupied by buildings nor devoted to the specific use of a
particular tenant, including, without limitation:
(i) all sidewalks, walkways, pedestrian tunnels, sky walks, plazas,
bridges, driveway entrances and exits, curbs, service drives, loading areas,
alleys, transportation facilities, if any, outside lighting fixtures,
shrubbery, grass, planters and other landscaped areas, common storm drain and
sewer systems; and
(ii) all Parking Facilities.
"Cosmetic Alterations" means Alterations which (1) are nonstructural and which
--------------------
do not affect the Facility's mechanical, electrical, plumbing, life-safety or
other Building systems or the structural integrity of the Facility, (2) do not
affect any part of the Facility other than the Premises, do not affect any
service required to be furnished by Landlord to Tenant or to any other tenant or
occupant of the Facility and do not reduce the value or utility of the Facility
or any part thereof, (3) are of a purely cosmetic or decorative nature (such as
painting or installation of wall covering or carpeting), and (4) have an
estimated cost for all labor and materials in connection with such Alterations
in any one instance (or in a series of instances effectuating a single
alteration plan) of less than Five Thousand ($5,000.00) Dollars.
"CWDLP" means Crow Winthrop Development Limited Partnership, a Maryland
-----
Limited Partnership or any of its successors or assigns.
"Development Parcel" means that certain parcel or parcels of land contiguous
------------------
to and which surround the Facility as shown on Exhibit A-1 on which is presently
-----------
situated all Parking Facilities, the California Pizza Kitchen restaurant and
related improvements, Common Area and certain improvements presently under
construction.
"Environmental Law" means all federal, state and local statutes, ordinances,
-----------------
regulations and rules presently in force or hereafter enacted relating to
environmental quality, contamination and clean up of Hazardous Materials
including, without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, 42 U.S.C. (S)6091 et seq., as amended by
-- ---
the Superfund Amendments and Reauthorization Act of 1986, the Resource
Conservation and Recovery Act of 1976, 42 U.S.C. (S)6091 et seq., as amended by
-- ---
the Hazardous and Solid Waste Amendments of 1984 and state super lien and
environmental clean-up statutes and all rules and regulations presently or
hereafter promulgated under said statutes as amended.
<PAGE>
"Event of Default" means any of the events specified in Section 19.01 after
----------------
the expiration of the applicable cure period set forth therein, if any.
"Facility" means the complex of buildings and improvements presently located
--------
at 3333 to 3355 Michelson Drive, Irvine, California containing 1,499,028
useable square feet of area as well as land underlying such buildings and
improvements and all overlying space above such land, buildings and
improvements, as the same may be hereafter expanded, altered, improved,
contracted or otherwise modified.
"Facility Common Areas" means the total of all areas now or at any time
---------------------
hereafter which, based on Landlord's reasonable discretion, are or become within
or part of the Facility and are made available for the general non-exclusive
use, convenience and benefit of Landlord, Tenant and all other tenants of the
Facility or other tenants in buildings to be constructed within the Facility and
their respective employees and invitees, including, without limitation:
(i) all lobbies, entrances, stairs, structural components, exterior
walls of the Facility, roofs, elevators, escalators, hallways, passageways and
other interior public portions of the Facility which are not specifically
leased to Tenant or any other tenant of the Facility;
(ii) all exterior walkways, landscaped areas, open space areas, plazas,
driveways and transportation facilities on, in or above the Facility; and
(iii) all pedestrian linkages, whether covered or not, between any
portion of the Facility, whether existing or hereafter constructed, excluding
therefrom any portions of such pedestrian linkages which are specifically
identified as tenant space.
"Governmental Entity" means any subdivision, authority, body, agency,
-------------------
instrumentality or other entity created and/or controlled pursuant to the law of
the State of California or any city, town or village of such state or of federal
government.
"Hazardous Materials" means all hazardous and toxic substances, wastes and
-------------------
materials, any pollutant or contaminant, including, without limitation, PCB's,
asbestos, asbestos-containing material, petroleum products and raw materials
that are included under or regulated by any Environmental Law or that pose a
health, safety or environmental hazard.
"Interest Rate" means the greater of ten percent (10%) per annum or four
-------------
percent (4%) in excess of the prime lending or reference rate of Wells Fargo
Bank N.A. or any successor bank in effect on the twenty-fifth (25th) day of the
calendar month immediately prior to the event giving rise to the Interest Rate
imposition; provided, however, the Interest Rate will in no event exceed the
maximum interest rate permitted under Applicable Laws.
"Lease" means this instrument.
-----
"Lease Year" means one (1) full year from the Term Commencement Date to the
----------
first Anniversary Date or between two (2) consecutive Anniversary Dates.
"Non-Structural Alterations" means Alterations which (1) are nonstructural and
--------------------------
which do not affect the Facility's mechanical, electrical, plumbing, life-safety
or other Building systems or the structural integrity of the Facility, (2) do
not affect any part of the Facility other than the Premises, do not affect any
service required to be furnished by Landlord to Tenant or to any other tenant or
occupant of the Facility and do not reduce the value or utility of the Facility
or any part thereof, and (3) are not Cosmetic Alterations.
"Operating Expenses" means all expenses and costs (and taxes, if any,
------------------
thereon) of every kind and nature determined by Landlord in it sole judgment
acting in good faith to the extent they are in accordance with sound management
principles respecting the operation of large first class office complexes in
the Newport Beach/Irvine/South Coast Plaza area which principles shall be
consistently applied (with accruals appropriate to Landlord's business), which
Landlord shall pay or become obligated to pay because of, or in connection with,
the ownership, management, maintenance, repair, replacement, restoration or
operation of (1) the Facility or the Building or the sidewalks and areas
adjacent thereto (but not the cost of development of the Facility), (2) the
Common Area, the Facility Common Area and all areas which become part of the
Common Area or the Facility Common Area, (3) the Parking Facilities, (4) such
additional facilities to be constructed as part of the Common Area or the
Facility Common Area in subsequent years as may be determined to be desirable
for the Facility and (5) the personal property of Landlord used in the operation
of the Facility, including, but not limited to the following:
(i) Property Taxes;
(ii) Any and all assessments and payments imposed with respect to the
Facility or the Premises pursuant to any Applicable Laws;
Exhibit C - Page 2
<PAGE>
(iii) The costs of all utilities and services provided under the Lease,
including water and sewer charges and the costs of electricity, heating,
ventilation and air conditioning;
(iv) All maintenance, janitorial and other service costs for the
Premises and for the Facility and the equipment therein, including, without
limitation, security services, alarm services, window cleaning, elevator and
escalator maintenance, and rubbish removal;
(v) All maintenance, repair, restoration, replacement and operation
costs of the Common Area, the Facility Common Area and the Parking Facilities,
including, without limitation, with respect to signage (other than tenant
signage), lighting, landscaping and gardening, parking lot resurfacing,
repairing and restriping;
(vi) Wages, salaries and related expenses and benefits of all
personnel whether Landlord's employees or employees of Landlord's agents, or
other third parties' independent contractors, whether on-site or off-site,
engaged in the operation, management, maintenance, repair, engineering and
security of the Facility, and the rental value of a management office in the
Facility; provided, however, that Operating Expenses shall not include wages,
salaries or commissions paid for any real estate broker, salesperson or agent
for leasing areas within the Facility;
(vii) the cost of all supplies, tools, materials and equipment, whether
leased or owned, used in the operation, security, management, repair and
maintenance of the Facility;
(viii) A management fee paid to the manager of the Facility equal to
five percent (5%) of gross rent derived from the Facility;
(ix) Legal expenses, accounting costs, including costs of audits by
certified public accountants and other professional fees and expenses in
connection with the operation, ownership, management, maintenance, repair,
replacement or restoration of the Facility or the Building;
(x) All insurance premiums and costs, including but not limited to,
the premiums and cost of fire, casualty and liability coverage and rental
abatement or comprehensive rental interruption insurance and earthquake
insurance (if Landlord elects to provide such coverage) applicable to the
Facility and Landlord's personal property used in connection therewith,
however, excluding therefrom any personal property of Landlord used by
Landlord exclusively in connection with the use and occupation of portions of
the Facility other than the Premises or the Common Areas or the Parking
Facilities;
(xi) Repairs, replacements, service and general maintenance (excluding
repairs and general maintenance paid by proceeds of insurance or by Tenant or
other third parties, and alterations attributable solely to tenants of the
Facility other than Tenant) of the Facility, including, without limitation
all systems and equipment, including but not limited to, elevators, plumbing,
heating, air conditioning, ventilating, lighting, electrical, security, and
fire alarms, fire pumps, fire extinguishers and hose cabinets, mail chutes and
those related to guard service, painting, window cleaning, service area,
mechanical rooms and Facility exteriors;
(xii) All supplies, materials, rental of equipment, security,
management, utilities, repairs, replacements and maintenance costs and all
other costs and expenses attributable to, related to or used in connection
with the Common Area, the Facility Common Area and the Parking Facilities;
(xiii) All of Landlord's costs and expenses of contesting by legal
proceedings any matter concerning the operation or management of the Facility,
or the amount or validity of any Property Taxes levied against all or any part
of the Facility;
(xv) The costs of personnel, utilities, insurance, materials,
supplies, payroll and equipment related to or used in connection with services
provided or available to be provided within the Facility for the use and
benefit of all tenants, including Tenant, in the Facility, to the extent not
recovered from charges made for the cost of such services;
(xiv) The cost of capital improvements, modifications or improvements
made to the Facility, amortized on a straight line basis over the useful life
thereof as determined in accordance with sound accounting principles, together
with interest on the amortized costs of each expenditure;
(xvi) Energy allocation or use charges or surcharges or developmental
or environmental charges imposed in connection with the operation or
management of the Facility;
(xvii) Costs incurred in connection with the implementation and
operation of any transportation management program or similar program;
(xviii) Cost of supplying and cleaning employees' uniforms and work
clothes;
(xix) Reasonable dues and expenses for trade and industry associations;
Exhibit C - Page 3
<PAGE>
(xx) Reasonable administrative costs, such as (but not limited to)
postage, stationery, photocopy expenses and other management office supplies;
(xxi) Imputed cost equal to the loss of rent by Landlord for space used
for on-site management at an imputed cost which is equal to the rental rate
then charged by Landlord for comparable space in the Facility;
(xxii) Costs of providing pest control for the Facility;
(xxiii) Cost of casualty, liability and other insurance;
(xxiv) Any and all occupancy, gross receipts or rental taxes paid by
Landlord in connection with the Facility, but not income or any other tax
imposed or measured by Landlord's income or profits (unless such tax is in
lieu of real estate taxes or sales taxes);
Notwithstanding anything to the contrary herein contained, Operating
Expenses shall not include:
(aa) depreciation of the Building;
(bb) the cost of providing tenant improvements to Tenant or any other
tenant or the cost of renovating space for existing or new tenants;
(cc) principal, interest or debt required to be paid on any mortgage or
deed of trust recorded with respect to the Facility and/or the Premises;
(dd) the cost of special services, goods or materials provided to any
tenant;
(ee) advertising costs incurred in renting individual space in the
Facility;
(ff) any compensation paid to clerks, attendants or other persons in
commercial concessions operated by Landlord;
(gg) material damages incurred due to the violation by any tenant of the
terms and conditions of any lease of space in the Facility;
(hh) any Operating Expenses solely resulting from or related to any new
building constructed on the Facility, except as otherwise expressly provided;
(ii) The cost to Landlord of repairs made, or other work done, by Landlord
as a result of fire, windstorm or other insurable casualty or by the exercise of
eminent domain, provided, however, that this exclusion is limited to the amount
of the insurance proceeds or condemnation award actually received by Landlord
for such repairs or other work;
(jj) specific costs incurred for the account of and separately billed to
specific tenants and other specific services or Property Taxes which could have
been billed to tenants under their leases;
(kk) costs and expenses incurred as a result of any lease negotiations
with any prospective tenant of the Facility including, without limitation,
leasing or brokerage commissions, attorney's fees and space planning costs;
(ll) tenant allowances and other costs of installation of tenant
improvements and decorations incurred to prepare a space for any new tenant;
(mm) costs of alterations, additions and improvements made by Landlord to
the Building to comply with ADA as presently enacted;
(nn) costs of alterations, additions and improvements made by Landlord to
the Building to comply with any existing violation of any Applicable Law with
respect to the Hazardous Materials;
(oo) except as otherwise permitted pursuant to the terms hereof, costs of
Landlord's general corporate overhead for employees who do not perform work with
respect to the Facility, the Building or any part thereof; and
(pp) costs arising from repairs necessitated by, or resulting solely and
directly from, the gross negligence or intentional acts of Landlord.
Operating Expenses with respect to new or modified Common Area shall be
allocated to the Facility and the Premises on a reasonable basis. In
determining the amount of Operating Expenses for any calendar year, if less than
ninety-five (95%) of the rentable area in the Facility shall have been occupied
by tenants at any time during such calendar year, Operating Expenses shall be
determined for such calendar year to be an amount equal to the
Exhibit C - Page 4
<PAGE>
like expenses which would normally be expected to be incurred had such occupancy
been ninety-five (95%) throughout such calendar year.
If any capital improvement is made during any lease year in compliance with
requirements of any federal, state or local law or environmental regulation,
whether or not such law or regulation is valid or mandatory, then the reasonable
annual amortization, with interest of the cost of such improvements shall be
deemed an Operating Expense in each of the lease years during which such
amortization occurs.
"Parking Facilities" means all surface, aboveground and underground parking
------------------
facilities (including, without limitation, accessways, parking spaces, parking
structures, pedestrian crossings or paths or ramps) now or hereafter constructed
and designated by Landlord for use by tenants of or within the Project.
"Permitted Use" means use as general offices and related uses and for no other
-------------
purpose.
"Premises" means that certain space consisting of that approximate number of
--------
rentable square feet as set forth in the Basic Lease Information located on the
floor(s) designated on the Basic Lease Information and as outlined on the floor
plan attached hereto as Exhibit B incorporated herein by reference. The
---------
Premises shall include the interior surface of all walls, but shall not include
the exterior walls of the Facility, or any structural components or any Facility
Common Area or Common Area. All references to the Premises in this Lease shall
mean the Premises under this Lease in any given Lease Year.
"Project" means the land and improvements, and the overlying space, that
-------
presently exist or as same may be expanded, developed or altered from time to
time, designated on Exhibit A-1 attached hereto and incorporated herein by
-----------
reference, presently known as Park Place, including, without limitation, the
Facility, the retail center and related improvements, all improvements presently
under construction within the area depicted on Exhibit A-1, the Common Area and
-----------
all Parking Facilities.
"Property Taxes" means all real and personal property taxes and assessments,
--------------
general or special, and all other taxes, charges, levies and license and permit
fees of any kind or nature whatsoever, foreseen or unforeseen, general or
special, ordinary or extraordinary, which are now or any time during the term of
this Lease levied, assessed, imposed upon, confirmed or become due and payable
out of or with respect to the Facility and the improvements, fixtures, equipment
and other items of personal property of Landlord therein which are used in the
operation and maintenance of the Facility; any taxes which become payable by
Landlord, whether or not now customary or within the contemplation of Landlord
or Tenant, which are levied in addition to or in lieu of such real or personal
property taxes or assessments including, without limitation, any occupancy,
gross receipts or rental tax (i) allocable to or measured by Rent or other
amounts payable to Landlord hereunder, (ii) with respect to the receipt of such
Rents or amounts by Landlord, (iii) with respect to any activity or right of
Tenant in the leasing, possession, occupancy, use, operation, management,
repair, maintenance, alteration, or improvement of the Premises or (iv) upon
this transaction or any document to which Tenant is a party creating or
transferring an interest or an estate in the Premises; and any interest,
penalties or delinquency charges thereon which attach for any reason other than
late payment or non-payment thereof by Landlord, unless such late payment or
non-payment by Landlord is in connection with a late payment or non-payment by
Tenant. Property taxes shall include transit impact development fees, housing
impact development fees (fees for services such as fire protection, street,
sidewalk and road maintenance, refuse removal and other governmental services),
and other fees or taxes payable by Landlord, in connection with the Facility
that are levied with respect to the Facility and which are payable with monthly
Rent as provided in subparagraph (b) below.
(a) Property Taxes shall not include: (i) any taxes or assessments
---
against the personal property of Tenant or any other tenant of the Facility
which taxes and assessments are separately billed to Tenant or such other tenant
by the tax collecting authority; or (ii) any income tax, franchise tax or
transfer tax (exclusive of any transfer tax imposed on this Lease) for which
Landlord may be or become personally liable.
(b) In addition to all monthly Rent and other charges to be paid by
Tenant under this Lease, Tenant shall reimburse Landlord upon demand for
Tenant's Share of any and all transit impact development fees, housing impact
development fees and other fees or taxes payable by Landlord, whether or not now
customary or within the contemplation of the parties hereto, that are levied
with respect to the Facility that are not due or attributable to the development
of the Facility and related to the cost of providing governmental or public
facilities or services. Property Taxes shall not include transit impact
development fees or housing impact development fee which (i) are imposed solely
on Landlord as a result of development of the Facility and (ii) are not imposed
generally upon other landowners within the taxing agency's jurisdiction.
(c) There shall be deducted from Property Taxes the net amount of any
refunds actually received by Landlord, after reasonable expenses. To the extent
reasonably practicable, all such refunds to be applied against said Property
Taxes for the same calendar year to which the Property Taxes apply.
(d) The amount of special taxes or special assessments to be Included as
Property Taxes shall be limited to the amount of the installments of special
taxes or special assessments required to be paid during the calendar year in
respect to which these special taxes or special assessments are to be
determined; however, Landlord shall elect the longest period of time allowed by
the authority imposing the tax or assessment in which to pay installments of
special taxes or special assessments.
Exhibit C - Page 5
<PAGE>
(e) Property Taxes shall include expenses incurred by Landlord in
attempting to protest, reduce or minimize Property Taxes for the year in which
such expenses are incurred. If for any Lease Year subsequent to the Base Year,
Property Taxes are reduced, then commencing in the Lease Year in which such
decrease occurs and continuing for all subsequent Lease Years, Base Year
Operating Expenses shall be deemed reduced by the amount of such decrease to
Property Taxes.
"REA" means that certain Construction, Operation and Reciprocal Easement
---
Agreement for the Facility recorded July 30, 1985 as Instrument No. 85-279768 in
the Official Records of Orange County, California.
"Related Corporation" means corporations or other business entities (but not
-------------------
including Governmental Entities) which Control, are Controlled by or are under
common Control with Tenant.
"Rent" means all rent and other payments to Landlord under this Lease,
----
including, without limitation, (i) Basic Rent as set forth in Section 4.01, and
(ii) such other charges and payments as are designed as Rent under this Lease.
"Scheduled Term Commencement Date" means the date set forth as the Scheduled
--------------------------------
Term Commencement Date in the Basic Lease Information of this Lease.
"Scheduled Term Expiration Date" means the date set forth as the Scheduled
------------------------------
Term Expiration Date in the Basic Lease Information of this Lease.
"Section" means a section of this Lease.
-------
"Tenant" means the tenant under this Lease as set forth in the Basic Lease
------
Information, or its permitted successors and assigns.
"Tenant Improvements" means the improvements to the Premises to be made by
-------------------
Landlord as provided in the Tenant Improvement Agreements attached hereto as
Exhibit E-1 and Exhibit E-2 and incorporated herein by reference.
- ----------- -----------
"Tenant's Operating Expenses" means the difference between Tenant's Share of
---------------------------
Operating Expenses and Tenant's Share of Base Year Operating Expenses to be
determined and paid as provided in Article XXV.
"Tenant's Share" means the ratio (expressed as percentage) of the useable
--------------
floor area deemed to be in the Premises to the useable floor area deemed to be
in the Facility. In the event the useable square footage of the Premises or the
Facility is changed, Tenant's Share shall be appropriately adjusted effective
upon such change.
"Term" means the term of this Lease.
----
"Term Commencement Date" means the actual date on which the Term of this Lease
----------------------
commences.
"Term Expiration Date" means the actual date on which the term of this Lease
--------------------
expires.
Exhibit C - Page 6
<PAGE>
EXHIBIT D
---------
COMMENCEMENT MEMORANDUM
-----------------------
To:__________________ Date:___________________
__________________
Re: Lease dated__________19__(the "Lease"), between Crow Winthrop Operating
Partnership, Landlord, and ___________, Tenant, concerning Suite ___ located at
_________________________ (the "Premises").
To Whom It May Concern:
In accordance with the subject Lease, we wish to advise and/or confirm as
follows:
1. That the Premises have been accepted by the Tenant as being substantially
complete in accordance with the subject Lease and that there is no deficiency in
construction.
2. That the Tenant has possession of the subject Premises and acknowledges
that under the provisions of the Lease the Term Commencement Date is
___________________, and the Term Expiration Date is _________________________.
3. That in accordance with the Lease, rent commenced to accrue on___________.
4. If the Term Commencement Date of the Lease is other than the first day of
the month, the first billing will contain a pro rata adjustment. Each billing
thereafter will be for the full amount of the monthly installment as provided
for in the Lease.
5. Rent is due and payable in advance on the first day of each and every
month during the Term of the Lease. Your rent checks should be made payable to
___________________ at _________________________.
6. The number of square feet deemed to be in the Premises is _______ useable
and __________ rentable square feet.
7. The number of square feet within the Facility is deemed to be
approximately ______________ useable square feet.
8. Tenant's Share, as adjusted based upon the number of rentable square feet
deemed to be within the Premises, is ___%.
LANDLORD:
CROW WINTHROP OPERATING PARTNERSHIP,
a Maryland general partnership
By: Winthrop California Investors Limited Partnership,
a Delaware limited partnership,
Its: General Partner
By: Three Winthrop Properties Inc.,
a Massachusetts corporation,
Its: General Partner
By:___________________________________________
Janine R. Padia
Vice President
TENANT:
T.A.R. PREFERRED MORTGAGE CORPORATION,
a California corporation
By:__________________________________________
Print Name:_________________________________
Title:______________________________________
<PAGE>
EXHIBIT E-1
-----------
PRELIMINARY TENANT IMPROVEMENT AGREEMENT
----------------------------------------
THIS PRELIMINARY TENANT IMPROVEMENT AGREEMENT ("Preliminary Tenant Improvement
Agreement") is entered into as of the ____ day, January, 1997 by and between
Crow Winthrop Operating Partnership, a Maryland general partnership
("Landlord"), and T.A.R. Preferred Mortgage Corporation ("Tenant"), a
California corporation.
R E C I T A L S :
A. Concurrently with the execution of this Preliminary Tenant Improvement
Agreement, Landlord and Tenant have entered into a lease (the "Lease") covering
certain premises (the "Premises") more particularly described in Exhibit B-1
------------
and Exhibit B-2 attached to the Lease. All terms not defined herein have the
-----------
same meaning as set forth in the Lease. To the extent applicable, the
provisions of the Lease are incorporated herein by this reference.
B. In order to induce Tenant to enter into the Lease and in consideration of
the mutual covenants hereinafter contained, Landlord and Tenant agree as
follows:
1. PRELIMINARY TENANT IMPROVEMENTS. As used in the Lease and this
-------------------------------
Preliminary Tenant Improvement Agreement, the term "Preliminary Tenant
Improvements" or "Preliminary Tenant Improvement Work" means collectively (a)
applying one (1) coat of Standard (as hereinafter defined) paint to the walls of
the Premises in a Standard color selected by Tenant and (b) furnishing and
installing Standard wall-to-wall carpeting in the Premises.
2. CONSTRUCTION REPRESENTATIVES. Landlord hereby appoints the following
----------------------------
person(s) as Landlord's representative ("Landlord's Representative") to act for
Landlord in all matters covered by this Preliminary Tenant Improvement
Agreement: Robert E. Negohosian . Tenant hereby appoints the following
------------------------
person(s) as Tenant's representative ("Tenant's Representative") to act for
Tenant in all matters covered by this Preliminary Tenant Improvement Agreement:
Walter F. Villaume . All communications with respect to the matters covered by
- --------------------
this Preliminary Tenant Improvement Agreement are to made to Landlord's
Representative or Tenant's Representative, as the case may be, in writing in
compliance with the notice provisions of the Lease. Either party may change its
representative under this Preliminary Tenant Improvement Agreement at any time
by written notice to the other party in compliance with the notice provisions of
the Lease.
3. PRELIMINARY TENANT IMPROVEMENTS.
-------------------------------
(a) SELECTION OF COLORS; STYLES. Landlord shall submit to Tenant for
---------------------------
Tenant's review and approval, Standard paint and carpeting options for the
Premises. Tenant shall promptly select the Standard paint and carpeting to be
installed in the Premises. Once selected by Tenant, the Standard selections
may not be changed without the prior written approval of both Landlord and
Tenant, and then only after Tenant pays any excess costs resulting from such
changes. Tenant hereby acknowledges that any such changes will be subject to
the terms of Paragraph 8 below.
(b) PRELIMINARY WORK COST ESTIMATE AND STATEMENT. Prior to the
--------------------------------------------
commencement of construction of any of the Preliminary Tenant Improvements,
Landlord will submit to Tenant a written estimate of the cost to complete the
Preliminary Tenant Improvement Work (the "Preliminary Work Cost Estimate").
Upon Tenant's approval of the Preliminary Work Cost Estimate (such approved
Work Cost Estimate to be hereinafter known as the "Preliminary Work Cost
Statement"), Landlord will have the right to purchase materials and to
commence the construction of the items included in the Preliminary Work Cost
Statement pursuant to Paragraph 5 hereof. If the total costs reflected in the
Preliminary Work Cost Statement exceed the Preliminary Allowance described in
Paragraph 4 below, Tenant agrees to pay such excess, as additional rent,
within five (5) business days after Tenant's approval of the Preliminary Work
Cost Estimate. Throughout the course of construction, any differences between
the estimated Preliminary Work Cost in the Preliminary Work Cost Statement and
the actual Preliminary Work Cost will be determined by Landlord and
appropriate adjustments and payments by Landlord or Tenant, as the case may
be, will be made within five (5) business days thereafter.
4. PAYMENT FOR THE PRELIMINARY TENANT IMPROVEMENTS.
-----------------------------------------------
(a) PRELIMINARY ALLOWANCE. Landlord hereby grants to Tenant a
---------------------
preliminary tenant improvement allowance of up to $3.00 per useable square
foot of space deemed to be contained in the Premises (the "Preliminary
Allowance"). The Preliminary Allowance is to be used only for the
construction of the Preliminary Tenant Improvements.
<PAGE>
(b) EXCESS COSTS. The cost of the Tenant Improvements shall be charged
------------
against the Preliminary Allowance. If the Preliminary Work Cost exceeds the
Preliminary Allowance, Tenant agrees to pay to Landlord such excess within
two (2) business days after invoice therefor (less any sums previously paid by
Tenant for such excess pursuant to the Preliminary Work Cost Estimate). If
the Preliminary Allowance exceeds the Preliminary Work Cost, Tenant will not
be entitled to any payment, rent reduction or credit therefor except as
otherwise expressly set forth herein. In no event will the Preliminary
Allowance be used to pay for Tenant's furniture, artifacts, equipment,
telephone systems or any other item of personal property which is not affixed
to the Premises.
(c) UNUSED PRELIMINARY ALLOWANCE AMOUNTS. Any unused portion of the
------------------------------------
Preliminary Allowance upon completion of the Preliminary Tenant Improvements
will not be refunded to Tenant or be available to Tenant as a credit against any
obligations of Tenant under the Lease.
5. CONSTRUCTION OF TENANT IMPROVEMENTS. Until Tenant selects the Standard
-----------------------------------
colors and styles for the Preliminary Tenant Improvement Work, approves the
Preliminary Work Cost Statement and pays Landlord the amount by which the
Preliminary Work Cost Statement exceeds the Preliminary Allowance, if any,
Landlord will be under no obligation to cause the construction of any of the
Preliminary Tenant Improvements. Following Tenant's approval of the Preliminary
Work Cost Statement described in Subparagraph 3(b) above and upon Tenant's
payment of the total amount by which such Preliminary Work Cost Statement
exceeds the Preliminary Allowance, if any, Landlord's contractor will commence
and diligently proceed with the construction of the Preliminary Tenant
Improvements, subject to Tenant Delays (as described in Paragraph 8 below) and
Force Majeure Delays (as described in Paragraph 9 below). Promptly upon the
commencement of the Preliminary Tenant Improvement Work, Landlord will furnish
Tenant with a construction schedule letter setting forth the projected
completion dates therefor and showing the deadlines for any actions required to
be taken by Tenant during such construction, and Landlord may from time to time
during construction of the Preliminary Tenant Improvements modify such schedule.
6. FREIGHT/CONSTRUCTION ELEVATOR. Landlord will, consistent with its
-----------------------------
obligation to other tenants in the Building, if appropriate and necessary, make
the freight/construction elevator reasonably available to Tenant in connection
with initial decorating, furnishing and moving into the Premises. Tenant agrees
to pay for any after-hours staffing of the freight/construction elevator, if
needed.
7. TERM COMMENCEMENT DATE AND SUBSTANTIAL COMPLETION.
-------------------------------------------------
(a) TERM COMMENCEMENT DATE. The Term of the Lease will commence on the
----------------------
date (the "Term Commencement Date") which is the earlier of:
(i) the date Tenant moves into the Premises; or
(ii) the date the Preliminary Tenant Improvements have been
"substantially completed" (as defined below); provided, however, that if
substantial completion of the Preliminary Tenant Improvements is delayed
as a result of any Tenant Delays then the Term Commencement Date as would
otherwise have been established pursuant to this Subparagraph 7(a)(ii)
will be accelerated by the number of days of such Tenant Delays.
(b) SUBSTANTIAL COMPLETION. For purposes of Subparagraph 7(a)(ii)
----------------------
above, the Tenant Improvements will be deemed to be "substantially completed"
when Landlord's contractor certifies in writing to Landlord and Tenant that
Landlord has substantially performed all of the Preliminary Tenant Improvement
Work required to be performed by Landlord under this Preliminary Tenant
Improvement Agreement, other than decoration and minor "punch-list" type items
and adjustments which do not materially interfere with Tenant's access to or
use of the Premises.
(c) DELIVERY OF POSSESSION. Landlord agrees to deliver possession of the
----------------------
Premises to Tenant when the Preliminary Tenant Improvements have been
substantially completed in accordance with Subparagraph (b) above. The parties
estimate that Landlord will deliver possession of the Premises to Tenant and
the Term of this Lease will commence on or before the Scheduled Term
Commencement Date set forth in the Basic Lease Information section of the
Lease. Landlord agrees to use its commercially reasonable efforts to cause the
Premises to be substantially completed on or before the Scheduled Term
Commencement Date. Tenant agrees that if Landlord is unable to deliver
possession of the Premises to Tenant on or prior to the Scheduled Term
Commencement Date, the Lease will not be void or voidable, nor will Landlord
be liable to Tenant for any loss or damage resulting therefrom, nor will the
expiration date of the Term be in any way extended, unless such late delivery
is due solely to the gross negligence or willful misconduct of Landlord. If
Landlord is delayed in delivering possession of the Premises due to Landlord's
gross negligence or willful misconduct or due to any Force Majeure Delay(s),
then, as Tenant's sole remedy, the Term Commencement Date will be extended one
(1) day for each day Landlord is delayed in delivering possession of the
Premises to Tenant.
Exhibit E-1 - Page 2
<PAGE>
8. TENANT DELAYS. For purposes of this Preliminary Tenant Improvement
-------------
Agreement, "Tenant Delays" means any delay in the completion of the Preliminary
Tenant Improvements resulting from any or all of the following:
(a) Tenant's failure to timely perform any of its obligations pursuant to
this Preliminary Tenant Improvement Agreement;
(b) Tenant's request for materials, finishes, or installations which are
not readily available or which are incompatible with the Standards;
(c) any delay of Tenant in making payment to Landlord for Tenant's share
of the Preliminary Work Cost; or
(d) any other act or failure to act by Tenant, Tenant's employees,
agents, architects, independent contractors, consultants and/or any other
person performing or required to perform services on behalf of Tenant.
9. FORCE MAJEURE DELAYS. For purposes of this Preliminary Tenant
--------------------
Improvement Agreement, "Force Majeure Delays" means any actual delay in the
construction of the Preliminary Tenant Improvements, which is beyond the
reasonable control of Landlord or Tenant, as the case may be, as described in
Article XXVIII of the Lease.
IN WITNESS WHEREOF, the undersigned Landlord and Tenant have caused this
Tenant Improvement Agreement to be duly executed by their duly authorized
representatives as of the date of the Lease.
LANDLORD:
CROW WINTHROP OPERATING PARTNERSHIP,
a Maryland general partnership
By: Winthrop California Investors Limited Partnership,
a Delaware limited partnership,
Its General Partner
By: Three Winthrop Properties, Inc.,
a Massachusetts corporation,
Its General Partner
By:_________________________________________________
Janine R. Padia
Vice President
TENANT:
T.A.R. PREFERRED MORTGAGE CORPORATION,
a California corporation
By:_________________________________
Print Name:________________________
Title:_____________________________
Exhibit E-1 - Page 3
<PAGE>
EXHIBIT E-2
-----------
SUBSEQUENT TENANT IMPROVEMENT AGREEMENT
---------------------------------------
THIS SUBSEQUENT TENANT IMPROVEMENT AGREEMENT ("Subsequent Tenant Improvement
Agreement") is entered into as of the ___ day of January, 1997 by and between
Crow Winthrop Operating Partnership, a Maryland general partnership
("Landlord"), and T.A.R. Preferred Mortgage Corporation, a California
corporation ("Tenant").
R E C I T A L S :
A. Concurrently with the execution of this Subsequent Tenant Improvement
Agreement, Landlord and Tenant have entered into a lease (the "Lease") covering
certain premises (the "Premises") more particularly described in Exhibit B-1
------------
and Exhibit B-2 attached to the Lease. All terms not defined herein have the
-----------
same meaning as set forth in the Lease. To the extent applicable, the
provisions of the Lease are incorporated herein by this reference.
B. In order to induce Tenant to enter into the Lease and in consideration of
the mutual covenants hereinafter contained, Landlord and Tenant hereby agree as
follows:
1. SUBSEQUENT TENANT IMPROVEMENTS. As used in the Lease and this Subsequent
------------------------------
Tenant Improvement Agreement, the term "Subsequent Tenant Improvements" or
"Subsequent Tenant Improvement Work" means those items of general tenant
improvement construction shown on the Final Plans (described in Paragraph 4
below), including, but not limited to, partitioning, doors, ceilings, floor
coverings, wall finishes (including paint and wall covering), electrical
(including lighting, switching, telephones, outlets, etc.), plumbing, heating,
ventilating and air conditioning, fire protection, cabinets and other millwork
and distribution of Building services such as sprinkler and electrical service.
2. WORK SCHEDULE. If Tenant shall desire that Landlord perform the
-------------
Subsequent Tenant Improvements, Tenant shall furnish Landlord with written
notice thereof. Within ten (10) business days thereafter, Landlord shall
deliver to Tenant for Tenant's review and approval, a schedule ("Work Schedule")
which will set forth the timetable for the planning and completion of the
installation of the Subsequent Tenant Improvements. The Work Schedule will set
forth each of the various items of work to be done or approval to be given by
Landlord and Tenant in connection with the completion of the Subsequent Tenant
Improvements. The Work Schedule will be submitted to Tenant for its approval,
which approval Tenant agrees not to unreasonably withhold, and, once approved by
both Landlord and Tenant, the Work Schedule will become the basis for completing
the Subsequent Tenant Improvements. All plans and drawings required by this
Subsequent Tenant Improvement Agreement and all work performed pursuant thereto
are to be prepared and performed in accordance with the Work Schedule. If
Tenant fails to approve the Work Schedule, as it may be modified after
discussions between Landlord and Tenant within five (5) business days after the
date the Work Schedule is first received by Tenant, the Work Schedule shall be
deemed to be approved by Tenant as submitted.
3. CONSTRUCTION REPRESENTATIVES. Landlord hereby appoints the following
----------------------------
person(s) as Landlord's representative ("Landlord's Representative") to act for
Landlord in all matters covered by this Subsequent Tenant Improvement Agreement:
Robert E. Negohosian . Tenant hereby appoints the following person(s) as
- ----------------------
Tenant's representative ("Tenant's Representative") to act for Tenant in all
matters covered by this Subsequent Tenant Improvement Agreement: Walter F.
-----------
Villaume . All communications with respect to the matters covered by this
- ----------
Subsequent Tenant Improvement Agreement are to made to Landlord's Representative
or Tenant's Representative, as the case may be, in writing in compliance with
the notice provisions of the Lease. Either party may change its representative
under this Subsequent Tenant Improvement Agreement at any time by written notice
to the other party in compliance with the notice provisions of the Lease.
4. SUBSEQUENT TENANT IMPROVEMENT PLANS.
-----------------------------------
(a) PREPARATION OF SPACE PLANS. In accordance with the Work Schedule,
--------------------------
Tenant agrees to meet with Landlord's architect and/or space planner for the
purpose of promptly preparing preliminary space plans for the layout of the
Premises ("Space Plans"). The Space Plans are to be sufficient to convey the
architectural design of the Premises and layout of the Subsequent Tenant
Improvements therein and are to be submitted to Landlord in accordance with the
Work Schedule for Landlord's approval. If Landlord reasonably disapproves any
aspect of the Space Plans, Landlord will advise Tenant in writing of such
disapproval and the reasons therefor in accordance with the Work Schedule.
Tenant will then submit to Landlord for Landlord's approval, in accordance with
the Work Schedule, a redesign of the Space Plans incorporating the revisions
reasonably required by Landlord.
<PAGE>
(b) PREPARATION OF FINAL PLANS. Based on the approved Space Plans, and in
--------------------------
accordance with the Work Schedule, Landlord's architect will prepare complete
architectural plans, drawings and specifications and complete engineered
mechanical, structural and electrical working drawings for all of the
Subsequent Tenant Improvements for the Premises (collectively, the "Final
Plans"). The Final Plans will show: (a) the subdivision (including partitions
and walls), layout, lighting, finish and decoration work (including carpeting
and other floor coverings) for the Premises; (b) all internal and external
communications and utility facilities which will require conduiting or other
improvements from the base Building shell work and/or within common areas; and
(c) all other specifications for the Subsequent Tenant Improvements. The Final
Plans will be submitted to Tenant for signature to confirm that they are
consistent with the Space Plans. If Tenant reasonably disapproves any aspect of
the Final Plans based on any inconsistency with the Space Plans, Tenant agrees
to advise Landlord in writing of such disapproval and the reasons therefor
within the time frame set forth in the Work Schedule. In accordance with the
Work Schedule, Landlord will then cause Landlord's architect to redesign the
Final Plans incorporating the revisions reasonably requested by Tenant so as to
make the Final Plans consistent with the Space Plans.
(c) REQUIREMENTS OF TENANT'S FINAL PLANS. Tenant's Final Plans will
------------------------------------
include locations and complete dimensions, and the Subsequent Tenant
Improvements, as shown on the Final Plans, will: (i) be compatible with the
Building shell and with the design, construction and equipment of the Building;
(ii) if not comprised of the Building standards set forth in the written
description thereof (the "Standards"), then compatible with and of at least
equal quality as the Standards and approved by Landlord; (iii) comply with all
applicable laws, ordinances, rules and regulations of all governmental
authorities having jurisdiction, and all applicable insurance regulations; (iv)
not require Building service beyond the level normally provided to other tenants
in the Building and will not overload the Building floors; and (v) be of a
nature and quality consistent with the overall objectives of Landlord for the
Building, as determined by Landlord in its reasonable but subjective discretion.
(d) SUBMITTAL OF FINAL PLANS. Once approved by Landlord and Tenant,
------------------------
Landlord's architect will submit the Final Plans to the appropriate governmental
agencies for plan checking and the issuance of a building permit. Landlord's
architect, with Tenant's cooperation, will make any changes to the Final Plans
which are requested by the applicable governmental authorities to obtain the
building permit. After approval of the Final Plans no further changes may be
made without the prior written approval of both Landlord and Tenant, and then
only after agreement by Tenant to pay any excess costs resulting from the design
and/or construction of such changes.
(e) CHANGES TO SHELL OF BUILDING. If the Final Plans or any amendment
----------------------------
thereof or supplement thereto shall require changes in the Building shell, the
increased cost of the Building shell work caused by such changes will be paid
for by Tenant or charged against the "Allowance" described in Paragraph 5 below.
(f) SUBSEQUENT WORK COST ESTIMATE AND STATEMENT. Prior to the commencement
-------------------------------------------
of construction of any of the Subsequent Tenant Improvements shown on the Final
Plans, Landlord will submit to Tenant a written estimate of the cost to complete
the Subsequent Tenant Improvement Work, which written estimate will be based on
the Final Plans taking into account any modifications which may be required to
reflect changes in the Final Plans required by the City or County in which the
Premises are located (the "Subsequent Work Cost Estimate"). Tenant will either
approve the Subsequent Work Cost Estimate or disapprove specific items and
submit to Landlord revisions to the Final Plans to reflect deletions of and/or
substitutions for such disapproved items. Submission and approval of the
Subsequent Work Cost Estimate will proceed in accordance with the Work Schedule.
Upon Tenant's approval of the Subsequent Work Cost Estimate (such approved
Subsequent Work Cost Estimate is hereinafter referred to as the "Subsequent
Work Cost Statement"), Landlord will have the right to purchase materials and to
commence the construction of the items included in the Subsequent Work Cost
Statement pursuant to Paragraph 6 hereof. If the total costs reflected in the
Subsequent Work Cost Statement exceed the Subsequent Allowance described in
Paragraph 5 below, Tenant agrees to pay such excess, as additional rent, within
five (5) business days after Tenant's approval of the Subsequent Work Cost
Estimate. Throughout the course of construction, any differences between the
estimated Subsequent Work Cost in the Subsequent Work Cost Statement and the
actual Subsequent Work Cost will be determined by Landlord and appropriate
adjustments and payments by Landlord or Tenant, as the case may be, will be made
within five (5) business days thereafter.
5. PAYMENT FOR THE SUBSEQUENT TENANT IMPROVEMENTS.
----------------------------------------------
(a) SUBSEQUENT ALLOWANCE. Landlord hereby grants to Tenant a tenant
--------------------
improvement allowance of up to $7.00 per useable square foot of the Premises
(the "Subsequent Allowance"). The Subsequent Allowance is to be used only for:
(i) Payment of the cost of preparing the Space Plans and the Final Plans,
including mechanical, electrical, plumbing and structural drawings and of all
other aspects necessary to complete the Subsequent Tenant Improvement Plans.
The Subsequent Allowance will not be used for the payment of extraordinary
design work not consistent with the scope of Landlord's Standards (i.e.,
above-standard design work) or for payments to any other consultants,
designers or architects other than Landlord's architect and/or Tenant's
architect.
Exhibit E-2 - Page 2
<PAGE>
(ii) The payment of plan check, permit and license fees relating to
construction of the Subsequent Tenant Improvements.
(iii) Construction of the Subsequent Tenant Improvements, including,
without limitation, the following:
(aa) Installation within the Premises of all partitioning, doors,
floor coverings, ceilings, wall coverings and painting, millwork and
similar items;
(bb) All electrical wiring, lighting fixtures, outlets and switches,
and other electrical work necessary for the Premises;
(cc) The furnishing and installation of all duct work, terminal boxes,
diffusers and accessories necessary for the heating, ventilation and air
conditioning systems within the Premises, including the cost of meter and
key control for after-hour air conditioning;
(dd) Any additional improvements to the Premises required for Tenant's
use of the Premises including, but not limited to, odor control, special
heating, ventilation and air conditioning, noise or vibration control or
other special systems or improvements;
(ee) All fire and life safety control systems such as fire walls,
sprinklers, halon, fire alarms, including piping, wiring and accessories,
necessary for the Premises; and
(ff) Fees for the contractor and tenant improvement coordinator
including, but not limited to, fees and costs attributable to general
conditions associated with the construction of the Subsequent Tenant
Improvements.
(iv) All other costs to be expended by Landlord in the construction of
the Subsequent Tenant Improvements, including those costs incurred by Landlord
for construction of elements of the Subsequent Tenant Improvements in the
Premises, which construction was performed by Landlord prior to the execution
of this Lease by Landlord and Tenant and which construction is for the benefit
of tenants and is customarily performed by Landlord prior the execution of
leases for space in the Building for reasons of economics (examples of such
construction would include, but not be limited to, the extension of mechanical
including heating, ventilating and air conditioning systems and electrical
distribution systems outside of the core of the Building, wall construction,
column enclosures and painting outside of the core of the Building, ceiling
hanger wires and window treatment).
(b) EXCESS COSTS. The cost of each item referenced in Paragraph 5(a) above
------------
shall be charged against the Subsequent Allowance. If the Subsequent Work Cost
exceeds the Subsequent Allowance, Tenant agrees to pay to Landlord such excess
prior to the commencement of construction within five (5) business days after
invoice therefor (less any sums previously paid by Tenant for such excess
pursuant to the Subsequent Work Cost Estimate). If the Subsequent Allowance
exceeds the Subsequent Work Cost, Tenant will not be entitled to any payment,
rent reduction or credit therefor except as otherwise expressly set forth
herein. In no event will the Subsequent Allowance be used to pay for Tenant's
furniture, artifacts, equipment, telephone systems or any other item of personal
property which is not affixed to the Premises.
(c) CHANGES. If, after the Final Plans have been prepared and the
-------
Subsequent Work Cost Statement has been established, Tenant requires any changes
or substitutions to the Final Plans, any additional costs related thereto are to
be paid by Tenant to Landlord prior to the commencement of construction of the
Subsequent Tenant Improvements. Any changes to the Final Plans will be approved
by Landlord and Tenant in the manner set forth in Paragraph 4 above and will, if
necessary, require the Subsequent Work Cost Statement to be revised and agreed
upon between Landlord and Tenant in the manner set forth in Subparagraph 4(f)
above. Landlord will have the right to decline Tenant's request for a change to
the Final Plans if such changes are inconsistent with the provisions of
Paragraph 4 above, or if the change would unreasonably delay construction of the
Subsequent Tenant Improvements .
(d) GOVERNMENTAL COST INCREASES. If increases in the cost of the
---------------------------
Subsequent Tenant Improvements as set forth in the Subsequent Work Cost
Statement are due to requirements of any governmental agency, Tenant agrees to
pay Landlord the amount of such increase within five (5) days of Landlord's
written notice; provided, however, that Landlord will first apply toward any
such increase any remaining balance of the Subsequent Allowance.
(e) UNUSED SUBSEQUENT ALLOWANCE AMOUNTS. Provided that Tenant shall not
-----------------------------------
then be (and shall not at any time during the Term have been) in default under
the Lease, any unused portion of the Subsequent Allowance upon completion of the
Subsequent Tenant Improvements will be available to Tenant as a credit against
any obligations of Tenant under the Lease, subject to the terms of Paragraph 7.
6. CONSTRUCTION OF TENANT IMPROVEMENTS. Notwithstanding the foregoing, until
-----------------------------------
Tenant approves the Final Plans and the Subsequent Work Cost Statement and pays
Landlord the amount by which the Subsequent Work Cost Statement exceeds the
Subsequent Allowance, if any, Landlord will be under no
Exhibit E-2 - Page 3
<PAGE>
obligation to expend any monies and/or to cause the construction of any of the
Subsequent Tenant Improvements; it being further agreed that Landlord shall have
no obligation to perform the Subsequent Tenant Improvements if Tenant shall then
be (or shall have at any time been) in default under the Lease. Tenant
acknowledges that Tenant shall be in possession the Premises during the
performance of the Subsequent Tenant Improvements. Landlord and Tenant shall
cooperate to mutually determine when the Subsequent Tenant Improvements will be
commenced. However, once the work begins, Landlord shall have the right to
complete the same on a continuous, uninterrupted schedule without Tenant
interference. Tenant acknowledges that such work shall be performed at such
times, including normal business hours, and in such manner as Landlord shall
reasonably determine. Tenant agrees (a) to cooperate with Landlord or Landlord's
Representative during the performance of such work, including but not limited
to, temporarily removing and relocating Tenant's and Tenant's employees'
furniture, fixtures, equipment and other personalty and (b) to release Landlord,
Landlord's Representative and their respective agents from all losses, costs,
damages and expenses, including, but not limited to, loss of business, incurred
in connection with such work.
7. CONVERSION OF SUBSEQUENT ALLOWANCE.
----------------------------------
(a) DEFINITIONS. As used in this Paragraph, the following defined terms
-----------
shall have the following meanings ascribed thereto:
(i) The term "Rent Conversion Date" shall mean the date identified by
Tenant in the Conversion Notice (as hereinafter defined) as the date for the
conversion of the Unapplied Allowance and the Rent Credit Unapplied Allowance to
a credit against the Basic Rent due under the Lease, which Rent Conversion Date
shall be on the first day of a calendar month and shall occur no earlier than
thirty (30) days following Landlord's receipt of the Conversion Notice.
(ii) The term "Unapplied Allowance" shall mean the difference between
(A) $385,994.00, which the parties hereto agree is the amount of the Subsequent
Allowance attributable to the Premises (other than the Rent Credit Space) and
(B) the aggregate amount which Landlord determines, in its sole but reasonable
judgment, has not been incurred by or on behalf of Tenant in connection with the
performance of the Subsequent Tenant Improvements in the Premises (other than
Subsequent Tenant Improvements attributable to the Rent Credit Space).
(iii) The term "Rent Credit Unapplied Allowance" shall mean the
difference between (A) $105,693.00, which the parties hereto agree is the amount
of the Subsequent Allowance attributable to the Rent Credit Space and (B) the
aggregate amount which Landlord determines, in its sole but reasonable judgment,
has not been incurred by or on behalf of Tenant in connection with the
performance of the Subsequent Tenant Improvements attributable to the Rent
Credit Space.
(b) CONVERSION. Provided that (i) the Lease is in full force and effect
----------
and Tenant is not and has not been in default under the Lease and (ii) Tenant is
in occupancy of the entire Premises and Tenant shall not have assigned the Lease
or sublet all or any part of the Premises, Tenant shall have the right,
exercisable by written notice to Landlord (the "Conversion Notice"), to convert
the Unapplied Allowance and the Rent Credit Unapplied Allowance to a credit
against the Basic Rent due under the Lease (the "Conversion Option"). If Tenant
shall exercise the Conversion Option as aforesaid on the Rent Conversion Date,
the Unapplied Allowance and Rent Credit Unapplied Allowance shall be converted
to a credit against the Basic Rent, which credit will be applied against
subsequent payments of Basic Rent under the Lease in twenty-four (24) equal
monthly installments provided and upon the condition that on the Rent Conversion
Date and on the date of each subsequent installment of such credit, Tenant shall
not be or have been in default under the Lease. Notwithstanding the foregoing
or anything to the contrary contained in the Conversion Notice, Tenant shall not
be entitled to credit any portion of the Rent Credit Unapplied Allowance against
the Basic Rent due under the Lease prior to April 1, 1998.
(c) LANDLORD'S OBLIGATIONS CEASE. Notwithstanding anything to the
-----------------------------
contrary contained herein or otherwise, upon Landlord's receipt of the
Conversion Notice, Landlord shall have no further obligation to perform the
Subsequent Improvements or to perform any act of any kind required hereunder in
connection therewith, other than as expressly set forth in Subparagraph 7(b)
above.
Exhibit E-2 - Page 4
<PAGE>
IN WITNESS WHEREOF, the undersigned Landlord and Tenant have caused this
Tenant Improvement Agreement to be duly executed by their duly authorized
representatives as of the date of the Lease.
LANDLORD:
CROW WINTHROP OPERATING PARTNERSHIP,
a Maryland general partnership
By: Winthrop California Investors Limited Partnership,
a Delaware limited partnership,
Its General Partner
By: Three Winthrop Properties, Inc.,
a Massachusetts corporation,
Its General Partner
By:_____________________________________________
Janine R. Padia
Vice President
TENANT:
T.A.R. PREFERRED MORTGAGE CORPORATION,
a California corporation
By:___________________________________
Print Name:________________________
Title:_____________________________
Exhibit E-2 - Page 5
<PAGE>
EXHIBIT F
---------
FORM OF ESTOPPEL CERTIFICATE
----------------------------
The undersigned,______________________, a _____________________,
("Landlord"), with a mailing address c/o __________________________.
and ______________________________, a __________________________
("Tenant"), hereby certify to ___________________________________,
as follows:
1. Attached hereto is a true, correct and complete copy of that certain lease
dated _________________, 19___, between Landlord and Tenant (the "Lease"),
regarding the premises located at _______________________(the "Premises"). The
Lease is now in full force and effect and has not been amended, modified or
supplemented, except as set forth in Paragraph 4 below.
2. The Term of the Lease commenced on _____________, 19___.
3. The Term of the Lease shall expire on ___________, 19___.
4. The Lease has: (Initial one)
(____________) not been amended, modified, supplemented, extended, renewed or
assigned.
(____________) been amended, modified, supplemented, extended, renewed or
assigned by the following described terms or agreements, copies of which are
attached hereto:
_______________________________
_______________________________
_______________________________
5. Tenant has accepted and is now in possession of the Premises.
6. Tenant and Landlord acknowledge that Landlord's interest in the Lease will
be assigned to ___________________ and that no modification, adjustment,
revision or cancellation of the Lease or amendments thereto shall be effective
unless written consent of _________________________ is obtained, and that until
further notice, payments under the Lease may continue as heretofore.
7. The amount of Monthly Basic Rent is $______________
8. The amount of Tenant's security deposit (if any) is $_________________.
No other security deposits have been made except as follows:____________________
________________________________________________________________________________
________________________________________________________________________________
9. Tenant is paying the full lease rental which has been paid in full as of
the date hereof. No rent or other charges under the Lease have been paid for
more than thirty (30) days in advance of its due date except as follows:
10. All work required to be performed by Landlord under the Lease has been
completed except as follows:____________________________________________________
11. There are no defaults on the part of the Landlord or Tenant under the
Lease except as follows:________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
<PAGE>
12. Neither Landlord nor Tenant has any defense as to its obligations under
the Lease and claims no set-off or counterclaim against the other party except
as follows:_____________________________________________________________________
___________________________________________
13. Tenant has no right to any concession (rental or otherwise) or similar
compensation in connection with renting the space it occupies other than as
provided in the Lease except as follows:________________________________________
___________________________________________
All provisions of the Lease and the amendments thereto (if any) referred to
above are hereby ratified.
The foregoing certification is made with the knowledge that__________________
is about to fund a loan to Landlord or __________ is about to purchase the
Project (or part thereof) from Landlord and that ____________ is relying upon
the representations herein made in funding such loan or in purchasing the
Project (or part thereof).
IN WITNESS WHEREOF, this certificate has been duly executed and delivered by
the authorized officers of the undersigned as of _______________, 19_______.
LANDLORD:
CROW WINTHROP OPERATING PARTNERSHIP,
a Maryland general partnership
By: Winthrop California Investors Limited Partnership,
a Delaware limited partnership,
Its General Partner
By: Three Winthrop Properties, Inc.,
a Massachusetts corporation,
Its General Partner
By:________________________________________________
Janine R. Padia
Its Vice President
TENANT:
______________________________
a_____________________________
By:___________________________
Print Name:__________________
Title:_______________________
By:___________________________
Print Name:__________________
Title:_______________________
Exhibit F - Page 2
<PAGE>
EXHIBIT G
---------
RULES AND REGULATIONS
---------------------
A. General Rules and Regulations. The following rules and regulations
govern the use of the Facility, including the Building, each tenant's premises
and all Common Area. Each tenant shall be bound by such rules and regulations
and shall be responsible for the observance of these rules and regulations by
its employees, subtenants, assignees, contractors, suppliers, customers,
invitees and guests.
1. Sidewalks, halls, passages, exits, entrances, elevators, escalators and
stairways of the Facility shall not be obstructed by tenants or used by them for
any purpose other than for ingress to and egress from their respective premises.
The halls, passages, exits, entrances, elevators, stairways, balconies and roof
are not for the use of the general public and Landlord shall in all cases retain
the right to control and prevent access thereto by all persons whose presence in
the judgment of Landlord shall be prejudicial to the safety, character,
reputation and interests of the Facility and its tenants, provided that nothing
herein contained shall be construed to prevent such access to persons with whom
any tenant normally deals in the ordinary course of such tenant's business
unless such persons are engaged in illegal activity. No tenant and no employee
or invitee of and tenant shall go upon the roof of the Corporate Tower or any
other building in the Facility, except as authorized by Landlord.
2. No sign, placard, picture, name, advertisement or notice, visible from
the exterior of the premises shall be inscribed, painted, affixed, installed or
otherwise displayed by any tenant either on its premises or any part of the
Facility without the prior written consent of Landlord. Landlord shall have the
right to remove any such sign, placard, picture, name, advertisement or notice
without notice to and at the expense of the tenant. If Landlord shall have
given such consent to any tenant at any time, whether before or after the
execution of the Lease, such consent shall in no way operate as a waiver or
release of any of the provisions hereof or of such Lease and shall be deemed to
relate only to the particular sign, placard, picture, name, advertisement or
notice so consented to by Landlord and shall not be construed as dispensing with
the necessity of obtaining the specific written consent of Landlord with respect
to any other such sign, placard, picture, name, advertisement or notice. All
approved signs or lettering on doors and walls shall be printed, painted,
affixed or inscribed at the expense of the tenant by a person approved by
Landlord.
3. All bulletin boards or directories or other name identifications, if any,
will be provided exclusively for the display of the name and location of tenants
only and Landlord reserves the right to exclude any other names therefrom.
4. No curtains, draperies, blinds, shutters, shades, screens or other
coverings, awnings, hangings or decorations shall be attached to, hung or placed
in, or used in connection with, any window or door on any premises without the
prior written consent of Landlord. In any event, with the prior written consent
of Landlord, all such items shall be installed inboard of Landlord's standard
window covering and shall in no way be visible from the exterior of the
Facility. No articles shall be placed or kept on the window sills so as to be
visible from the exterior of the Facility. No articles shall be placed against
glass partitions or doors or any window or wall which might appear unsightly
from outside tenant's premises.
5. Landlord reserves the right to exclude from the Facility between the
hours of 6:00 p.m. and 8:00 a.m. and after 2:00 p.m. on Saturdays and at all
hours on Sundays and holidays all persons who are not tenants or their
accompanied guests in the Facility. Landlord, at its option, may require all
persons admitted to or leaving the Facility or certain portions of the Facility
during such hours to register. Each tenant shall be responsible for all persons
for whom it allows to enter the Facility and shall be liable for damages for
error with regard to the admission to or exclusion from the Facility of any
person. During the continuance of any invasion, mob, riot, public excitement or
other circumstance rendering such action advisable in Landlord's opinion,
Landlord reserves the right to prevent access to the Facility by closing the
doors, or otherwise, for the safety of tenants and protection of the Facility
and property in the Facility. Subject to Landlord's prior reasonable approval,
tenant shall not permit the visit to the premises of persons in such numbers or
under such conditions as will interfere with the use and enjoyment of the Common
Area by others or with the use and enjoyment of the premises leased to other
tenants in the Facility.
6. No tenant shall employ any person or persons other than the janitor of
Landlord for the purpose of cleaning its premises unless otherwise agreed to by
Landlord in writing. Except with the written consent of Landlord no person or
persons other than those approved by Landlord shall be permitted to enter the
Facility for the purpose of cleaning the same. No tenant shall cause any
unnecessary labor by reason of such tenant's carelessness or indifference in the
preservation of good order and cleanliness of the premises. Janitorial services
shall be provided to Landlord by independent contractors who are bonded.
<PAGE>
7. No tenant shall obtain for use upon its premises food, beverage, or other
similar services except through facilities provided by Landlord (and maintained
by tenant) and under regulations fixed by Landlord, or accept barbering or
bootblacking services in its premises except from persons authorized by Landlord
at such reasonable hours and under such reasonable regulations as may be fixed
by Landlord. Landlord expressly reserves the right to absolutely prohibit
solicitation, canvassing, sales and displays of products, goods and wares in all
portions of the Facility except for such activities as may be expressly
requested by a tenant and conducted solely within such requesting tenant's
premises. Landlord reserves the right to restrict and regulate the use of the
Common Area of the Facility and the Building by invitees of tenants providing
services to tenants on a periodic or daily basis including food and beverage
vendors. Such restrictions may include limitations on time, place, manner and
duration of access to a tenant's premises for such purposes. Without limiting
the foregoing, Landlord may require that such parties use service elevators,
halls, passageways and stairways for such purposes to preserve access within the
Building for tenants and the general public. No tenant shall install, maintain
operate upon the premises any vending machine without the written consent of
Landlord, except for machines which dispense candy, ice water, soft drinks and
cigarettes. Microwave ovens for preparation of food for the convenience of a
tenant's employees, guests and invitees are permitted, as provided in Paragraph
15 of these rules and regulations.
8. Each tenant shall see that all doors of its premises are closed and
securely locked and must observe strict care and caution that all water faucets
or water apparatus are entirely shut off before the tenant or its employees
leave such premises, and that all utilities shall likewise be carefully and
entirely shut off, so as to prevent waste or damage, and for any default or
carelessness the tenant shall make good all injuries sustained by other tenants
or occupants of the Facility or Landlord. On multiple-tenancy floors, all
tenants shall keep the door or doors to the Facility corridors closed at all
times except for ingress or egress.
9. Tenant shall use its reasonable efforts to not waste electricity, water
or air-conditioning and agrees to cooperate fully with Landlord to assure the
most effective operation of the Facility's heating and air-conditioning, and
shall refrain from attempting to adjust any controls other than room thermostats
installed for tenant's use.
10. No tenant shall alter any lock or access device or install any new
additional locks or access devices or any bolts on any door of its premises
without the prior written consent of Landlord. If Landlord shall give its
consent, the tenant shall in each case furnish Landlord with a key for any such
lock, bolt or device. Landlord agrees to cooperate with tenant in coordinating
security access and control systems for the premises and the facility. In no
event shall tenant install or operate such security systems which are in
conflict with systems installed or operated by Landlord.
11. No tenant shall make or have made additional copies of any keys or
access provided by Landlord. Each tenant, upon the termination of the tenancy,
shall deliver to Landlord all the keys or access devices for the Facility,
offices, rooms and toilet rooms which shall have been furnished the tenant or
which the tenant shall have had made. In the event of the loss of any keys or
access devices so furnished by Landlord, tenant shall pay Landlord therefor.
12. The toilet rooms, toilets, urinals, wash bowls and other apparatus
shall not be used for any purpose other than that for which they were
constructed and no foreign substance of any kind whatsoever shall be thrown
therein, and the expense of any breakage, stoppage or damage resulting from the
violation of this rule shall be borne by the tenant who, or whose employees or
invitees, shall have caused it.
13. No tenant shall use or keep in premises or otherwise on the Facility
any kerosene, gasoline or inflammable or combustible fluid or material other
than limited quantities necessary for the operation or maintenance of office or
office equipment. Any permitted corrosion, flammable or other special wastes
shall be handled for disposal as directed by Landlord. No tenant shall use any
method of heating or air-conditioning other than that supplied by Landlord.
14. No tenant shall use, keep or permit to be used or kept in its premises
any foul or noxious gas or substance or permit or suffer such premises to be
occupied or used in a manner offensive or objectionable to Landlord or other
occupants of the Facility by reason of noise, odors and/or vibrations or
interfere in any way with other tenants or those having business therein, nor
shall any animals or birds be brought or kept in or about any premises of the
Facility.
15. Except as otherwise permitted by Landlord, no cooking shall be done or
permitted by any tenant on its premises (except that use by tenant of
Underwriters' Laboratory approved equipment for the preparation of beverages and
food for tenants and their employees, guests and invitees shall be permitted,
provided that such equipment and use is in accordance with all applicable
federal, state and city laws, codes, ordinances, rules and regulations), nor
shall premises be used for washing clothes or lodging.
16. Except with the prior written consent of Landlord, no tenant shall
sell, or permit the sale, at retail, of newspapers, magazines, periodicals,
theater tickets or any other goods or merchandise in or on any premises, nor
shall tenant carry on, or permit or allow any employee or other person to carry
on, the business of stenography, typewriting or any similar business in or from
any premises for the service or accommodation of occupants of any other
Facility, nor shall the premises of any tenant be used for the storage of
merchandise or
Exhibit G - Page 2
<PAGE>
for manufacturing of any kind, or the business of a public barber shop, beauty
parlor, nor shall the premises of any tenant be used for any improper, immoral
or objectionable purpose, or any business or activity other than that
specifically provided for in such tenant's lease.
17. If Tenant requires telegraphic, telephonic, burglar alarm or similar
services, it shall first obtain, and comply with, Landlord's instructions in
their installation.
18. Landlord will direct electricians as to where and how telephone
telegraph and electrical wires are to be introduced or installed. No boring or
cutting for wires will be allowed without the prior written consent of Landlord.
The location of burglar alarms, telephones, call boxes and other equipment
affixed to all premises shall be subject to the written approval of Landlord.
19. No tenant without Landlord's prior approval shall install any radio or
television antenna, loudspeaker or any other device on the exterior walls or the
roof of the Facility. No tenant shall interfere with radio or television
broadcasting or reception from or in the Facility or elsewhere.
20. No tenant shall lay linoleum, tile, carpet or any other floor covering
so that the same shall be affixed to the floor of its premises in any manner
except as approved in writing by Landlord. The expense of repairing any damage
resulting from a violation of this rule or the removal of any floor covering
shall be borne by the tenant of whom, or by whose contractors, employees or
invitees, the damage shall have been caused. No tenant shall place floormats or
other objects outside the boundaries of its premises.
21. No furniture, freight, equipment, materials, supplies, packages,
merchandise or other property will be received in the Facility except between
such hours and at such locations designated by Landlord. Such items shall be
carried up and down only in such elevators as shall be designated by Landlord.
Tenant shall be responsible for receiving, checking, inspecting and paying for
deliveries of such merchandise, supplies, goods, materials, equipment and
products addressed to tenant and shall be responsible for moving these items to
its premises. Landlord will not accept deliveries for tenants.
22. Landlord shall have the right to prescribe the weight, size and
position of all safes, furniture or other heavy equipment brought into the
Facility. Safes or other heavy objects shall, if considered necessary by
Landlord, stand on wood strips of such thickness as determined by Landlord to be
necessary to distribute properly the weight thereof. Landlord shall not be
responsible for loss of or damage to any such safe, equipment or property from
any cause, and all damage done to the Facility by moving or maintaining any such
safe, equipment or other property shall be repaired at the expense of the
tenant.
23. No tenant shall place a load upon any floor of the premises which
exceeds the load per square foot which such floor was designed to carry and
which is allowed by law. No tenant shall mark, or drive nails, screw or drill
into, the partitions, woodwork or plaster or in any way deface such premises or
any part thereof, except as may be reasonably necessary in minor decoration of
the premises. No tenant shall mark or defile escalators, elevators, water
closets, toilet room walls, windows, doors, or any other part of the Facility or
the Common Area.
24. There shall not be used in any space, or in the public areas of the
Common Area, either by any tenant or others, any hand trucks except those
equipped with rubber tires and side guards or such other material-handling
equipment as Landlord may approve. No other vehicles of any kind (except a
wheelchair for an individual) shall be brought by any tenant into or kept in or
about the premises.
25. Each tenant shall store all its trash and garbage within the interior
of its premises or within receptacles provided by Landlord. No material shall
be placed in the trash boxes or receptacles if such material is of such nature
that it may not be disposed of in the ordinary and customary manner of removing
and disposing of trash and garbage in the city without violation of any law or
ordinance governing such disposal. All trash, garbage and refuse disposal shall
be made only through entryways and elevators provided for such purposes and at
such time as Landlord shall designate.
26. Canvassing, soliciting, distribution of handbills or any other written
material, and peddling in the Facility are prohibited and each tenant shall
cooperate to prevent the same. No tenant shall make room-to-room solicitation
of business from other tenants in the Facility.
27. Landlord may in the exterior of the Facility designate and use or
authorize the use of areas for shows, festivals or other events, both public and
private. Any fees collected from individuals or organizations for the use of
such areas may be used by Landlord for any purpose Landlord desires.
28. Tenant shall: (a) not effect or execute any agreement or other
instrument whereby its premises or any part thereof is restricted on the basis
of age, religion, sex or national origin in the sale, lease or occupancy
thereof; (b) not discriminate in the use or occupancy of any or all of its
premises against any person because of age, race, color, sex, religion or
national origin, not shall any person be deprived of the right to use its
premises or any of the facilities therein by reason of race, color, sex,
religion, national origin, or, except where required by law, age: and (c) comply
with all federal, state and local laws, ordinances, rules and regulations, in
effect
Exhibit G - Page 3
<PAGE>
from time to time, prohibiting discrimination or segregation by reason of race,
religion, color, sex, national origin, or except where dictated by law, age.
29. Landlord shall have the right, exercisable upon reasonable advance
notice and without liability to any tenant, to change the name and address of
the Facility and the arrangement and/or location of the Common Area and to
install and maintain a sign or signs on the exterior of any building or in any
corridor and passageway.
30. Landlord reserves and shall have the right voluntarily or pursuant to
government requirements, at Landlord's expense, to make repairs, alterations or
improvements in or to the Facility or any part thereof, and during such repair,
alteration or improvement work to temporarily block or close entrances, doors,
windows, corridors, elevators, or other Common Area, provided that such
temporary blocking or closing shall not unreasonably interfere with any tenant's
use and occupancy of its premises or the Facility and take any and all measures,
including inspections, repairs, alterations, additions and improvements to the
Premises or the Facility as may be necessary or desirable for the safety,
protection or preservation of the Premises or Facility, the Landlord's interest
therein, or as may be necessary or desirable in the operation of the Facility.
31. Landlord reserves the right to grant any tenant the exclusive right to
conduct any particular business or undertaking in the Facility.
32. Landlord reserves the right to exclude or expel from the Facility any
person who, in Landlord's judgment is intoxicated or under the influence of
liquor or drugs or who is in violation of any of the Rules and Regulations of
the Facility.
33. Without the prior written consent of Landlord, no tenant shall use the
name of the Facility in connection with or in promoting or advertising the
business of tenant except as such tenant's address. Landlord may prohibit any
advertisement by any tenant, which in Landlord's opinion, tends to impair the
reputation or desirability of the Facility. Upon receipt of written notice from
Landlord objecting to such advertising, tenant shall cease and refrain from such
advertising.
34. Tenant shall comply with all safety, fire protection and evacuation
procedures and regulations established by Landlord or any governmental agency.
35. Tenant assumes any and all responsibility for protecting its premises
from theft, robbery and pilferage, which includes keeping doors locked and other
means of entry to its premises closed.
36. Tenants authorized to sell or serve food shall not employ persons who
do not have and keep a neat, clean appearance or who are sloppy and careless in
their food handling work habits.
37. The requirements of tenants will be attended to only upon application
at the office of the Facility by an authorized individual. Employees of Landlord
shall not perform any work or do anything outside of their regular duties unless
under special instructions from Landlord, and no employees will admit any person
(tenant or otherwise) to any office without specific instructions from Landlord.
38. Landlord may waive any one or more of these Rules and regulations for
the benefit of any particular tenant or tenants, but no such waiver by Landlord
shall be construed as a waiver of such Rules and Regulations in favor of any
other tenant or tenants, nor prevent Landlord from thereafter enforcing any such
Rules and Regulations against any or all tenants of the Facility.
Notwithstanding the foregoing, Landlord shall not enforce the rules and
regulations against Tenant in a discriminatory manner.
39. Landlord reserves the right to make such other and reasonable rules and
regulations as in its judgment may from time to time be needed for safety and
security, for care and cleanliness of the Facility and for the preservation of
good order therein. Tenant agrees to abide by all such Rules and Regulations
which are adopted.
40. The Rules and Regulations are in addition to, and shall not be
construed to in any way modify, alter or amend, in whole or in part, the terms,
covenants, agreements and conditions of any lease of any Premises in the
Facility. Whenever in these Rules and Regulations the word "tenant" is used it
shall apply to and include the tenant under the lease and its agents, employees,
customer and vendors. Similarly, the word "Landlord" shall include the
Landlord, its agents, employees, contractors and vendors.
B. Parking Rules and Regulations. The following rules and regulations
govern the use of the Parking Facilities which serve the Facility. Tenant will
be bound by such rules and regulations and agrees to cause its employees,
subtenants, assignees, contractors, suppliers, customers and invitees to observe
the same:
1. Tenant will not permit or allow any vehicles that belong to or are
controlled by Tenant or Tenant's employees, subtenants, customers or invitees to
be loaded, unloaded or parked in areas other than those designated by Landlord
for such activities. No vehicles are to be left in the parking areas overnight
and no
Exhibit G - Page 4
<PAGE>
vehicles are to be parked in the parking areas other than normally sized
passenger automobiles, motorcycles and pick-up trucks. No extended term storage
of vehicles is permitted.
2. Vehicles must be parked entirely within painted stall lines of a single
parking stall.
3. All directional signs and arrows must be observed.
4. The speed limit within all parking areas shall be five (5) miles per hour
or as otherwise posted.
5. Parking is prohibited:
(a) in areas not striped for parking;
(b) in aisles or on ramps, if any;
(c) where "no parking" signs are posted;
(d) in cross-hatched areas; and
(e) in such other areas as may be designated from time to time by
Landlord or Landlord's parking operator.
6. Landlord reserves the right, without cost or liability to Landlord, to
tow any vehicle if such vehicle's audio theft alarm system remains engaged for
an unreasonable period of time.
7. Washing, waxing, cleaning or servicing of any vehicle in any area not
specifically reserved for such purpose is prohibited.
8. Landlord may refuse to permit any person to park in the parking
facilities who violates these rules with unreasonable frequency, and any
violation of these rules shall subject the violator's car to removal, at such
car owner's expense. Tenant agrees to use its best efforts to acquaint its
employees, subtenants, assignees, contractors, suppliers, customers and invitees
with these parking provisions, rules and regulations.
9. Parking stickers, access cards, or any other device or form of
identification supplied by Landlord as a condition of use of the parking
facilities shall remain the property of Landlord. Parking identification
devices, if utilized by Landlord, must be displayed as requested and may not be
mutilated in any manner. The serial number of the parking identification device
may not be obliterated. Parking identification devices, if any, are not
transferable and any device in the possession of an unauthorized holder will be
void. Landlord reserves the right to refuse the sale of monthly stickers or
other parking identification devices to Tenant or any of its agents, employees
or representatives who willfully refuse to comply with these rules and
regulations and all unposted city, state or federal ordinances, laws or
agreements.
10. Loss or theft of parking identification devices or access cards must be
reported to the management office in the Facility immediately, and a lost or
stolen report must be filed by the Tenant or user of such parking identification
device or access card at the time. Landlord has the right to exclude any
vehicle from the Parking Facilities that does not have a parking identification
device or valid access card. Any parking identification device or access card
which is reported lost or stolen and which is subsequently found in the
possession of an unauthorized person will be confiscated and the illegal holder
will be subject to prosecution.
11. All damage or loss claimed to be the responsibility of Landlord must be
reported, itemized in writing and delivered to the management office located
within the Facility within ten (10) business days after any claimed damage or
loss occurs. Any claim not so made is waived. Landlord is not responsible for
damage by water or fire, or for the acts or omissions of others, or for articles
left in vehicles. In any event, the total liability of Landlord, if any, is
limited to Two Hundred Fifty Dollars ($250.00) for all damages or loss to any
car. Landlord is not responsible for loss of use.
12. The parking operators, managers or attendants are not authorized to
make or allow any exceptions to these rules and regulations, without the express
written consent of Landlord. Any exceptions to these rules and regulations made
by the parking operators, managers or attendants without the express written
consent of Landlord will not be deemed to have been approved by Landlord.
13. Landlord reserves the right, without cost or liability to Landlord, to
tow any vehicles which are used or parked in violation of these rules and
regulations.
14. Landlord reserves the right from time to time to modify and/or adopt
such other reasonable and non-discriminatory rules and regulations for the
Parking Facilities as it deems reasonably necessary for the operation of the
Parking Facilities.
<PAGE>
EXHIBIT H
---------
EXPANSION SPACE
---------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE Page
- ------- ----
<S> <C>
BASIC LEASE INFORMATION................................................................................ i
R E C I T A L S........................................................................................ 1
- - - - - - - - -
ARTICLE I - DEFINITIONS................................................................................ 1
ARTICLE II - PREMISES 1
2.01 LEASE OF PREMISES......................................................................... 1
2.02 CALCULATIONS OF AREAS..................................................................... 1
2.03 COMMON AREA............................................................................... 1
2.04 ACCESS.................................................................................... 2
ARTICLE III - TERM AND POSSESSION 2
3.01 TERM COMMENCEMENT......................................................................... 2
3.02 DELIVERY OF POSSESSION.................................................................... 2
3.03 CONDITION OF PREMISES..................................................................... 2
ARTICLE IV - RENT...................................................................................... 3
4.01 BASIC RENT................................................................................ 3
4.02 OPERATING EXPENSES........................................................................ 3
4.03 SECURITY DEPOSIT.......................................................................... 3
4.04 PAYMENT; LATE CHARGES..................................................................... 3
4.05 ALL PAYMENTS AS RENT...................................................................... 4
ARTICLE V - RESTRICTIONS ON USE/COMPLIANCE WITH LAWS................................................... 4
5.01 USE....................................................................................... 4
ARTICLE VI - ALTERATIONS............................................................................... 4
6.01 TENANT ALTERATIONS........................................................................ 4
6.02 INSTALLATION OF ALTERATIONS............................................................... 4
6.03 REMOVAL OF ALTERATIONS.................................................................... 5
6.04 PAYMENT OF LANDLORD'S FEES AND COSTS...................................................... 6
6.05 REMOVAL OF PERSONAL PROPERTY.............................................................. 6
6.06 FAILURE TO REMOVE ITEMS................................................................... 6
ARTICLE VII - REPAIRS.................................................................................. 6
7.01 LANDLORD'S OBLIGATIONS.................................................................... 6
7.02 TENANT'S OBLIGATIONS...................................................................... 7
7.03 TENANT'S FAILURE TO REPAIR................................................................ 7
ARTICLE VIII - LIENS................................................................................... 7
ARTICLE IX - ASSIGNMENT AND SUBLETTING................................................................. 7
9.01 RIGHT TO ASSIGN, SUBLEASE AND ENCUMBER.................................................... 7
9.02 TRANSFER NOTICE........................................................................... 7
9.03 LANDLORD'S OPTIONS........................................................................ 8
9.04 REASONABLE DISAPPROVAL.................................................................... 8
9.05 ADDITIONAL CONDITIONS..................................................................... 8
9.06 EXCESS RENT............................................................................... 9
9.07 RECAPTURE RIGHTS.......................................................................... 9
9.08 NO RELEASE................................................................................ 9
9.09 ADMINISTRATIVE AND ATTORNEYS' FEES........................................................ 9
9.10 EFFECTIVENESS CONDITIONED UPON ASSUMPTION................................................. 9
9.11 LIABILITY OF TENANT....................................................................... 10
9.12 RELATED CORPORATION....................................................................... 10
ARTICLE X - INSURANCE AND INDEMNIFICATION.............................................................. 10
10.01 LIMITATION ON LANDLORD'S LIABILITY........................................................ 10
10.02 INDEMNIFICATION OF LANDLORD............................................................... 10
10.03 LANDLORD'S INDEMNITY...................................................................... 11
10.04 SURVIVAL OF INDEMNITIES................................................................... 11
10.05 TENANT'S INSURANCE........................................................................ 11
10.06 WAIVER OF SUBROGATION..................................................................... 12
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
ARTICLE XI - SERVICES AND UTILITIES 12
11.01 MAINTENANCE BY LANDLORD.................................................................................. 12
11.02 DELIVERY OF SERVICES AND UTILITIES....................................................................... 12
11.03 EQUIPMENT REQUIRING EXCESSIVE UTILITIES.................................................................. 12
11.04 RIGHT TO CURTAIL SERVICES AND UTILITIES.................................................................. 12
11.05 AFTER HOURS AND ADDITIONAL SERVICES...................................................................... 13
ARTICLE XII - ESTOPPEL CERTIFICATE.................................................................................... 13
ARTICLE XIII - PARKING................................................................................................ 13
13.01 SPACES................................................................................................... 13
13.02 CONTROL.................................................................................................. 14
13.03 GENERAL PROVISIONS....................................................................................... 14
13.04 COOPERATION WITH TRAFFIC MITIGATION MEASURES............................................................. 14
13.05 PARKING RULES AND REGULATIONS............................................................................ 14
ARTICLE XIV - SUBSTITUTION............................................................................................ 14
ARTICLE XV - SURRENDER OF PREMISES; HOLDING OVER...................................................................... 15
15.01 SURRENDER OF PREMISES.................................................................................... 15
15.02 NO MERGER................................................................................................ 15
15.03 HOLDING OVER............................................................................................. 15
ARTICLE XVI - SUBORDINATION AND QUIET ENJOYMENT....................................................................... 15
16.01 SUBORDINATION............................................................................................ 15
16.02 QUIET ENJOYMENT.......................................................................................... 16
ARTICLE XVII - RULES AND REGULATIONS.................................................................................. 16
ARTICLE XVIII - ENTRY................................................................................................. 16
ARTICLE XIX - DEFAULT BY TENANT....................................................................................... 16
19.01 EVENTS OF DEFAULT........................................................................................ 16
19.02 REMEDIES UPON DEFAULT OR TERMINATION..................................................................... 17
19.03 DAMAGES UPON TERMINATION................................................................................. 17
19.04 OPERATING EXPENSES....................................................................................... 18
19.05 PERFORMANCE BY LANDLORD.................................................................................. 18
19.06 LANDLORD'S SECURITY INTEREST............................................................................. 18
19.07 REMEDIES CUMULATIVE...................................................................................... 18
ARTICLE XX - DAMAGE BY FIRE OR OTHER CASUALTY......................................................................... 18
20.01 NOTICE OF LOSS........................................................................................... 18
20.02 SUBSTANTIAL OR TOTAL DAMAGE.............................................................................. 18
20.03 LOSS CAUSED BY TENANT OR TENANT'S EMPLOYEES.............................................................. 19
20.04 DESTRUCTION DURING FINAL YEAR............................................................................ 19
20.05 DESTRUCTION OF TENANT'S PERSONAL PROPERTY, TENANT'S EXTRA IMPROVEMENTS OR PROPERTY OF
TENANT'S EMPLOYEES....................................................................................... 19
20.06 EXCLUSIVE REMEDY......................................................................................... 19
20.07 DELAYS................................................................................................... 19
20.08 PROPERTY DAMAGE.......................................................................................... 19
ARTICLE XXI - EMINENT DOMAIN.......................................................................................... 20
21.01 TOTAL OR SUBSTANTIAL TAKING.............................................................................. 20
21.02 PARTIAL TAKING........................................................................................... 20
21.03 TEMPORARY TAKING......................................................................................... 20
ARTICLE XXII - SALE BY LANDLORD....................................................................................... 20
ARTICLE XXIII - WAIVER................................................................................................ 20
ARTICLE XXIV - NOTICES................................................................................................ 21
ARTICLE XXV - OPERATING EXPENSES...................................................................................... 21
25.01 GENERAL.................................................................................................. 21
25.02 PAYMENT OF OPERATING EXPENSES............................................................................ 21
25.03 COMPUTATION OF OPERATING EXPENSES ADJUSTMENT............................................................. 21
25.04 MINIMUM RENT............................................................................................. 21
25.05 PRORATION................................................................................................ 22
</TABLE>
iv
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<TABLE>
<S> <C>
ARTICLE XXVI - TAXES PAYABLE BY TENANT............................................................................... 22
26.01 PERSONALTY.............................................................................................. 22
26.02 TAXES AS RENT........................................................................................... 22
ARTICLE XXVII - LANDLORD'S DEFAULT................................................................................... 22
27.01 NOTICE.................................................................................................. 22
27.02 REMEDY FOR BREACH....................................................................................... 22
ARTICLE XXVIII - FORCE MAJEURE....................................................................................... 22
ARTICLE XXIX - LANDLORD'S MORTGAGEES AND LESSORS..................................................................... 22
29.01 MODIFICATIONS........................................................................................... 22
29.02 CURE RIGHTS............................................................................................. 22
ARTICLE XXX - SIGNS.................................................................................................. 23
ARTICLE XXXI - FINANCIAL STATEMENTS.................................................................................. 23
ARTICLE XXXII - EXPANSION OF PREMISES................................................................................ 23
32.01 EXERCISE OF EXPANSION................................................................................... 23
32.02 EFFECT OF EXERCISE...................................................................................... 23
32.03 TENANT IMPROVEMENTS..................................................................................... 24
ARTICLE XXXIII - RIGHT OF FIRST OFFER................................................................................ 25
33.01 EXERCISE OF RIGHT....................................................................................... 25
33.02 EFFECT OF EXERCISE...................................................................................... 25
33.03 OPTIONS PERSONAL........................................................................................ 25
ARTICLE XXXIV - MISCELLANEOUS........................................................................................ 26
34.01 SUCCESSORS AND ASSIGNS.................................................................................. 26
34.02 ATTORNEYS' FEES......................................................................................... 26
34.03 LIGHT AND AIR........................................................................................... 26
34.04 PUBLIC TRANSPORTATION................................................................................... 26
34.05 HEADINGS................................................................................................ 26
34.06 USE OF PRONOUNS......................................................................................... 26
34.07 TIME OF THE ESSENCE..................................................................................... 26
34.09 BROKERS................................................................................................. 26
34.10 MODIFICATIONS........................................................................................... 26
34.11 UNENFORCEABLE PROVISIONS................................................................................ 26
34.12 COVENANTS AND CONDITIONS................................................................................ 26
34.13 INCORPORATION........................................................................................... 26
34.14 RECORDATION OF MEMORANDUM; QUITCLAIM AND RELEASE AGREEMENT.............................................. 26
34.15 ADDITIONAL INSTRUMENTS.................................................................................. 27
34.16 ENTIRE LEASE BETWEEN PARTIES............................................................................ 27
34.17 NONDISCLOSURE OF LEASE TERMS............................................................................ 27
34.18 JOINT AND SEVERAL OBLIGATIONS........................................................................... 27
34.19 TENANT AS CORPORATION OR PARTNERSHIP.................................................................... 27
34.20 EXAMINATION OF LEASE.................................................................................... 27
34.21 LANDLORD'S AUTHORITY.................................................................................... 27
</TABLE>
EXHIBITS
- --------
EXHIBIT A - LEGAL DESCRIPTION OF LAND COMPRISING THE FACILITY
EXHIBIT A-1 - SITE PLAN OF THE FACILITY AND THE PROJECT
EXHIBIT B-1 - FLOOR PLAN OF THE PREMISES AT 3347 MICHELSON DRIVE
EXHIBIT B-2 - FLOOR PLAN OF THE PREMISES AT 3355 MICHELSON DRIVE
EXHIBIT C - DEFINITIONS
EXHIBIT D - COMMENCEMENT MEMORANDUM
EXHIBIT E-1 PRELIMINARY TENANT IMPROVEMENT AGREEMENT
EXHIBIT E-2 SUBSEQUENT TENANT IMPROVEMENT AGREEMENT
EXHIBIT F - FORM OF ESTOPPEL CERTIFICATE
EXHIBIT G - RULES AND REGULATIONS
EXHIBIT H - EXPANSION SPACE
v
<PAGE>
EXHIBIT 10.4
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WAREHOUSING CREDIT AND SECURITY AGREEMENT
(Residential Mortgage Loans)
BETWEEN
T.A.R. Preferred Mortgage
as the Company
AND
PNC Mortgage Bank, National Association
as the Bank
------------------------------------
Dated as of ____________________, 19__
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE I
DEFINITIONS
<S> <C>
Section 1.1 Defined Terms.................................................. 1
Section 1.2 Other Definitional Provisions.................................. 6
ARTICLE II
THE CREDIT
Section 2.1 The Commitment................................................. 6
Section 2.2 Procedures for Obtaining Advances.............................. 7
Section 2.4 Interest & Transaction Fees.................................... 8
Section 2.5 Principal Payments............................................. 9
Section 2.6 Expiration and/or Termination of Commitment.................... 10
Section 2.7 Method of Making Payments; Reductions in Commitment............ 10
Section 2.8 Late Payment Fees.............................................. 11
Section 2.9 Commitment Fee................................................. 11
Section 2.10 Net Payments; Reduced Return................................... 11
ARTICLE III
COLLATERAL
Section 3.1 Assignments and Grant of Security Interest..................... 12
Section 3.2 Delivery of Additional Collateral or Mandatory Prepayment...... 12
Section 3.3 Right of Redemption from Pledge................................ 13
Section 3.4 Collection and Servicing Rights................................ 13
Section 3.5 Return of Collateral at End of Commitment...................... 13
ARTICLE IV
CONDITIONS PRECEDENT
Section 4.1 Initial Advance................................................ 13
Section 4.2 Each Advance................................................... 15
ARTICLE V
REPRESENTATIONS AND WARRANTIES
Section 5.1 Organization; Good Standing; Subsidiaries...................... 16
Section 5.2 Authorization and Enforceability............................... 16
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Section 5.3 Approvals.................................................. 16
Section 5.4 Financial Condition........................................ 17
Section 5.5 Litigation................................................. 17
Section 5.6 Compliance with Laws....................................... 17
Section 5.7 Regulation U............................................... 17
Section 5.8 Investment Company Act..................................... 17
Section 5.9 Payment of Taxes........................................... 17
Section 5.10 Agreements................................................. 17
Section 5.11 Title to Properties........................................ 18
Section 5.12 ERISA...................................................... 18
Section 5.13 Eligibility................................................ 18
Section 5.14 Special Representations Concerning Collateral.............. 19
Section 5.15 Warehouse Line Application................................. 21
ARTICLE VI
AFFIRMATIVE COVENANTS
Section 6.1 Payment of Note............................................ 21
Section 6.2 Financial Statements and Other Reports..................... 21
Section 6.3 Maintenance of Existence; Conduct of Business.............. 21
Section 6.4 Compliance with Applicable Laws............................ 23
Section 6.5 Inspection of Properties and Books......................... 23
Section 6.6 Notice..................................................... 23
Section 6.7 Payment of Debt, Taxes, etc................................ 24
Section 6.8 Insurance.................................................. 38
Section 6.9 Insured Closings........................................... 24
Section 6.10 Subordination of Certain Indebtedness...................... 24
Section 6.11 Other Loan Obligations..................................... 24
Section 6.12 Use of Proceeds of Advances................................ 25
Section 6.13 Special Affirmative Covenants Concerning Collateral........ 25
ARTICLE VII
NEGATIVE COVENANTS
Section 7.1 Indebtedness............................................... 26
Section 7.2 Sale or Pledge of Servicing Contracts...................... 26
Section 7.3 Merger; Sale of Assets; Acquisitions; Change in Control;
Change of Senior Management.............................. 26
Section 7.4 Deferral of Subordinated Debt.............................. 26
Section 7.5 Loss of Eligibility........................................ 26
Section 7.6 Proforma Debt to Adjusted Tangible Net Worth Ratio......... 26
Section 7.7 Minimum Adjusted Tangible Net Worth........................ 26
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Section 7.8 Loans to Officers, Employees and Shareholders.............. 26
Section 7.9 Special Negative Covenants Concerning Collateral........... 26
ARTICLE VIII
DEFAULTS; REMEDIES
Section 8.1 Events of Default.......................................... 28
Section 8.2 Remedies................................................... 30
Section 8.3 Application of Proceeds.................................... 31
Section 8.4 Bank Appointed Attorney-in-Fact............................ 32
Section 8.5 Right of Set-Off........................................... 32
Section 8.6 Reasonable Assurances...................................... 32
ARTICLE IX
REIMBURSEMENT OF EXPENSES; INDEMNITY
Section 9.1 Cost of Enforcement........................................ 33
Section 9.2 Payments of Taxes.......................................... 33
Section 9.3 Indemnification............................................ 34
ARTICLE X
DELIVERIES OF COLLATERAL DOCUMENTS
ARTICLE XI
MISCELLANEOUS
Section 11.1 Relationship of Parties................................... 34
Section 11.2 Recourse.................................................. 35
Section 11.3 Notices................................................... 35
Section 11.4 Terms Binding Upon Successors; Survival................... 35
Section 11.5 Assignment................................................ 35
Section 11.6 Amendments................................................ 36
Section 11.7 No Waiver; Remedies Cumulative............................ 36
Section 11.8 Invalidity................................................ 36
Section 11.9 Participations............................................ 36
Section 11.10 lntegration............................................... 36
Section 11.11 Additional Instruments, etc............................... 36
Section 11.12 Governing Law............................................. 36
Section 11.13 Company Information....................................... 37
</TABLE>
<PAGE>
EXHIBIT A Promissory Note
EXHIBIT B Guaranty
EXHIBIT C Request for Advance Under Warehouse Line of Credit
EXHIBIT D Procedures and Documentation for Warehousing Residential Mortgage
Loans
EXHIBIT E List of Servicing Contracts
EXHIBIT F Subordination of Debt Agreement
EXHIBIT G Subsidiaries
EXHIBIT H Bailee Agreement
EXHIBIT I Form of Legal Opinion by Counsel to Company
EXHIBIT J Irrevocable Instructions for Payment
EXHIBIT K Power of Attorney to Indorse Negotiable Instruments
<PAGE>
WAREHOUSING CREDIT AND SECURITY AGREEMENT
THIS WAREHOUSING CREDIT AND SECURITY AGREEMENT (the "Agreement"), dated as
of December 6, 1995 by and between T.A.R. Preferred Mortgage, a corporation
----------------
organized under the laws of California, having its principal office at 19702
MacArthur Blvd., Suite 200, Irvine, CA 92715 (the "Company" or the "Borrower"),
and PNC Mortgage Bank, National Association, a national bank organized under the
laws of the United States having an office at 440 North Fairway Drive, Vernon
Hills, Illinois 60061 (the "Bank").
WHEREAS, the Company has requested the Bank, and the Bank is willing, to
extend a revolving warehousing line of credit to the Company to finance the
making of residential mortgage loans, and the parties desire to set forth herein
the terms and conditions under which Advances under the revolving warehousing
line of credit shall be made and security provided for the repayment thereof;
NOW, THEREFORE, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Defined Terms.
-------------
Capitalized terms defined below or elsewhere in this Agreement (including
the Exhibits hereto) shall have the following meanings:
"Adjusted Tangible Net Worth" means with respect to any Person at any date,
---------------------------
the Tangible Net Worth of such person at such date minus deferred excess service
fees, plus that portion of Subordinated Debt not due within one year of such
date, plus the product obtained by multiplying one hundred basis points (0.0100)
times the principal balance of loans being serviced at such date by the Company.
"Advance" means a disbursement by the Bank under the Commitment, including
-------
readvances of funds previously advanced to the Company and repaid to the Bank.
"Advance Request" has the meaning set forth in Section 2.2(a) hereof.
---------------
"Affiliate" has the meaning set forth in Rule 12b-2 of the General Rules
---------
and Regulations
1
<PAGE>
under the Exchange Act.
"Agreement" means this Warehousing Credit and Security Agreement, either as
---------
originally executed or as it may from time to time be supplemented, modified or
amended.
"Bank" has the meaning set forth in the first paragraph of this Agreement.
----
"Base Rate" has the meaning set forth in Section 2.4 (a) hereof.
---------
"Business Day" means any day excluding Saturday, Sunday and any day which
------------
is a legal holiday under the laws of the State of Illinois.
"Collateral" has the meaning set forth in Section 3.1 hereof.
----------
"Collateral Documents" has the meaning set forth in Section 2.2(b) hereof.
--------------------
"Commitment" has the meaning set forth in Section 2.1 (a) hereof.
----------
"Commitment Fee" has the meaning set forth in Section 2.9 hereof.
--------------
"Company" has the meaning set forth in the first paragraph of this
-------
Agreement.
"Conventional Mortgage Loan" means a Mortgage loan other than a FHA-insured
--------------------------
or VA-guaranteed Mortgage Loan.
"Custodian" means the organization which holds documents relating to pooled
---------
Mortgage Loans on the Company's and GNMA's, FNMA's or FHLMC's behalf.
"Debt" means, with respect to any Person, at any date (a) all indebtedness
----
or other obligations of such Person which, in accordance with GAAP, would be
included in determining total liabilities as shown on the liabilities side of a
balance sheet of such Person at such date; (b) all indebtedness or other
obligations of such Person for borrowed money or for the deferred purchase price
of property or services; (c) all indebtedness or other obligations of any other
Person for borrowed money or for the deferred purchase price of property or
services in respect of which such Person is liable, contingently or otherwise,
to pay or advance money or property as guarantor, endorser, or otherwise (except
as endorser of negotiable instruments for collection in the ordinary course of
business), or which such Person has agreed to purchase or otherwise acquire; and
(d) all indebtedness for borrowed money or for the deferred purchase price of
property or services secured by a Lien on any property owned or being purchased
by such Person (even though such Person has not assumed or otherwise become
liable for the payment of such indebtedness) to the extent that such
indebtedness would not be otherwise counted as a liability for purposes of
determining the Tangible Net Worth of such Person and to the extent
2
<PAGE>
that such indebtedness does not exceed the net book value for such property.
"Default" means the occurrence of any event or existence of any condition
-------
which, but for the giving of notice, the lapse of time, or both, would
constitute an Event of Default.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended from time to time and any successor statute.
"Event of Default" means any of the conditions or events set forth in
----------------
Section 8.1 hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended from
------------
time to time, and any successor statute.
"Federal Funds Rate" means the average weighted rate of interest at which
------------------
overnight federal fund transactions with member banks of the Federal Reserve
System a traded as published on the next succeeding business day by the Federal
Reserve Bank of New York.
"FHA" means The Federal Housing Administration of the United States
---
Department of Housing and Urban Development and any successor hereto.
"FHLMC" means The Federal Home Loan Mortgage Corporation and any successor
-----
thereto.
"FICA" means the Federal Insurance Contributions Act.
----
"Floating Rate" has the meaning set forth in Section 2.4(a) hereof.
-------------
"FNMA" means The Federal National Mortgage Association and any successor
----
thereto.
"GAAP" means generally accepted accounting principles set forth in the
----
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession, which are applicable to the circumstances as of the date of
determination.
"Gestation Repo" means a Mortgage Loan eligible for a repurchase agreement
--------------
covering the time between the date the issuing Custodial submits documents to
GNMA, FNMA, or FHLMC for initial pool certification and the date the new
security is actually issued.
"GNMA" means Government National Mortgage Association or any successor
----
thereto.
3
<PAGE>
"Guarantors" mean Todd Rodriguez.
----------
"HUD" means the United States Department of Housing and Urban Development
---
or any successor thereto.
"Indemnified Liabilities" has the meaning set forth in Section 9.3 hereof.
-----------------------
"Insurer" means FHA, VA or a private mortgage insurer, as applicable.
-------
"Internal Revenue Code" means the Internal Revenue Code of 1986, or any
---------------------
subsequent federal income tax law or laws, as any of the foregoing have been or
may from time to time be amended.
"Investor" means FNMA, FHLMC or GNMA or a financially responsible private
--------
institution (which is deemed acceptable by the Bank in its sole discretion)
purchasing Mortgage Loans from the Company pursuant to a Purchase Commitment.
"Jumbo Loan" means a loan in excess of $203,150.00.
----------
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
----
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof, and any agreement to give
any security interest).
"Margin Stock" has the meaning assigned to that term in Regulation U of the
------------
Board of Governors of the Federal Reserve System as in effect front time to
time.
"Mortgage" means either (1) a first-lien mortgage, deed of trust, security
--------
deed or similar instrument on improved real property; or (2) a second-lieu
mortgage, deed of trust, security deed or similar instrument on improved real
property insured under Title I of the National Housing Act, 12 U.S.C. 1701 et
seq.
"Mortgage Loan" means any loan evidenced by a Mortgage Note. A Mortgage
-------------
Loan, unless otherwise expressly stated herein, means a Residential Mortgage
Loan.
"Mortgage Loan Documents" means the Mortgage, Mortgage Note, credit and
-----------------------
closing packages, disclosures, and all other files, records and documents
necessary to establish the eligibility of the Mortgage Loans for mortgage
insurance or guarantee by an Insurer or for purchase by an Investor.
"Mortgage Note" means a note secured by a Mortgage and evidencing a
-------------
Mortgage Loan.
"Mortgage Note Amount" means the outstanding unpaid principal amount of a
--------------------
Mortgage
4
<PAGE>
Note at the time such Mortgage Note is pledged to the Bank.
"Multiemployer Plan" means a "multiemployer plan" as defined in Section
------------------
4001(a)(3) of ERISA which is maintained for employees of the Company or a
Subsidiary of the Company.
"Nonconforming Mortgage Loan" means a First Mortgage Loan which does not
---------------------------
conform to the eligibility requirements of FNMA or FHLMC with respect to the
credit rating of the mortgagor, but which is underwritten and approved by an
Investor prior to funding, and which is to be sold to the Investor on a
servicing-released basis; provided that in no event shall its original principal
amount exceed Six Hundred Thousand Dollars ($600,000).
"Note" has the meaning set forth in Section 2.3 hereof.
----
"Notices" has the meaning set forth in Article 9 hereof.
-------
"Officers' Certificate" means a certificate executed on behalf of the
---------------------
Company by its chief financial officer or its treasurer.
"Person" means and includes natural persons, corporations, limited
------
partnerships, general partnerships, joint stock companies, joint ventures,
associations, companies, trusts, banks, trust companies, land trusts, business
trusts or other organizations, whether or not legal entities, and governments
and agencies and political subdivisions thereof.
"Plans" has the meaning set forth in Section 5.12 hereof.
-----
"Pledged Mortgages" has the meaning set forth in Section 3.1 (a) hereof.
-----------------
"Purchase Commitment" means a written commitment, in form and substance
-------------------
satisfactory to the Bank, issued in favor of the Company by an Investor pursuant
to which that Investor commits to purchase one or more Mortgage Loans, along
with the related correspondent or whole loan purchase agreement by and between
the Company and the Investor, in form and substance satisfactory to the Bank,
governing the terms and conditions of any such purchases.
"Redemption Amount" has the meaning set forth in Section 3.3 hereof.
-----------------
"Residential Mortgage Loan" means a Mortgage Loan secured by a Mortgage
-------------------------
covering improved real property containing a one- to four-family residence.
"Servicing Contracts" means the rights and obligations of the Company, as
-------------------
servicer, pursuant to the Servicing Contracts identified on Exhibit E attached
---------
hereto or made part hereof, as the same may be revised from time to time, or
such other servicing contract to which Company is or may be a party, to
administer, collect the payments for the reduction of principal
5
<PAGE>
and application of interest, pay taxes and insurance, remit collected payment,
provide foreclosure services, provide full escrow administration and any other
obligations required by any Investor or Insurer in, of or for the Mortgage Loans
pursuant to the Servicing Agreements, together with the right to receive the
servicing fee and any ancillary fees arising from or connected to the Mortgage
Loans.
"Statement Date" has the meaning set forth in Section 4.1(a)(7) hereof.
--------------
"Subordinated Debt" means Debt of the Company which has been subordinated
-----------------
as provided in Sections 4.1(h) or 6.10 hereof.
"Subsidiary" means any corporation, association or other business entity in
----------
which more than fifty percent (50%) of the total voting power or shares of stock
entitled to vote in the election of directors, managers or trustees thereof is
at the time owned or controlled, directly or indirectly, by any Person or one or
more of the other Subsidiaries of that Person or a combination thereof.
"Tangible Net Worth" means with respect to any Person at any date, the
------------------
excess of the total assets over total liabilities of such person on such date,
each to be determined in accordance with GAAP consistent with those applied in
the preparation of the financial statements referred to in Section 5.4 hereof,
plus that portion of Subordinated Debt not due within one year of such date plus
the reserve for loan losses, provided that, for purposes of this Agreement,
there shall be excluded from total assets, those assets of any Person which, if
such Person were a HUD mortgagee, would be deemed by HUD to be non-acceptable by
calculating adjusted net worth in accordance with its requirements in effect as
of such date, as such requirements appear in the "Audit Guide for Audit of
Approved Non-Supervised Mortgagees."
"VA" means the Department of Veterans Affairs and any successor thereto.
--
"Wet Settlement" means a closing or settlement of a Residential Mortgage
--------------
Loan wherein the Bank is requested to make an advance to the Company based upon
delivery of the Collateral Documents to a third person as agent for or on behalf
of the Bank, but prior to examination of the Collateral Documents by the Bank.
Section 1.2 Other Definitional Provisions.
-----------------------------
1.2(a) Accounting terms not otherwise defined herein shall have the
meanings given them under GAAP.
1.2(b) Defined terms may he used in the singular or the plural, as the
context requires.
6
<PAGE>
ARTICLE II
THE CREDIT
Section 2.1 The Commitment.
--------------
2.1(a) Subject to the terms and conditions of this Agreement and provided
no Default has occurred and is continuing, the Bank agrees, from time to time
during the period from the date hereof to the expiration date (unless such
period is earlier determined pursuant hereto) make Advances to, or on behalf of
the Company or its designee, provided the total aggregate principal amount which
is (i) outstanding at any one time of all such Advances shall not exceed Five
Million Dollars ($5,000,000) and (ii) advanced in any one (1) day shall not
exceed Two Million Five Hundred Thousand Dollars ($2,500,000) without written
request by the Company and subsequent approval by an officer of the Bank. The
obligation of the Bank to make Advances hereunder up to such limits or the
amount to which such limit may be reduced pursuant to Section 2.7(b) hereof, is
hereinafter referred to as the "Commitment". Within the Commitment, the Company
may borrow, repay and reborrow. Notwithstanding the foregoing, the Bank shall
not be obligated to make Advances hereunder at all or up to any specified
aggregate limit unless the Company elects to pay the Commitment Fee specified in
Section 2.9 hereof, in which event this Agreement shall govern any Advances that
the Bank from time to time elects in its sole discretion to make to the Company.
2.1(b) Advances shall be used by the Company solely for the purpose of
funding the origination of Mortgage Loans and shall be made at the request of
the Company, in the manner hereinafter provided in Section 2.2, against the
pledge of such Mortgage Loans. No Advance shall be made against any Mortgage
Loan which is not covered by a Purchase Commitment. Such Purchase Commitment
shall include a direction by the Company to the Investor of such Mortgage Loan
to pay the purchase price of such Mortgage Loan to the Bank.
2.1(c) No Advance shall exceed ninety-eight percent (98%) of the lower of
(i) the Mortgage Note Amount or (ii) the committed purchase price set forth in
the Purchase Commitment for the related Mortgage Loan which is originated with
the proceeds of such Advance.
2.1(d) The aggregate amount of Advances for Jumbo loans shall not exceed
Two Million Dollars ($2,000,000) at any time.
2.1(e) The aggregate amount of Advances for Wet Settlement shall not
exceed One Million Five Hundred Thousand Dollars ($1,500,000) at any one time.
2.1(f) The aggregate amount of Advances for Second Mortgages shall not
exceed Four Million Dollars ($4,000,000)) at any one time.
7
<PAGE>
Section 2.2 Procedures for Obtaining Advances.
---------------------------------
2.2(a) The Company may obtain an Advance hereunder, subject to the
satisfaction of the conditions set forth in Sections 4.1 and 4.2 hereof, upon
compliance with the procedures set forth in this Section 2.2. Requests for
Advances shall be initiated by the Company by delivering to the Bank a completed
and signed request for an Advance (an "Advance Request") on the then current
form therefor approved by the Bank. The current form in use by the Bank is set
forth in Exhibit C hereto. The Bank shall have the right to revise or
supplement approved forms of Advance Request by giving notice thereof to the
Company.
2.2(b) The procedures to be followed by the Company in making an Advance
Request, and the document relating to the Collateral described in the Advance
Request (the "Collateral Documents") required to be delivered to the Bank, shall
consist of those set forth in the following described Exhibit attached hereto
and hereby made part hereof: Procedures and Documentation for Warehousing
Residential Mortgage loans, as set forth in Exhibit D hereto. Unless the
related Advance is no longer outstanding, the Company shall require the
remaining Collateral Documents, as set forth in the aforementioned Exhibit D, to
be furnished to the Bank within three (3) Business Days after the date of the
Wet Settlement.
The Bank shall have the right, on not less than three (3) Business Days
prior notice to the Company, to modify said Exhibit(s) to conform to current
legal requirements or Bank practices, and, as so modified, said Exhibit shall be
deemed part hereof.
2.2(c) Before funding any Advance, the Bank shall have a reasonable time
to examine each Advance Request and the Collateral Documents to be delivered
prior to the Advance, as set forth in Exhibits D hereto, and may reject such of
them as do not meet the requirements of this Agreement or of the related
Purchase commitment.
2.2(d) To make an Advance, the Bank shall (i) wire funds to the closing
agent or authorize payment of the Company's draft upon compliance by the Company
with the terms of this Agreement and shall immediately thereafter debit said
account for the amount of the Advance and transmit such amount in accordance
with the procedures described herein.
2.2(e) All Advances under this Agreement shall constitute a single
indebtedness and all of the Collateral shall be security for the Note and for
the performance of all obligations of the Company to the Bank.
Section 2.3 Note. The Company's obligation to pay the principal of, and
----
interest on, all Advances made by the Bank shall be evidenced by the promissory
note (the "Note") of the Company dated as of the date hereof substantially in
the form of Exhibit A attached hereto. The term "Note" shall include all
extensions, renewals and modifications of the Note and all substitutions
therefor. All terms and provisions of the Note are incorporated herein.
8
<PAGE>
Section 2.4 Interest & Transaction Fees.
---------------------------
2.4(a) The unpaid amount of each Advance shall bear interest, from the
date of such Advance until paid in full, at a floating rate of interest (the
"Floating Rate") from time to time (computed on the basis of a 360-day year and
applied to the actual number of days elapsed in each interest calculation
period) which is equal to two and one-half of one percent (2.5%) in excess of
the prior month's average daily Federal Funds Rate. As used herein, the term
"Federal Funds Rate" means the average weighted rate of interest at which
- -------------------
federal fund transactions with member banks of the Federal Reserve system are
traded as published on the next succeeding Business Day by the Federal Reserve
Bank of New York. The prior month's available investable balances in non
interest bearing accounts at the Bank or its designee may be used to offset
interest expenses. The rate of interest on the portion of the line
corresponding to the prior month's available investable balance will bear
interest at one and three-quarters of one percent (1.75%) per annum.
2.4(b) The Company shall pay the Bank a transaction fee equal to Thirty
Dollars ($30) for each Advance processed by wire and Twenty Five Dollars ($25)
for each Advance processed by draft under the terms of this Agreement.
2.4(c) All interest and transaction fees will be deducted from the
proceeds remitted from the Investor to the Bank on each individual loan. In the
event the total sum of the Advance plus such fees and interest exceeds the
remittance amount received from the Investor, the deficit amount shall be deemed
in arrears and will be payable to the Bank on the second day of each month.
2.4(d) The holder of the Note is hereby authorized to record the date and
amount of each payment of principal and interest, and applicable interest rates
and other information with respect thereto, on the schedules annexed to and
constituting a part of the Note and any such recordation shall constitute prima
facie evidence of the accuracy of the information so recorded; provided however,
that the failure to make a notation or the inaccuracy of any notation shall not
limit or otherwise affect the obligations of the Company hereunder or
thereunder.
Section 2.5 Principal Payments.
------------------
2.5(a) The outstanding principal amount of each Advance shall be payable
in full upon the earliest to occur of (i) demand, (ii) the occurrence of any
event described in Section 2.5(c) hereof with respect to such Advance or (iii)
expiration or termination of the Commitment.
2.5(b) The Company shall have the right to prepay the outstanding Advances
in whole or in part, from time to time, without premium or penalty or advance
notice.
2.5(c) The Company shall be obligated to pay to the Bank, without the
necessity of prior
9
<PAGE>
demand or notice from the Bank, and the Company authorizes the Bank to charge
its account for, the amount of any outstanding Advance against a specific
Mortgage Loan, upon the occurrence of any of the following events:
(1) Sixty (60) calendar days elapse from the date the Mortgage Loan with
respect to which the Advance was made was delivered to an Investor for
examination and purchase, without the purchase being made unless an extension of
an additional thirty (30) calendar days is granted by the Bank in its sole
discretion, in which case repayment would be required ninety (90) calendar days
from the time of the advance;
(2) Ten (10) calendar days elapse from the date the Investor rejects for
purchase the Mortgage Loan with respect to which the Advance was made;
(3) One (1) Business Day elapses from the date the Collateral Documents
relating to a Mortgage Loan against which an Advance was made, were required to
be received by the Bank without the actual receipt thereof, or such Collateral
Documents, upon examination by the Bank, are found not to be in compliance with
the requirements of this Agreement or the related Purchase Commitment;
(4) Ten (10) Business Days elapse from the date a Collateral Document was
delivered to the Company for correction or completion, without being returned to
the Bank;
(5) A default occurs under the Mortgage Loan with respect to which such
Advance was made and remains uncured for a period of thirty (30) calendar days;
and
(6) Upon sale of the Mortgage Loan.
Upon making such payment to the Bank, the Company shall be deemed to have
redeemed such Mortgage Loan from pledge, and the Collateral Documents relating
thereto shall be released by the Bank to the Company or to the Investor.
Section 2.6 Expiration and/or Termination of Commitment.
-------------------------------------------
2.6(a) Unless terminated earlier as permitted hereunder, the Commitment
shall expire of its own term, and without the necessity of action by the Bank,
on May 31, 1996.
2.6(b) The Bank shall have the right, without cause, at any time to
terminate the Agreement on not less than sixty (60) days' notice to the
Company.
2.6(c) The Bank shall have the right to terminate this Agreement and any
line of credit extended to the Company pursuant to the terms of this Agreement,
upon any adverse material change in the Company's financial condition as defined
by the Bank in its sole discretion during
10
<PAGE>
the term of this Agreement. Such an adverse change of financial condition will
include, but not be limited to the occurrence of any one or more of the events
listed in Section 6.6 hereto.
2.6(d) The Bank shall have the right from time to time and in its sole
discretion, to extend the term of this Agreement. The length of any such
extension shall also be determined in the Bank's sole discretion. Such
extension may be made subject to the renegotiation of the terms hereunder and to
any other such conditions as the Bank may deem necessary. Under no
circumstances shall such an extension by the Bank be interpreted or construed as
the Bank's forfeiture of any of its rights, entitlement or interest created
hereunder. The Company acknowledges and understands that the Bank is under no
obligation whatsoever to extend the term of this Agreement beyond its expiration
date as originally stated in this Agreement.
Section 2.7 Method of Making Payments; Reductions in Commitment.
---------------------------------------------------
2.7(a) Except as otherwise specifically provided herein, all payments
hereunder shall be received by the Bank on the date when due and shall be made
in lawful money of the United States of America in immediately available funds
at the office of the Bank, at 440 North Fairway Drive, Vernon Hills, Illinois
60061, or at such other place as the Bank from time to time shall designate.
Whenever any payment to be made hereunder or under the Note shall be stated to
be due on a day which is not a Business Day, the due date thereof shall be
extended to the next succeeding Business Day, and, with respect to payments of
principal, the interest thereon shall be payable at the applicable rate during
such extension. Funds received by the Bank after 5:00 p.m. (Chicago, Illinois
time) on a Business Day shall be deemed to have been paid by the Company on the
next succeeding Business Day.
2.7(b) The Company shall have the right, at any time and from time to
time, effective as of the first day of any calendar month, to terminate in whole
or permanently reduce in part, without premium or penalty, the amount of the
Commitment in excess of the then outstanding principal amount of all Advances
hereunder. The Company shall give written notice to the Bank designating the
date of such termination or reduction not less than five (5) Business Days prior
to the date such termination or reduction is to take effect, and the amount of
any partial reduction of the Commitment shall be in an aggregate minimum amount
of One Million Dollars ($1,000,000) or integral multiples of One Hundred
Thousand Dollars ($100,000) in excess of that amount.
Section 2.8 Late Payment Fees. In the event the Company fails to make any
-----------------
payment (whether of principal, interest or any other sum) on the date such
payment is due and payable hereunder or under the Note, and such failure
continues for more than five (5) days, the Company shall pay to the Bank, upon
demand therefor, a late payment fee equal to five percent (5%) of the amount of
such payment.
Section 2.9 Commitment Fee. As a condition to obtaining the Commitment,
--------------
the
11
<PAGE>
Company agrees to pay to the Bank monthly in arrears on the second day of each
month a Commitment Fee equal to one-quarter of one percent (1/4%) annualized of
the average daily unused portion of $2,500,000 of the total Commitment.
Section 2.10 Net Payments; Reduced Return.
----------------------------
2.10(a) All payments with respect to any Advance shall be made in such
amounts as may be necessary in order that all such payments after withholding
for or on account of any present or future taxes, levies, imports, duties or
other similar charges of whatever nature imposed by any government or any
political subdivision or taxing authority hereof, other than any taxes on or
measured by the net income of the Bank pursuant to the state, federal and local
tax laws of the jurisdiction where the Bank's principal office or offices or
lending office or offices are located, compensate Bank for any additional cost
or reduced amount receivable of making or maintaining advances as a result of
such taxes, imports, duties or other charges.
2.10(b) If, after the date hereof, the Bank shall have determined that the
adoption of any applicable law, rule or regulation regarding capital adequacy,
or any change therein, or any change in the interpretation or administration
thereof by any governmental authority, central bank or comparable agency charged
with the interpretation or administration thereof, or compliance by the Bank
with any request or directive regarding capital adequacy (whether or not having
the force of law) of any such authority, central bank or comparable agency, has
or would have the effect of reducing the rate of return on the Bank's capital as
a consequence of its obligations hereunder to a level below that which the Bank
could have achieved but for such adoption, change or compliance (taking into
consideration the Bank's policies with respect to capital adequacy) by an amount
deemed by the Bank to be material, then from time to time, within 30 days after
demand by the Bank the Company shall pay to the Bank such additional amount or
amounts as will compensate the Bank for such reduction. Compensation due the
Bank under this subsection (b) will only accrue after the Bank has notified the
Company of any event of which it has knowledge, occurring after the date hereof,
which will entitle the Bank to compensation pursuant to this subsection (b). A
certificate of the Bank claiming compensation under this subsection (b) and
setting forth the additional amount or amounts to be paid to it hereunder shall
be conclusive in the absence of manifest error. In determining such amount, the
Bank may use any reasonable averaging and attribution methods.
ARTICLE III
COLLATERAL
Section 3.1 Assignments and Grant of Security Interest. As security for
------------------------------------------
the payment of the Note and for the performance of all of the Company's
obligations hereunder, the Company hereby grants to the Bank a security interest
in all rights and interest of the Company in and to the following described
property (collectively, the "Collateral"):
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3.1(a) All Mortgage loans, including all Mortgage Notes and Mortgages
evidencing such Mortgage Loans and the related Mortgage loan Documents, which
from time to time are delivered, or caused to be delivered, to the Bank
(including delivery to a third party on behalf of the Bank) pursuant hereto or
in respect of which an Advance has been made by the Bank hereunder (the "Pledged
Mortgages");
3.1(b) All mortgage insurance and all commitments issued by Insurers to
insure or guarantee any Mortgage Loans included in the Pledged Mortgages; all
Purchase Commitments held by the Company covering the Pledged Mortgages and all
proceeds resulting from the sale thereof to Investors pursuant thereto; and all
personal property, contract rights, servicing and servicing fees and Income,
accounts and general intangibles of whatsoever kind relating to the Pledged
Mortgages, said Insurer commitments and the Purchase Commitments, and all other
documents or instruments delivered to the Bank in respect of the Pledged
Mortgages, including, without limitation, the right to receive all insurance
proceeds and condemnation awards which may be payable in respect of the premises
encumbered by any Mortgage;
3.1(c) All right, title and interest of the Company in and to all files,
surveys, certificates, correspondence, appraisals, computer programs, tapes,
discs, cards, accounting records, and other information and data of the Company
relating to the Collateral;
3.1(d) All property of the Company, in any form or capacity now or at any
time hereafter in the possession or direct or indirect control of the Bank
(including possession by a parent company, affiliate or subsidiary of the Bank);
and
3.1(e) All products and proceeds of any and all of the foregoing. In
addition to the foregoing grant of a security interest to the Bank in the
Collateral, the Company hereby assigns and delivers to the Bank all of the
following: (i) the Company's right (but not any liabilities of the Company)
under all Purchase Commitments now held or hereafter acquired by the Company
covering Pledged Mortgages and all proceeds resulting from the sale of Pledged
Mortgages pursuant thereto and (ii) all rights of the Company (but not any
liabilities of the Company) with respect to the Investor. Upon the request of
the Bank, the Company shall execute any further document or instrument requested
by the Bank to further evidence or effectuate the assignments set forth in this
subparagraph.
Section 3.2 Delivery of Additional Collateral or Mandatory Prepayment. In
---------------------------------------------------------
the event that the Bank shall determine at any time that the value of the
Collateral then pledged hereunder (such value being determined at such time as
if then being pledged under Section 3.1(b) hereof) is less than the aggregate
amount of the Advances then outstanding hereunder, the Company shall immediately
(a) deliver to the Bank for pledge hereunder additional Mortgage Loans, Purchase
Commitments and other related Collateral satisfactory to the Bank (each valued
at that time in accordance with Section 2.1(c) hereof) and/or cash, in aggregate
amounts sufficient to cover the difference between the value of the Collateral
pledged and the aggregate amount of
13
<PAGE>
Advances outstanding hereunder, or (b) repay the Advances in an amount
sufficient to reduce the aggregate balance thereof outstanding to or below the
value of the Collateral pledged hereunder.
Section 3.3 Right of Redemption from Pledge. Provided no Default has
-------------------------------
occurred and is continuing, the Company may redeem a Mortgage Loan from pledge,
by either (i) paying, or causing an Investor to pay, to the Bank, for
application to prepayment of the principal balance of the Note, an amount (the
"Redemption Amount") equal to the then collateral value (each valued at that
time in accordance with Section 2.1(c) hereof) of the Mortgage Loan to be
released, but not less than the amount of the Advance made with respect to such
Mortgage Loan or (ii) delivering substitute Collateral which, in addition to
being acceptable to the Bank in its sole discretion, will when included with the
Collateral, result in a collateral value (as determined in accordance with
Section 2.1 (c) hereof) of all Collateral held by the Bank which is at least
equal to the aggregate outstanding Advances.
Section 3.4 Collection and Servicing Rights. So long as no Event of
-------------------------------
Default shall have occurred, the Company shall be entitled to service, receive
and collect directly all sums payable to the Company in respect of the
Collateral, except amounts payable to the Company for the purchase by any
Investor under a Purchase Commitment of any Mortgage Loans which are funded in
whole or in part with the proceeds of any Advance, which amounts shall he paid
directly to the Bank. The Company shall direct each Investor to pay the amounts
payable for the purchase of such Mortgage Loans directly to the Bank. Following
the occurrence of any Event of Default, the Bank shall thereafter he entitled to
service, receive and collect all sums payable to the Company in respect of the
Collateral, and in such case (a) the Bank in its discretion may, in its own name
or in the name of the Company or otherwise, demand, sue for, collect or receive
any money or property at any time payable or receivable on account of or in
exchange for any of the Collateral, but shall he under no obligation to do so,
(b) the Company shall, if the Bank so requests, forthwith pay to the Bank at its
principal office or such other place as the Bank may designate all amounts
thereafter received by the Company upon or in respect of any of the Collateral,
advising the Bank as to the source of such funds, and (c) all amounts so
received and collected by the Bank shall be held by it as part of the
Collateral.
Section 3.5 Return of Collateral at End of Commitment. If (i) the
-----------------------------------------
Commitment shall have expired or been terminated, and (ii) no Advances, interest
or other amounts evidenced by the Note or due under this Agreement shall be
outstanding and unpaid, the Bank shall deliver or release all Collateral in its
possession to the Company. The receipt of the Company for any Collateral
released or delivered to the Company pursuant to any provision of this Agreement
shall be a complete and full acquittance for the Collateral so returned, and the
Bank shall hereafter be discharged from any liability or responsibility
therefor.
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<PAGE>
ARTICLE IV
CONDITIONS PRECEDENT
Section 4.1 Initial Advance. The obligation of the Bank to make the
---------------
initial Advance is subject to the satisfaction, in the sole discretion of the
Bank, on or before the date thereof of the following conditions precedent:
4.1(a) The Bank shall have received the following, all of which must be
satisfactory in form and content to the Bank, in its sole discretion:
(1) The Note duly executed by the Company;
(2) The Guaranty, in the form attached hereto as Exhibit B, duly executed
---------
by each of the Guarantors;
(3) Certified copies of the Company's articles of incorporation and
bylaws, and certificates of good standing dated no less recently than three (3)
months prior to the date of the initial Advance;
(4) A written opinion of counsel to the Company and each of the Guarantors
(or of separate counsel at the option of the Company and the Guarantors) in form
and content satisfactory to the Bank, dated as of, or prior to, the date of the
initial Advance, addressed to the Bank, substantially in the form attached
hereto as Exhibit I.
---------
(5) An original resolution of the board of directors of the Company,
certified as of the date of the initial Advance by its corporate secretary,
authorizing the execution, delivery and performance of this Agreement and the
Note, and all other instruments or documents to be delivered by the Company
pursuant to this Agreement;
(6) A certificate of the Company's corporate secretary as to the
incumbency and authenticity of the signatures of the officers of the Company
executing this Agreement and the Note and each Advance Request and all other
instrument or document to be delivered pursuant hereto (the Bank being entitled
to rely thereon until a new such certificate has been furnished to the Bank);
(7) Original independently audited financial statements of the Company
(and its Subsidiaries, on a consolidated basis) for the most recent fiscal year
end containing a balance sheet and related statements of income and retained
earnings (the "Statement Date") and changes in financial position for the period
entered on the Statement Date, all prepared in accordance with GAAP applied on a
basis consistent with prior periods and acceptable to the Bank;
15
<PAGE>
(8) Financial statements of each of the Guarantors, signed by them, dated
no less recently than three (3) months prior to the date of the initial Advance;
(9) Copies of the certificates, documents or other written instruments
which evidence the Company's eligibility described in Section 5.13 hereof, all
in form and substance satisfactory to the Bank;
(10) Copies of the Company's errors and omissions insurance policy or
mortgage impairment insurance policy and blanket bond coverage policy, or
certificates in lieu of policies, all in form and content satisfactory to the
Bank, showing compliance by the Company as of the date of the initial Advance
with the related provisions of Section 6.8 hereof; and
(11) A copy of irrevocable instructions to the Investor stating that
payment for the Mortgage Loan will be remitted to the Bank in the form of
Exhibit J.
- ---------
4.1(b) At the sole discretion of the Bank, the Bank may require any
director, officer or shareholder of the Company, all Affiliates of the Company
or of any Subsidiary of the Company, and each of the Guarantors, to whom or to
any of whom the Company shall be indebted as of the date of this Agreement, to
execute a Subordination of Debt Agreement, in the form of Exhibit F hereto; and
---------
the Bank shall have received an executed copy of said Subordination of Debt
Agreement, certified by the corporate secretary of the Company to be true and
complete and in full force and effect as of the date of the Advance.
Section 4.2 Each Advance. The obligation of the Bank to make the initial
------------
and each subsequent Advance is subject to the satisfaction, in the sole
discretion of the Bank, as of the date of each such Advance, of the following
additional conditions precedent:
4.2(a) The Company shall have delivered to the Bank the Advance Request,
and Collateral Documents called for under, and shall have satisfied the
procedures set forth in, Sections 2.2(a) through 2.2(b) hereof and the
applicable Exhibits hereto described in those Sections. All items delivered to
the Bank must be satisfactory to the Bank in form and content, and the Bank may
reject such of them as do not meet the requirements of this Agreement or of the
related Purchase Commitment as provided in Section 2.2(c).
4.2(b) The Bank shall have received evidence satisfactory to it as to the
due filing and recording in all appropriate offices of all financing statements
and other instruments as may be necessary to perfect the security interest of
the Bank in the Collateral under the Uniform Commercial Code of the State of
Illinois or other applicable law.
4.2(c) The representations and warranties of the Company contained in
Article V hereof shall be true and correct in all material respects as if made
on and as of the date of each Advance.
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<PAGE>
4.2(d) The Company and each of the Guarantors shall have performed all
agreements to be performed by them hereunder and under the Guaranty,
respectively, and after giving effect to the requested Advance, there shall
exist no default hereunder.
4.2(e) The Company shall not have (i) incurred any material liabilities,
direct or contingent, other than in the ordinary course of its business, since
the dates of the Company's most recent financial statements theretofore
delivered to the Bank or (ii) experienced any other material adverse change in
its business or operations.
4.2(f) The Bank shall have received from counsel for the Company or for
each of the Guarantors or both, if requested by the Bank in its sole discretion,
an updated opinion, in form and substance satisfactory to the Bank, addressed to
the Bank and dated as of the date of such Advance, covering such of the matters
set forth in Section 4.1(a)(4) hereto as the Bank may reasonably request.
Acceptance of the proceeds of the requested Advance by the Company shall be
deemed a representation by the Company that all conditions set forth in this
Section 4.2 shall have been satisfied as of the date of such Advance.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
In order to induce the Bank to enter into this Agreement and make each
Advance, the Company hereby represents and warrants to the Bank, as of the date
of this Agreement and as of the date of each Advance Request, that:
Section 5.1 Organization; Good Standing; Subsidiaries. The Company and
-----------------------------------------
each Subsidiary of the Company is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its incorporation,
has the full legal power and authority to own its property and to carry on its
business as currently conducted and is duly qualified as a foreign corporation
to do business and is in good standing in each jurisdiction in which the
transaction of its business makes such qualification necessary, except in
jurisdictions, if any, where a failure to be in good standing has no material
adverse effect on the business, operations, assets or financial condition of the
Company or any such Subsidiary. The Company has no Subsidiaries except as set
forth on Exhibit G hereto. Exhibit G sets forth the name of each such
--------- ---------
Subsidiary, place of incorporation, each state in which qualified as a foreign
corporation, and the percentage ownership of the capital stock of each such
Subsidiary by the Company.
Section 5.2 Authorization and Enforceability. The Company has the power
--------------------------------
and authority to execute, deliver and perform this Agreement, the Note and all
other documents contemplated hereby or thereby. The Guarantors each have the
power and capacity to execute, deliver and perform the Guaranty. The execution,
delivery and performance by the Company
17
<PAGE>
of this Agreement, the Note and all other documents contemplated hereby or
thereby and the making of the borrowing hereunder and thereunder, have been duly
and validly authorized by all necessary corporate action on the part of the
Company (none of which actions have been modified or rescinded, and all of which
actions are in full force and effect) and do not and will not conflict with or
violate any provision of law or of the articles of incorporation or by-laws of
the Company, conflict with or result in a breach of or constitute a default or
require any consent under, or result in the creation of any Lien upon any
property or assets of the Company, or result in or require the acceleration of
any indebtedness of the Company pursuant to any agreement, instrument or
indenture to which the Company is a party or by which the Company or its
property may be bound or affected. This Agreement, the Note and all other
documents contemplated hereby or thereby and the Guaranty constitute legal,
valid, and binding obligations of the Company or of the Guarantors,
respectively, enforceable in accordance with their respective terms, except as
limited by bankruptcy, insolvency or other such laws affecting the enforcement
of creditors' rights.
Section 5.3 Approvals. The execution and delivery of this Agreement, the
---------
Note and all other documents contemplated hereby or thereby and the performance
of the Company's obligations hereunder and thereunder do not require any
license, consent, approval or other action of any state or federal agency or
governmental or regulatory authority.
Section 5.4 Financial Condition. The balance sheet of the Company (and,
-------------------
if applicable, its Subsidiaries, on a consolidated basis) as at the Statement
Date, and the related statements of income and changes in shareholders' equity
for the fiscal year ended on the Statement Date, heretofore furnished to the
Bank, fairly present the financial condition of the Company (and its
Subsidiaries) as at the Statement Date and the results of its operations for the
fiscal period ended on the Statement Date. The Company had, on the Statement
Date, no liabilities, direct or indirect, fixed or contingent, matured or
unmatured, known or unknown, or liabilities for taxes, long-term leases or
unusual forward or long-term commitments not disclosed by, or reserved against
in, said balance sheet and related statements, and at the present time there are
no material unrealized or anticipated losses from any loans, advances or other
commitments of the Company except as heretofore disclosed to the Bank in
writing. Said financial statements were prepared in accordance with GAAP
applied on a consistent basis throughout the periods involved. Since the
Statement Date, there has been no material adverse change in the business,
operations, assets or financial condition of the Company (and its Subsidiaries),
nor is the Company aware of any state of facts which (with or without notice or
lapse of time or both) would or could result in any such material adverse
change.
Section 5.5 Litigation. There are no actions, claims, suits or
----------
proceedings pending, or to the knowledge of the Company, threatened or
reasonably anticipated against or affecting the Company or any Subsidiary of the
Company in any court or before any arbitrator or before any government
commission, board, bureau or other administrative agency which, if adversely
determined, may reasonably be expected to result in any material and adverse
change in the
18
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business, operations, assets, licenses, qualifications or financial condition of
the Company as a whole.
Section 5.6 Compliance with Laws. Neither the Company nor any Subsidiary
--------------------
of the Company is in violation of any provision of any law, or of any judgment,
award, rule, regulation, order, decree, writ or injunction of any court or
public regulatory body or authority which might have a material adverse effect
on the business, operations, assets or financial condition of the Company as a
whole.
Section 5.7 Regulation U. The Company is not engaged principally, or as
------------
one of its major activities, in the business of extending credit for the purpose
of purchasing or carrying Margin Stock, and no part of the proceeds of any
Advances made hereunder will be used to purchase or carry any Margin Stock or to
extend credit to others for the purpose of purchasing or carrying any Margin
Stock.
Section 5.8 Investment Company Act. The Company is not an "investment
----------------------
company," or a company controlled by an "investment company," within the meaning
of the Investment Company Act of 1940, as amended.
Section 5.9 Payment of Taxes. The Company has filed or caused to be filed
----------------
all federal, state and local income, excise, property and other tax returns with
respect to the operations of the Company and its Subsidiaries which are required
to be filed, all such returns are true and correct, and the Company has paid or
caused to be paid all taxes as shown on such returns or on any assessment, to
the extent that such taxes have become due.
Section 5.10 Agreements. Neither the Company nor any Subsidiary of the
----------
Company is a party to any agreement, instrument or indenture or subject to any
restriction materially and adversely affecting its business, operations, assets
or financial condition, except as disclosed in the financial statements
described in Section 5.4 hereof. Neither the Company nor any Subsidiary of the
Company is in default in the performance, observance or fulfillment of any of
the obligations, covenants or conditions contained in any agreement, instrument,
or indenture which default could have a material adverse effect on the business,
operations, properties or financial condition of the Company as a whole. No
holder of any indebtedness of the Company or of any of its Subsidiaries has
given notice of any asserted default thereunder, and no liquidation or
dissolution of the Company or of any of its Subsidiaries and no receivership,
insolvency, bankruptcy, reorganization or other similar proceedings relative to
the Company or of any of its Subsidiaries or any of its properties is pending,
or to the knowledge of the Company, threatened.
Section 5.11 Title to Properties. The Company and each Subsidiary of the
-------------------
Company has good, valid, insurable (in the case of real property) and marketable
title to all of its properties and assets (whether real or personal, tangible or
intangible) reflected on the financial
19
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statements described in Section 5.4 hereof, except for such properties and
assets as have been disposed of since the date of such financial statements as
no longer used or useful in the conduct of its business or as have been disposed
of in the ordinary course of business, and all such properties and assets are
free and clear of all Liens except as disclosed in such financial statements.
Section 5.12 ERISA. All plans ("Plans") of a type described in Section
-----
3(3) of ERISA in respect of which the Company or any Subsidiary of the Company
is an "Employer", as defined in Section 3(8) of ERISA, are in substantial
compliance with ERISA, and none of such Plans is insolvent or in reorganization,
has an accumulated or waived funding deficiency within the meaning of Section
412 of the Internal Revenue Code, and neither the Company nor any Subsidiary of
the Company has incurred any material liability (including any material
contingent liability) to or on account of any such Plan pursuant to Sections
4062, 4063, 4064, 4201 or 4204 of ERISA; and no proceedings have been instituted
to terminate any such plan, and no condition exists which presents a material
risk to the Company or a Subsidiary of the Company of incurring a liability to
or on account of any such Plan pursuant to any of the foregoing Sections of
ERISA. No Plan or trust forming a part thereof has been terminated since
September 1, 1974.
Section 5.13 Eligibility. The Company meets the application criteria set
-----------
forth in the Warehouse Line Application. The Company has all state and local
permits, licenses, approvals, registrations and qualifications which it is
required to have in order to make, purchase, sell or service the Mortgage Loans.
The Company, if approved, is qualified and in good standing as a lender or
seller/servicer, as set forth below, and meets all requirements applicable to
its status as such:
5.13(a) GNMA approved issuer and servicer of Mortgage Loans
guaranteed by GNMA.
5.13(b) HUD approved lender, eligible to originate, purchase, hold,
sell and service FHA-insured Mortgage Loans (and to participate in HUD's Direct
Endorsement Mortgage Insurance Program).
5.13(c) FNMA approved seller/servicer of Mortgage Loans, eligible to
originate, purchase, hold, sell, and service Mortgage Loans to be sold to FNMA.
5.13(d) FHLMC approved seller/servicer of Mortgage Loans, eligible to
originate, purchase, hold, sell and service Mortgage Loans to be sold to FHLMC.
5.13(e) Lender in good standing under the VA loan guarantee program
eligible to originate (on an "automatic" basis), purchase, hold, sell and
service VA-guaranteed Mortgage Loans.
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Section 5.14 Special Representations Concerning Collateral. The Company
---------------------------------------------
hereby represents and warrants to the Bank, as of the date of this Agreement and
as of the date of each Advance Request, that:
5.14(a) The Company owns the Collateral free and clear of any lien,
security interest, charge or encumbrance except for the security interest
created by this Agreement. No effective financing statement or other instrument
similar in effect covering all or any part of the Collateral is on file in any
recording office, except such as may have been filed in favor of Secured Party
relating to this Agreement. The Company has no trade name.
5.14(b) This Agreement, together with possession of the Mortgage
Notes and a duly filed financing statement, creates a valid and perfected first
priority security interest in the Collateral, securing the payment of the
Obligations, and all filings and other actions necessary or desirable to perfect
and protect such security interest have been duly taken or shall be taken at the
time of the initial Advance hereunder.
5.14(c) No authorization, approval or other action by, and no notice
to or filing with, any governmental authority or regulatory body is required
(and has not been obtained, delivered or filed, as applicable) either (i) for
the grant by the Company of the security interest granted hereby or for the
execution, delivery or performance of this Agreement by the Company or (ii) for
the perfection of or the exercise by Secured Party of its rights and remedies
hereunder, other than the filing of a financing statement which has been duly
executed by the Company and delivered to Lender for filing.
5.14(d) The principal office of the Company for purposes of Section
9-103 of the Uniform Commercial Code is located at the address set forth at the
front of this Agreement.
5.14(e) Each Mortgage Loan conforms to the requirements and the
specifications set forth in the applicable Purchase Commitment and the related
regulations, rules, requirements and/or handbooks of the applicable Investor and
is eligible for sale to and insurance or guaranty by, respectively, the
applicable Investor and the applicable insurer.
5.14(f) The Mortgage Loan Documents have been duly executed by the
mortgagor and create valid and legally binding obligations of the mortgagor,
enforceable in accordance with their terms, except as may be limited by
bankruptcy or other laws affecting the enforcement of creditors' rights
generally, and there are no rights of rescission, set-offs, counterclaims or
other defenses with respect thereto. The full original principal amount of each
Mortgage Loan (net of any discounts) has been fully advanced or disbursed to the
mortgagor named therein. There is no requirement for future advances and except
for loans insured under Section 203(k) of the National Housing Act, any and all
requirements as to completion of any on-site or off-site improvements and as to
disbursements of any escrow funds therefor have been satisfied. To Company's
knowledge and except as disclosed to Bank, there is no default,
21
<PAGE>
breach, violation or event of acceleration existing under the Mortgage or the
related Mortgage Note, and no event has occurred which, with the passage of time
or with notice and the expiration of any grace or cure period, would constitute
a default, breach, violation or event of acceleration; and the Company has not
waived any default, breach, violation or event of acceleration. The terms of
the Mortgage Loan have in no way been waived, impaired, changed or modified. To
Company's knowledge and except as disclosed to Bank, all tax identifications and
property descriptions are legally sufficient; tax segregation, where required,
has been completed. All taxes, governmental assessments, insurance premiums,
water, sewer and municipal charges, leasehold payments or ground rents which
previously became due and owing have been paid, or an escrow of funds has been
established in an amount sufficient to pay for every such item which remains
unpaid.
5.14(g) Each of the Mortgage Loans has been originated, made and
serviced in material compliance with all industry standards, applicable Investor
and Insurer requirements and all applicable federal, state and local statutes,
regulations and rules, including, without limitation, the Federal Truth-in-
Lending Act of 1968, as amended, and Regulation Z thereunder, the Federal Fair
Credit Reporting Act, the Federal Equal Credit Opportunity Act, the Federal Real
Estate Settlement Procedures Act of 1974, as amended, and Regulation X
thereunder, and all applicable usury, licensing, real property, consumer
protection and other laws.
5.14(h) Each Conventional Mortgage Loan is insured as to payment
defaults by a policy of primary mortgage guaranty insurance in the amount
required where applicable, and by an insurer approved, by the applicable
investor and all provisions of such primary mortgage guaranty insurance policy
have been and are being complied with, such policy is in full force and effect,
and all premiums due thereunder have been paid. Each Mortgage Loan which is
represented by the Company to have, or to be eligible for, FHA insurance is
insured, or eligible to be insured, pursuant to the National Housing Act. Each
Mortgage Loan which is represented by the Company to be guaranteed, or to be
eligible for guaranty, by the VA is guaranteed, or eligible to be guaranteed,
under the provisions of Chapter 37 of Title 38 of the United States Code. As to
each FHA insurance certificate or each VA guaranty certificate, the Company has
complied with applicable provisions of the insurance for guaranty contract and
federal statutes and regulations, all premiums or other charges due in
connection with such insurance or guarantee have been paid, there has been no
act or omission which would or may invalidate any such insurance or guaranty,
and the insurance or guaranty is, or when issued, will be, in full force and
effect with respect to each Mortgage Loan. There are no defenses,
counterclaims, or rights of setoff affecting the Mortgage Loans or affecting the
validity or enforceability of any private mortgage insurance or FHA insurance
applicable to the Mortgage Loans or any VA guaranty with respect to the Mortgage
Loans.
5.14(i) Each of the Mortgage Loans presently is covered by a policy
of hazard insurance (and flood insurance and insurance against other insurable
risks and hazards as required by the applicable Investor and the agreements
applicable to such Mortgage Loans), in
22
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amounts not less than outstanding principal balance of the Mortgage Loans or
such maximum lesser amount as permitted by applicable law, all in a form usual
and customary in the industry and which is in full force and effect, and all
amounts required to have been paid under any such policy have been paid; and all
taxes, assessments, ground rents or other applicable charges or fees due and
payable as to each Mortgage Loan have been paid. Each Loan is covered by a
valid and assignable, full fee, life of loan tax service contract, in full force
and effect.
5.14(j) A valid and enforceable title policy currently in full force
and effect has been issued for each Mortgage Loan in an amount not less than the
original principal amount of such Mortgage Loan, which title policy insures that
the Mortgage relating thereto is either (i) a valid first lien on the property
therein described and that the mortgaged property is free and clear of all
encumbrances and liens having priority over the first lien of the Mortgage and
otherwise in compliance with the requirements of the applicable Investor; or
(ii) if the Mortgage Loan is insured under Title I of the national Housing Act,
a valid second lien on the property therein described and that the mortgaged
property is free and clear of all encumbrances and liens (other than the first
lien) having priority over the second lien of the Mortgage, and otherwise in
compliance with the requirements of the applicable Investor.
5.14(k) All escrow/custodial accounts have been established in
accordance with the requirements of FHA, VA and the applicable Investor and
Insurer and all other applicable laws and by the terms of the related Mortgages.
5.14(l) There are no accrued liabilities of the Company with respect
to the Mortgage Loans.
5.14(m) The Company, all prior servicers and, if different, the
originating mortgagee, have performed all obligations required of them to be
performed under or pursuant to each of the Servicing Contracts and related
requirements of the applicable Investor and Insurer and each other document or
agreement relating to the Mortgage Loans by which the Company is bound, and no
event has occurred and is continuing which, under the provisions of any such
Servicing Contracts and related requirements of the applicable Investor or other
document or agreement, but for the passage of time or the giving of notice, or
both, would constitute an event of default thereunder.
5.14(n) The books, records, accounts and reports of the Company with
respect to the Mortgage Loans and Servicing Contracts have been prepared and
maintained in accordance with all applicable Investor and Insurer requirements.
Section 5.15 Warehouse Line Application. All of the information set forth
--------------------------
in the Warehouse Line Application is true, accurate and complete.
23
<PAGE>
ARTICLE VI
AFFIRMATIVE COVENANTS
The Company agrees that so long as the Commitment is outstanding or there
remain any obligations of the Company to be paid or performed under this
Agreement or under the Note, the Company shall:
Section 6.1 Payment of Note. Punctually pay or cause to be paid the
---------------
principal and interest on and all other amounts due and payable hereunder and
under the Note in accordance with the terms hereof and thereof.
Section 6.2 Financial Statements and Other Reports. Deliver to the Bank:
--------------------------------------
6.2(a) Upon request by the Bank, as soon as available and in any
event within thirty (30) days after each calendar month, statements of income
and changes in shareholders' equity of the Company (and, if applicable, its
Subsidiaries, on a consolidated basis) for the immediately preceding month, and
related balance sheet as of the end of the immediately preceding month, all in
reasonable detail and certified by the chief financial officer of the Company,
subject, however, to year-end audit adjustments.
6.2(b) As soon as available and in any event within sixty (60) days
after the close of each of the first three fiscal quarters of the Company in
each fiscal year: statements of income and changes in shareholders' equity of
the Company (and, if applicable, its Subsidiaries, on a consolidated basis) for
the period from the beginning of such fiscal year to the end of such fiscal
quarter, and the related balance sheet as at the end of such fiscal quarter, all
in reasonable detail and certified by the chief financial officer of the
Company, subject, however, to year-end audit adjustments.
6.2(c) As soon as available and in any event within ninety (90) days
after the close of each fiscal year: a statement of income and changes in
shareholders' equity of the Company (and, if applicable, its Subsidiaries, on a
consolidated basis) for such year, the related balance sheet as at the end of
such year (setting forth in comparative form the corresponding figures for the
preceding fiscal year), all in reasonable detail and accompanied by an opinion
of an accounting firm reasonably satisfactory to the Bank, or other independent
public accountants of recognized standing selected by the Company and acceptable
to the Bank, as to said financial statements and a certificate signed by the
chief financial officer of the Company stating that said financial statements
fairly present the financial condition and results of operations of the Company
(and, if applicable, its Subsidiaries) as at the end of, and for, such year.
6.2(d) Together with each delivery of financial statements pursuant
to Sections 6.2(b) and 6.2(c) hereof, an Officer's Certificate stating that the
signatory or signatories thereto have reviewed the terms of this Agreement and
have made, or caused to be made under their
24
<PAGE>
supervision, a review in reasonable detail of the transactions and conditions of
the Company (and, if applicable, its Subsidiaries) during the accounting period
covered by such financial statements and that such review has not disclosed the
existence during or at the end of such accounting period, and that the signatory
or signatories thereto do not have knowledge of the existence as of the date of
the Officer's Certificate, of any Default or if any Default existed or exists,
specifying the nature and period of the existence thereof and what action the
Company has taken, is taking and proposes to take with respect thereto.
6.2(e) As soon as available and in any event within ninety (90) days
after the close of each fiscal year of the Company, current financial statements
of each of the Guarantors, signed by each of them, and dated not more than
ninety (90) days prior to the date of required delivery to the Bank hereunder.
6.2(f) Such other reports in respect of the Mortgage Loans, in such
detail and at such times as the Bank in its discretion may request at any time
or from time to time.
6.2(g) Copies of all regular or periodic financial and other reports,
if any, which the Company shall file with the Securities and Exchange Commission
or any governmental agency successor thereto.
6.2(h) Copies of all audits, examinations and reports concerning the
operations of the Company from any Investor, Insurer or licensing authority.
6.2(i) Any and all changes to the information set forth in the
Warehouse Line Application to assure that the same continues to be true,
accurate and complete.
6.2(j) From time to time, with reasonable promptness, such further
information regarding the business, operations, properties or financial
condition of the Company as the Bank may reasonably request.
All financial statements and reports furnished to the Bank hereunder
shall be prepared in accordance with GAAP, applied on a basis consistent with
that applied in preparing the financial statements as at, and for the period
ended, the Statement Date (except to the extent otherwise required to conform to
good accounting practice).
Section 6.3 Maintenance of Existence; Conduct of Business. Preserve and
---------------------------------------------
maintain its corporate existence in good standing and all of its rights,
privileges, licenses, qualifications and franchises necessary or desirable in
the normal conduct of its business, including, without limitation, its
eligibility as an approved lender and issuer as described under Section 5.13
hereof; conduct its business in an orderly and efficient manner; maintain a net
worth of acceptable assets as required by its Investors at any and all times for
maintaining the Company's status as a FHA approved lender; and make no change in
the nature or character of its business or engage in any
25
<PAGE>
business in which it was not engaged on the date of this Agreement.
Section 6.4 Compliance with Applicable Laws. Comply with the requirements
-------------------------------
of all applicable laws, rules, regulations and orders of any governmental
authority and prudent industry standards, a breach of which could materially
adversely affect its business, operations, assets, or financial condition or
which could materially adversely impair the ability of Company to perform its
obligation hereunder, except where contested in good faith and by appropriate
proceedings.
Section 6.5 Inspection of Properties and Books. Permit authorized
----------------------------------
representatives of the Bank, its parent company or affiliates to discuss the
business, operations, assets and financial condition of the Company and its
Subsidiaries with their officers and employees and to examine their books of
account and make copies or extracts thereof, all at such reasonable times as the
Bank may request. The Company will provide its accountants with a copy of this
Agreement promptly after the execution hereof and will instruct its accountants
to answer candidly and fully any and all questions that the officers of the Bank
or any authorized representatives of the Bank may address to them in reference
to the financial condition or affairs of the Company and its Subsidiaries. The
Company may have its representatives in attendance at any meetings between the
officers or other representatives of the Bank and the Company accountants held
in accordance with this authorization.
Section 6.6 Notice. Give prompt written notice to the Bank of (a) any
------
action, suit or proceeding instituted by or against the Company or any of its
Subsidiaries in any federal or state court or before any commission or other
regulatory body (federal, state or local, domestic or foreign), or any such
proceedings threatened against the Company or any of its Subsidiaries in a
writing containing the details thereof, (b) the filing, recording or assessment
of any federal, state or local tax lien against it, or any of its assets or any
of its Subsidiaries, (c) the occurrence of any Event of Default hereunder or the
occurrence of any Default and continuation thereof for five (5) days, (d) the
actual or threatened suspension, revocation or termination of the Company's
eligibility, in any respect, as an approved lender, and issuer as described
under Section 5.13 hereof, (e) the suspension, revocation or termination of any
existing credit or investor relationship made to the Company to facilitate the
sale and/or origination of residential mortgages, (f) the transfer or loss of
any Servicing Contract to which the Company is a party, or which is held for the
benefit of the Company, and the reason for such transfer or loss, if known to
the Company, (g) any demand by any Investor or Insurer for either the repurchase
of a mortgage loan or indemnification and (h) any other action, event or
condition of any nature which may lead to or result in a material adverse effect
upon the business, operations, assets, or financial condition of the Company and
its Subsidiaries or which, with or without notice or lapse of time or both,
would constitute a default under any other agreement, instrument or indenture to
which the Company is a party or to which the Company, its properties or assets
may be subject.
26
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Section 6.7 Payment of Debt, Taxes, etc. Pay and perform all obligations
----------------------------
of the Company, and cause to be paid and performed all obligations of its
Subsidiaries, promptly and in accordance with the terms thereof and pay and
discharge or cause to be paid and discharged promptly all taxes, assessments and
governmental charges or levies imposed upon the Company or its Subsidiaries or
upon their respective income, receipts or properties before the same shall
become past due, as well as all lawful claims for labor, materials and supplies
or otherwise which, if unpaid, might become a Lien or charge upon such
properties or any part thereof; provided, however, that the Company and its
Subsidiaries shall not be required to pay taxes, assessments or governmental
charges or levies or claims for labor, materials or supplies for which the
Company or its Subsidiaries shall have obtained an adequate bond or adequate
insurance or which are being contested in good faith and by proper proceedings
which are being reasonably and diligently pursued.
Section 6.8 Insurance. Will maintain (a) errors and omissions insurance
---------
or mortgage impairment insurance and blanket bond coverage, with such companies
and in such amounts as satisfy prevailing FNMA, GNMA or FHLMC requirements
applicable to a qualified mortgage originating institution, and (b) liability
insurance and fire and other hazard insurance on its properties, with
responsible insurance companies approved by the Bank, in such amounts and
against such risks as is customarily carried by similar businesses operating in
the same vicinity; and (c) within thirty (30) days after notice from the Bank,
will obtain such additional insurance as the Bank shall reasonably require, all
at the sole expense of the Company. Copies of all such policies shall be
furnished to the Bank without charge upon request of the Bank.
Section 6.9 Insured Closings. Will obtain and maintain in effect at all
----------------
times an insured closing letter from each title insurance company from which
mortgagee title insurance is procured, indemnifying and holding the Company
harmless from and against the failure of the agents and approved title attorneys
of such title insurance companies to comply with the written closing
instructions of the Company as to the Mortgage Loans pledged hereunder and will
provide the Bank with evidence of the same from time to time upon request. The
Company agrees to indemnify and hold the Bank harmless from and against any
loss, including reasonable attorneys' fees and costs, attributable to the
failure of such title insurance company, agent or approved attorney to comply
with the disbursement or instruction letter or letters of the Company or of the
Bank relating to such Mortgage Loan. The Bank shall have the right to pre-
approve the closing instructions of the Company to the title insurance company,
agent or attorney in any case where the Mortgage Loan to be created at
settlement is intended to be warehoused by the Company pursuant hereto.
Section 6.10 Subordination of Certain Indebtedness. Will cause any
-------------------------------------
indebtedness of the Company, incurred after the date of this Agreement, to any
shareholder, director or officer of the Company, or to any Affiliate of the
Company or of any Subsidiary of the Company, or to any Guarantor, to be
subordinated to all obligations of the Company under this Agreement and the
Note, by the execution of a Subordination of Debt Agreement in the form of
Exhibit F hereto
- ---------
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and will deliver to the Bank an executed copy of said Agreement, certified by
the corporate secretary of the Company to be true and complete and in full force
and effect.
Section 6.11 Other Loan Obligations. Will perform all obligations under
----------------------
the terms of each loan agreement, note, mortgage, security agreement or debt
instrument by which the Company is bound or to which any of its property is
subject, and will promptly notify the Bank in writing of the cancellation or
reduction of any of its other mortgage warehousing lines of credit or agreements
with any other lender.
Section 6.12 Use of Proceeds of Advances. Will use the proceeds of each
---------------------------
Advance solely for the purpose of financing Mortgage Loans.
Section 6.13 Special Affirmative Covenants Concerning Collateral.
---------------------------------------------------
6.13(a) The Company warrants and will defend the right, title and
interest of the Bank in and to the Mortgage Loans against the claims and demands
of all persons whomsoever.
6.13(b) The Company shall service or cause to be serviced all
Mortgage Loans in accordance with the standard requirements of the issuers of
the respective Purchase Commitments covering the same and all applicable
governmental requirements, including without limitation taking all actions
necessary to enforce the obligations of the obligors under such Mortgage Loans.
The Company shall service or cause to be serviced all Mortgage Loans in
accordance with all applicable requirements of the issuers of the respective
Purchase Commitments covering the same. The Company shall hold all escrow funds
collected in respect of Mortgage Loans in trust, without commingling the same
with non-custodial funds, and apply the same for the purposes for which such
funds were collected.
6.13(c) The Company shall execute and deliver to the Bank such
Uniform Commercial Code financing statements with respect to the Collateral as
the Bank may request. The Company shall also execute and deliver to the Bank
such further instruments of sale, pledge or assignment or transfer, and such
powers of attorney, as required by the Bank, and shall do and perform all
matters and things necessary or desirable to be done or observed, for the
purpose of effectively creating, maintaining and preserving the security and
benefits intended to be afforded the Bank under this Agreement. The Bank shall
have all the rights and remedies of a secured party under the Uniform Commercial
Code of the State of Illinois, or any other applicable law, in addition to all
rights provided for herein.
6.13(d) The Company shall notify the Bank within two (2) Business
Days of any default under, or of the termination of, or the rejection for
purchase under, any Purchase Commitment relating to any Mortgage Loan.
6.13(e) The Company will promptly comply in all respects with the
terms and
28
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conditions of all Purchase Commitments, and all extensions, renewals and
modifications or substitutions thereof or thereto. The Company will cause to be
delivered to the Investor the Mortgage Loans to be sold under each Purchase
Commitment not later than the earlier of three (3) Business Days prior to the
expiration thereof or three (3) Business Days prior to the deadline for
acquisition of the Mortgage Loan by the Investor thereunder.
6.13(f) The Company shall maintain, at its principal office or in a
regional office approved by the Bank, or in the office of a computer service
bureau engaged by the Company and approved by the Bank, and, upon request, shall
make available to the Bank the originals, or copies in any case where the
original has been delivered to the Bank, or to an Investor, of its Mortgage
Notes and Mortgages included in Mortgage Loans, Purchase Commitments, and all
related Mortgage Loan documents and instruments, and all files, surveys,
certificates, correspondence, appraisals, computer programs, tapes, discs,
cards, accounting records and other information and data relating to the
Collateral.
ARTICLE VII
NEGATIVE COVENANTS
The Company agrees that so long as the Commitment is outstanding or there
remain any obligation of the Company to be paid or performed hereunder or under
the Note, the Company shall not, either directly or indirectly, without the
prior written consent of the Bank:
Section 7.1 Indebtedness. Incur, assume, guarantee, endorse, or otherwise
------------
become liable for the obligation of any person or entity except by endorsement
of negotiable instruments for deposit or collection in the ordinary course of
business.
Section 7.2 Sale or Pledge of Servicing Contracts. Sell, pledge or grant
-------------------------------------
a security interest in any existing or future Servicing Contracts of the Company
pursuant to the terms of this Agreement, or omit to take any action required to
keep all such Servicing Contracts in full force and effect.
Section 7.3 Merger; Sale of Assets; Acquisitions; Change in Control;
--------------------------------------------------------
Change of Senior Management. Liquidate, dissolve, consolidate or merge or sell,
- ---------------------------
transfer or otherwise dispose of, any substantial part of its assets, nor
acquire substantially all of the assets of another, nor permit a change in any
of the following: (a) ownership beneficially or of record of more than ten
percent (10%) of the voting stock of Company; (b) ownership beneficially or of
record of more than ten percent (10%) of the voting stock of any company which
controls the Company; or (c) Senior Management of Company or any company which
controls the Company.
Section 7.4 Deferral of Subordinated Debt. Pay in advance of the stated
-----------------------------
maturity thereof any Subordinated Debt of the Company or, if an Event of Default
hereunder shall have occurred, make any payment of any kind thereafter on such
Subordinated Debt until all
29
<PAGE>
obligations of the Company hereunder and under the Note have been paid and
performed in full.
Section 7.5 Loss of Eligibility. Take, or fail to take, any action that
-------------------
would cause the Company to lose all or any part of its status as an eligible
lender, as described under Section 5.13 hereof.
Section 7.6 Proforma Debt to Adjusted Tangible Net Worth Ratio. Permit
--------------------------------------------------
the proforma ratio of Debt to Adjusted Tangible Net Worth of the Company (and
its Subsidiaries, on a consolidated basis) at any time to exceed 10 to 1.
Section 7.7 Minimum Adjusted Tangible Net Worth. Permit Tangible Net
-----------------------------------
Worth of the Company (and its Subsidiaries, on a consolidated basis) at any time
to be less than $2,000,000.
Section 7.8 Loans to Officers, Employees and Shareholders. Make any
---------------------------------------------
personal loans or advances to any officers, employees or shareholders in all
aggregate amount exceeding $100,000.
Section 7.9 Special Negative Covenants Concerning Collateral.
------------------------------------------------
7.9(a) The Company shall not amend or modify, or waive any of the
terms and conditions of, or settle or compromise any claim in respect of, any
Mortgage Loan pledged hereunder.
7.9(b) The Company shall not sell, assign, transfer or otherwise
dispose of, or grant any option with respect to, or pledge or otherwise encumber
(except pursuant to this Agreement) any of the Collateral or any interest
therein.
7.9(c) The Company shall not make any compromise, adjustment or
settlement in respect of any of the Collateral or accept other than cash in
payment or liquidation of the Collateral.
ARTICLE VIII
DEFAULTS; REMEDIES
Section 8.1 Events of Default. The occurrence of any of the following
-----------------
conditions or events shall be an event of default ("Event of Default"):
8.1(a) Failure to pay the principal of any Advance when due, whether
at stated maturity, by acceleration, or otherwise; or failure to pay any
installment of interest on any Advance or any other amount due under this
Agreement when due; or
8.1(b) Failure of the Company or any of its Subsidiaries to pay, or
any default
30
<PAGE>
in the payment of any principal or interest on, any other indebtedness or in the
payment of any contingent obligation beyond any period of grace provided; or
breach or default with respect to any other material term of any other
indebtedness or of any loan agreement, note, mortgage, security agreement,
indenture or other agreement relating thereto, if the effect of such failure,
default or breach is to cause, or to permit the holder or holders thereof (or a
trustee on behalf of such holder or holders) to cause, indebtedness of the
Company or its Subsidiaries in the aggregate amount of $100,000 or more to
become or be declared due prior to its stated maturity (upon the giving or
receiving of notice, lapse of time, both, or otherwise); or
8.1(c) Failure of the Company to perform or comply with any term or
condition applicable to it contained in Sections 6.1 through 6.13, inclusive, or
7.1 through 7.9, inclusive, of this Agreement; or
8.1(d) Any of the Company's representations or warranties made herein
or in any statement or certificate at any time given by the Company in writing
pursuant hereto or in connection herewith shall be false in any material respect
on the date as of which made; or
8.1(e) The Company shall default in the performance of or compliance
with any term contained in this Agreement other than those referred to above in
subsections 8.1(a), (c) or (d) and such default shall not have been remedied or
waived within thirty (30) days after receipt of notice from the Bank of such
default; or
8.1(f)(1) A court having jurisdiction shall enter a decree or order
for relief in respect of the Company or any of its Subsidiaries or of any
Guarantor in an involuntary case under any applicable bankruptcy, insolvency or
other similar law now or hereafter in effect, which decree or order is not
stayed; or (2) any other similar relief shall be granted under any applicable
federal or state law; or a decree or order of a court having jurisdiction for
the appointment of a receiver, liquidator, sequestrator, trustee, custodian or
other officer having similar powers over the Company or any of its Subsidiaries
or of any Guarantor, or over all or a substantial part of their respective
property, shall have been entered; or the involuntary appointment of an interim
receiver, trustee or other custodian of the Company or any of its Subsidiaries
or of any Guarantor for all or a substantial part of their respective property;
or the issuance of a warrant of attachment, execution or similar process against
any substantial part of the property of the Company or any of its Subsidiaries
or of any Guarantor, and the continuance of any such events in this clause (2)
for sixty (60) days unless dismissed, bonded off or discharged; or
8.1(g) The Company or any of its Subsidiaries or any Guarantor shall
have an order for relief entered with respect to it or commence a voluntary case
under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or shall consent to the entry of an order for relief in an
involuntary case, or to the conversion to an involuntary case, under any such
law, or shall consent to the appointment of or taking possession by a receiver,
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<PAGE>
trustee or other custodian for all or a substantial part of its property; the
making by the Company or any of its Subsidiaries or any Guarantor of any
assignment for the benefit of creditors; or the inability or failure of the
Company or any of its Subsidiaries or of any Guarantor, or the admission by the
Company or any of its Subsidiaries or any Guarantor in writing of its inability
to pay its debts as such debts become due; or
8.1(h) Any money judgment, writ or warrant of attachment, or similar
process involving in any case an amount in excess of $25,000 shall be entered or
filed against the Company or any of its Subsidiaries or any Guarantor or any of
their respective assets and shall remain undischarged, unvacated, unbonded or
unstayed for a period of thirty (30) days or in any event later than five (5)
days prior to the date of any proposed sale thereunder; or
8.1(i) Any order, judgment or decree shall be entered against the
Company decreeing the dissolution, liquidation or split up of the Company and
such order shall remain undischarged or unstayed for a period in excess of
twenty (20) days; or
8.1(j) Any Plan maintained by the Company or any of its Subsidiaries
shall be terminated within the meaning of Title IV of ERISA or a trustee shall
be appointed by an appropriate United States district court to administer any
Plan, or the Pension Benefit Guaranty Corporation (or any successor thereto)
shall institute proceedings to terminate any Plan or to appoint a trustee to
administer any Plan if as of the date thereof the Company's liability or any
such Subsidiary's liability (after giving effect to the tax consequences
thereof) to the Pension Benefit Guaranty Corporation (or any successor thereto)
for unfunded guaranteed vested benefits under the Plan exceeds the then current
value of assets accumulated in such Plan by more than $25,000 (or in the case of
a termination involving the Company or any of its Subsidiaries as a "substantial
employer" (as defined in Section 4001(a)(2) of ERISA) the withdrawing employer's
proportionate share of such excess shall exceed such amount); or
8.1(k) The Company or any of its Subsidiaries as employer under a
Multiemployer Plan shall have made a complete or partial withdrawal from such
Multiemployer Plan and the plan sponsor of such Multiemployer Plan shall have
notified such withdrawing employer that such employer has incurred a withdrawal
liability in an annual amount exceeding $25,000; or
8.1(l) The Company shall purport to disavow its obligations hereunder
or shall contest the validity or enforceability hereof; or the Bank's security
interest in any portion of the Collateral shall become unenforceable or
otherwise impaired; provided that, subject to the Bank's approval, no Event of
Default shall occur as a result of such impairment if all Advances made against
any such Collateral shall be paid in full within ten (10) days of the date of
such impairment.
Section 8.2 Remedies.
--------
32
<PAGE>
8.2(a) Upon the occurrence of any Event of Default described in
Section 8.1(f) or (g) the unpaid principal amount of and accrued interest on the
Note shall automatically become due and payable, without presentment, demand or
other requirements of any kind, all of which are hereby expressly waived by the
Company.
8.2(b) Upon the occurrence of any Event of Default (other than those
described in Section 8.1(f) or (g)), the Bank may, by written notice to the
Company declare all or any portion of the Advances to be due and payable
whereupon the same shall forthwith become due and payable, together with all
accrued interest thereon, and the obligation of the Bank to make Advances shall
thereupon terminate.
8.2(c) Upon the occurrence of any Event of Default, the Bank may also
do any one or more or all of the following:
(1) Foreclose upon or otherwise enforce its security interest in and
Lien on all of the Collateral or on any portion thereof to secure all payments
and performance of obligations owed by the Company under this Agreement.
(2) Notify all obligors of Collateral or on any portion thereof that
the Collateral has been assigned to the Bank and that all payments thereon are
to be made directly to the Bank or such other party as may be designated by the
Bank; settle, compromise, or release, in whole or in part, any amounts owing of
the Collateral, any such obligor or Investor or any portion of the Collateral,
on terms acceptable to the Bank; enforce payment and prosecute any action or
proceeding with respect to and any and all Collateral; and where any such
Collateral is in default, foreclose on and enforce security interests in, such
Collateral by any available judicial procedure or without judicial process and
sell property acquired as a result of any such foreclosure.
(3) Act, or contract with a third party to act, as servicer of all or
any item of Collateral requiring servicing and perform all obligations required
in connection with Purchase Commitments, such third party's fees to be paid by
the Company.
(4) Exercise all rights and remedies of a secured creditor under the
Uniform Commercial Code of the State of Illinois or the state in which the
Collateral is located, including but not limited to selling the Collateral at
public or private sale. The Bank shall give the Company not less than ten (10)
days' notice of any such public sale or of the date after which private sale may
he held. The Company agrees that ten (10) days' notice shall be reasonable
notice. At any such sale the Collateral may be sold as an entirety or in
separate parts, as the Bank may determine. The Bank may, without notice or
publication, adjourn any public or private sale or cause the same to be
adjourned from time to time by announcement at the time and place fixed for the
sale, and such sale may be made at any time or place to which the same may be so
adjourned. In case of any sale of all or any part of the Collateral on credit
or for
33
<PAGE>
future delivery, the Collateral so sold may be retained by the Bank until the
selling price is paid by the purchaser thereof, but the Bank shall not incur any
liability in case of the failure of such purchaser to take up and pay for the
Collateral so sold and, in case of any such failure, such Collateral may again
be sold upon like notice. The Bank may, however, instead of exercising the
power of sale herein conferred upon it, proceed by a suit or suits at law or in
equity to collect all amounts due upon all or any portion of the Collateral or
to foreclose the pledge and sell all or any portion of the Collateral under a
judgment or decree of a court or courts of competent jurisdiction, or both.
(5) Proceed against the Company on the Note or against the Guarantors
under the Guaranty or both.
(6) Pursue any rights and/or remedies available at law or in equity
against the Company or the Guarantors or both.
8.2(d) The Bank shall incur no liability as a result of the sale of the
Collateral, or any part thereof, at any private sale. The Company hereby waives
any claims it may have against the Bank arising by reason of the fact that the
price at which the Collateral may have been sold at such private sale was less
than the price which might have been obtained at a public sale or was less than
the aggregate amount of the outstanding Advances and the unpaid interest accrued
thereon, even if the Bank accepts the first offer received and does not offer
the Collateral, or any part thereof, to more than one offeree.
8.2(e) The Company waives any right to require the Bank to (1) proceed
against any Person, (2) proceed against or exhaust all or any of the Collateral
or pursue its rights and remedies as against the Collateral in any particular
order, or (3) pursue any other remedy in its power. The Bank shall not be
required to take any steps necessary to preserve any rights of the Company
against holders of mortgages prior in lien to the Lein of any Mortgage included
in the Collateral or to preserve rights against prior parties.
8.2(f) The Bank may, but shall not be obligated to, advance any sums or do
any act or thing necessary to uphold and enforce the Lien and priority of, or
the security intended to be afforded by, any Mortgage included in the
Collateral, including, without limitation, payment of delinquent taxes or
assessments and insurance premiums. All advances, charges, costs and expenses,
including reasonable attorneys' fees and disbursements, incurred or paid by the
Bank in exercising any right, power or remedy conferred by this Agreement, or in
the enforcement hereof, together with interest thereon, at the rate of interest
specified in the Note, from the time of payment until repaid, shall become a
part of principal balance outstanding under the Note.
8.2(g) No failure on the part of the Bank to exercise, and no delay in
exercising, any right, power or remedy provided hereunder, at law or in equity
shall operate as a waiver thereof; nor shall any single or partial exercise by
the Bank of any right, power or remedy
34
<PAGE>
provided hereunder, at law or in equity preclude any other or further exercise
thereof or the exercise of any other right, power or remedy. Without intending
to limit the foregoing, all defenses based on the statute of limitations are
hereby waived by the Company. The remedies herein provided are cumulative and
are not exclusive of any remedies provided at law or in equity.
Section 8.3 Application of Proceeds. The proceeds of any sale or other
-----------------------
enforcement of the Bank's security interest in all or any part of the Collateral
shall be applied by the Bank:
First, to the payment of the costs and expenses of such sale or
-----
enforcement, including reasonable compensation to the Bank's agents and counsel,
and all expenses, liabilities and advances made or incurred by or on behalf of
the Bank in connection therewith;
Second, to the payment of any other amounts due (other than principal and
------
interest) under the Note or this Agreement;
Third, to the payment of interest accrued and unpaid on the Note;
-----
Fourth, to the payment of the outstanding principal balance of the Note;
------
and
Finally, to the payment to the Company, or to its successors or assigns,
-------
or as a court of competent jurisdiction may direct, of any surplus then
remaining from such proceeds. If the proceeds of any such sale are insufficient
to cover the costs and expenses of such sale, as aforesaid, and the payment in
full of the Note and all other amounts due hereafter, the Company shall remain
liable for any deficiency.
Section 8.4 Bank Appointed Attorney-in-Fact. The Bank is hereby appointed
-------------------------------
the attorney-in-fact of the Company, with full power of substitution for the
purpose of carrying out the provisions hereof and taking any action and
executing any instruments which the Bank may deem necessary or advisable to
accomplish the purposes hereof, which appointment as attorney-in-fact is
irrevocable and coupled with an interest. Without limiting the generality of
the foregoing, the Bank shall have the right and power to give notices of its
security interest in the Collateral to any Person, either in the name of the
Company or in its own name, to endorse all Mortgage Loans payable to the order
of the Company, or to receive, endorse and collect all checks made payable to
the order of the Company representing any payment on account of the principal of
or interest on, or the proceeds of sale of, any of the Mortgage Loans or and to
give full discharge for the same.
Section 8.5 Right of Set-Off. If the Company shall default in the payment
----------------
of the Note, any interest accrued thereon, or any other sums which may become
payable hereunder when due, or in the performance of any of its other
obligations or liabilities under this Agreement, the Bank, shall have the right,
at any time and from time to time, without notice, to set-off and to
35
<PAGE>
appropriate or apply any and all deposits of money or property or any other
indebtedness at any time held or owing by the Bank or a parent company,
affiliate, or subsidiary of the Bank to or for the credit of the account of the
Company against and on account of the obligations and liabilities of the Company
under the Note and this Agreement, irrespective of whether or not the Bank shall
have made any demand hereunder and whether or not said obligations and
liabilities shall have matured, provided, however, that the aforesaid right of
set-off shall not apply to any deposits of escrow monies being held on behalf of
the mortgagors under Mortgage Loans or other third parties.
Section 8.6 Reasonable Assurances. If, at any time during the term of the
---------------------
Agreement, Bank has reason to believe that Company is not conducting its
business in accordance with, or otherwise is not satisfying: (i) all applicable
statutes, regulations, rules, and notices of federal, state, or local
governmental agencies or instrumentalities, all applicable requirements of
Investors and Insurers and prudent industry standards or (ii) all applicable
requirements of Bank, as set forth in this Agreement, then, Bank shall have the
right to demand, pursuant to written notice from Bank to Company specifying with
particularity the alleged act, error or omission in question, reasonable
assurances from Company that such a belief is in fact unfounded, and any failure
of Company to provide to Bank such reasonable assurances in form and substance
reasonably satisfactory to Bank, within the time frame specified in such written
notice shall itself constitute an Event of Default hereunder. Company hereby
authorizes Bank to take such actions as may be necessary or appropriate to
confirm the continued eligibility of Company for Advances hereunder, including
without limitation (i) ordering credit reports and (ii) contacting mortgagors,
licensing authorities and Investors or Insurers.
ARTICLE IX
REIMBURSEMENT OF EXPENSES; INDEMNITY
The Company shall:
Section 9.1 Cost of Enforcement. Pay all out-of-pocket costs and expenses
-------------------
of the Bank, including reasonable attorney's fees, in connection with the
enforcement of this Agreement, the Note, and other documents and instruments
related hereto and the making and repayment of file Advances and the payment of
interest thereon.
Section 9.2 Payments of Taxes. Pay, and hold the Bank and any holder of
-----------------
the Note harmless from and against, any and all present and future stamp,
documentary and other similar taxes with respect to the foregoing matters and
save the Bank and the holder or holders of the Note harmless from and against
any and all liabilities with respect to or resulting from any delay or omission
to pay such taxes.
Section 9.3 Indemnification. Indemnify, pay and hold harmless the Bank
---------------
and any of its
36
<PAGE>
officers, directors, employees or agents and any subsequent holder of the Note
from and against any and all liabilities, obligations, losses, damages,
penalties, judgments, suits, costs, expenses and disbursements of any kind
whatsoever (the "Indemnified Liabilities") (excluding any such Indemnified
liabilities resulting from failure by the Bank to perform any of its obligations
under this Agreement, the Note, or any other document referred to herein as
established in a suit between the Company and the Bank which may be the same
suit in which indemnification is being sought hereunder by the Bank) which may
be imposed upon, incurred by or asserted against the Bank or such holder in any
way relating to or arising out of this Agreement, the Note, or any other
document referred to herein or any of the transactions contemplated hereby or
thereby to the extent that any such Indemnified liabilities result (directly or
indirectly) from (i) the inaccuracy or incompleteness of any representation or
warranty made by the Company in this Agreement or any schedule, statement,
Exhibit or certificate furnished by the company pursuant to this Agreement or
(ii) the failure by the Company to observe or perform any term or provision of
this Agreement or of any agreement executed in connection herewith, including
without limitation any claims made, or any actions, suits or proceedings
commenced or threatened, by or on behalf of any creditor (excluding the Bank and
the holder or holders of the Note), security holder, shareholder, mortgagor,
customer (including, without limitation, any person or entity having any
dealings of any kind with the Company), trustee, director, officer, employee
and/or agent of the Company acting in such capacity, the Company or any
governmental regulatory body or authority (excluding the Office of the
Comptroller of the Currency, the Federal Deposit Insurance Corporation and any
other banking regulatory body or authority having jurisdiction over the Bank).
ARTICLE X
DELIVERIES OF COLLATERAL DOCUMENTS
The Bank exclusively shall deliver Pledged Mortgages to the Investor under
the Purchase Commitment with respect thereto for its examination and purchase,
against a bailee letter substantially in the form attached hereto as Exhibit H.
---------
The Bank may deliver any document relating to the Collateral to the Company for
correction or completion against a properly executed trust receipt in the form
approved by the Bank with instructions to the Company to either return the
corrected document to the Bank within ten (10) Business Days after such delivery
or redeem the Mortgage Loan from pledge. In the case of deliveries of Pledged
Mortgages by the Bank, the Company shall deliver to the Bank a letter, to
accompany the delivery, confirming the security interest of the Bank and
designating the Bank as payee under any Purchase Commitment.
ARTICLE XI
MISCELLANEOUS
Section 11.1 Relationship of Parties. The relationship between Bank and
-----------------------
the Company is limited to that of creditor/secured party, on the one hand, and
borrower, on the other hand.
37
<PAGE>
The provisions herein for compliance with financial covenants and delivery of
financial statements, are intended solely for the benefit of Bank to protect its
interests as lender in assuring performance of the obligations hereunder, and
nothing contained in this Agreement shall he construed as permitting or
obligating Bank to act as a financial or business advisor or consultant to the
Company, as permitting or obligating the Bank to control the Company or to
conduct the Company's operations, as creating any joint venture, agency,
fiduciary, trustee, or other relationship between the parties other than as
explicitly and specifically stated in this Agreement. The Company acknowledges
that it has had the opportunity to obtain the advice of experienced counsel of
its own choosing in connection with the negotiation and execution of this
Agreement and to obtain the advice of such counsel with respect to all matters
contained herein. The Company further acknowledges that it is experienced with
respect to financial and credit matters and has made its own independent
decision to execute and deliver this Agreement.
Section 11.2 Recourse. The Company acknowledges and agrees that it is
--------
fully liable for repayment of all Advances and all sums due hereunder or under
the Note and for performance of all obligations contained in this Agreement.
Section 11.3 Notices. All notices, demands, consents, requests and other
-------
communications required or permitted to be given or made hereunder
(collectively, "Notices") shall, except as otherwise expressly provided
hereunder, be in writing and shall be delivered in person or telegraphed or
mailed, first class, return receipt requested, postage prepaid, or by overnight
delivery service or by telecopy or other telecommunications device addressed to
the respective parties hereto at their respective addresses hereinafter set
forth or, as to any such party, at such other address as may be designated by it
in a Notice to the other. All Notices shall be conclusively deemed to have been
properly given or made when duly delivered, in person or by overnight delivery
service or by telecopy or other telecommunications device, or if mailed on the
third Business Day after being deposited in the mails or when delivered to the
telegraph company, addressed as follows:
if to the Company: T.A.R. Preferred Mortgage
19702 MacArthur Blvd., Suite 200
Irvine, CA 92715
Attn: __________________________________
with a copy to: _________________________________
_________________________________
Attn: ___________________________
Telecopy No.:____________________
if to the Bank: PNC Mortgage Bank, N.A.
700 Deerpath Drive
Vernon Hills, IL 60061
38
<PAGE>
Attn: Warehouse Lending
Telecopy No: 708-918-5316
Section 11.4 Terms Binding Upon Successors; Survival. The terms and
---------------------------------------
provisions of this Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns. All
representations, warranties, covenants and agreements herein contained on the
part of the Company shall survive the making of any Advance and the execution of
the Note, and shall be effective so long as the Commitment is outstanding or
there remains any obligation of the Company hereunder or under the Note to be
paid or performed.
Section 11.5 Assignment. This Agreement may not be assigned by the
----------
Company. This Agreement and the Note, along with the Bank's security interest
in any or all of the Collateral, may, at any time, be transferred or assigned,
in whole or in part, by the Bank, and any such transferee or assignee thereof
may enforce this Agreement, the Note and such security interest.
Section 11.6 Amendments. This Agreement may be modified or amended by the
----------
Lender at any time upon 30 days notice to the Company. Such modification or
amendment will not take effect if, within fifteen (15) days from the date of
such notice, the Lender receives a written objection to such modification or
amendment from the Company. If no such objection is received by the Lender such
modification or amendment will automatically become effective upon the 30th day
from the date of such notice by the Lender.
Section 11.7 No Waiver; Remedies Cumulative. No failure or delay on the
------------------------------
part of the Company or the Bank or any holder of the Note in exercising any
right, power or privilege hereunder and no course of dealing between the Company
and the Bank or the holder of the Note shall operate as a waiver thereof; nor
shall any single or partial exercise of any right, power or privilege hereunder
or under the Note preclude any other or further exercise thereof or the exercise
of any other right, power or privilege hereunder. The rights and remedies
herein expressly provided are cumulative and not exclusive of any rights or
remedies which the Company or the Bank or the holder of the Note would otherwise
have. No notice to or demand on the Company in any case shall entitle the
Company to any other or further notice or demand in similar or other
circumstances or constitute a waiver of the rights of the Bank or the holder of
the Note to any other or further action in any circumstances without notice or
demand.
Section 11.8 Invalidity. In case any one or more of the provisions
----------
contained in this Agreement shall for any reason be held to be invalid, illegal,
or unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions hereof, and this Agreement shall be
construed as if such invalid, illegal or unenforceable provision have not been
included.
Section 11.9 Participations. The Bank may from time to time sell or
--------------
otherwise grant participations in the Commitment and the Note, and the holder of
any such participation, if the
39
<PAGE>
participation agreement so provides, (i) shall, with respect to its
participation, be entitled to all of the rights of the Bank and (ii) may
exercise any and all rights of setoff or banker's lien with respect thereto, in
each case as fully as time the Company were directly indebted to the holder of
such participation in the amount of such participation; provided, however, that
the Company shall not be required to send or deliver to any of the participants
other than the Bank any of the materials or notices required to be sent or
delivered by it under the terms of this Agreement, nor shall it have to act
except in compliance with the instructions of the Bank.
Section 11.10 Integration. This Agreement, together with the Note, and
-----------
other documents executed pursuant to the terms hereof, constitute the entire
agreement between the parties hereto, with respect to the subject matter hereof.
Section 11.11 Additional Instruments, etc. The Company shall execute and
---------------------------
deliver such further instruments and shall do and perform all matters and things
necessary or expedient to be done or observed for the purpose of effectively
creating, maintaining and preserving the security and benefits intended to be
afforded by this Agreement.
Section 11.12 Governing Law. This Agreement and the rights and
-------------
obligations of the parties hereunder and under the Note shall be construed in
accordance with and governed by the laws of the State of Illinois.
Section 11.13 Company Information. The Company hereby authorizes the
-------------------
Bank to provide any Affiliate of the Bank with information regarding the
Company, including copies of documents, financial statements, corporate records
and reports, obtained by the Bank from the Company or any other entity during
the course of the negotiation or administration of this Agreement.
40
<PAGE>
IN WITNESS WHEREOF, the parties hereto executed as of the date first above
written.
COMPANY:
T.A.R. Preferred Mortgage
By /s/ Todd A. Rodriguez
------------------------------
Its: ____________________________
41
<PAGE>
WITNESS my hand and official seal this 5 day of Dec. 1995.
/s/ Cynthia A. Villaume
----------------------------------
Notary Public
My Commission Expires: 5-12-95
[Seal]
BANK
PNC Mortgage Bank, N.A.
By /s/
-------------------------------
Its: Vice President
WITNESS my hand and official seal this 11 day of December, 1995
/s/ Cheryl E. Saref
----------------------------------
Notary Public
My Commission Expires: 10-6-97
[Seal]
42
<PAGE>
T.A.R. PREFERRED MORTGAGE CORPORATION
PNC Mortgage Bank, N.A.
440 N. Fairway Drive
Vernon Hills, IL 60061
RE: Warehousing Credit and Security Agreement dated _______________, 199__ (the
"Agreement") by and between PNC Mortgage Bank, N.A. (the "Bank") and T.A.R.
Preferred Mortgage Corporation (the "Company").
Ladies and Gentlemen:
We have acted as counsel to the Company in connection with the preparation,
execution and delivery of the above referenced Agreement. This Opinion Letter
is provided to you at the request of the Company pursuant to Section 4.1(a)(4)
of the Agreement. Except as otherwise provided herein, capitalized terms used
in the Opinion Letter are defined as set forth in the Agreement or the Accord
(see below).
This Opinion Letter is governed by, and shall be interpreted in accordance with,
the Legal Opinion Accord (the "Accord") of the ABA Section of Business Law
(1991). As a consequence, it is subject to a number of qualifications,
exceptions, definitions, limitations on coverage and other limitations, all as
more particularly described in the Accord, and this Opinion Letter should be
read in conjunction therewith. The law covered by the opinions expressed herein
is limited to the Federal Law of the United States and the Law of the State(s)
of California.
Based upon and subject to the foregoing, we are of the opinion that:
1. The Agreement is enforceable against the Company.
2. Execution and delivery by the Company of, and performance of its
agreements in, the Agreement do not (i) violate the Constituent
Documents, or (ii) breach, or result in a default under, any existing
obligation of the Company under an Other Agreement, or (iii) breach or
otherwise violate any existing obligation of the Company under a Court
Order.
3. Execution and delivery by the Company of, and performance by the
Company of its agreements in, the Agreement do not violate applicable
provisions of statutory law or regulation.
<PAGE>
4. Possession of the Mortgage Notes by the Bank, or its bailee, along
with the filing of an executed UCC Financing Statement in California
will give the Bank a perfected first lien security interest in the
Collateral.
The General Qualifications apply to the No Violation of Law Opinion set forth in
paragraph three (3) above as well as to the Remedies Opinion set forth in
paragraph one (1) above.
We hereby confirm to you, pursuant to the request set forth in Section 5.5 of
the Agreement, that there are no actions or proceedings against the Company
pending or overtly threatened in writing, before any court, governmental agency
or arbitrator which (i) seek to affect the enforceability of the Agreement, or
(ii) come within the objective standards established in the Agreement for
disclosure of such matters.
A copy of this Opinion Letter may be delivered by you to syndicate participants,
potential and actual, in connection with any sale, or potential sale, of
participation interests in the warehousing line of credit established by the
Agreement. Additionally, a copy of this Opinion Letter may be delivered by you
to any state or federal regulatory entity in connection with your continued
compliance of state and federal regulations or any such regulatory examination.
Such syndicate participants and regulatory entities may rely on this Opinion
Letter as if it were addressed and had been delivered to them on the date
hereof. Subject to the foregoing, this Opinion Letter may be relied upon by you
only in connection with the Transaction and may not be used or relied upon by
you or any other person for any purpose whatsoever, except to the extent
authorized in the Accord, without in each instance our prior written consent.
Very truly yours,
/s/ Walter F. Villaume
- ----------------------------
Attorney at Law
Cal. State Bar #120403
<PAGE>
T.A.R. PREFERRED MORTGAGE CORPORATION
I, Walter F. Villaume III, Corporate Secretary of T.A.R. Preferred Mortgage
Corporation, do hereby certify that the following is true, complete and correct
copy or a resolution duly adopted by the Board of Directors at a meeting held
the 5th day of December, 1995, at which a quorum was present and voting
throughout:
RESOLVED, That T.A.R. Preferred Mortgage Corporation (the "Company") is
hereby authorized to enter into a Warehouse Credit and Security Agreement
with PNC Mortgage Bank, N.A. (the "Agreement") and that Todd A. Rodriguez
is authorized to execute and deliver the Agreement on behalf of the
Company.
BE IT FURTHER RESOLVED, That the following individuals are authorized to
sign and deliver all other notices, certificates, documents and instruments, to
perform all obligations and to give all instructions contemplated under or in
connection with the Agreement.
Todd A. Rodriguez /s/ Walter F. Villaume III /s/
----------------- -------------
Cindy Villaume /s/ Li-Lin Ko /s/
-------------------- --------------------------
Jo Ann Niffenegger /s/ Lori Cartwright /s/
---------------- --------------------
Susan Lewis /s/ G. Chehaiber /s/
----------------------- -----------------------
Dipika Patel /s/ Yvette P. Lawrence /s/
---------------------- -----------------
Teresa M. Dowsett /s/ Sheila Morrentino /s/
----------------- ------------------
Colleen Mansfield /s/
------------------
I FURTHER CERTIFY That the foregoing signatures of the signatories are true,
correct and accurate and that said resolution has not been modified or rescinded
and is in full force and effect as of the date hereof.
IN WITNESS WHEREOF I have set my hand and official seal of T.A.R. Preferred
Mortgage Corporation this 5 day of December, 1995.
[Seal]
/s/ Beth Owens
------------------------------
Notary Public
<PAGE>
STATE OF ILLINOIS
UNIFORM COMMERCIAL CODE - FINANCING STATEMENT - FORM UCC-1
<TABLE>
<CAPTION>
<S> <C>
Filed with: Secretary of State
This STATEMENT is presented to a filing officer For Filing Officer
for filing pursuant to the Uniform Commercial (Date, Time, Number, and Filing Office)
Code.
Debtor(s) (Last Name First) and address(es) Secured Party(ies) and address(es)
T.A.R. PREFERRED MORTGAGE PNC MORTGAGE BANK, N.A.
19702 MAC ARTHUR BLVD., SUITE 200 440 N. FAIRWAY DR.
IRVINE, CA 92715I VERNON HILLS, IL 60061
1. This financing statement covers the following types (or items) of property: ASSIGNEE OF SECURED PARTY
SEE PROPERTY DESCRIBED ON ATTACHED EXHIBIT A HERETO
2. [x] Products of Collateral are also covered.
-
[3] Additional sheets presented. T.A.R. PREFERRED MORTGAGE
-
[x] Filed with Office of Secretary of State of Illinois. By:_______________________________ Signature
- of (Debtor)
[ ] Debtor is a transmitting utility as defined in Sec. UCC9-105 (Secured Party)
Signature of Debtor Required in Most Cases;
Signature of Secured Party in Cases by UCC Sec.
9-402(2)
This form of financing statement is approved by the Secretary of State.
STANDARD FORM - UNIFORM COMMERCIA CODE - FORM UCC-1-REV. 1 - 75 LI-092794
</TABLE>
<PAGE>
EXHIBIT A TO UCC FINANCING STATEMENT
Debtor:___________________________________
Secured Party: PNC Mortgage Bank, N.A.
As security for the payment of the Note (as defined in the Warehousing and
Credit Security Agreement between Debtor and the Secured Party dated
_______________, (the "Credit Agreement"), the Debtor hereby grants to the
Secured Party a security interest in all existing and hereafter arising rights
and interest of the Debtor in and to the following described property
(collectively, the "Collateral"):
1. All Mortgage Loans, including all Mortgage Notes and Mortgages evidencing
such Notes and Mortgage Loans and the related Mortgage Loan Documents,
which are from time to time delivered or caused to be delivered to the
Secured Party (including delivery to a third party on behalf of the Secured
Party) pursuant hereto or in respect of which and Advance has been made by
the Secured Party;
2. All mortgage insurance and all commitments issued by Insurers to insure or
guarantee any Mortgage Loans included in the Pledged Mortgages; all
Purchase Commitments held by the Debtor covering the Pledged Mortgages and
all proceeds resulting from the sale thereof to Investors pursuant thereto;
and all personal property, contract rights, servicing and servicing fees
and income, accounts and general intangibles of whatsoever kind relating to
the Pledged Mortgages, said Insurer commitments and the Purchase
Commitments, and all other documents or instruments delivered to the
Secured Party in respect of the Pledged Mortgages, including, without
limitation, the right to receive all insurance proceeds and condemnation
awards which may be payable in respect of the premises encumbered by any
Mortgage;
3. All right, title and interest of the Debtor in and to all files, surveys,
certificates, correspondence, appraisals, computer programs, tapes, discs,
cards, accounting records, and other information and data of the Debtor
relating to the Collateral;
4. All property of the Debtor, in any form or capacity now or at any time
hereafter in the possession or direct or indirect control of the Secured
Party or a parent company, affiliate or subsidiary of the Secured Party;
6. All products and proceeds of any and all of the foregoing.
<PAGE>
ATTACHMENT TO ILLINOIS UCC-1:
T.A.R. PREFERRED MORTGAGE (DEBTOR)
- --------------------------------------------------------------------------------
SIGNATURES OF PARTIES:
SECURED PARTY(IES) :
Page 1
<PAGE>
This FINANCING STATEMENT is presented for filing and will remain effective with
certain exceptions for a period of five years from the date of filing pursuant
to section 9403 of the California Uniform Commercial Code
<TABLE>
<CAPTION>
<S> <C>
1. DEBTOR (LAST NAME FIRST - IF AN INDIVIDUAL) 14. SOCIAL SECURITY OR FEDERAL TAX NO.
T.A.R. PREFERRED MORTGAGE
- -----------------------------------------------------------------------------------------------------------------------------------
1B. MAILING ADDRESS 1C. CITY, STATE 1D. ZIP CODE
19702 MAC ARTHUR BLVD., SUITE 200 IRVINE, CA 92715
- -----------------------------------------------------------------------------------------------------------------------------------
2. ADDITIONAL DEBTOR (IF ANY) (LAST NAME FIRST - IF AN INDIVIDUAL) 2A. SOCIAL SECURITY OR FEDERAL TAX NO.
- ----------------------------------------------------------------------------------------------------------------------------------
2B. MAILING ADDRESS 2C. CITY, STATE 2D. ZIP CODE
- -----------------------------------------------------------------------------------------------------------------------------------
3. DEBTOR'S TRADE NAMES OR STYLES (IF ANY) 3A. FEDERAL TAX NUMBER
- -----------------------------------------------------------------------------------------------------------------------------------
4. SECURED PARTY 44. SOCIAL SECURITY NO., FEDERAL TAX NO.
NAME PNC MORTGAGE BANK, N.A. OR
MAILING ADDRESS 440 N. FAIRWAY DR. BANK TRANSIT AND A.B.A. NO. 5.
CITY VERNON HILLS STATE IL ZIP CODE 60061
- -----------------------------------------------------------------------------------------------------------------------------------
5. ASSIGNEE OF SECURED PARTY (IF ANY) 5A. SOCIAL SECURITY NO., FEDERAL TAX NO.
OR
BANK TRANSIT AND A.B.A. NO.
NAME
MAILING ADDRESS
CITY STATE ZIP CODE
- -----------------------------------------------------------------------------------------------------------------------------------
6. This FINANCING STATEMENT covers the following types or items of property (include description of real property on which located
and owner of record when required)
SEE PROPERTY DESCRIBED ON ATTACHED EXHIBIT A HERETO
No. of Additional Sheets Presented: 2
==================================================================================================================================
7. CHECK [x] 8A. [x] PRODUCTS OF COLLATERAL 7B. DEBTOR(S) SIGNATURE NOT REQUIRED IN ACCORDANCE WITH
IF APPLICABLE ARE ALSO COVERED INSTRUCTION 5(a) ITEM:
[ ] (1) [ ] (2) [ ] (3) [ ] (4)
- -----------------------------------------------------------------------------------------------------------------------------------
8. CHECK [x] [x] DEBTOR IS A "TRANSMITTING UTILITY" IN ACCORDANCE WITH UCC SEC. 9105 (1) (n)
IF APPLICABLE
- -----------------------------------------------------------------------------------------------------------------------------------
9. DATE: C 10. THIS SPACE FOR USE OF FILING OFFICER
T.A.R. PREFERRED MORTGAGE O (DATE, TIME, FILE NUMBER
D AND FILING OFFICER)
SIGNATURE(S) OF DEBTOR(S) E
- ------------------------------------------------------------------------------
1
PNC MORTGAGE BANK N.A. 2
SIGNATURE OF SECURED PARTY(IES) 3
- ------------------------------------------------------------------------------
4
5
===============================================================================
11. RETURN COPY TO 6
===============================================================================
JOANNE HOLSTRO FORM UCC-1 7
PNC MORTGAGE BANK N.A. Approved by the Secretary of State
700 DEERPATH 8
VERNON HILLS, IL 60061
9
0
===================================================================================================================================
Page 2
</TABLE>
<PAGE>
EXHIBIT A
PROMISSORY NOTE
$5,000,000 Date: ________________, 19___
FOR VALUE RECEIVED, the undersigned (herein called the "Company"), hereby
promises to pay, on demand, to the order of PNC Mortgage Bank, National
Association (the "Bank" or, together with its successors and assigns, the
"Holder") at 440 N. Fairway Drive, Vernon Hills, IL 60061, or at such other
place as the Holder may designate from time to time, the principal sum of Five
Million Dollars ($5,000,000) or so much thereof as may be outstanding from time
to time, pursuant to the Warehousing Credit and Security Agreement (described
below), and to pay interest on said principal sum or such part thereof as shall
remain unpaid from time to time, from the date of each Advance until repaid in
full, at a rate per annum equal to the Base Rate plus two and one-half of one
percent (2.5%) (as hereinafter defined) of the Bank. All interest and
transaction fees will be deducted from the proceeds remitted from the Investor
to the Bank on each individual loan. In the event the total sum of the advance
plus such fees and interest exceeds the remittance amount received from the
investor, the deficit amount shall be deemed in arrears and will be payable to
the Bank on the second day of each month. All payments hereunder shall be made
in lawful money of the United States and in immediately available funds.
As used herein, the term "Base Rate" shall mean the rate of interest from time
to time established and publicly announced by file Bank in its sole discretion,
at its then applicable Base Rate of interest to be used as an index in
determining actual interest rates to be charged to certain of the Bank's
borrowers. The rate of interest hereunder shall be adjusted as of the effective
date of each change in the Base Rate.
Should any issue arise as to the Base Rate in effect on any date or for any
period, a certificate as to the Base Rate in effect on such date or for such
period, executed by the chief financial officer of the Bank, shall be deemed
conclusively to establish such Base Rate.
Interest shall be computed on file basis of a 360-day year and applied to the
actual number of days elapsed in each interest calculation period.
All payments due under this Note shall be made in lawful money of the United
States of America in immediately available funds. If any payment required to be
made by the Company hereunder becomes due and payable on a Saturday, Sunday or
holiday, the due date thereof shall be extended to the next succeeding business
day and interest hereon shall be payable at the then applicable rate during such
extension. The holder of this Note is hereby authorized to record the date and
amount of each payment of principal and interest, and applicable interest rates
and other information with respect thereto, on the schedules annexed to and
constituting a part of this Note and any such recordation shall constitute prima
facie evidence of the accuracy of the information so recorded; provided,
however, that the failure to make a notation or the inaccuracy of any notation
shall not limit or otherwise affect the obligations of the Company hereunder.
Payments shall be applied first to the interest due hereunder at the
applicable rate set forth
Page 3
<PAGE>
above and the balance thereof shall be applied on account of the principal of
this Note.
This Note is the note referred to in that certain Warehousing Credit and
Security Agreement dated the date hereof between the Company and the Bank (the
"Agreement") and is entitled to the benefits thereof. Capitalized terms used
herein without definition shall have the meanings given them in said Agreement.
Upon failure of the Company to pay any payment due hereunder in full when due
or upon the occurrence of an Event of Default, the entire unpaid principal
balance hereof plus accrued and unpaid interest thereon shall, at the option of
the Blink, mature and become immediately due and payable.
This Note may be prepaid in whole or in part at any time without premium or
penalty.
The Company hereby agrees to pay, in addition to all of the sums of money due
hereunder, all costs of collection and attorneys' fees, whether suit be brought
or not, and all other amounts due under the Agreement, if this Note is not paid
in full when due, whether at the stated maturity or by acceleration. No
provision hereof may be waived or modified orally, but all such waivers or
modifications shall be in writing.
The Company hereby waives presentment for payment, demand, protest, notice of
protest and notice of dishonor.
This Note shall be construed and enforced in accordance with the laws of the
State of Illinois, without reference to its principles of conflicts of law.
IN WITNESS WHEREOF, the Company has executed this Note on the day and year
first above written.
By: /s/ Walter Villaume
---------------------------
Page 4
<PAGE>
STATE OF CALIFORNIA )
SS )
COUNTY OF SAN BERNADINO )
I, a Notary Public in and for the jurisdiction aforesaid, do hereby certify
that Walter Villaume personally appeared before me in said jurisdiction, being
personally well known (or satisfactorily proven) to me to be the person named
in the foregoing and annexed Promissory Note bearing date as of the 6th day of
December, 1995, who, being by me first duly sworn, acknowledged said instrument
to be his free act and deed and that he executed and delivered the same as such.
Witness my hand and official seal this 6th day of December, 1995.
/s/ Jo Anne Niffenagger
----------------------------------
Notary Public
My Commission Expires:
January 30, 1998 [SEAL]
Page 5
<PAGE>
SCHEDULE OF ADVANCES AND PAYMENTS OF PRINCIPALS
-----------------------------------------------
Page 6
<PAGE>
AUTHORIZED SIGNERS
Company Name: T.A.R. PREFERRED MORTGAGE CORPORATION
Effective Date: 11/9/1995
Authorized to sign Wire Advance Requests:
<TABLE>
<CAPTION>
<S> <C> <C>
Name Title Signature
---- ----- ---------
Todd A. Rodriguez CEO /s/
- ----------------------- ---------------------- --------------------------
Walter F. Villaume Secretary /s/
- ----------------------- ---------------------- --------------------------
Li-Lin Ko CFO /s/
- ----------------------- ---------------------- --------------------------
JoAnn Niffenegger Controller /s/
- ----------------------- ---------------------- --------------------------
- ----------------------- ---------------------- --------------------------
- ----------------------- ---------------------- --------------------------
- ----------------------- ---------------------- --------------------------
Name Title Signature
---- ----- ---------
Sheila Morrentino Shipping - 2nd T.D. /s/
- ----------------------- ---------------------- ---------------------------
Colleen Mansfield Shipping - First T.D. /s/
- ----------------------- ---------------------- ---------------------------
Jo Ann Niffenegger Controller /s/
- ----------------------- ---------------------- ---------------------------
- ----------------------- ---------------------- ---------------------------
- ----------------------- ---------------------- ---------------------------
- ----------------------- ---------------------- ---------------------------
</TABLE>
Page 7
<PAGE>
Approved By:
/s/ Walter F. Villaume /s/ Todd A Rodriguez
- ------------------------------ ----------------------------------
Signature Name, Title (President/CEO)
President and Secretary
Walter F. Villaume III
AUTHORIZED SIGNERS
Company Name: T.A.R. PREFERRED MORTGAGE CORPORATION
Effective Date: 12/7/1995
Please add the following individuals as authorized to sign Wire Advance
Requests:
Name Title Signature
---- ----- ---------
G. Chehaiber Second T.D. Funder /s/
- --------------------- ---------------------- ----------------------
Yvette Lawrence First T.D. Funder /s/
- --------------------- ---------------------- ----------------------
Dipika Patel First T.D. Funder /s/
- --------------------- ---------------------- ----------------------
- --------------------- ---------------------- ----------------------
- --------------------- ----------------------- ----------------------
Approved by:
/s/ Walter F. Villaume Walter F. Villaume, President/Secretary
- -----------------------------
Page 8
<PAGE>
EXHIBIT B
GUARANTY
THIS GUARANTY (the "Guaranty") made and entered into as of the _____ day of
_____________, 1995 by Todd Rodriguez, (the "Guarantor"), to and for the benefit
of PNC Mortgage Bank, National Association (the "Lender").
WITNESSETH:
WHEREAS contemporaneously herewith subject to certain terms and conditions,
Lender has agreed to extend a revolving line of credit (the "Loan") to T.A.R.
Preferred Mortgage (the "Borrower"), in the maximum principal amount of Five
Million Dollars ($5,000,000), as evidenced by that certain promissory note (the
"Note") of even date herewith made by Borrower and currently payable to Lender
pursuant to the terms, obligations, and agreements contained in that certain
Warehousing Credit and Security Agreement (Single-Family Mortgage Loan Servicing
Rights) between Borrower and Lender of even date herewith (the "Credit
Agreement"); and
WHEREAS, Lender has advised Guarantor and Borrower that it will not make any
advances of funds under the Loan unless, among other matters, Guarantor
guarantees to Lender the timely repayment of amounts owing under the Note, as
hereinafter provided, because Guarantor will derive substantial financial
benefits from the Loan.
NOW, THEREFORE, in order to induce Lender to make advances to Borrower under
the aforesaid Loan transaction, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, Guarantor agrees,
as follows:
Section 1. Incorporation of Recitals and Definition of Loan Documents. The
----------------------------------------------------------
foregoing recitals are hereby acknowledged and agreed to be true and are hereby
incorporated into the body of this Guaranty by reference to the same extent as
if herewith set forth in full. The Note, the Credit Agreement and all other
documents, instruments and certifications evidencing or securing the Loan are
sometimes herein collectively referred to as the "Loan Documents."
Section 2. Guaranty of Payment. The Guarantor hereby absolutely and
-------------------
unconditionally guarantees to Lender, its successors and assigns, as the current
holder of the Note, (i) the prompt and unconditional payment of the total amount
of principal advanced from time to time under the Note, and (ii) the prompt and
unconditional payment of all interest, costs, charges, expenses and reasonable
attorneys' fees in connection with the Loan as the same shall become due and
payable under any of the Loan Documents (whether at stated maturity, by
acceleration or otherwise).
Guarantor further hereby unconditionally and irrevocably agrees and guarantees
to make full and prompt payment to Lender of any of the indebtedness or other
sums paid to Lender pursuant to the Loan Documents which Lender is subsequently
ordered or required to pay or disgorge on the grounds that such payment
constituted an avoidable preference or a fraudulent transfer under applicable
bankruptcy, insolvency or fraudulent transfer laws; and Guarantor shall fully
and promptly indemnify Lender for all costs (including, without limitation,
attorneys' fees) incurred by Lender in defense of such claims of avoidable
preference or fraudulent transfer.
1
<PAGE>
This is a guaranty of payment and performance and not of collection only.
Section 3. Subordination of Other Indebtedness. Any indebtedness of the
-----------------------------------
Borrower to the Guarantor now or hereafter existing (including, but not limited
to, any rights to subrogation the Guarantor may have as a result of any payment
by the Guarantor under this Guaranty), together with any interest thereon, shall
be, and such indebtedness is hereby subordinated until payment in full of the
indebtedness of the Borrower to the Lender under the Loan Document and all other
obligations hereunder. Until payment in full with interest of the indebtedness
of the Borrower to the lender (and including interest accruing on the Note after
any petition under the Bankruptcy Reform Act of 1978, as amended (the
"Bankruptcy Code"), which post-petition interest the parties agree shall remain
a claim that is prior and superior to any claim of the Guarantor
notwithstanding any contrary practice, custom or ruling in proceedings under the
Bankruptcy Code generally), the Guarantor agrees not to accept any payment or
satisfaction of any kind of any indebtedness of the Borrower to the Guarantor.
Further, the Guarantor agrees that until such payment in full: (i) no Guarantor
shall accept payment from any other Guarantor by way of contribution on account
of any payment made hereunder by such party to the Lender; (ii) no one of them
will take any action to exercise or enforce any rights to such contribution; and
(iii) if any individual or entity comprising the Guarantor should receive any
payment, satisfaction or security for any indebtedness of the Borrower to any
individual or entity comprising the Guarantor or for any contribution by any
other individual or entity comprising the Guarantor for payment made hereunder
by the recipient to the Lender at any time the Borrower is in default under the
Loan Documents, the same shall be delivered to the Lender in the form received,
endorsed or assigned as may be appropriate for application on account of, or as
security for the indebtedness of the Borrower to the Lender. This provision
shall not restrict or impair Guarantor's right to receive compensation from
Borrower for his service to Borrower as an employee.
Any lien or charge on the Collateral (as defined the Credit Agreement), all
rights therein and thereto, and on the profits, losses, income and distributions
to be realized therefrom, which the Guarantor may have or obtain as security for
any loans or advances to Borrower shall be, and such lien or charge hereby is,
subordinated to the indebtedness of the Borrower to the Lender under the Credit
Agreement and the Note.
Section 4. Right to Set-Off. The Guarantor further agrees that upon the
----------------
occurrence of an Event of Default (as defined in the Credit Agreement), the
Lender shall have the right to set off amounts owing in respect of the Loan
against other amounts in its possession and otherwise owing to the Guarantor.
Section 5. Benefit. This Guaranty may be assigned or transferred in whole or
-------
in part by Lender, and the benefit of this Guaranty shall automatically pass
with a transfer or assignment of any portion of the Note to any subsequent owner
or holder. All references to Lender therein or herein shall be deemed to include
any successor or assignee of Lender or any subsequent owner or holder of the
Note.
2
<PAGE>
Section 6. Actions by Lender. No action which Lender may take or omit to
-----------------
take in connection with the Loan Documents or the administration of the Loan,
nor any course of dealing with Borrower or any other person shall release
Guarantor's obligations hereunder, affect this Guaranty in any way, or afford
Guarantor any recourse against Lender. By way of example, but not in limitation
of the foregoing, Guarantor hereby expressly agrees that Lender may, from time
to time, and without notice to Guarantor:
(a) Amend, change or modify, in whole or in part, any of the Loan Documents or
increase the amount of the Loan;
(b) Accelerate, change, extend or renew the time for payment of the Note;
(c) Waive any terms, conditions or covenants of the Note, the Credit Agreement
or any Loan Document, or grant any extension of time or forbearance for
performance of the same;
(d) Compromise or settle any amount due or owing, or claimed to be due or
owing, under the Note;
(e) Surrender, release or subordinate any or all security for the Note or
accept additional or substituted security therefor; and
(f) Release, substitute or add a Guarantor or Guarantors of the Note.
The provisions of this Guaranty shall extend and be applicable to all
renewals, amendments, extensions and modifications of the Loan Documents, and
all references to any of the Loan Documents shall be deemed to include any
renewal, extension, amendment or modification thereof.
Section 7. Waiver of Notice. Guarantor expressly waives notice of acceptance
----------------
of this Guaranty and diligence in collecting sums due under the Note or the
enforcing of any of the terms of the Loan Documents, or the taking of any action
with reference to the Note or any liability under this Guaranty.
Section 8. Independent Obligation. The obligation of the Guarantor hereunder
----------------------
shall he, in each instance, absolute and unconditional, and independent of the
obligations of Borrower. Lender may proceed directly against the Guarantor to
enforce its rights under this Guaranty without proceeding against or joining the
Borrower and without applying or enforcing any security for the Note. Guarantor
hereby waives any rights he may have to compel Lender to proceed against
Borrower, or any security, or to participate in any security for sums guaranteed
hereby.
Section 9. Delegation. Guarantor's obligations hereunder shall not be
----------
assigned nor delegated.
3
<PAGE>
Section 10. No Oral Change. This Guaranty may not be changed or amended,
--------------
except by a writing signed by the party against whom enforcement of such change
or amendment is sought, and no obligation of the Guarantor shall be released or
waived by Lender or any subsequent owner or holder of the Note, except by a
writing signed by the owner or holder of the Note.
Section 11. Cost of Enforcement. Guarantor agrees to indemnify Lender for
-------------------
all costs and expenses, including, but not limited to, reasonable attorneys'
fees, incurred or paid by Lender in enforcing this Guaranty, whether or not
litigation is commenced.
Section 12. Financial Statements. The balance sheet and income statement of
--------------------
the Guarantor heretofore furnished to the Lender, fairly present the financial
condition of the Guarantor as of the date thereof. The Guarantor has, as of the
date hereof, no material liabilities, direct or indirect, fixed or contingent,
matured or unmatured, or liabilities for taxes, long-term leases or unusual
forward or long-term commitments known to Guarantor not disclosed by, or
reserved against in, said balance sheet and related statements, and at the
present time there are no material unrealized or anticipated losses from any
loans, advances or other commitments of the Guarantor, except as heretofore
disclosed to the Lender in writing. Since the date thereof, there has been no
material adverse change in the business, operations, assets or financial
condition of the Guarantor nor is the Guarantor aware of any state of facts
which (with or without notice or lapse of time or both) is expected to result in
any such material adverse change. During the term of this Guaranty, Guarantor
shall, within one hundred twenty (120) days after the end of each calendar year,
provide financial statements to Lender for such calendar year certified by
Guarantor as true and correct, which statements shall be in form and detail
acceptable to Lender.
Section 13. Governing Law and Consent to Jurisdiction. This Guaranty shall
-----------------------------------------
be governed by and construed in accordance with the laws of the State of
Illinois. In the event of any litigation arising out of this Guaranty, Guarantor
agrees that the substantive law of the State of Illinois shall apply, Including,
without limitation, all provisions relating to the rights and remedies of the
owner or holder of the Note against any security therefor and/or Guarantor.
Guarantor hereby consents to jurisdiction within the State of Illinois for
purposes of such litigation. Nothing herein contained however, shall prevent
any owner or holder of the Note from bringing any action or exercising any
rights against any security or against the Guarantor or against any property of
the Guarantor within any other jurisdiction or state. Initiating such
proceeding or taking such action in any other jurisdiction or state shall not,
however, constitute a waiver of the agreement contained herein that the laws of
the State of Illinois shall govern the rights and obligations of the parties
hereunder.
Section 14. Invalidity of Particular Provisions. If any term or provision of
-----------------------------------
this Guaranty shall be determined to he illegal or unenforceable, all other
terms and provisions thereof shall nevertheless remain effective and shall be
enforced to the fullest extent permitted by law.
Section 15. Headings. The headings used herein are for purposes of
--------
convenience only and shall not be used in construing the provisions hereof.
4
<PAGE>
Section 16. Notice of Special Events. If the Guarantor shall become bankrupt
------------------------
or insolvent, or any application shall be made to have Guarantor declared
bankrupt or insolvent, or a receiver or trustee shall be appointed for Guarantor
or for all or a substantial part of the property of Guarantor, or if Guarantor
shall make an assignment for the benefit of the creditors, notice of such
occurrence or event shall be promptly furnished to Lender by Guarantor.
Section 17. Notices. All notices, demands, consents, requests and other
-------
communications required or permitted to be given or made hereunder
(collectively, "Notices") shall, except as otherwise expressly provided
hereunder, be in writing and shall be delivered in person or telegraphed or
mailed, first class, return receipt requested, postage prepaid, addressed to the
respective parties hereto at their respective addresses hereinafter set forth
or, as to any such party, at such other address as may be designated by it in a
Notice to the other. All Notices shall be conclusively deemed to have been
properly given or made when duly delivered, in person, or if mailed on the third
business day after being deposited in the mails or when delivered to the
telegraph company, addressed as follows:
If to the Guarantors:
If to the Lender: PNC Mortgage Bank, N.A.
700 Deerpath Drive
Vernon Hills, IL 60061
Attn: Warehouse Lending
Section 18. Termination of Guaranty. Guarantor hereby agrees that this
-----------------------
Guaranty shall remain in full force and effect despite the cancellation of the
Note and that the Guaranty shall not terminate until full and indefeasible
repayment of all principal, interest, costs, charges and expenses due under the
Loan (including, without limitation, not subject to challenge or refund in the
event of bankruptcy and after the expiration of any preference period),
whereupon liability of the Guarantor hereunder shall automatically cease. Until
all obligations of the Borrower to Lender under the Note and the Credit
Agreement have been fully performed, the Guarantor shall have no right of
subrogation against Borrower or any partner comprising Borrower.
Section 19. Heirs, Successors and Assigns. The obligations of the Guarantor
-----------------------------
herein shall be binding upon the Guarantor and the Guarantor's heirs,
successors, assigns, executors and administrators, jointly and severally, for
the performance of the obligations of the Guarantor herein.
Section 20. Independent Guaranty. Nothing in this Agreement shall affect or
--------------------
limit any rights or remedies which Lender may have against the Guarantor under
any other Guaranty from the Guarantor to the Lender.
5
<PAGE>
Section 21. Waiver of Jury Trial. Guarantor hereby (i) covenants and agrees
--------------------
not to elect a trial by jury of any issue triable of right by a jury, and (ii)
waives any right to trial by jury fully to the extent that any such right shall
now or hereafter exist. This waiver of right to trial by jury is separately
given, knowingly and voluntarily, by each of the undersigned hereunder, and this
waiver is intended to encompass individually each instance and each issue as to
which the right to a jury trial would otherwise accrue. Lender is hereby
authorized and requested to submit this Guaranty to any court having
jurisdiction over the subject matter and the parties hereto, so as to serve as
conclusive evidence of the undersigned's herein contained waiver of the right to
jury trial. Further, each of the undersigned hereby certifies that no
representative or agent of the Lender (including the Lender's counsel) has
represented, expressly or otherwise, to any of the undersigned that the Lender
will not seek to enforce this waiver or right to jury trial provision.
Section 22. Relationship of the Parties. This Guaranty provides for the
---------------------------
guaranteeing by the Guarantor of performance of Borrower's obligations to the
Lender under a certain revolving line of credit made by Lender, in its capacity
as a lender, to the Borrower, in its capacity as a borrower. The relationship
between Lender and the Guarantor is limited to that of creditor/secured party,
on the one hand, and Guarantor, on the other hand. The provisions herein for
compliance with financial covenants and delivery of financial statements, are
intended solely for the benefit of Lender to protect its interests as Lender in
assuring performance of the obligations hereunder, and nothing contained in this
Guaranty shall be construed as permitting or obligating Lender to act as a
financial or business advisor or consultant to Guarantor, as permitting or
obligating the Lender to control Guarantor or to conduct Guarantor's operations,
as creating any fiduciary obligation on the part of Lender to Guarantor, or as
creating any joint venture, agency, or other relationship between the parties
other than as explicitly and specifically stated in this Guaranty. The
Guarantor acknowledges that he has had the opportunity to obtain the advice of
experienced counsel of his own choosing in connection with the negotiation and
execution of this Guaranty and to obtain the advice of such counsel with respect
to all matters contained herein, including, without limitation, the provision in
Paragraph 21 above for waiver of trial by jury. The Guarantor further
acknowledges that he is experienced with respect to financial and credit matters
and has made his or her own independent decision to execute and deliver this
Guaranty.
6
<PAGE>
IN WITNESS WHEREOF, this Guaranty has been executed under seal as of the day
and year first above written.
By /s/ Todd G. Rodriguez
------------------------------
County of Orange
State of California
I, a Notary Public in and for the jurisdiction aforesaid, do hereby certify
that Todd Rodriguez personally appeared before me in said jurisdiction, being
personally well known (or satisfactorily proven) to me to be the person named in
the foregoing and annexed Guaranty bearing date as of the 5th day of December,
1995, who, being by me first duly sworn, acknowledged said instrument to be his
free act and deed and that he executed and delivered the same as such.
WITNESS my hand and official seal this 5th day of December, 1995.
/s/ Cynthia A Villaume
-------------------------------
Notary Public
My Commission Expires: December 12, 1998
[Seal]
7
<PAGE>
EXHIBIT K
POWER OF ATTORNEY TO ENDORSE NEGOTIABLE INSTRUMENTS
Know by all men by these presents: TAR PREFERRED MORTGAGE CORPORATION herein
called "the Company", does hereby make, constitute and appoint PNC Mortgage-
Bank, National Association herein called "the Bank", to be the true and lawful
attorney for the Company, and in the name place and stead of the Company to
endorse all checks, promissory notes and other negotiable security instruments
or documents related thereto, giving and granting to said attorney by these
presents full power and authority in and about the premises to have, use, and
take all lawful ways and means in the name of the Company for the purpose
aforesaid. And, generally, all and every other act or acts necessary to be done
in and about the premises, for the Company and in the name of the Company, to
do, execute, and perform as fully and effectively as the Company might do as if
acting on its own behalf; hereby ratifying and confirming all that the attorney
shall do by virtue of these presents, and the payee on of such amounts and
without inquiry as to the circumstances of issue, negotiation assignment or as
to the disposition of the proceeds thereof, or as to whether the same be
required or applied for the Company's business or benefit, even if drawn
indorsed or payable to bearer or the individual order of attorney.
This power of attorney shall remain in full force and be binding, until
termination of the Warehouse Credit and Security Agreement (the "Agreement")
between the Company and the Bank, and until all liability contracted thereunder
before termination of said Agreement, shall have been fully satisfied.
Dated: December 5, 1997
TAR PREFERRED MORTGAGE CORPORATION
By: /s/ Todd A. Rodriguez
----------------------------
Its:____________________________
State of California
County of Orange
I, Cynthia Villaume, a Notary Public in and for the County and State
aforesaid, do hereby certify that Todd Rodriguez personally known to me to be
the same person whose name is subscribed to the foregoing instrument, appeared
before me this day in person and acknowledged that he signed, sealed and
delivered the instrument as his free and voluntary act for the uses and purposes
therein set forth.
<PAGE>
Given under my hand and Notarial Seal this 5th day of December, 1995.
/s/ Cynthia A. Villaune
- -------------------------------
Notary Public
<PAGE>
EXHIBIT 10.5
[LETTERHEAD OF NIKKO]
Preferred Credit Corporation
3347 Michelson Drive, Suite 400
Irvine, California 92612
Attention: Li-Lin Ko ,Chief Financial Officer
Telephone: (714)474-0700
Facsimile: (714)253-9845 June 13,1997
Gentlemen:
This Commitment Letter confirms our agreement between Preferred Credit
Corporation ("Customer") and Nikko Financial Services, Inc. ("Nikko") pursuant
to which Nikko shall provide committed financing collateralized by eligible
Mortgage Loans in accordance with the terms and conditions hereof and as set
forth in the Residential Mortgage Financing Facility and the Promissory Note,
dated as of June 13, and the Tri-Party Custody Agreement(s) executed by Customer
related thereto (collectively, the "Agreements"). Capitalized terms not defined
herein shall have the meanings ascribed to them in the Agreements.
In the event of a conflict between the terms of this Commitment Letter and the
terms of the Agreements, the terms of this Commitment Letter shall control.
Subject to the terms and conditions of the Agreements and the Commitment Letter,
Nikko hereby commits to:
1. Provide a revolving credit line to Customer for 1 to 4 family residential
second lien (or better) Mortgage Loans which, will have an LTV (when combined
with the LTV of the First Mortgage) less than or equal to 125% ("125 Mortgage
Loans") until June 30,1998 ( the" Expiration Date") as follows:
(a) $ 150,000,000 for 125 Mortgage Loans with the Required Documents
delivered to Custodian in accordance with terms of the Agreements ("125
Mortgage Transactions").
provided, however, that:
(i) all Mortgage Loans shall have an underwritten FICO score in excess of
620;
(ii) all Mortgage Loans shall be eligible for securitzation under the
current applicable rating-agency standards and shall be underwritten in
accordance with the underwriting guidelines previously submitted to,
and approved by, Nikko;
<PAGE>
(iii) the total of all Advances involving Mortgage Loans with respect to
which the Required Documents have not yet been delivered, but which
shall be delivered, to Custodian in accordance with Section 9(b) of the
Custody Agreement ("Wet Transaction"), shall not exceed $ 15,000,000.
2. Maintain an Advance Rate per annum as follows:
(a) 175 basis points over LIBOR of comparable maturity for any 125 Mortgage
Transaction and;
(b) 200 basis points over LIBOR of comparable maturity for any Wet
Transaction;
provided, however, that (i) for purposes of the foregoing, "LIBOR" shall
mean the London Inter-Bank Offered Rate, as quoted from time to time, by
Nikko in good faith, and (ii) Nikko may charge Customer for any related
daylight overdraft charge at the rate imposed on Nikko, if any.
Customer commits to:
1. With respect to each Advance, provide to Nikko, when such Advance is made
and thereafter on a daily mark to market basis, Collateral equal to 102% of
each such Advance related to a 125 Mortgage Transaction (i.e., at any time
an Advance is made or shall be outstanding, such Advance shall not exceed
98% of the Collateral Value of the items of Collateral included in the Trust
Receipt).
2. Pay Nikko on the first day of each month or of the month following the
expiration or termination of the Commitment, a Non-usage Fee, if the average
daily principal balance of all Advances outstanding during the immediately
preceding calendar month is less than $100 million. Such Non-usage Fee shall
be calculated by multiplying (a) the amount representing the difference
between $100 million and the average daily outstanding principal balance of
all Advances for the relevant month by (b) 25 basis points, and dividing
such product by 12;
3. Provide evidence to Nikko that Customer has, and will continue to maintain,
insurance coverage for itself and its subsidiaries that encompasses employee
dishonesty, forgery or alteration, theft, disappearance and destruction,
robbery and safe burglary, property (other than money and securities), and
computer fraud in an aggregate amount of at least $1,000,000 and shall
include Nikko Financial Services, Inc. as a Loss Payee; and
4. Notify Nikko of its intent to borrow under an Advance at least 1 Business
Day prior to such Advance.
5. Provide Nikko or its designees with such data regarding the Mortgage Loans
as requested by Nikko which data shall be in computer-readable form
acceptable to Nikko.
Nikko shall have the right to terminate this Commitment Letter, and Nikko shall
no longer be obligated to make Advances under this Commitment and may accelerate
the maturity dates of all Advances then outstanding, upon the occurrence of a
Commitment Letter Termination Event. Upon such termination, Nikko shall have no
obligation to return any fees collected and may exercise any right or remedy
available to it in the Agreements or at law. A Commitment Letter Termination
Event shall include any one or more of the following:
1. an "Event of Default" shall have occurred under any of the Agreements.
2. Any litigation or proceeding affecting Customer or its subsidiaries that is
likely to be adversely determined and which, if adversely determined, could
have a material adverse effect on the Collateral or the ability of Customer
to pay and perform on the Obligations.
3. Customer consolidates or amalgamates with, or merges into or transfers all
or substantially all its assets to another entity and, at the time of such
consolidation, amalgamation, merger or transfer:
2
<PAGE>
(a) the resulting, surviving or transferee entity fails to assume all the
obligations of Customer and its subsidiaries under this Commitment
Letter and the Agreements by operation of law or pursuant to an
agreement satisfactory to Nikko; or
(b) the benefits of any guarantee, support letter or "keep well" letter
relating to this Commitment Letter or the transactions herein
contemplated fail to extend to the performance by such resulting,
surviving or transferee entity of its obligations under this Commitment
Letter.
4. Financial Condition
(a) A change in Customer's business, operations or financial condition that
would materially and adversely affect the ability of Customer to
perform its obligations under this Commitment Letter and the Agreements
as determined in good faith by Nikko;
(b) GAAP Net Worth is less than $ 17 million;
(c) Customer's Adjusted Net Worth is less than $ 17 million. With respect
to the foregoing, "Adjusted Net Worth" shall mean, at any date, the sum
of Tangible Net Worth plus 1% of the aggregate outstanding principal
balance of all 1 to 4 family residential mortgage loans in Customer's
servicing portfolio, if any. "Tangible Net Worth" shall mean the excess
of total assets over total debt determined in accordance with GAAP but
shall exclude all assets (other than deferred commitment fees) which
would be classified as intangible assets under GAAP (e.g., purchased
and capitalized value of servicing rights, excess servicing fees,
goodwill, and deferred charges including, without limitation,
unamortized debt discount and expense, and organization costs).
(d) As of any date Customer's ratio of current assets to current
liabilities is less than 1.05:1; provided,however, that "current
assets" shall include residual securities at the then current market
value.
(e) Customer experiences three (3) consecutive quarterly losses;
(f) Customer, directly or indirectly, engages in any business other than
the mortgage banking business;
(g) Customer uses the proceeds of the Advances for any purpose other than
to fund the related Mortgage Loans;
(h) Customer sells any asset other than in its ordinary course of its
business; and
(i) Customer guarantees the debt obligation of any other entity.
5. Financial Statements:
(a) Customer shall fail to deliver to Nikko within 90 days after the last
day of its fiscal year, its audited consolidated statement of income
and statement of changes in cash flow for such year and balance sheet
as of the end of such year in each case presented fairly in accordance
with GAAP and the requirements of HUD Handbook IG 4000.3 REV and
accompanied, in all cases, by an unqualified report of a firm of
independent certified public accountants acceptable to Nikko.
(b) Customer shall fail to deliver to Nikko within 60 days after the last
day of each of the first three fiscal quarters in any fiscal year of
Customer, its consolidated statement of income and statement of changes
in cash flow for such quarter and balance sheet as of the end of such
quarter presented fairly in accordance with GAAP.
(c) Customer shall fail to deliver to Nikko within 30 days after the last
day of each calendar month in any fiscal year of Customer, (i) its
consolidated statement of income for such month and balance sheet as of
the end of such month accompanied in each case by a certificate of the
chief financial officer or treasurer of Customer stating that such
financial statements are presented fairly in accordance with GAAP and
the requirements of HUD Handbook IG 4000.3 REV and (ii) an officer's
certificate from its chief financial officer or treasurer certifying
that there does not exist an event of default in the Agreements.
3
<PAGE>
(d) Customer shall fail to deliver to Nikko as soon as available copies of
all proxy statements, financial statements, and reports which Customer
sends to its stockholders, and copies of all regular, periodic and
special reports, and all registration statements under the Securities
Act of 1933, as amended, which it files with the Securities and
Exchange Commission or any governmental authority which may be
substituted therefor, or with any national securities exchange.
(e) Customer shall fail to deliver to Nikko as soon as the same are
available, copies of all regular, periodic and special audit reports
conducted by GNMA, FNMA and/or FHLMC with respect to Customer's
operations.
6. There occurs a catastrophic event or events resulting in the effective
absence of a "repo market" for a period of at least 30 consecutive days
respecting mortgage loans and such event results in Nikko not being able to
finance any Advance through the repo market with Nikko's traditional repo
counterparties. Upon the occurrence of such an event, Customer shall not be
obligated to make any further payments of Commitment Fees or Non-usage Fees
Customer hereby represents, warrants and covenants that Nikko is not, and will
not, be Customer's sole source of funding of its business, and that it has not
and will not guarantee any debt obligation of any entity without the express
written consent of Nikko. Customer agrees to immediately notify Nikko upon any
intent to effect any change in ownership of Customer.
Please acknowledge your agreement to the foregoing by signing and returning the
enclosed duplicate of this letter, whereby this Commitment Letter shall become a
binding agreement between Nikko and Customer.
Sincerely,
Nikko Financial Services, Inc.
BY: /s/ Roddy Ennico
----------------------------
NAME: Rod Ennico
--------------------------
TITLE: Managing Director
-------------------------
AGREED AND ACCEPTED
Preferred Credit Corporation
BY: /s/ Todd Rodriquez
----------------------------
NAME: Todd Rodriquez
--------------------------
TITLE: C.E.O.
-------------------------
<PAGE>
EXHIBIT 10.6
RESIDENTIAL MORTGAGE FINANCING FACILITY
RESIDENTIAL MORTGAGE FINANCING FACILITY, dated June 13, 1997, between Nikko
Financial Services, Inc., on behalf of itself and holders from time to time of
interests in the Promissory Note ("Nikko"), and Preferred Credit Corporation
("Customer" or "you").
Nikko may, from time to time, provide you with advances (individually, an
"Advance", and collectively, "Advances") secured by Mortgage Loans on the terms
set forth in the Program Documents. Such Advances, together with all your other
Obligations shall be secured by a grant of security interest in the Collateral.
In addition, you also agree to enter into the Custody Agreement, pursuant to
which certain documents relating to the Collateral, as specifically provided in
the Custody Agreement ("Required Documents"), will be deposited with, and held
by, Custodian.
1. DEFINITIONS. Capitalized terms and phrases used herein shall have the
-----------
following meanings:
"Agency" means any of the Government National Mortgage Association ("GNMA"), the
------
Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC").
"Agency Securities" means securities or certificates issued or guaranteed by
-----------------
GNMA, FNMA or FHLMC.
"Authorized Purchaser" means any bona fide purchaser acceptable to Nikko in its
--------------------
sole discretion.
"Business Day" means any day other than a Saturday, Sunday or a public or bank
------------
holiday in New York City.
"Collateral" shall have the meaning ascribed to it in the Promissory Note.
----------
"Collateral Receipt" means a document duly executed by you with respect to each
------------------
delivery of Mortgage Loan documents to Custodian in the form attached to the
Custody Agreement.
"Collateral Value" means the lesser of the Market Value or the unpaid principal
----------------
amount of an item of Collateral.
"Custodian" means each entity acting as bailee of and agent for Nikko with
---------
respect to any item of Collateral.
"Custody Agreement" means each Tri-Party Custody Agreement, as amended, among
-----------------
you, Nikko and a Custodian, with respect to any Collateral.
"Default" means any event that, with the giving of notice or the lapse of time
-------
or both, would constitute an Event of Default.
"Event of Default" shall have the meaning ascribed to it in the Promissory Note.
----------------
"Facility" means this Residential Mortgage Financing Facility, as amended from
--------
time to time.
"FHA/VA Commitments" means a commitment issued by the Federal Housing
------------------
Administration ("FHA") or the Department of Veterans Affairs ("VA") to insure or
guarantee a Mortgage Loan.
"FICO Score" means the credit evaluation score as developed by Fair, Issac and
----------
Company, or its equivalent as developed by a nationally recognized rating
company.
"Good Delivery" shall have the meaning ascribed to such term in the PSA Guide in
-------------
connection with the standard requirements for the delivery and settlement of an
Agency Security.
"LTV" means the ratio of the outstanding principal balance of the mortgage loan
---
to the appraised value of the mortgage property on the date of determination.
"Market Value" means the market bid price obtainable for an item of Collateral,
------------
as reasonably determined by Nikko.
"Mortgage Note" means the note or other evidence of an obligor made under a
-------------
Mortgage Loan together with all riders thereto and amendments thereof.
1
<PAGE>
"Mortgage" means a mortgage, deed of trust, deed to secured debt or other
--------
instrument creating a first or second lien on an estate in fee simple interest
on real property securing a Mortgage Note.
"Mortgage Loan" means a first or second 1-to-4 family residential mortgage loan
-------------
(a) eligible and intended to secure or underlie Agency Securities or eligible
and intended for purchase by an Agency ("Agency Mortgage Loan") or (b) intended
to be purchased for cash by an Authorized Purchaser ("Nonagency Mortgage Loan").
"NSI" means The Nikko Securities Co. International, Inc.
---
"125 Mortgage Loan" means a Second Mortgage (or better) wherein the combined
-----------------
loan-to-value of the first mortgage and the second mortgage shall not be more
than 125% of the appraised value of the mortgage property.
"Obligations" means (a) all of your indebtedness, obligations and liabilities
-----------
(including without limitation, guarantees and other contingent liabilities) to
Nikko, its affiliates or Custodian arising under, or in connection with, the
Program Documents or any other related document, whether now existing or
hereafter arising, including without limitation each Advance made or to be made
together with interest and other amounts due under the Program Documents
(including without limitation interest and other amounts accruing after the
commencement of a proceeding of the type described in Section 6(e) or 6(f) of
the Promissory Note); (b) any and all sums paid by Nikko or on behalf of Nikko
in order to preserve or protect the Collateral or its security interest therein
and lien thereon; (c) in the event of any proceeding for the collection or
enforcement of any of your indebtedness, obligations or liabilities referred to
in clause (a) the reasonable expenses of retaking, holding, collecting,
preparing for sale, selling or otherwise disposing of or realizing on the
Collateral, or of any exercise by Nikko of its rights under the Program
Documents, including without limitation reasonable attorneys' fees and
disbursements and court costs; and (d) all of your indemnity obligations to
Nikko or Custodian pursuant to the Program Documents.
"Program Documents" means this Facility, the Promissory Note, each Custody
-----------------
Agreement, each Collateral Receipt and each Trust Receipt, in each case as
amended, modified or supplemented with Nikko's written consent.
"Promissory Note" means the Promissory Note executed by you substantially in the
---------------
form attached hereto.
"PSA Guide" means The Uniform Practices for the Clearance and Settlement of
---------
Mortgage-Backed Securities and Other Related Securities, published (and
periodically updated as supplemented) by the Public Securities Association
("PSA").
"Purchase Commitment" means an obligation of (i) a bona fide purchaser to
-------------------
purchase an Agency Security or (ii) an Authorized Purchaser to purchase
specified Mortgage Loans, in each case at a specific price and on or by a
specific date.
"Second Mortgage" means those mortgages which constitute a second lien on the
---------------
real property securing the related Mortgage Note.
"Servicing Records" means all servicing records, including but not limited to
-----------------
any and all servicing agreements, subservicing agreements, custodial agreements,
files, documents, records, data bases, customer lists, computer software,
computer tapes, copies of computer tapes, proof of insurance coverage, insurance
policies, appraisals, other closing documentation, payment history records, and
any other data and records relating to or evidencing the servicing of the
Mortgage Loans described in each Collateral Receipt, whether or not any of the
foregoing constitute trade secrets.
"Trust Receipt" shall have the meaning ascribed to it in the Custody Agreement.
-------------
2. THE ADVANCES. Nikko agrees to consider from time to time your requests that
------------
Nikko make Advances to you in an aggregate principal amount outstanding at any
one time not to exceed the maximum stated principal amount of the Promissory
Note (the "Maximum Credit"). Unless otherwise agreed in writing by Nikko, this
Facility is not a commitment to lend, but rather this Facility sets forth the
procedures to be used in connection with periodic requests for Advances. You
hereby acknowledge that Nikko is under no obligation to make any Advance
pursuant to this Facility. In deciding whether to make any Advance, and whether
to demand payment of any Advance previously made or exercise any other right or
remedy hereunder or under the other Program Documents, Nikko shall exercise its
sole and absolute discretion, without any obligation (expressed or implied) to
act in good faith. All Advances made by Nikko hereunder shall be evidenced by
the Promissory Note. The Promissory Note shall be dated the date of issue, and
the stated principal amount shall be equal to the Maximum Credit. Interest in
respect thereof shall be payable only for the periods during which the Advances
evidenced thereby are outstanding.
2
<PAGE>
3. MAKING THE ADVANCES. (a) On any day you desire to borrow funds from Nikko
-------------------
under this Facility, you shall notify Nikko that you wish to borrow money on a
specified date and in a specified principal amount.
(b) Upon receipt of your request for an Advance, Nikko may make an offer to you
specifying the terms under which Nikko would be willing to make such Advance,
including the interest rate per annum (the "Advance Rate") to be paid by you in
respect of such Advance. You shall immediately notify Nikko as to whether or
not you elect to borrow such an Advance under such terms. Each such oral or
written election by you (an "Election to Borrow") may be made by a person
believed by Nikko to be authorized to borrow on your behalf. On the date of
such Advance, as so agreed by you and Nikko, Nikko will make its Advance to you
subject to and upon the satisfaction of the conditions precedent to such Advance
set forth in Section 5 hereof. Promptly thereafter, Nikko will send to you a
written confirmation of such Advance (each, a "Confirmation"), and your
acceptance of the related proceeds shall constitute your agreement to the terms
of such Confirmation.
4. PAYMENT OF PRINCIPAL AND INTEREST. Upon the disbursement of funds with
---------------------------------
respect to each Advance you shall have effected a borrowing from Nikko and shall
be indebted to Nikko for the principal amount thereof, plus interest thereon, in
accordance with the terms of this Facility and the Promissory Note. You shall
repay the principal amount of each Advance made to you and the interest thereon
prior to 12:00 p.m., New York City time on the Maturity Date, as such term is
defined in the Promissory Note. Any funds received by Nikko after 12:00 p.m.
New York City time shall be applied to the repayment of the applicable Advance
on the next succeeding business day but such funds shall earn interest at an
overnight rate of interest established by Nikko.
5. CONDITIONS PRECEDENT.
--------------------
5.1 INITIAL ADVANCE. As conditions precedent to the making of the initial
---------------
Advance, Nikko shall have received on or before the day of such Advance the
following, in form and substance satisfactory to Nikko and duly executed by you:
a) The Program Documents;
b) Evidence that all other actions necessary or, in the opinion of Nikko,
desirable to perfect and protect the security interests and liens created by
the Promissory Note have been taken, including without limitation duly
executed Uniform Commercial Code financing statements on Form UCC-1 with
respect to the Collateral;
c) A certified copy of your corporate resolutions authorizing the execution and
delivery of the Program Documents and borrowings thereunder, and all
documents evidencing other necessary corporate action or governmental
approvals as may be required in connection with the Program Documents;
d) A certificate of your corporate secretary certifying the names, true
signatures and titles of your officers and employees duly authorized to
execute and deliver the Program Documents and to request Advances, and to
make Elections to Borrow hereunder; and
e) A favorable opinion of your counsel, which may be internal counsel, as to
such matters as Nikko may reasonably request.
5.2 EACH ADVANCE. As conditions precedent to making each Advance:
------------
a) Nikko or its designee shall have received An Election to Borrow, the related
Required Documents and the related Trust Receipt, each in form and
substance satisfactory to Nikko;
b) If the Collateral consists of Agency Mortgage Loans, either (a) an assignment
-
by you to NSI of the related Purchase Commitment in form and substance
acceptable to Nikko in its sole discretion, or (b) evidence that you have
-
instructed the relevant Agency to pay the purchase price for such Agency
Mortgage Loans under the related Purchase Commitment directly to Nikko or
its designee, unless otherwise agreed by Nikko;
c) Nikko shall have received all such other documents as it has reasonably
requested; and
d) No Event of Default shall have occurred and be continuing.
5.3 RELEASE OF COLLATERAL. Upon the full satisfaction of all outstanding
---------------------
principal, accrued interest thereon, and all other Obligations owing with
respect to any Advance, if no Default or Event of Default has occurred and is
continuing, but subject to the rights of any holder of a lien on the items of
Collateral of which Nikko has notice, Nikko shall, and shall direct
3
<PAGE>
Custodian to, release the Collateral related to such Advance. Subject to the
provisions of this Section 5.3, on the Maturity Date of each Advance, if
requested by you, Nikko or its designee will deliver against payment any related
Agency Securities being held by it as security for such Advance and apply the
net proceeds received from such sale to the repayment of such Advance .
6. NIKKO ENTITLED TO RELY. In making any Advance or taking any other action
----------------------
pursuant to the Program Documents, Nikko may conclusively rely upon, and shall
incur no liability to you in acting upon, any Election to Borrow, request or
other communication that Nikko believes to have been given or made by a person
authorized to borrow on your behalf, whether or not such person is listed on the
certificate delivered pursuant to Section 5.1(d). In each such case, you
hereby waive the right to dispute Nikko's record of the terms of the Election to
Borrow, request or other communication.
7. REPRESENTATIONS AND WARRANTIES. You, as of the date hereof and as of the
------------------------------
date of each Advance, hereby represent and warrant to Nikko as follows:
7.1 DULY ORGANIZED CORPORATION. You are a corporation duly organized, validly
--------------------------
existing and in good standing under the laws of your jurisdiction of
incorporation, your principal place of business, and you are in compliance with
all applicable laws. You are duly licensed, qualified and in good standing in
every other jurisdiction in which the failure to take such action would have a
material adverse effect on your ability to perform your obligations under the
Mortgage Loans and the Program Documents.
7.2 ENFORCEABILITY. The Program Documents are your legal, valid and binding
--------------
obligations, enforceable against you in accordance with their respective terms.
7.3 APPROVED SELLER/SERVICER. You are an approved seller/servicer or issuer in
------------------------
good standing with each Agency to which Agency Mortgage Loans will be submitted.
7.4 EXECUTION, DELIVERY AND PERFORMANCE. Your execution, delivery and
-----------------------------------
performance of the Program Documents are within your charter and corporate
powers, have been duly authorized by all necessary corporate action, and do not
contravene (i) your charter or bylaws or (ii) any rule, regulation or other law
- --
or other contractual restriction binding on or affecting you or your property.
7.5 GOVERNMENTAL AUTHORITY. Other than the necessary filings with the Agencies
----------------------
regarding the Collateral (to the extent that the Collateral includes Agency
Mortgage Loans), no authorization or approval or other action by, and no notice
to or filing with, any governmental authority or regulatory body is required for
your due execution, delivery and performance of the Program Documents.
7.6 FINANCIAL CONDITION. The available balance sheets, statements of income
-------------------
and changes in financial condition of you and your subsidiaries (the "Financial
Reports") as of your most recently completed fiscal year and quarter, fairly
present your financial condition and results of operations for the period then
ended and are in accordance with generally accepted accounting principles
consistently applied, and copies of such statements, together with the most
recent opinion with respect to such statements of an independent public
accounting firm, have been provided to Nikko, and since such date there has been
no material adverse change in such financial condition, operations or business
prospects.
7.7 NO PENDING LITIGATION. There is no pending or threatened action or
---------------------
proceeding affecting you or any of your subsidiaries or your parent, if any,
before any court, governmental agency or arbitrator that may materially and
adversely affect the financial condition, operations or business prospects of
you or any of your subsidiaries.
7.8 COLLATERAL VALUE. Unless otherwise agreed, at any time any Advance is made
----------------
or shall be outstanding, such Advance shall not exceed 95% of the Collateral
Value of the items of Collateral included in the Trust Receipt related to such
Advance. Notwithstanding the foregoing, Nikko and you may agree upon such other
percentage for purposes of determining Collateral Value for any particular
Advance.
7.9 NO FRAUD. The Program Documents are not entered into in contemplation of
--------
insolvency or with any intent to hinder, delay or defraud any of your creditors.
7.10 ACCEPTABLE COLLATERAL. Unless otherwise agreed in writing by Nikko, only
---------------------
Mortgage Loans as indicated in the applicable Custody Agreement shall constitute
Collateral acceptable to Nikko for purposes of obtaining an Advance.
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<PAGE>
7.11 OWNERSHIP OF COLLATERAL; NO ENCUMBRANCE. You are the sole legal and
---------------------------------------
equitable owner and holder of the Collateral, free and clear of all security
interests, liens, pledges, participation interests or other encumbrances
whatsoever, except (i) the security interests and liens granted hereunder, (ii)
- --
if payment by Nikko of any Advance hereunder will satisfy any existing security
interest, lien or other encumbrance on the Collateral related to such Advance,
and (iii) with respect to Mortgage Loans that are secured by Second Mortgages,
---
the first lien on the related mortgaged property. All Agency Securities, FHA/VA
Commitments and Purchase Commitments have been or will be duly authorized and
validly issued, and all Mortgage Loans that are part of the Collateral are duly
and validly originated by or conveyed to you. All of the items of Collateral
(a) comply with all of the requirements of this Facility and (b) have been duly
- -
and validly pledged or assigned to Nikko in such a manner that Nikko's first
priority security interest therein is fully perfected.
7.12 AUTHORITY TO PLEDGE COLLATERAL. You have and will continue to have, the
------------------------------
full right, power and authority to grant to Nikko a first priority perfected
security interest in the Collateral.
7.13 CONFORMITY; ELIGIBILITY. (a) All Agency Mortgage Loans, Required
-----------------------
Documents applicable thereto and related Purchase Commitments conform to the
requirements for submission to the relevant Agency, and you have furnished to
Custodian all mortgage documents required to be submitted to the relevant Agency
or Custodian in connection with the issuance of the Agency Securities or the
cash purchase of the Agency Mortgage Loans by the relevant Agency.
(b) All Nonagency Mortgage Loans, Required Documents applicable thereto and
Purchase Commitments conform to the underwriting requirements of the
relevant Authorized Purchaser.
7.14 MORTGAGE LOANS. (a) Each Agency Mortgage Loan and, to the extent a
--------------
Purchase Commitment is in effect with respect thereto, each Nonagency Mortgage
Loan meets all of the following requirements as of the date delivered to
Custodian, and except for (viii) below, continuously while it is part of the
Collateral:
(i) It is eligible, and in the form required, for securitization or purchase
under the relevant Agency program or by the relevant Authorized Purchaser.
It is a bona fide Mortgage Loan of the type that it purports to be, made to
one or more borrowers each having substantially the credit standing he or
she is represented to have;
(ii) Except with respect to any Mortgage Loan secured by a Second Mortgage, it
has been fully advanced in the face amount thereof;
(iii) It is and will be secured by a valid and enforceable "first lien" (as
customarily referred to in the industry), except that with respect to Mortgage
Loans that are secured by Second Mortgages, it is and will be secured by a valid
and enforceable "second lien", in each case upon an existing site-built
residential real property of the type represented to secure the loan, having
substantially the value represented in the appraisal;
(iv) The documents related thereto have been duly executed and delivered by the
parties thereto;
(v) It has been made in compliance with all applicable laws, regulations,
rules, directives and orders of all governmental authorities, including all
requirements of the Real Estate Settlement Procedures Act and the Federal
Truth-In-Lending Act;
(vi) The promissory note, mortgage or deed of trust and all other documents
related to the Mortgage Loan are and will be valid and enforceable in
accordance with their terms, without defense, offset or right of
rescission, and have not been and will not be modified or amended nor any
requirements thereof waived, and the assignment of mortgage is in
recordable form and is acceptable for recording under the laws of the
jurisdiction in which the mortgaged property is located;
(vii) Any private mortgage insurance with respect to such loan is by a company
of recognized standing acceptable to the relevant Agency or Authorized Purchaser
at the time that such loan was originated and at the time that the respective
Advance is made;
(viii) No default, nor any event that, with notice or lapse of time or both,
would become a default, has occurred and is continuing under any such Mortgage
Loan. With respect to Mortgage Loans that are secured by Second Mortgages, no
default, nor any event that, with notice or lapse to time or both, would become
a default, has occurred and is continuing under the first lien;
(ix) With respect to each Mortgage Loan that is secured by a Second Mortgage, it
was originated and has been serviced in compliance with all applicable
federal, state and local laws regarding Mortgage Loans secured by second
liens;
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<PAGE>
(x) With respect to each Mortgage Loan that is secured by a Second Mortgage,
you have the right to cure any default with respect to the mortgage loan
that constitutes the first lien;
(xi) Each Wet Mortgage Loan conforms in all respects to the description thereof
set forth on the related Wet Closing Notice (as such terms are defined in
the Custody Agreement), and you will perform, and you have no reason to
believe that you will be unable to perform, your obligation to deliver to
Custodian within the time period agreed to in the Custody Agreement the
documents required to be delivered with respect thereto; and
(xii) The mortgaged property is free from any and all toxic or hazardous
substances and there exists no violation of any local, state or federal
environmental law, rule or regulation.
(b) Each Mortgage Loan, to the extent no Purchase Commitment is in effect with
respect thereto, meets all of the representations and warranties set forth
on Appendix A hereto as of the date delivered to Custodian and continuously
while it is a part of the Collateral.
7.15 COMPLIANCE WITH FHA/VA REQUIREMENTS. Each Mortgage Loan that is
-----------------------------------
designated by you as being insured by the FHA or partially guaranteed by the VA
has complied and will comply with all laws, rules and regulations with respect
to such insurance or guaranty, and such insurance or guaranty is, or will be, in
full force and effect.
7.16 INSURANCE POLICIES IN EFFECT. Except with respect to 125 Mortgages, each
----------------------------
fire and casualty insurance policy covering each of the premises securing a
Mortgage Loan that is a part of the Collateral:
(a) Affords and will afford sufficient insurance against fire and such other
risks as are usually insured against in the broad form of extended coverage
insurance from time to time available, as well as insurance against flood
hazards if the same is required by (i) the FHA, the VA or the relevant Agency or
-
(ii) the relevant Authorized Purchaser;
--
(b) Is a standard policy of insurance for the locale where the premises are
located; is in full force and effect; and the amount of the insurance is in the
amount of the full insurable value of the premises on a replacement cost basis
or the unpaid principal balance of the Mortgage Loan, whichever is less;
(c) Names and will name the present owner of the premises as the insured; and
(d) Contains a standard mortgagee loss payable clause in favor of the servicer
of the loan.
7.17 PURCHASE COMMITMENTS. All Purchase Commitments that are part of the
--------------------
Collateral are valid and enforceable obligations and have been approved by all
necessary authorities.
8. COVENANTS OF CUSTOMER.
---------------------
8.1 DEFENSE OF TITLE. You warrant and will defend the right, title and
----------------
interest of Nikko in and to all Collateral against all adverse claims and
demands.
8.2 NO AMENDMENT OR COMPROMISE. Without Nikko's prior consent, you and those
--------------------------
acting on your behalf shall not amend, modify or waive any term or condition of,
or settle or compromise any claim in respect of, any item of Collateral or any
related rights.
8.3 NO ASSIGNMENT. You shall not sell, assign, transfer or otherwise dispose
-------------
of, or grant any option with respect to, or pledge, hypothecate or grant a
security interest in or lien on or otherwise encumber (except pursuant to this
Facility), any of the Collateral or any interest therein, provided that this
section shall not prevent any transfer of Collateral in accordance with this
Facility and/or the Custody Agreement.
8.4 SERVICING OF MORTGAGES. (a) You shall service, or cause to be serviced,
----------------------
all Mortgage Loans that are part of the Collateral in accordance with the
standard industry practices, employing at least the same procedures and
exercising the same care that it customarily employs in servicing Mortgage Loans
for its own account, and in accordance with all applicable requirements of the
relevant Agency or Authorized Purchaser. You shall notify or cause to be
notified all servicers of Nikko's interest hereunder. You shall notify Nikko of
the name and address of all servicers. Nikko shall have the right to approve
each servicer and the form of all servicing agreements. You shall hold or cause
to be held all escrow funds collected with respect to such Mortgage Loans in
trust accounts and shall apply the same for the purposes for which such funds
were collected.
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<PAGE>
(b) Upon Nikko's request, you shall provide to Nikko a letter addressed to each
servicer of Mortgage Loans (the "Servicer Letters"), in form and substance
reasonably satisfactory to Nikko, advising such servicer of Nikko's security
interest in the Collateral and such other matters as Nikko may reasonably
request.
(c) If you should discover that, for any reason whatsoever, you or any entity
responsible to you by contract for managing or servicing any such Mortgage Loan
has failed to perform fully your obligations under the Program Documents or any
of the obligations of such entities with respect to the Collateral, you shall
promptly so notify Nikko.
8.5 PRESERVATION OF COLLATERAL; COLLATERAL VALUE. (a) You shall do all things
--------------------------------------------
necessary to preserve the Collateral so that it remains effective security
hereunder. Without limiting the foregoing, you will, in your dealings with the
Collateral, comply with all rules, regulations and other laws of any
governmental authority and cause the Collateral to comply with all applicable
rules, regulations and other laws. You will not allow any default for which you
are responsible to occur under any Collateral, and you shall fully perform or
cause to be performed when due all of your obligations under any Collateral.
(b) To the extent that a deficiency in the Collateral Value (determined in
accordance with Section 7.8) exists, you shall immediately cure any such
deficiency by delivering cash, securities or other additional Collateral
acceptable to Nikko.
8.6 MAINTENANCE OF PAPERS, RECORDS AND FILES. (a) You shall acquire and you or
----------------------------------------
your servicer shall build, maintain and have available a complete file in
accordance with industry custom and practice for each Mortgage Loan that is part
of the Collateral. You or your servicer will maintain all such papers, records
and files not in the possession of Custodian in good and complete condition in
accordance with industry practices and preserve them against loss.
(b) You shall collect and maintain or cause to be collected and maintained all
papers, records and files relating to the Collateral in accordance with industry
custom and practice, including those maintained pursuant to subparagraph (a)
above, and all such materials shall be in Custodian's or your possession unless
Nikko otherwise approves. You will not allow any such papers, records or files
that are an original or an only copy to leave your or Custodian's possession,
except for individual items removed in connection with servicing a specific
Mortgage Loan, in which event you will obtain or cause to be obtained a receipt
from a financially responsible person for any such paper, record or file.
(c) For so long as Nikko has a security interest in or lien on any Collateral,
you will hold or cause to be held any paper, record or file related to the
Collateral in trust for Nikko. You shall notify every other party holding any
such paper, record or file of the security interests and liens granted hereby.
(d) Upon reasonable advance notice from Custodian or Nikko, and during regular
business hours, you shall make any and all such papers, records or files
available to Custodian or Nikko to examine any such papers, records and files,
either by its own officers or employees, or by agents or contractors, or both,
and make copies of all or any portion thereof.
8.7 PRESERVATION AND PERFECTION OF SECURITY INTEREST. You shall execute and
------------------------------------------------
deliver such further instruments and shall do and perform all matters and things
necessary or expedient to be done or observed for the purpose of effectively
treating, perfecting, maintaining and preserving the security interests, liens
and other benefits intended to be afforded by this Facility. This shall
include, upon request of Nikko, the delivery of documents to Custodian, or
additional filings and recordations with governmental authorities.
8.8 STAMP. You shall, upon request of Nikko, stamp on its records concerning
-----
the Collateral or a portion thereof a notation, in form and substance
satisfactory to Nikko, of the security interest and lien of Nikko hereunder.
8.9 FINANCIAL REPORTS. You shall provide your Financial Reports to Nikko for
-----------------
each fiscal year and quarter that this Facility remains in effect.
8.10 ADDITIONAL RIGHTS OF NIKKO. Upon the occurrence of an Event of Default,
--------------------------
Nikko, at its option, shall have the right to do, or to request Custodian to do,
any or all of the following, and upon a request therefor by Nikko, you agree to
cooperate with Nikko and Custodian, as the case may be, to accomplish such
request:
(a) Nikko or, at its direction, Nikko's designee may take possession of all
original papers, records and files relating to the Collateral. In Custodian's
discretion, Custodian shall move such records and files to a location acceptable
to and under the control of Custodian.
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<PAGE>
(b) You will instruct all persons servicing the Mortgage Loans that are part of
the Collateral to take instructions from and make all reports to Custodian for
your account. If Nikko so desires, you will change the servicer for any such
Mortgage Loans to a company acceptable to Nikko.
(c) You shall cause all sums received with respect to the Collateral to be
deposited with Custodian.
8.11 SUBSTITUTE PROMISSORY NOTES. At any time, upon the request of Nikko or
---------------------------
its designee, you will exchange your original Promissory Note for two or more
substitute promissory notes (the "Substitute Promissory Notes"), each of which
will be in substantially the form of the original Promissory Note and, in such
amount, and secured by such Collateral, as may be specified by Nikko or its
designee, provided that the aggregate amount due under all such Substitute
--------
Promissory Notes shall equal the amount due under the original Promissory Note.
Upon such execution and delivery each Substitute Promissory Note will be deemed
to be a Promissory Note for all purposes under this Facility and the other
Program Documents.
8.12 NIKKO APPOINTED ATTORNEY-IN-FACT. Upon the occurrence of an Event of
--------------------------------
Default, Nikko is hereby appointed your attorney-in-fact for the purpose of
carrying out the provisions hereof and taking any action and executing any
instruments that Nikko may deem necessary or advisable to accomplish the
purposes hereof, which appointment is irrevocable and coupled with an interest.
Without limiting the generality of the foregoing, Nikko shall have the right and
power to receive, endorse and collect all checks made payable to the order of
you representing any payment on account of the Collateral and to give full
discharge for the same.
9. DEFAULTS - RIGHTS AND REMEDIES.
------------------------------
9.1 REMEDIES. (a) Upon the occurrence of an Event of Default, Nikko, at its
--------
option, in addition to its rights and remedies under the Promissory Note, shall
have any or all of the following rights and remedies, which may be exercised by
Nikko or by Custodian in accordance with the instructions of Nikko:
(i) Nikko may cause the disposition of all or any portion of the Collateral to
be conducted immediately upon the occurrence of an Event of Default or upon
the expiration of any period of delay or notice required by law. Should
Nikko decide to conduct more than one such sale or disposition, Nikko may
at its option cause the same to be conducted simultaneously or successively
on the same day or upon such different days or at such different times and
in such order as Nikko may deem to be in the best interests of the holders
of interests in the Promissory Note. You hereby waive, to the fullest
extent permitted by law, any prejudice resulting to it from any such
decision.
(ii) Nikko shall have the right to sell the Collateral in one or more lots, at
one or more times, at such place or places, at public or private sales and
with or without notice of any kind, as Nikko may elect, at such prices and
on such terms, as to cash or credit, as Nikko may deem proper. However,
notwithstanding any provision of this Facility to the contrary, two (2)
Business Days' notice of all sales of all or any portion of the Collateral
shall be given to you. Nikko shall have the right to become a purchaser at
any such sale that is open to the public and to apply all unpaid
Obligations toward the purchase price of all or any portion of the
Collateral sold to Nikko. If notice is given of public sale, it is agreed
that notice shall be satisfactorily given if such notice is published at
least once in The Wall Street Journal not less than two (2) Business Days
-----------------------
prior to such sale. The foregoing notice provisions shall not preclude
Nikko's rights to foreclose upon the Collateral in any other manner
permitted under the Uniform Commercial Code as in effect in the applicable
jurisdiction. However, a sale of the Collateral in accordance with such
notice requirements shall be deemed a disposal of the Collateral in a
commercially reasonable manner. Nikko shall have the right to sell the
Collateral, or to foreclose, sue upon or otherwise seek to enforce with
respect thereto in its own name or in the name of either Custodian or you.
Subject to the foregoing provisions of this paragraph, if an Event of
Default shall have occurred and be continuing, Nikko shall have the right
to renew, extend the time of payment of or otherwise modify, amend,
supplement, settle or compromise in any manner any obligations for the
payment of money included in the Collateral, any security therefor and any
other agreements, instruments, claims or chooses in action of any kind,
that may be included in the Collateral. In view of the nature of the
Collateral, the parties agree that liquidation of the Collateral does not
require a public sale and that one or more good faith private sales,
including such private sales at which Nikko shall have the right to become
a purchaser, is a commercially reasonable disposition of the Collateral.
(iii) Nikko, or upon its direction Custodian, may take possession of all or any
portion of the Collateral that is not already in its or Custodian's possession,
and you agree to assemble and make available the Collateral to Nikko at a
convenient location. Nikko, acting through Custodian if it so desires, may
manage and protect the Collateral, do any acts that Nikko deems proper to
protect the Collateral as security hereunder, and sue upon any contract or claim
relating to the Collateral and receive any payments due thereon or any damages
thereunder, and apply all sums received to the payment of the Obligations in
accordance with the same order of priorities as set forth in Section 9.3 hereof.
Any such actions of Nikko or Custodian shall not, absent written ratification by
Nikko, be deemed to impose upon Nikko or Custodian any of your obligations under
any contracts.
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<PAGE>
(iv) Nikko may direct the servicers to take such action with respect to the
Collateral as Nikko determines is appropriate.
(b) Upon the occurrence of an Event of Default, Nikko shall, without regard to
the adequacy of the security for the Obligations, be entitled to the appointment
of a receiver by any court having jurisdiction, without notice, to take
possession of and protect, collect, manage, liquidate, and sell the Collateral
or any portion thereof, collect the payments due with respect to the Collateral
or any portion thereof, and do anything that Nikko or Custodian is authorized
hereunder to do. You shall pay all costs and expenses incurred by Nikko in
connection with the appointment and activities of such receiver.
(c) Upon the occurrence of an Event of Default, Nikko may enforce its rights and
remedies hereunder without prior judicial process or hearing, and you hereby
expressly waive, to the extent permitted by law, any right you might otherwise
have to require Nikko to enforce its rights by judicial process. You also
waive, to the extent permitted by law, any defense you might otherwise have to
the Obligations arising from use of nonjudicial process, enforcement and sale of
all or any portion of the Collateral or from any other election of remedies.
You recognize that nonjudicial remedies are consistent with the usages of the
trade, are responsive to commercial necessity and are the result of a bargain at
arm's length.
(d) Notwithstanding the foregoing, upon the occurrence of an Event of Default
described in paragraphs 6(e) and 6(f) of the Promissory Note, Nikko shall have
the right to exercise any of its rights and/or remedies without presentment,
demand, protest or further notice of any kind, all of which are hereby expressly
waived by you.
9.2 DELAY NOT WAIVER; REMEDIES ARE CUMULATIVE. (a) No failure on the part of
-----------------------------------------
Nikko or Custodian to exercise, and no delay in exercising, any right, power or
remedy hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise by Nikko or Custodian of any right, power or remedy hereunder
preclude any other or further exercise thereof or the exercise of any other
right, power or remedy.
(b) All remedies of Nikko or Custodian provided for herein are cumulative and
in addition to any and all other rights and remedies provided by law, the
Program Documents and the other instruments and agreements contemplated hereby
and thereby. Nikko may exercise at any time after the occurrence of an Event of
Default one or more remedies, as it so desires, and may thereafter at any time
and from time to time exercise any other remedy or remedies.
9.3 APPLICATION OF PROCEEDS. The proceeds of any sale or disposition of each
-----------------------
item of the Collateral pursuant to this Section 9 shall be applied as follows:
(a) First, to the payment of the costs and expenses of such sale or
disposition, or any other enforcement action pursuant hereto, including
reasonable attorney's fees (including the allocated expenses of internal counsel
to Nikko and Custodian), and all other expenses incurred in connection
therewith, with a reasonable reserve for any liabilities incurred in connection
therewith and full repayment with interest of all advances made or incurred in
connection therewith;
(b) Second, to the payment in full, in such order as Nikko shall determine, of
(i) the accrued interest on the Advance secured by the item of Collateral sold
-
or otherwise disposed of, (ii) the outstanding principal on the Advance secured
--
by the item of Collateral sold or otherwise disposed of and (iii) all other
---
Obligations due and owing to the holder of such Advance secured by the item of
Collateral sold or otherwise disposed of, whether such holder is Nikko or an
assignee of Nikko;
(c) Third, to the payment in full, in such order as Nikko shall determine, of
(i) the accrued interest on the Promissory Note, (ii) the outstanding principal
- -- --
on the Promissory Note and (iii) all other Obligations; and
---
(d) Finally, to the payment to the person or persons entitled thereto, or as a
court of competent jurisdiction directs.
If the proceeds of any such sale are insufficient to cover the costs and
expenses of such sale, as aforesaid, and the payment in full of the Promissory
Note, including without limitation all Advances thereunder, and all other
Obligations, you shall remain liable for any deficiency.
9.4 REIMBURSEMENT. All sums expended by Nikko or Custodian in connection with
-------------
the exercise of any right or remedy provided for herein shall be and remain your
obligation. At the option of Nikko, all such sums may be paid from the
Collateral, or may be advanced by Nikko or Custodian, in which event they shall
be deemed to have been advanced to you and shall be reimbursed by you to the
party advancing such amount, with interest at the Default Rate until
reimbursement is made. During the continuance of an Event of Default, you
waive, and shall not have, any right to restrict or control the expenditures by
Nikko or Custodian from any cash which constitutes Collateral.
9
<PAGE>
You agree to pay, with interest at the Default Rate, the reasonable out-of-
pocket expenses (including estimated allocated costs for internal counsel) and
reasonable attorneys' fees incurred by Nikko or Custodian in connection with the
administration and enforcement of the Program Documents, the taking of any
action, including legal action, required or permitted to be taken by Nikko or
Custodian pursuant thereto, or in connection with any refinancing or
restructuring in the nature of a "workout".
9.5 INDEMNITY. (a) The powers conferred on Nikko or Custodian hereunder are
---------
solely for their protection and do not impose any duty on them to exercise any
such powers. Following the occurrence of an Event of Default, Nikko and
Custodian shall have no duty of care to you as to any Collateral or with respect
to the taking of any necessary steps to preserve rights against other parties,
or any other obligation pertaining to the Collateral. You, your successors and
assigns, waive all rights whatsoever against Nikko or Custodian for any loss,
expense, liability or damage you may suffer as a result of actions taken
pursuant to the Program Documents, including those arising under any "mortgagee
in possession" or similar doctrine. You agree to indemnify and hold harmless
Nikko and Custodian, and any contractors hired by them and their respective
officers, agents, attorneys and employees, from each and every cost, expense,
loss or other liability resulting from, or arising out of the Program Documents
and all other documents related thereto, and all actions taken pursuant thereto
(including without limitation any action taken by Nikko or Custodian pursuant to
Section 9 hereof), other than those caused by the gross negligence or willful
misconduct of Nikko or Custodian. In addition, you shall compensate and
indemnify Nikko for all reasonable costs, expenses, loss and other liabilities
that Nikko may sustain (i) if any repayment of the principal amount of any
-
Advance, together with interest thereon, is not made prior to 12:00 p.m. New
York City time on the Maturity Date thereof or (ii) in connection with the
--
protection of Nikko's rights under or the enforcement of the Program Documents
or any other document received by Nikko or Custodian in connection therewith.
(b) Without limiting the application of Section 9.5(a), you agree to pay, or
reimburse Nikko and Custodian for all fees and taxes in connection with the
recording or filing of instruments and documents in public offices, payment or
discharge of any taxes or liens upon or in respect of the Collateral and all
other fees, costs and other expenses in connection with protecting, maintaining
or preserving the Collateral and Nikko's interest therein, whether through
judicial proceedings or otherwise, or in defending or prosecuting any actions,
suits or proceedings arising out of or relating to the Collateral.
(c) Your indemnity obligations contained in this Section 9 shall continue in
full force and effect notwithstanding the full payment of the Promissory Note
and all of the other Obligations and notwithstanding the discharge thereof.
9.6 WAIVER OF REDEMPTION AND DEFICIENCY RIGHTS. You hereby expressly waive, to
------------------------------------------
the fullest extent permitted by law, every statute of limitation, any right of
redemption, any moratorium or redemption period, any limitation on a deficiency
judgment, any reduction in the proceeds of any Collateral as a result of
restrictions upon Nikko or Custodian contained in the Program Documents or any
other instrument delivered in connection therewith, and any right that it may
have to direct the order in which any of the Collateral shall be disposed of in
the event of any disposition pursuant hereto.
10. MISCELLANEOUS.
-------------
10.1 NOTICES. All written communications hereunder shall be mailed, telecopied
-------
or delivered at the respective address set forth in the Custody Agreement or at
such other address as shall be designated by a party in a written notice to the
other parties pursuant to the Custody Agreement. All such notices and
communications shall be effective when received by the party, to which such
notice is to be given.
10.2 ENTIRE AGREEMENT. This Facility supersedes and integrates all previous
----------------
negotiations, contracts, agreements and understandings between the parties
relating thereto, and it, together with the other Program Documents and the
other documents delivered pursuant hereto or thereto, contains the entire final
agreement of the parties. No prior negotiation, agreement, understanding or
prior contract shall have any validity hereafter.
10.3 TERMINATION. This Facility shall remain in effect until such time as it
-----------
is terminated by Nikko or you by giving written notice of termination hereof to
the other. However, no such termination shall affect your obligations with
respect to any
10
<PAGE>
Advances outstanding at the time of such termination. Your obligations to
indemnify Nikko pursuant to this Facility shall survive the termination hereof.
10.4 ASSIGNMENT. The Program Documents are not assignable by you. Nikko may
----------
assign, in whole or in part, the Program Documents and its security interest in
and lien on those items of Collateral securing a particular Advance, whether in
conjunction with an assignment of Nikko's interest in the Promissory Note, a
particular Advance thereunder or otherwise. Nothing contained herein shall
preclude Nikko from continuing to exercise all of its rights hereunder for the
benefit of any such assignee of Nikko, and you shall continue to take directions
solely from Nikko unless otherwise notified by Nikko in writing. Nikko may
distribute to any prospective assignee any document or other information
delivered to Nikko by you.
10.5 AMENDMENTS, ETC. No amendment or waiver of any provision of this Facility
---------------
or the Promissory Note nor any consent to any failure to comply herewith or
therewith shall in any event be effective unless the same shall be in writing
and signed by you and Nikko, and then such amendment, waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.
10.6 SEVERABILITY. If any provision of any Program Document is declared
------------
invalid by any court of competent jurisdiction, such invalidity shall not affect
any other provision, and each Program Document shall be enforced to the fullest
extent permitted by law.
10.7 BINDING EFFECT; GOVERNING LAW. This Facility shall be binding and inure
-----------------------------
to the benefit of the parties hereto and their respective successors and
assigns. This Facility shall be construed in accordance with, and governed by,
the law of the State of New York, without giving effect to the conflict of laws
principles thereof.
10.8 CONSENT TO JURISDICTION. You hereby waive trial by jury. You hereby
-----------------------
irrevocably consent to the non-exclusive jurisdiction of any court of the State
of New York, or in the United States District Court for the Southern District of
New York, arising out of or relating to the Program Documents in any action or
proceeding. You hereby submit to, and waive any objection you may have to,
personal jurisdiction and venue in the courts of the State of New York and the
United States District Court for the Southern District of New York, with respect
to any disputes arising out of or relating to the Program Documents.
IN WITNESS WHEREOF, this Facility has been executed by the parties hereto as of
the date first above written.
Preferred Credit Corporation (Customer)
- ----------------------------
By: /s/ Todd A. Rodriguez
-------------------------
Name: Todd A. Rodriguez
Title: C.E.O.
Nikko Financial Services, Inc.
By: /s/ Roddy R. Ennico
-------------------------
Name: Roddy R. Ennico
Title: Managing Director
11
<PAGE>
APPENDIX A
REPRESENTATIONS AND WARRANTIES REGARDING MORTGAGE LOANS WITHOUT A PURCHASE
COMMITMENT
Customer hereby represents and warrants to Nikko its successors and assigns
with respect to each Mortgage Loan that as of the date the Mortgage Loan was
originated and otherwise as set forth in the Program Documents:
a) Mortgage Loans as Described. The information set forth in the Trust Receipt
---------------------------
and the related mortgage loan schedule (the "Mortgage Loan Schedule"), is
complete, true and correct.
b) Payments Current; No Default. All payments required to be made under the
----------------------------
terms of the mortgage note have been made and credited. No payment required
under the Mortgage Loan has been delinquent at any time since the date the
Mortgage Loan was originated. There is no default, breach, violation or event
of acceleration existing under the mortgage or the mortgage note and no event
that, with the passage of time or with notice and the expiration of any grace
or cure period, would constitute a default, breach, violation or event of
acceleration, and neither you nor your predecessors have waived any default,
breach, violation or event of acceleration.
c) No Outstanding Charges. There are no defaults in complying with the terms of
----------------------
the mortgage, and all taxes, governmental assessments, insurance premiums,
water, sewer and municipal charges, leasehold payments or ground rents that
previously became due and owing have been paid, or an escrow of funds has
been established in an amount sufficient to pay for every such item that
remains unpaid and that has been assessed but is not yet due and payable. You
have not advanced funds, or induced, solicited or knowingly received any
advance of funds by a party other than the mortgagor, directly or indirectly,
for the payment of any amount required under the Mortgage Loan, except for
interest accruing from the date of the mortgage note or date of disbursement
of the Mortgage Loan proceeds, whichever is greater, to the day that precedes
by one month the due date of the first installment of principal and interest.
d) Original Terms Unmodified. The terms of the mortgage note and mortgage have
-------------------------
not been impaired, waived, altered or modified in any respect, except by a
written instrument that has been recorded, if necessary to protect the
interest of Nikko and that has been delivered to Nikko or its designee
(including the Custodian). The substance of any such waiver, alteration or
modification has been approved by the issuer of any related PMI Policy (as
defined in paragraph (o) below) and the title insurer, to the extent required
by the policy, and its terms are reflected on the Mortgage Loan Schedule. No
mortgagor has been released, in whole or in part, except in connection with
an assumption agreement approved by the issuer of any related PMI Policy and
the title insurer, to the extent required by the policy, and which assumption
agreement is included in the mortgage file delivered to Nikko or its designee
(including the Custodian) and the terms of which are reflected in the
Mortgage Loan Schedule.
e) No Defenses. The Mortgage Loan is not subject to any right of rescission,
-----------
set-off, counterclaim or defense, including without limitation the defense of
usury, nor will the operation of any of the terms of the mortgage note or the
mortgage, or the exercise of any right thereunder, render either the mortgage
note or the mortgage unenforceable, in whole or in part, or subject to any
right of rescission, set-off, counterclaim or defense, including without
limitation the defense of usury, and no such night of rescission, set-off,
counterclaim or defense has been asserted with respect thereto.
f) Insurance Policies in Effect. Except for 125 Mortgage Loans, the fire and
----------------------------
casualty insurance policy covering the mortgaged property (1) affords and
-
will afford sufficient insurance against fire and such other risks as are
usually insured against in the broad form of extended coverage insurance
from time to time available, as well as insurance against flood hazards if
the mortgaged property is in an area identified by the Federal Emergency
Management Agency as having special flood hazards; (2) is a standard policy
-
of insurance for the locale where the mortgaged property is located, is in
full force and effect, and the amount of insurance is in the amount of the
full insurable value of the mortgaged property on a replacement cost basis
or the unpaid balance of the Mortgage Loans, whichever is less; (3) names
-
(and will name) the present owner of the mortgaged property as the insured;
and (4) contains a standard mortgagee loss payable clause in favor of you.
-
g) Compliance with Applicable Laws. Any and all requirements of any federal,
-------------------------------
state or local law including, without limitation, usury, truth-in-lending,
real estate settlement procedure, consumer credit protection, equal credit
opportunity or disclosure laws applicable to the Mortgage Loan have been
complied with, and you shall maintain in your possession, available for
Nikko's inspection, and shall deliver to Nikko upon demand, evidence of
compliance with all such requirements.
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<PAGE>
h) No Satisfaction of Mortgage. The mortgage has not been satisfied, canceled,
---------------------------
subordinated or rescinded, in whole or in part, and the mortgaged property
has not been released from the lien of the mortgage, in whole or in part, nor
has any instrument been executed that would effect any such release,
cancellation, subordination or rescission.
i) Use of Mortgaged Property. No portion of the mortgaged property is used for
-------------------------
commercial purposes.
j) Valid First Lien. The mortgage is a valid, existing and enforceable first
----------------
lien (except with respect to Second Mortgages) on the mortgaged property,
including all buildings on the mortgaged property and all installations and
mechanical, electrical, plumbing, heating and air conditioning systems
located in or annexed to such building, and all additions, alterations and
replacements made at any time with respect to the foregoing. The lien of the
mortgage is subject only to:
1) the lien of the current real property taxes and assessments not yet due
and payable.
2) covenants, conditions and restrictions, rights of way, easements and other
matters of the public record as of the date of recording acceptable to
mortgage lending institutions generally and specifically referred to in
the lender's title insurance policy delivered to the originator of the
Mortgage Loan and (A) referred to or otherwise considered in the
-
appraisal made for the originator of the Mortgage Loan or (B) that do not
-
adversely affect the appraised value of the mortgaged property set forth
in such appraisal; and
3) other matters to which like properties are commonly subject that do not
materially interfere with the benefits of the security intended to be
provided by the mortgage or the use, enjoyment, value or marketability of
the related mortgaged property.
Any security agreement, chattel mortgage or equivalent document related to and
delivered in connection with the Mortgage Loan establishes and creates a
valid, subsisting and enforceable first lien and first priority security
interest on the property described therein and you have full right to pledge
and assign the same to Nikko or its designee (including Custodian).
k) Valid Second Lien. With respect to any mortgage loan secured by a Second
-----------------
Mortgage, such Second Mortgage is a valid, existing and enforceable second
lien on the mortgaged property, including all buildings on the mortgaged
property and all installations and mechanical, electrical, plumbing, heating
and air conditioning systems located in or annexed to such building, and all
additions, alterations and replacements made at any time with respect to the
foregoing. The lien of the mortgage is subject only to:
1) the first lien on the mortgaged property;
2) the lien of the current real property taxes and assessments not yet due
and payable;
3) covenants, conditions and restrictions, rights of way, easements and other
matters of the public record as of the date of recording acceptable to
mortgage lending institutions generally and specifically referred to in
the lender's title insurance policy delivered to the originator of the
Mortgage Loan and (A) referred to or otherwise considered in the
-
appraisal made for the originator of the Mortgage Loan or (B) that do not
-
materially and adversely affect the appraised value of the mortgaged
property set forth in such appraisal; and
4) other matters to which like properties are commonly subject that do not
materially interfere with the benefits of the security intended to be
provided by the mortgage or the use, enjoyment, value or marketability of
the related mortgaged property;
Any security agreement, chattel mortgage or equivalent document related to
and delivered in connection with any mortgage loan secured by a Second
Mortgage establishes and creates a valid, subsisting and enforceable second
lien and second priority security interest on the property described therein
and you have full right to pledge and assign the same to Nikko or its
designee (including Custodian).
1) Validity and Recordability of Mortgage Documents. The mortgage note and the
------------------------------------------------
mortgage are genuine, and each is the legal, valid and binding obligation of
the maker thereof enforceable in accordance with its terms, subject to
applicable insolvency laws. All parties to the mortgage note and the mortgage
had legal capacity to enter into the Mortgage Loan and to execute and deliver
the mortgage note and the mortgage, and the mortgage note and the mortgage
have been duly
13
<PAGE>
and properly executed by such parties. The assignment of
mortgage is in recordable form and is acceptable for recording under the laws
of the jurisdiction in which the mortgaged property is located.
m) Full Disbursement of Proceeds. The proceeds of the Mortgage Loan secured by
-----------------------------
a mortgage with a first priority lien have been fully disbursed and there is
no requirement of future advances thereunder, and any and all requirements as
to completion of any on-site or off-site improvement and as to disbursements
of any escrow funds therefor have been complied with. All costs, fees and
expenses incurred in making or closing said Mortgage Loan and the recording
of the mortgage were paid, and the mortgagor is not entitled to any refund of
any amounts paid or due under the mortgage note or mortgage.
n) Doing Business. All parties that have had any interest in the Mortgage Loan,
--------------
whether as mortgagee, assignee, pledgee or otherwise, are (or, during the
period in which they held and disposed of such interest, were) (1) in
-
compliance with any and all applicable licensing requirements of the laws
of the state wherein the mortgaged property is located, and (2) organized
-
under the laws of such state, or (3) qualified to do business in such
-
state, or (4) federal savings and loan associations or national banks
-
having principal offices in such state, or (5) not doing business in such
-
state.
o) LTV; PMI Policy. Except for 125 Mortgages, the original LTV of the Mortgage
---------------
Loan either was not more than 80% or the excess over 80% is and will be
insured as to payment defaults by a policy of primary mortgage guaranty
insurance issued by a generally accepted insurance carrier (a "PMI Policy")
until the LTV of such Mortgage Loan is reduced to 80%. All provisions of such
PMI Policy have been and are being complied with, such policy is in full
force and effect, and all premiums due thereunder have been paid. Any
Mortgage Loan subject to a PMI Policy obligates the mortgagor thereunder to
maintain the PMI Policy and to pay all premiums and charges in connection
therewith. The mortgage interest rate for the Mortgage Loan as set forth on
the Mortgage Loan Schedule is net of any such insurance premium. With respect
to Second Mortgages, the combined LTV of the first mortgage and the second
mortgage does not exceed 125% of the appraised value of the mortgage
property.
p) Title Insurance. The Mortgage Loan secured by a mortgage with a first
---------------
priority lien ("First Mortgage") is covered by either (1) an attorney's
-
opinion of title and abstract of title the form and substance of which is
acceptable to mortgage lending institutions making mortgage loans in the
area where the mortgaged property is located or (2) an ALTA lender's title
-
insurance policy or other generally acceptable form of policy of insurance,
issued by a title insurer and qualified to do business in the jurisdiction
where the mortgaged property is located, insuring you, your successors and
assigns, as to the first priority lien of the mortgage in the amount of
100% of the original principal amount of the Mortgage Loan, subject only to
the exceptions contained in clauses (1), (2) and (3) of paragraph (j) above
and, with respect to adjustable rate Mortgage Loans, against any loss by
reason of the invalidity or unenforceability of the lien resulting from the
provisions of the mortgage providing for adjustment to the mortgage
interest rate and monthly payment. Unless otherwise agreed by Nikko, the
Mortgage Loan secured by a Second Mortgage is covered by either (1) an
-
attorney's opinion of title or (2) abstract of title the form and substance
of which is acceptable to mortgage lending institutions making similar
mortgage loans in the area where the mortgaged property is located or (3)
-
an ALTA lender's title insurance policy or other generally acceptable form
of policy of insurance, issued by a title insurer and qualified to do
business in the jurisdiction where the mortgaged property is located,
insuring you, your successors and assigns, as to the second priority lien
of the mortgage in the amount of 100% of the original principal amount of
the Mortgage Loan, subject only to the exceptions contained in clauses (1),
(2), (3) and (4) of paragraph (k) above and, with respect to adjustable
rate Mortgage Loans, against any loss by reason of the invalidity or
unenforceability of the lien resulting from the provisions of the mortgage
providing for adjustment to the mortgage interest rate and monthly payment.
You are the sole insured of such lender's title insurance policies, and
such lender's title insurance policies are in full force and effect and
will be in force and effect upon the consummation of the transactions
contemplated by this Facility. No claims have been made under such
lender's title insurance policies, and no prior holder of the mortgages,
including you, has done, by act or omission, anything that would impair the
coverage of such lender's title insurance policies.
q) No Mechanics' Liens. There are no mechanics' or similar liens or claims that
-------------------
have been filed for work, labor or material (and no rights are outstanding
that under the law could give rise to such liens) affecting the mortgaged
property that are or may be liens prior to, or equal or coordinate with,
the lien of the Mortgage, unless title insurance coverage exists with
respect to such liens or claims in an amount at least equal to such liens
or claims.
r) Location of Improvements; No Encroachments. All improvements that were
------------------------------------------
considered in determining the appraised value of the mortgaged property lay
wholly within the boundaries and building restriction lines of the
mortgaged property and no improvements on adjoining properties encroach
upon the mortgaged property. No improvement located on or being part of
the mortgaged property is in violation of any applicable zoning law or
regulation.
14
<PAGE>
s) Origination; Payment Terms. The Mortgage Loan was originated by you or an
--------------------------
originator properly licensed in the state where the mortgaged property is
located. The documents, instruments and agreements submitted for loan
underwriting were not falsified and contain no untrue statement of material
fact or omit to state a material fact required to be stated therein or
necessary to make the information and statements therein not misleading. With
respect to adjustable rate Mortgage Loans, the mortgage interest rate is
adjusted periodically on each interest rate adjustment date to equal the
index plus the gross margin, rounded up or down to the nearest 1/8%, subject
to the mortgage interest rate cap and the installments of interest are
subject to change due to the adjustments to the mortgage interest rate on
each interest rate adjustment date, with interest calculated and payable in
arrears, sufficient to amortize the Mortgage Loan fully by the stated
maturity date, over an original term of not more than thirty years from
commencement of amortization. With respect to fixed rate Mortgage Loans, the
mortgage note is payable each month in equal monthly installments of
principal and interest.
t) Deeds of Trust. In the event the mortgage constitutes a deed of trust, a
--------------
trustee, duly qualified under applicable law to serve as such, has been
properly designated and currently so serves and is named in the mortgage, and
no fees or expenses are or will become payable by Nikko to the trustee under
the deed of trust, except in connection with a trustee's sale after default
by the mortgagor.
u) Acceptable Investment. You have no knowledge of any circumstances or
---------------------
conditions with respect to the mortgage, the mortgaged property, the
mortgagor or the mortgagor's credit standing that can reasonably be expected
to cause private institutional investors to regard the Mortgage Loan as an
unacceptable investment, cause the Mortgage Loan to become delinquent, or
adversely affect the value or marketability of the Mortgage Loan.
v) Due on Sale. The Mortgage contains an enforceable provision for the
-----------
acceleration of the payment of the unpaid principal balance of the Mortgage
Loan in the event that the mortgaged property is sold or transferred
without the prior written consent of the mortgagee thereunder.
w) Buydown Provisions; Graduated Payments or Contingent Interests. With respect
--------------------------------------------------------------
to mortgage loans which contain provisions pursuant to which monthly payments
are paid or partially paid with funds deposited in any separate account
established by you, the mortgagor or anyone on behalf of the mortgagor, which
may constitute a "buydown" provision, the amount of each assistance payment
shall be the sum necessary to make up the difference between the monthly
principal and interest payment required by the terms of the note and the
reduced monthly payment, as stated in the buydown certification. However, if
for any reason the assistance payments from the escrow funds are not made by
the escrow agent as contemplated, it shall be the obligation of the mortgagor
to make the monthly payments required by the terms of the note.
With respect to graduated payment mortgage loans, the scheduled annual
payment adjustments are sufficient to cover all interest due and to fully
amortize the loan in 15 years.
x) Consolidation of Future Advances. Any future advances made prior to the date
--------------------------------
such Mortgage Loan was delivered to Custodian have been consolidated with the
outstanding principal amount secured by the mortgage, and the secured
principal amount, as consolidated, bears a single interest rate and single
repayment term. The lien of the mortgage securing the consolidated principal
amount is expressly insured as having first or second, as applicable, lien
priority by a title insurance policy or an endorsement to the policy insuring
the mortgagee's consolidated interest or by other title evidence acceptable
to Nikko. The consolidated principal amount does not exceed the original
principal amount of the Mortgage Loan.
y) Condition of the Mortgaged Property. There is no proceeding pending or
-----------------------------------
threatened for the total or partial condemnation of the mortgaged property.
The mortgaged property is undamaged by waste, fire, earthquake or earth
movement, windstorm, flood, tornado or other casualty so as to affect
adversely the value of the mortgaged property as security for the Mortgage
Loan or the use for which the premises were intended. The mortgaged property
is free from any and all toxic or hazardous substances and there exists no
violation of any local, state or federal environmental law, rule or
regulation.
z) Collection Practices; Escrow Deposits; Interest Rate Adjustments. The
----------------------------------------------------------------
origination and collection practices used with respect to the Mortgage Loan
have been in all respects in accordance with industry custom and practice,
and have been in all respects legal and proper. With respect to escrow
deposits and escrow payments, all such payments are in your possession and
there exist no deficiencies in connection therewith for which customary
arrangements for repayment thereof have not been made. All escrow payments
have been collected in full compliance with state and federal law. An
15
<PAGE>
escrow of funds is not prohibited by applicable law and has been established
in an amount sufficient to pay for every item that remains unpaid and has
been assessed but is not yet due and payable. No escrow deposits or escrow
payments or other charges or payments due you have been capitalized under
the mortgage or the mortgage note. All mortgage interest rate adjustments
have been made in strict compliance with state and federal law and the terms
of the related mortgage note. Any interest required to be paid pursuant to
state and local law has been properly paid and credited.
aa) Underwriting Guidelines. Each Mortgage Loan was underwritten by you in
-----------------------
accordance with underwriting guidelines previously delivered by you to
Nikko and you will not modify such underwriting guidelines without the
prior written consent of Nikko.
bb) Appraisal. In the case of each 125 Mortgage Loan, the appraisal of the
---------
related mortgage property is either (i) an "as stated value" appraisal if
the original principal amount of the Mortgage Loan secured by such 125
Mortgage Loan is less than $35,000; or (ii) a "desk top" appraisal if the
original principal amount of the Mortgage Loan secured by such 125 Mortgage
Loan is $35,000 or more, in each case as further described in the
underwriting guidelines previously delivered by Customer to Nikko.
Except with respect to 125 Mortgage Loans, the mortgage file contains an
appraisal of the related mortgaged property signed prior to the approval of
the Mortgage Loan application by a qualified appraiser, duly appointed by
you, who had no interest, direct or indirect in the mortgaged property or in
any loan made on the security thereof, and whose compensation is not
affected by the approval or disapproval of the Mortgage Loan, and the
appraisal satisfies the requirements of Title XI of the Federal Institutions
Reform, Recovery, and Enforcement Act of 1989 and the regulations
promulgated thereunder, all as in effect on the date the Mortgage Loan was
originated.
cc) Credit Rating. With respect to any Second Mortgage, the obligor under the
-------------
related mortgage note shall have been rated a "FICO Score" of at least 620
or its equivalent by any nationally recognized credit rating agency.
16
<PAGE>
EXHIBIT 10.7
RESIDENTIAL MORTGAGE FINANCING FACILITY
PROMISSORY NOTE
$150,000,000 Dated: as of June 13, 1997
New York, New York
FOR VALUE RECEIVED, the undersigned ("Customer" or "you"), HEREBY PROMISES TO
PAY to the order of Nikko Financial Services, Inc. ("Nikko"), for the benefit of
Nikko and the holders from time to time of interests herein, in lawful money of
the United States of America, the lesser of (i) one hundred and fifty million
-
dollars and (ii) the aggregate unpaid principal amount of all Advances made by
--
Nikko to you pursuant to the Residential Mortgage Financing Facility, dated the
date hereof (as amended, the "Facility"), between Nikko and you, ON DEMAND or,
---------
if separately agreed to by Nikko in writing with respect to any Advance, on the
date specified for repayment of such Advance (the date of demand or such
specified date, as applicable, the "Maturity Date"). Repayment of each Advance
hereunder shall be made with interest on such Advance from and including the
date on which such Advance is made until the principal amount of the applicable
Advance is paid in full on the applicable Maturity Date (and, as to any overdue
principal and accrued interest thereon, on demand), at an interest rate per
annum equal to the Advance Rate applicable to such Advance and on such overdue
amounts as provided herein. Each Advance under this promissory note (the
"Promissory Note") shall be evidenced by an entry on Nikko's books and records.
1. DEFINITIONS. Capitalized terms used herein and not otherwise defined herein
-----------
shall have the respective meanings ascribed to them in the Facility.
2. LATE PAYMENTS. You shall pay interest on any overdue principal of each
-------------
Advance and (to the extent permitted by applicable law) accrued interest
thereon, payable daily at a fluctuating interest rate per annum equal to 5%
above the rate of interest per annum quoted as the prime rate in The Wall Street
---------------
Journal (the "Default Rate"), each change in such Default Rate to take effect
- -------
simultaneously with any change in such prime rate.
3. FACILITY. This Promissory Note is the Promissory Note referred to in the
--------
Facility and is entitled to the benefit and is subject to the provisions of the
Facility and the other Program Documents.
4. PAYMENTS AND COMPUTATIONS. You shall make each payment due hereunder prior
-------------------------
to 12:00 p.m. New York City time on the day when due to Nikko pursuant to
Nikko's instructions in same day funds. All computations of interest shall be
made by Nikko on the basis of a year of 360 days for the actual number of days
(including the first day but excluding the last day) occurring in the period for
which such interest is payable. Any payment to be made hereunder on a day other
than a Business Day shall be made on the next succeeding Business Day, and such
extension of time shall in such case be included in the computation of payment
of interest.
5. NO PREPAYMENT. With respect to any Advance for which a specific Maturity
-------------
Date is separately agreed to by Nikko in writing, you shall have no right to
prepay any principal amount of such Advance without Nikko's prior consent.
6. EVENTS OF DEFAULT. If any of the following events (each, an "Event of
-----------------
Default") shall occur and be continuing:
a) you shall fail to pay when due any principal of, interest on or other
amounts due and payable under this Promissory Note attributable to any
Advance made hereunder; or
b) you shall fail to perform or observe any other term, covenant or agreement
contained in the Program Documents on your part to be performed or observed
when required; or
c) any representation or warranty made by you (or any of your officers) in the
Program Documents or in any document delivered in connection therewith shall
prove to have been incorrect in any material respect when made; or
d) you or any of your subsidiaries shall fail to pay any of your or its
indebtedness for borrowed money (including non-recourse indebtedness), or
any interest or premium thereon when due (whether by scheduled maturity,
required prepayment, acceleration, demand or otherwise), or shall fail to
make any payment when due under your or its guarantee of another person's
indebtedness for borrowed money, and such failure shall continue after the
applicable grace period, if any, specified in the agreement or instrument
relating to such indebtedness or guarantee; or any other default under any
agreement or instrument relating to any such indebtedness or guarantee, or
any other event, shall occur and shall continue after the applicable grace
period, if any, specified in such agreement, instrument or guarantee, if the
effect of such default
1
<PAGE>
or event is to accelerate, or to permit the acceleration of, the maturity of
such indebtedness or guarantee; or if any such indebtedness or guarantee
shall be declared to be due and payable, or required to be prepaid (other
than by a regularly scheduled required prepayment), prior to the stated
maturity thereof; or
e) a custodian, receiver, conservator, liquidator, trustee, sequestrator or
similar official for you or any of your subsidiaries, or of any of your or
their property, is appointed or takes possession of such property; or you or
any of your subsidiaries generally fails to pay your or its debts as they
become due; or you or any of your subsidiaries is adjudicated bankrupt or
insolvent; or an order for relief is entered under the Federal Bankruptcy
Code, any successor or similar applicable statute, or any administrative
insolvency scheme, against you or any of your subsidiaries; or any of your
or their property is sequestered by court or administrative order; or a
petition is filed against you or any of your subsidiaries under any
bankruptcy, reorganization, arrangement, insolvency, readjustment of debt,
dissolution or liquidation law of any jurisdiction, whether now or
subsequently in effect; or
f) you or any of your subsidiaries files a voluntary petition in bankruptcy or
seeks relief under any provision of any bankruptcy, reorganization,
arrangement, insolvency, readjustment of debt, dissolution or liquidation
law of any jurisdiction whether now or subsequently in effect; or consents
to the filing of any petition against it under any such law; or consents to
the appointment of or taking possession by a custodian, receiver,
conservator, trustee, liquidator, sequestrator or similar official for you
or any of your subsidiaries, or of all or any part of your or their
property; or makes an assignment for the benefit of your or their creditors;
or
g) any judgment or order for the payment of money in excess of $1,000,000 shall
be rendered against you or any of your subsidiaries; or
h) any governmental authority or agency or any person, agency or entity acting
or purporting to act under governmental authority shall have taken any
action to condemn, seize or appropriate, or to assume custody or control of,
all or any substantial part of the property of you or of any of your
subsidiaries, or shall have taken any action to displace the management of
you or of any of your subsidiaries or to curtail its authority in the
conduct of the business of you or of any of your subsidiaries, or any Agency
takes any action to remove, limit or restrict the approval of you as an
issuer, lender or a seller/servicer of mortgage loans; or
i) you or any of your subsidiaries shall default under, or fail to perform as
requested under, or shall otherwise breach the terms of any instrument,
agreement or contract between you and Nikko or any of Nikko's affiliates; or
j) any material adverse change occurs in the financial condition, operations,
business prospects or corporate structure of you or any of your
subsidiaries;
then, and in any such event, Nikko may (i) by notice to you, declare this
-
Promissory Note and all Advances made hereunder, the outstanding principal of
and all interest accrued thereon and all other amounts payable hereunder and
under the Program Documents to be immediately due and payable, whereupon this
Promissory Note and all such Advances, interest and other amounts shall become
and be immediately due and payable, without presentment, demand, protest or
further notice of any kind, all of which are hereby expressly waived by you, and
(ii) exercise or cause to be exercised all rights and remedies of Nikko as
--
secured party hereunder and under the other Program Documents; provided, that
--------
upon occurrence of any Event of Default described in paragraphs (e) and (f)
above, the outstanding principal of and accrued interest on this Promissory Note
and all other amounts payable hereunder and under the Program Documents shall
immediately and automatically become due and payable without presentment,
demand, protest or notice of any kind.
7. GRANT OF SECURITY INTEREST TO NIKKO. (a) In consideration for the making of
-----------------------------------
each respective Advance and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, you hereby convey,
transfer, mortgage, hypothecate, pledge, grant and assign to Nikko and its
successors and assigns, as security for the payment of the Obligations, a first
priority perfected security interest in and lien on all of your right, title and
interest in, under and to the following properties, estates, rights and
privileges, whether now existing or hereafter acquired (collectively, the
"Collateral"):
(i) All Mortgage Loans described in a Collateral Receipt, all payments of
principal and interest thereon and all related items constituting the
complete file for each such Mortgage Loan (including, without limitation,
all escrow payments, mortgage notes, mortgages, title insurance policies,
primary mortgage insurance policies, guarantees, applications, appraisals,
surveys and all other documents evidencing or relating to the Mortgage
Loan and all other documents described in the related
2
<PAGE>
Collateral Receipt), wherever located and whether now or hereafter held in
whole or in part by a Custodian, Nikko, you or otherwise;
(ii) All FHA/VA Commitments and Purchase Commitments related to the Mortgage
Loans that are described in, and all other documents required to be
submitted in connection with, a Collateral Receipt, wherever located and
whether now or hereafter held in whole or in part by a Custodian, Nikko,
you or otherwise;
(iii) All Agency Securities related to the Mortgage Loans that are described in
a Collateral Receipt, wherever located and whether now or hereafter held
in whole or in part by a Custodian, Nikko, The Nikko Securities Co.
International, Inc. ("NSI"), you or otherwise;
(iv) All securities or cash on deposit with, or received by, Nikko or Custodian
for your account in connection with any transaction or in respect of such
Mortgage Loans or Agency Securities, or representing proceeds of
Collateral;
(v) All tangible and intangible personal property of whatever kind, including
all payments with respect thereto and all proceeds thereof, that relates
to such Mortgage Loans, Agency Securities, FHA/VA Commitments or Purchase
Commitments, wherever located and whether now or hereafter held in whole
or in part by a Custodian, Nikko, you or otherwise;
(vi) All property held for your account by a Custodian or any affiliate of
Nikko;
(vii) All of your rights, powers and privileges related to the servicing of the
Mortgage Loans, including all Servicing Records;
(viii) Any additional items submitted in connection with a Collateral Receipt;
(ix) All such other additional assets or items as you and Nikko shall agree
upon from time to time; and
(x) All proceeds of any of the foregoing.
(b) To induce Nikko and NSI to accept assignment of Purchase Commitments you
hereby convey, transfer, mortgage, hypothecate, pledge, grant and assign to
Nikko and NSI as security for your performance under such Purchase
Commitments, a security interest in, and lien on, the Collateral that is
solely subordinate to, and junior to, the liens set forth in Section 7(a)
hereof.
8. AMENDMENTS, ETC. No amendment or waiver of any provision of this Promissory
----------------
Note, nor any consent to any failure by you to comply therewith, shall be
effective unless the same shall be in writing and signed by Nikko. Any such
amendment, waiver or consent shall be effective only in the specific instance
and for the specific purpose for which it is given.
9. NOTICES. All written communications hereunder shall be mailed, telecopied
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or delivered at the respective addresses as listed in the Custody Agreement or
at such other address as shall be designated by you or Nikko in a written notice
to the other. All such notices and communications shall be effective when
delivered to the party to which such notice is to be given.
10. NO WAIVER, REMEDIES. No failure on the part of Nikko to exercise, and no
-------------------
delay in exercising, any right hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any right hereunder preclude any other
or further exercise thereof or the exercise of any other right. The remedies
herein provided are cumulative and not exclusive of any other remedies provided
in equity or at law.
11. BINDING EFFECT; GOVERNING LAW; VENUE. This Promissory Note shall be
------------------------------------
binding upon you and your successors and assigns, and shall inure to the benefit
of Nikko and its successors and assigns. You may not assign your obligations
under this Promissory Note without the prior written consent of Nikko. Nikko
may assign, by bookkeeping entry on Nikko's records or otherwise, all or any
part of, or any interest in, Nikko's rights and benefits hereunder, including,
without limitation, its right to payments of principal and interest, and the
items of Collateral, with respect to a particular Advance. To the extent of
such assignment, such assignee shall have the same rights and benefits against
you as it would have had if it were Nikko hereunder. However, nothing contained
herein shall preclude Nikko from continuing to exercise all of its rights
hereunder for the benefit of any such assignee of Nikko, and you shall continue
to accept directions and other notices solely from Nikko unless otherwise
notified by Nikko in writing. This Promissory Note shall be construed in
accordance with, and governed by, the laws of the State of New York, without
giving effect to the conflict of law principles thereof. You waive trial by
jury. You hereby irrevocably consent to the non-exclusive jurisdiction of any
court of the State of New York, or in the United States
3
<PAGE>
District Court for the Southern District of New York, in any action or
proceeding arising out of or relating to this Promissory Note. You hereby submit
to, and waive any objection you may have to, personal jurisdiction and venue in
the courts of the State of New York and the United States District Court for the
Southern District of New York, with respect to any disputes arising out of or
relating to this Promissory Note. You consent to service of process by mail at
the address specified pursuant to Section 9 hereof and waive any objection you
may have to the sufficiency or adequacy of such method of service of process.
The time for the performance of any obligation hereunder shall be strictly
construed, time being of the essence.
IN WITNESS WHEREOF, you have caused this Promissory Note to be executed by your
officer thereunto duly authorized, as of the date first above written.
PREFERRED CREDIT CORPORATION, as Customer
By: /s/ Todd A. Rodriguez
-------------------------------
Name: Todd A. Rodriguez
-----------------------------
Title: C.E.O
----------------------------
4
<PAGE>
FORM OF OPINION OF COUNSEL
Dated: June 16th, 1997
Nikko Financial Services, Inc.
200 Liberty Street, 28th Floor
New York, New York 10281-1095
Attention: Mr. Roddy R. Ennico
Re: Residential Mortgage Financing Program
Gentlemen:
We have acted as counsel to Preferred Credit Corporation, a corporation
organized and existing under the laws of the State of California ("Customer"),
in connection with the preparation, execution and delivery of the Residential
Mortgage Financing Facility, dated June 13, 1997 (the "Facility"), between
Customer and Nikko Financial Services, Inc. ("Nikko"), and the other documents
referred to therein.
This opinion is furnished to you pursuant to Section 5.1 of the Facility.
Capitalized terms used and not otherwise defined herein shall have the meaning
given them in the Program Documents as defined herein.
In connection with this opinion, we have examined executed copies of and are
familiar with the following agreements and documents:
(a) the Facility, the Promissory Note, the Tri-Party Custody Agreement and the
Collateral Receipt (collectively, the "Program Documents");
(b) resolutions adopted by the Board of Directors of the Customer, authorizing
the transaction contemplated by the Facility and
(c) such other documents, agreements and instruments as we have deemed necessary
as a basis for the opinions hereinafter expressed.
In our examination we have assumed the genuineness of all signatures, the legal
capacity of natural persons, the authenticity of all documents submitted to us
as originals, the conformity to original documents of all documents submitted to
us as certified or photostatic copies, and the authenticity of the originals of
such copies. Where facts were not independently established, we have relied, to
the extent that we believed such reliance was justified, upon certificates of
officers of the Customer, public officials and other appropriate persons.
Based upon the foregoing and having regard to the legal considerations we deem
relevant, we are of the opinion that:
1. The Customer (a) is a corporation duly organized, validly existing and in
good standing under the laws of the State of California, (b) has the power
and authority to carry on its business as presently conducted by it, and (c)
has the power and authority to execute and deliver the Program Documents and
to perform all of its obligations thereunder.
2. The Program Documents have been duly authorized, executed and delivered by
the Customer and constitute the legal, valid and binding obligations of the
Customer, enforceable against the Customer in accordance with their
respective terms, except as enforceability may be subject to (i) applicable
bankruptcy, insolvency, moratorium, reorganization and other similar laws
affecting the rights or remedies of creditors generally, and (ii) general
principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law) affecting the enforcement of
obligations.
3. The execution and delivery by the Customer of each of the Program Documents
and the performance by the Customer of its obligations thereunder and the
consummation by the Customer of the transactions described therein (a) will
not violate or be in conflict with (i) any provision of applicable law, (ii)
any order of any court or other governmental authority, (iii) any rule or
regulation of any governmental authority, (iv) any provision of any
shareholders' agreement or thrust with respect to the securities or related
rights of the Customer, (b) will not violate, be in conflict with, result in
a breach of or
<PAGE>
constitute a default (with or without the giving of notice or the passage of
time or both) under any material instrument, indenture, agreement or other
obligation to which the Customer is a party or by which it or any of its
assets and properties is or may be bound or subject and (c) will not result
in or create any lien, charge or encumbrance or require any consent under,
any indenture or any loan, credit or similar agreement of the Customer or
applicable to its assets.
4. No consent, approval or authorization of or registration, declaration or
filing with (except to the extent financing statements may be required to be
filed to perfect security interests in so much of the Collateral as
constitutes property in which a financing statement may or must be filed to
perfect such security interest under the applicable Uniform Commercial
Code), any governmental authority or other person (including, without
limitation, the shareholders of the Customer) is required of the Customer as
a condition precedent, concurrent or subsequent to or in connection with (a)
the due and valid execution, delivery and performance by the Customer of its
obligations under the Program Documents, (b) the consummation of the
transactions described in the Program Documents, (c) the legality, validity,
binding effect or enforceability of any of the respective representations,
warranties, covenants or other terms or provisions of the Program Documents,
(d) grant by the Customer of the security interest created pursuant to the
Program Documents of the validity and enforceability thereof or (e) the
perfection of or the exercise of any of the rights and remedies provided in
the Program Documents.
5. There are no actions, suits, or proceedings pending, or, to the best of our
knowledge after due inquiry, threatened at law, in equity, in arbitration or
before any court or other governmental authority involving or affecting (a)
the Customer that could have a material adverse effect on the assets or
business of the Customer, (b) the obligations of the Customer under the
Program Documents, (c) any of the transactions by the Customer contemplated
by the Program Documents, (d) the Customer that could reasonably be expected
to materially adversely affect the financial condition, assets, operations
or ability of the Customer to carry out the transactions contemplated in the
Program Documents, including the grant of the security interest in and lien
on the Collateral. The Customer is not in default with respect to any
judgment, writ, injunction, decree, rule or regulation or any governmental
authority, which default could have or has had such a material adverse
effect.
6. The Program Documents will grant fully to Nikko a valid, first priority
perfected security interest in and lien on all of the Customer's right,
title and interest in, under and to the Collateral. The delivery to the
Custodian of the assignments of mortgage and the original endorsed mortgage
notes as contemplated by the Program Documents is sufficient to permit Nikko
to avail itself of all protection available under applicable law against the
claims of any present or future creditors of the Customer, and pursuant to
the terms and conditions of the Program Documents, is sufficient to prevent
any other sale, transfer, assignment, pledge or hypothecation of the
mortgages and the mortgage notes by the Customer from being enforceable.
Very truly yours,
^^ ^^
_________________________________
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<PAGE>
AUTHORIZED OFFICER'S CERTIFICATE
I, Walter E. Villaume, hereby certify that I am a duly appointed, qualified and
acting President/Secretary of Preferred Credit Corporation (the "Corporation"),
and further that, in connection with (i) the Residential Mortgage Financing
Facility, dated June 13, 1997, between Nikko Financial Services, Inc. ("Nikko")
and the Corporation (the "Facility"), (ii) the Promissory Note, dated June 13,
1997, executed by the Corporation payable to the order of Nikko (the "Promissory
Note"), (iii) one or more Tri-Party Custody Agreements in the form of the Tri-
Party Custody Agreement, dated June 13, 1997, among Nikko, the Corporation and
Bankers Trust Co. of California, N.A., as Custodian (collectively, the "Custody
Agreement"), (iv) each Collateral Receipt, and (v) each other amendment,
supplement, security agreement, financing statement, certificate and any other
agreement, instrument or document related to the foregoing (the Facility, the
Promissory Note, each Custody Agreement, each Collateral Receipt and each other
related agreement, instrument or document, collectively, the "Program
Documents"), as follows:
Each of the persons named below is on the date hereof a duly elected and
qualified incumbent officer of the Corporation and/or has been authorized,
pursuant to a resolution adopted by the Corporation's Board of Directors, to act
on behalf of the Corporation, to execute any of the Program Documents and to
make an Election to Borrow (as defined in the Facility) on behalf of the
Corporation, but such list is not an exclusive list of those persons authorized
to act on behalf of the Corporation. The signature appearing at the right of
said person's name below is the genuine signature of said person.
Title Name Signature
Chief Executive Officer Todd A. Rodriguez /s/ Todd A. Rodriguez
- ----------------------- ---------------------- -----------------------
President Walter F. Villaume /s/ Walter F. Villaume
- ----------------------- ---------------------- -----------------------
Chief Financial Officer Li-Lin Ko /s/ Li-Lin Ko
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- ----------------------- ---------------------- -----------------------
- ----------------------- ---------------------- -----------------------
- ----------------------- ---------------------- -----------------------
- ----------------------- ---------------------- -----------------------
- ----------------------- ---------------------- -----------------------
- ----------------------- ---------------------- -----------------------
IN WITNESS WHEREOF, Corporation has caused this Authorized Officer's Certificate
to be executed in its name by a duly authorized officer, this 16th day of June,
1997.
Preferred Credit Corporation, as Customer
By:
-----------------------------
Name: /s/ Walter F. Villaume
----------------------------
Title: President/Secretary
---------------------------
<PAGE>
UNANIMOUS WRITTEN CONSENT OF BOARD OF DIRECTORS OF PREFERRED CREDIT CORPORATION
The undersigned, being all of the Directors of Preferred Credit Corp. a
---------------------
California corporation (the "Corporation"), acting by written consent without a
- ----------
meeting pursuant to the applicable corporation law of its state of
incorporation, _______________ do hereby approve and adopt the following
resolutions:
RESOLVED, That it is in the best interest of the Corporation to enter into (i)
that certain Residential Mortgage Financing Facility, dated June 13, 1997,
-------
between Nikko Financial Services, Inc. ("Nikko") and the Corporation (the
"Facility"), (ii) that certain Promissory Note, dated June 13, 1997, executed by
-------
the Corporation payable to the order of Nikko (the "Promissory Note") and (iii)
one or more Tri-Party Custody Agreements in the form of that certain Tri-Party
Custody Agreement, dated June 13, 1997, among Nikko, the Corporation and Bankers
------- -------
Trust Co. of California NA as Custodian (collectively, the "Custody Agreement";
- --------------------------
the Facility, the Promissory Note and the Custody Agreement, collectively, the
"Program Documents"), true and correct copies of each of which are attached
hereto, and to secure the obligations of the Corporation under the Program
Documents with the Collateral described in, and granted pursuant to, the Program
Documents; and
RESOLVED FURTHER, That the Program Documents are, and are hereby, authorized and
approved, and that the President, any Executive Vice President, any Senior Vice
President, any Vice President, any Assistant Vice President, the Treasurer or
any Assistant Treasurer and such other individuals as indicated on the list
attached hereto (each, an "Authorized Officer") of the Corporation be, and each
Authorized Officer is hereby, authorized, empowered and directed to execute the
Program Documents and make an Election to Borrow (as defined in the Program
Documents) for and on behalf and in the name of the Corporation, with such
changes in the terms of provisions thereof as the Authorized Officer executing
the same shall in his sole discretion deem necessary or desirable and in the
best interest of the Corporation, his signature being conclusive evidence that
he did so deem any such changes to be necessary or desirable and in the best
interest of the Corporation; and
RESOLVED FURTHER, That each Authorized Officer of the Corporation be, and is
hereby, authorized, empowered and directed to perform all the transactions
contemplated by the Program Documents, as defined therein, specifically
including, but not limited to, the execution and delivery of the Collateral
Receipts contemplated by and as defined in the Program Documents, with such
modifications, amendments and further instruments, security agreements,
financing statements, certificates and other agreements, instruments or
documents as such Authorized Officer, in such Authorized Officer's discretion,
deems necessary or desirable and in the best interest of the Corporation, such
Authorized Officer's taking of any such action, for, on behalf or in the name of
the Corporation, and/or such Authorized Officer's execution and delivery for,
and on behalf and in the name of the Corporation, of any such agreement,
instrument or document being conclusive evidence that such Authorized Officer
did so deem the same to be necessary or desirable and in the best interest of
the corporation; and
RESOLVED FURTHER, That the Authorized Officers be, and are hereby, authorized,
empowered and directed to consummate the loan transactions contemplated by the
Program Documents and to request Advances (as defined in the Program Documents)
pursuant to the Program Documents and the other documents executed or to be
executed in connection therewith, up to an aggregate loan balance outstanding at
any one time not to exceed $15,000,000, provided that, in connection with the
Advances, the execution of any document and the giving of any Election to Borrow
by any employee of the Corporation that is not an Authorized Officer shall
nonetheless be conclusively deemed to be authorized by the Corporation if Nikko
advanced funds with respect thereto; and
RESOLVED FURTHER, That the Secretary of the Corporation be, and is hereby,
authorized, empowered and directed to certify and attest any documents which
such officer may deem necessary or desirable to consummate the transactions
contemplated by the Program Documents, provided,however, that such certification
or attestation shall not be required for the validity of the particular
documents; and
RESOLVED FURTHER, That any and all actions relating to the negotiation and
execution of the Program Documents by the Corporation taken in good faith by the
officers and directors of the Corporation prior to the date hereof on behalf of
the Corporation as its own act and deed, and shall be conclusively deemed to be
such corporate act and deed for all purposes.
IN WITNESS WHEREOF, The undersigned, being all of the Directors of Preferred
---------
Credit Corporation, have executed this Unanimous Written Consent effective as of
- ------------------
this 16th day of June, 1997.
---- ----
/s/ Todd A. Rodriguez
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^^
- -----------------------------
- -----------------------------
<PAGE>
EXHIBIT 10.8
RESIDENTIAL MORTGAGE FINANCING FACILITY
TRI-PARTY CUSTODY AGREEMENT
among Preferred Credit Corporation ("Customer"), Nikko Financial Services, Inc.,
on behalf of itself and its successors and assigns ("Nikko"), and Bankers Trust
Company of California, N.A. ("Custodian") dated June 13, 1997. This Tri-Party
Custody Agreement ("Agreement") is made and entered into as on the date written
above, among Customer, Custodian and Nikko.
PRELIMINARY STATEMENT
With respect to the mortgage loans related to this Agreement, Nikko may, from
time to time, (i) make advances or purchase assets under an agreement to resell
such purchased assets to Customer (each, an "Advance") and (ii) assign all or
part of its interests in the Advance to one or more investors. Customer has
granted or shall hereafter grant to Nikko a security interest in and lien on
certain collateral ("Collateral") as security for the performance of the
obligations of Customer in connection with Advances. Nikko has also agreed to
make Advances to Customer to allow Customer to originate, purchase or finance
mortgage loans secured by enforceable first or second lien mortgages on real
properties, which Advances may be disbursed by Customer's designated closing
agent (individually or collectively, a "Closing Agent").
Customer intends, from time to time, to deliver certain items of Collateral to
Custodian and Custodian is willing to hold such Collateral in custody as bailee
of and as agent for Nikko, in order to perfect Nikko's security interest in and
lien on such Collateral.
Certain items of Collateral constitute 1-to-4 family residential first or second
lien mortgage loans intended either to secure or underlie securities or
certificates issued or guaranteed by the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA") or the
Federal Home Loan Mortgage Corporation ("FHLMC", GNMA, FNMA and FHLMC, each, an
"Agency") or to be purchased for cash by an Agency ("Agency Mortgage Loans"),
and certain items of Collateral constitute mortgage loans intended to be
purchased for cash by a purchaser listed on Schedule I hereto as amended from
time to time by Nikko ("Authorized Purchaser") or held for investment purposes
by Customer ("Nonagency Mortgage Loans"). Agency Mortgage Loans and Nonagency
Mortgage Loans are herein referred to as "Mortgage Loans".
NOW, THEREFORE, the parties to this Agreement hereby agree as follows:
1. APPOINTMENT OF CUSTODIAN. Nikko hereby appoints Custodian, and Custodian
------------------------
hereby accepts its appointment, to act as the bailee of and agent for Nikko and
its successors and assigns for the purpose of taking custody of such Collateral
and the proceeds thereof or substitutions therefor. With respect to each Agency
Mortgage Loan, Custodian's appointment as Nikko's bailee and agent shall
terminate upon (i) Custodian's receipt of notification from Nikko that a
security backed in whole or in part by such Agency Mortgage Loan has been issued
by an Agency, (ii) settlement of purchase of such Agency Mortgage Loan by an
Agency or (iii) notice from Nikko. With respect to each Nonagency Mortgage
Loan, Custodian's appointment as Nikko's bailee and agent shall terminate upon
settlement of purchase of such Nonagency Mortgage Loan by an Authorized
Purchaser, repurchase of such Nonagency Mortgage Loan by Customer or upon notice
from Nikko.
2. DEPOSIT OF COLLATERAL. Customer shall deposit with Custodian, and Custodian
---------------------
agrees to hold in pledge, as bailee of and as agent for Nikko and its successors
and assigns, such Collateral that may be so deposited hereunder from time to
time. For each item of Collateral deposited with Custodian hereunder, Customer
shall submit a collateral receipt substantially in the form attached hereto
("Collateral Receipt").
3. GNMA REQUIRED DOCUMENTS. For each Mortgage Loan intended to be included in
-----------------------
a GNMA pool, Customer shall deposit with Custodian the following required
documents (the "GNMA Required Documents") and/or all such other documents as
GNMA or Nikko may require from time to time for the issuance of the related GNMA
securities, duly authorized and completed:
(a) the original note, bearing all intervening endorsements, endorsed "Pay to
the order of ________, without recourse" and signed in the name of Customer
by an Authorized Representative of Customer, unless otherwise specified by
GNMA;
1
<PAGE>
(b) an original assignment of mortgage or deed of trust (hereinafter referred
to as assignment of mortgage or assignment) from Customer with assignee in
blank, in form and substance acceptable for recording, but not recorded,
unless otherwise specified by GNMA;
(c) the original of all intervening assignments of mortgage, if any, unless
otherwise specified by GNMA;
(d) a completed Warehouse Lender's Release Letter, substantially in the form
attached hereto ("Warehouse Lender's Release Letter"), unless such Mortgage
Loans are already subject to a lien by Nikko under this Agreement;
(e) a Schedule of Subscribers and GNMA Contractual Agreement on Form HUD-11705
listing The Nikko Securities Co. International, Inc., 200 Liberty Street,
28th Floor, New York, New York 10281-1092, taxpayer number 94-1302123
("NSI"), as the only subscriber and as the sole person who is authorized to
take delivery of the related GNMA security;
(f) a Schedule of Pooled Mortgages on Form HUD-11706;
(g) a Release of Security Interest on Form HUD-11711A, with the signature of
the person authorized to sign for Nikko or Custodian on behalf of Nikko, in
blank;
(h) a Certification and Agreement Regarding Security Interest on Form HUD-
11711B; and
(i) a Summary of Guaranty Agreement on Form HUD-11716 (level payment), HUD-1746
(GPM or GEM) or HUD-1733 (serial notes) as appropriate.
4. FNMA REQUIRED DOCUMENTS. For each Mortgage Loan intended to be included in
-----------------------
a FNMA pool, Customer shall deposit with Custodian the following required
documents (the "FNMA Required Documents"), and/or all such other documents as
FNMA or Nikko may require from time to time for the issuance of the related FNMA
securities or the purchase by FNMA of such Mortgage Loan, duly authorized and
completed:
(a) the original note, bearing all intervening endorsements, endorsed "Pay to
the order of ________, without recourse" and signed in the name of Customer
by an Authorized Representative of Customer, unless otherwise specified by
FNMA;
(b) an original assignment of mortgage or deed of trust (hereinafter referred
to as assignment of mortgage or assignment) from Customer with assignee in
blank, in form and substance acceptable for recording, but not recorded,
unless otherwise specified by FNMA;
(c) the original of all intervening assignments of mortgage, if any, unless
otherwise specified by FNMA;
(d) a completed Warehouse Lender's Release Letter, unless such mortgage loans
are already subject to a lien by Nikko under this Agreement;
(e) a Security Release Certification on Form 2004, with the signature of the
person authorized to sign for Nikko, or Custodian on behalf of Nikko, in
blank;
(f) a Schedule of Mortgages on Form 2005 (fixed rate), Form 2025 (ARMs, GEMs
and VRMs) or other appropriate form; and
(g) either a Delivery Schedule on Form 2014 listing NSI as the only subscriber
and as the sole person to which the related FNMA securities shall be
delivered or, if the Mortgage Loans are to be purchased by FNMA, either (i)
a Loan Schedule (Form 1068 or 1069) listing Nikko's payee code, or (ii) a
bailee letter for execution by the Custodian substantially in the form
attached hereto (the "Bailee Letter").
5. FHLMC REQUIRED DOCUMENTS. For each Mortgage Loan intended to be included in
------------------------
a FHLMC pool, Customer shall deposit with Custodian the following required
documents (the "FHLMC Required Documents"), and/or all such other documents as
FHLMC or Nikko may require from time to time for either the issuance of the
related FHLMC securities or the purchase by FHLMC of such Mortgage Loan, duly
authorized and completed:
2
<PAGE>
(a) the original note, bearing all intervening endorsements, endorsed "Pay to
the order of ________, without recourse" and signed in the name of Customer
by an Authorized Representative of Customer, unless otherwise specified by
FHLMC;
(b) an original assignment of mortgage or deed of trust (hereinafter referred
to as assignment of mortgage or assignment) from Customer with assignee in
blank, in form and substance acceptable for recording, but not recorded,
unless otherwise specified by FHLMC;
(c) the original of all intervening assignments of mortgage, if any, unless
otherwise specified by FHLMC;
(d) a completed Warehouse Lender's Release Letter, unless such mortgage loans
are already subject to a lien by Nikko under this Agreement;
(e) a Mortgage Loan Submission Schedule on Form 11 (fixed rate), Mortgage
Submission Voucher on Form 13SF (ARM, GPM), or other appropriate form;
(f) a Contract Delivery Summary on Form 381;
(g) a Warehouse Lender Release of Security Interest on Form 996 listing either
(i) NSI as the only subscriber and as the sole person to which the related
FHLMC securities shall be delivered, or (ii) wire transfer instructions
listing Nikko as the recipient of such funds wired, with the signature of
the person authorized to sign on behalf of Nikko in blank; and
(h) either (i) a Security Settlement Information and Delivery Authorization on
Form 939 listing NSI as the only subscriber and as the sole person to which
the related FHLMC securities shall be delivered; (ii) a Wire Transfer
Authorization for Cash Warehouse Delivery on Form 987 listing Nikko as the
recipient of such funds wired; or (iii) a Bailee Letter for execution by
Custodian.
6. TABLE FUNDING REQUIRED DOCUMENTS. For each Mortgage Loan intended to be
--------------------------------
financed by Customer with funds provided by Nikko through Custodian (on behalf
of Nikko) directly to a Closing Agent, Customer shall deposit or cause to be
deposited with Custodian the following required documents (the "Table Funding
Required Documents"), and all such other documents as Nikko may require from
time to time, duly authorized and completed:
(a) the original note, bearing all intervening endorsements, endorsed "Pay to
the order of ________ without recourse" and signed in the name of Customer
or its correspondent by an Authorized Representative of Customer or its
correspondent, unless otherwise specified by Nikko;
(b) an original assignment of mortgage or deed of trust (hereinafter referred
to as assignment of mortgage or assignment) from Customer with assignee in
blank, in form and substance acceptable for recording, but not recorded,
unless otherwise specified by Nikko;
(c) the original of all intervening assignments of mortgage, if any, unless
otherwise specified by Nikko;
(d) a schedule of mortgage loans in computer-readable form acceptable to Nikko
and Custodian.
(e) if funds are sent by Nikko through Custodian (on behalf of Nikko) directly
to a Closing Agent, a letter executed by Customer and sent to the Closing
Agent which contains specific language that either (i) states that if for
any reason the Mortgage Loan does not close within three (3) business days
(for purposes of this Agreement, "business day" shall mean any day when
------------
Custodian is open for business) of its receipt of funds the Closing Agent
must immediately return all funds to Bankers Trust Company of California,
N.A. ABA#021001033 for further credit to Nikko Financial Services, Inc.
Settlement Account, Reference: (Customer) or (ii) is substantially in the
--------
form attached hereto ("Escrow Letter"), and
(f) in connection with a Mortgage Loan for which the documents set forth in
Sections 6(a), (b) and (c) have not yet been deposited with Custodian (a
"Wet Mortgage Loan"), on the business day immediately prior to the
scheduled date of the related Advance, a fully completed closing notice for
such Wet Mortgage Loan in a form acceptable to Nikko and communicated to
Custodian (a "Wet Closing Notice"). The receipt of the Wet Closing Notice
shall constitute a Table Funding Required Document and shall be deemed to
satisfy the requirement for the deposit of the documents set forth
3
<PAGE>
in Sections 6(a), (b) and (c) solely for purposes of the execution of the
related Trust Receipt (as defined below) as of the date thereof.
Notwithstanding the foregoing, Customer shall deposit with Custodian the
documents set forth in Sections 6(a), (b) and (c) for such Wet Mortgage
Loan within five (5) days after the date of the related Advance. If
Customer does not deposit such documents with Custodian within such five
day period, Custodian shall immediately notify Nikko. Upon receipt of such
documents by Custodian, Custodian shall review such documents in accordance
with the standards set forth in Section 9, shall promptly notify Nikko if
such documents do not comply with the requirements thereof and shall
indicate on its records that Custodian maintains possession of such
documents for Nikko hereunder. Customer hereby represents, warrants and
covenants to Nikko and Custodian that Customer and any person or entity
acting on behalf of Customer that has possession of any of the documents
set forth in Sections 6(a) (b) or (c) above, as applicable, for such Wet
Mortgage Loan prior to the deposit thereof with Custodian will hold such
documents in trust for Nikko.
7. INTERIM REQUIRED DOCUMENTS. For each Mortgage Loan other than one intended
--------------------------
to be financed through Sections 3, 4, 5 and 6 hereof, Customer shall deposit
with Custodian the following required documents (the "Interim Required
Documents"'), and all such other documents as Nikko may require from time to
time, duly authorized and completed:
(a) the original note, bearing all intervening endorsements, endorsed "Pay to
the order of __________, without recourse" or as directed by and signed in
the name of Customer by an Authorized Representative of Customer, unless
otherwise specified by Nikko;
(b) an original assignment of mortgage or deed of trust (hereinafter referred
to as assignment of mortgage or assignment) from Customer with assignee in
blank, in form and substance acceptable for recording, but not recorded,
unless otherwise specified by Nikko;
(c) the original of all intervening assignments of mortgage, if any, unless
otherwise specified by Nikko;
(d) a completed Warehouse Lender's Release Letter, unless such mortgage loans
are already subject to a lien by Nikko under this Agreement; and
(e) a schedule of mortgage loans in computer-readable form acceptable to Nikko
and Custodian.
8. ESTABLISHMENT OF THE WIRE OUT AND SETTLEMENT ACCOUNTS. For each Mortgage
-----------------------------------------------------
Loan intended to be financed by Customer through funds provided by Nikko through
Custodian (on behalf of Nikko), Customer, Nikko and Custodian agree as follows:
(a) Custodian shall establish and maintain a deposit account (the "Wire Out
Account") for and on behalf of Nikko entitled "Nikko Financial Services,
Inc. Wire Out Account Reference: (Customer)." Upon request, Custodian
--------
shall provide the Closing Agent, Customer or Nikko with the federal wire
reference number or bank check number for a particular payment. All
related fees and expenses for such Wire Out Account shall be borne by
Customer.
(b) Custodian shall establish and maintain a deposit account (the "Settlement
Account") for and on behalf of Nikko entitled "Nikko Financial Services,
Inc. Settlement Account Reference: (Customer)." Customer will cause all
--------
proceeds from the sale of each Mortgage Loan subject to this Agreement to
be sent by the purchaser thereof directly to the Settlement Account and
Customer shall provide Custodian and Nikko with (i) written notice of funds
anticipated to be received by Custodian and Nikko respectively, (ii) a copy
of the purchase advice, if any, relating to such Mortgage Loan received
from the purchaser thereof, and (iii) a list of loan numbers to which such
funds relate. If Custodian does not receive funds in the amount of the
notice received under Section 8(b)(i) above, Custodian shall immediately
notify Nikko. All related costs, fees and expenses for such Settlement
Account shall be borne by Customer.
(c) Unless otherwise agreed, Customer will submit to Custodian and Nikko a
position and settlement report (the "P&S Report") in accordance with
procedures as are separately agreed to by Custodian and Nikko. Unless
otherwise agreed between Customer and Custodian, with respect to the Wire
Out Account, Customer will enter disbursement instructions through
Custodian's wire system or bank check system. Unless otherwise directed in
writing by Nikko, following receipt by Custodian of the relevant P&S
Report, an executed Collateral Receipt and all applicable Required
Documents, Custodian will release such wire instructions or bank checks and
immediately disburse such funds provided (i) sufficient funds exist in the
Wire Out Account, (ii) such instructions do not include Customer as payee,
4
<PAGE>
(iii) if applicable, Custodian has received an executed Escrow Letter from
the payee, and (iv) the payee on the Escrow Letter agrees with the payee
stated on the disbursement instructions. If a conflict exists between the
above instructions of Nikko and the instructions of Customer, Custodian
shall follow Nikko's instructions.
(d) Custodian will immediately disburse such funds in the Settlement Account as
directed in such P&S Report provided (i) sufficient funds exist in the
Settlement Account and (ii) Nikko has authorized such disbursements.
Notwithstanding the foregoing, if a conflict exists between the
instructions of Nikko and the instructions of Customer, Custodian shall
follow Nikko's instructions. Custodian shall have the right to correct
such P&S Report on behalf of Customer for errors and/or omissions, which
corrections shall be deemed to have been made by Customer.
9. CERTIFICATION OF DOCUMENTATION; ELIGIBLE COLLATERAL. (a) Custodian, upon
---------------------------------------------------
receipt of all of the GNMA, FNMA, FHLMC, Interim, or Table Funding Required
Documents, as the case may be (collectively, the "Required Documents"), shall
review the related Collateral Receipt and such Required Documents in accordance
with the review and certification guidelines established by the respective
Agency or Nikko (as separately agreed to by Nikko and Custodian), as the case
may be, for their respective pool of Mortgage Loans to verify whether (i) all of
the Required Documents are in its possession, (ii) such documents have been
reviewed by it and appear regular on their face and relate to such Mortgage
Loan, (iii) based on its examination of such documents, the Required Documents
on their face satisfy the requirements set forth in Section 3, 4, 5, 6 or 7, as
applicable, and (iv) the related Collateral Receipt has been executed by an
Authorized Representative of Customer. Custodian makes no representations or
warranties as to and shall not be responsible to verify (i ) the validity,
legality, enforceability, sufficiency, due authority, recordability or
genuineness of any Required Document or of any of the Mortgage Loans or (ii) the
collectability, insurability, effectiveness or suitability of any such Mortgage
Loan. Subject to the provisions set forth in Section 6 hereof with respect to
Wet Mortgage Loans, Custodian shall notify Customer and Nikko in the form of an
exception report of any documents that are missing, incomplete on their face or
patently inconsistent. Customer shall promptly deposit such missing documents
with Custodian or complete or correct the documents. When the executed
Collateral Receipt and the related Required Documents have been received in full
and correct form, Custodian will: (a) promptly deliver a signed trust receipt
substantially in the form attached hereto ("Trust Receipt") to Nikko and its
designee, (b) promptly deliver a copy of the Warehouse Lender's Release Letter
if applicable to Nikko, (c) upon the written request of Customer, promptly
deliver the Required Documents referred to in Sections 3(f), (g), (h) and (i),
4(e), (f) and (g), 5 (a), (b), (e), (f), (g) and (h) and 7(a)(i) and (ii) or
7(b) (as applicable) to an Agency or an Authorized Purchaser, as the case may
be, (d) upon written request of Nikko, deliver either the original Required
Documents or copies thereof to Nikko, and (e) promptly transmit to Nikko and/or
its designee a schedule of mortgage loans underlying each Trust Receipt in
computer-readable form acceptable to Nikko and Custodian. In making such
verification, Custodian may rely conclusively on the Collateral Receipt
completed by Customer and the Required Documents, and Custodian shall have no
obligation to independently verify the correctness of Customer's certification
on such Collateral Receipt or the effectiveness, sufficiency, due authorization,
validity, enforceability, collectibility, recordability or adequacy of such
Collateral Receipt and the Required Documents.
(b) All Mortgage Loans deposited with Custodian under a Collateral Receipt
shall be deemed pledged to Nikko as Collateral. However, for purposes of
preparing the Trust Receipt, unless Custodian is notified by Nikko in writing to
the contrary, such Trust Receipt shall not include (i) second mortgages or (ii)
Mortgage Loans originated thirty (30) days or more prior to the requested
Advance Date, and such Trust Receipt shall not include, and shall deduct if
previously included: (i) Mortgage Loans with respect to which any Required
Documents have been returned to Customer for more than eighteen (18) days, (ii)
Mortgage Loans shipped to an Authorized Purchaser for more than thirty (30)
days, unless Custodian has received a confirmation from such Authorized
Purchaser that it will pay for such Mortgage Loan, and (iii) Mortgage Loans
subject to an Advance for more than seventy five (75) days. Custodian shall be
entitled to rely upon Nikko's information with respect to the preceding
exclusions. No notification by Nikko to Custodian pursuant to the preceding
sentence shall be effective unless the same shall be signed by Nikko, and any
such notification shall be effective only in the specific instance and for the
specific purpose for which given.
10. FURTHER OBLIGATIONS OF CUSTODIAN. For each Mortgage Loan held by Custodian
--------------------------------
under a Trust Receipt, Custodian shall maintain such mortgage loan data in
computer-readable form as separately agreed to in the review procedures
established by Nikko and Custodian and shall transmit such data electronically
each evening to Nikko and/or its designee in a format as established by Nikko
and Custodian.
Custodian shall immediately notify Nikko if (i) Customer fails to pay any amount
due Custodian under this Agreement or otherwise, or (ii) Custodian has actual
knowledge that any mortgage, pledge, lien, security interest or other charge or
5
<PAGE>
encumbrance (other than for the benefit of Nikko) has been placed on any account
maintained by Customer with Custodian or on the Required Documents or that an
Agency has rejected any Required Document.
Custodian shall use reasonable care and due diligence in the performance of its
duties hereunder, shall hold the Required Documents in its fire rated storage
vault under its exclusive custody and control in accordance with customary
standards for such custody and shall maintain a fidelity bond plus document
hazard insurance in amounts as will be separately disclosed to Nikko.
Custodian hereby represent and warrants to Nikko that Custodian is not
controlled by, under common control with or otherwise affiliated with Customer,
and covenants and agrees with Nikko that prior to any such affiliation in the
future, Custodian shall promptly notify Nikko, and that this Agreement has been
duly authorized, executed and delivered by Custodian and constitutes the legal,
valid and binding obligation of Custodian, enforceable in accordance with its
terms.
Custodian hereby agrees to recognize any security interest or lien granted by
Customer to NSI.
11. RELEASE OF REQUIRED DOCUMENTS. (a) Customer may from time to time request
-----------------------------
Nikko and Custodian in writing to permit the temporary withdrawal of certain
Required Documents for the purpose of correction of errors therein or for
permanent withdrawal. Custodian may permit the withdrawal of up to two (2)
mortgage files for the purpose of correcting such Required Documents without the
written consent of Nikko. Any request for permanent release, or any request for
temporary release beyond the two (2) mortgage files, will require the prior
written consent of Nikko and shall be in the form of the Document Request
attached hereto (the "Document Request") from Customer. Customer shall be
responsible for obtaining Nikko's signature on such Document Request if item 3
or 4 thereof is circled. Custodian shall execute such Document Request, shall
return one (1) copy to Customer, shall forward one (1) copy to Nikko and shall
retain the original. Promptly upon completion of such correction and in any
event within eighteen (18) days, Customer shall return such Required Documents
to Custodian. Custodian shall immediately notify Nikko if Customer has not
returned such Required Documents to it within the eighteen (18) days.
(b) If Customer desires to sell Mortgage Loans to an Agency or Authorized
Purchaser, Custodian shall complete the endorsements at the Customer's expense
and shall forward such related Required Documents as instructed by Customer in
writing to effect such securitization by, or sale to, the respective Agency or
Authorized Purchaser, together with a duly executed and completed Bailee Letter.
Customer shall make a reasonable effort to require such Authorized Purchaser to
execute such Bailee Letter and return it to Custodian.
12. RIGHT TO INSPECT. Custodian shall permit (i) inspection at all reasonable
----------------
times during regular business hours by Nikko (or by its auditors when requested
by Nikko) of the Required Documents and the records of Custodian relating to
this Agreement and (ii) Nikko (or its auditors when requested by Nikko) to make
copies of the Required Documents and the records of Custodian relating to this
Agreement at the expense of Nikko.
13. DELIVERY OF REQUIRED DOCUMENTS TO NIKKO. Custodian shall promptly deliver
---------------------------------------
to Nikko or its designee any or all Required Documents and other items of
Collateral in Custodian's custody upon Nikko's written request. Nikko shall
provide Customer with a copy of any such notice delivered to Custodian. Written
instructions as to the method of shipment and shipper(s) Custodian is directed
to utilize in connection with the delivery of Required Documents in the
performance of Custodian's duties hereunder shall be delivered by Nikko to
Custodian prior to any shipment of Required Documents pursuant to the request of
Nikko hereunder. Nikko will arrange for the provision of such services at its
sole cost and expense (or, at Custodian's option, reimburse Custodian for all
costs and expenses incurred by Custodian consistent with such instructions) and
will maintain such insurance against loss or damage to the Required Documents as
Customer deems appropriate.
14. CUSTODIAN FEES. It is understood that Custodian or its successor will
--------------
charge such fees for its services under this Agreement as are set forth in a
separate agreement between Custodian and Customer, the payment of which,
together with Custodian's expenses in connection herewith, shall be solely the
obligation of Customer.
15. TERMINATION. Custodian may terminate its obligations under this Agreement
-----------
upon thirty (30) days' prior written notice to Customer and Nikko. In the event
of such termination, Customer shall appoint a successor custodian, which shall
not be affiliated with Customer and shall be subject to approval by Nikko, and
Custodian shall promptly transfer to the successor custodian, as directed by
Nikko, all Required Documents and other items of Collateral being held by
Custodian
6
<PAGE>
under this Agreement. If, however, a successor custodian is not appointed by
Customer or Nikko within sixty (60) days, all duties and obligations of
Custodian shall cease and terminate. Custodian's sole responsibility thereafter
shall be to safely maintain all of the Custodian's mortgage files and to deliver
the same to a successor custodian, provided, however, if Customer and Nikko have
not appointed a successor custodian within thirty (30) days after the expiration
of the aforementioned sixty (60) day period, Custodian shall deliver such
documents to Nikko.
16. REPRESENTATIONS BY CUSTOMER. Customer hereby represents and warrants to
---------------------------
Nikko and Custodian that:
(a) The proceeds of each Mortgage Loan have been fully advanced to the obligor
under the Mortgage Note or in accordance with the written directions of the
obligor as contained in the obligor's loan application;
(b) Any and all funds advanced into the Wire Out Account pursuant to Customer's
request in accordance with Section 8(a) shall be deemed to be an Advance to
Customer;
(c) The Wire Out Account shall be used only to disburse funds for the sole
purpose of funding the related Mortgage Loan or to return funds to Nikko;
(d) Except for any funds to be advanced by Nikko as contemplated by Section
6(f), all other documents and requirements to create an enforceable first
or second lien mortgage, as applicable, on the related real property have
been completed and duly executed with respect to each Mortgage Loan held by
Custodian pursuant to this Agreement; and
(e) All Required Documents related to such Mortgage Loans withdrawn from
Custodian shall be held in trust by Customer for Nikko, and Customer will
not attempt to pledge, hypothecate or otherwise transfer such Mortgage
Loans to any other party until the related Advance has been paid in full.
17. NOTICES. All written communications hereunder shall be mailed, telecopied
-------
or delivered to each party at its address as indicated on the signature page
hereof or at such other address as shall be designated by such party in a
written notice to the other parties. All notices and communications shall be
effective when delivered.
18. CONCERNING THE CUSTODIAN. Custodian shall not be liable for any action or
------------------------
omission to act hereunder, except for its own negligence or wilful misconduct.
In no event shall Custodian have any responsibility to ascertain or take action
with respect to the Required Documents or other items of Collateral, except as
expressly provided herein. Custodian may act in reliance upon any written
communication of Customer and Nikko concerning the delivery of the Required
Documents and other items of Collateral pursuant to this Agreement. Custodian
does not assume and shall have no responsibility for, and makes no
representation as to monitoring the value of the Required Documents and other
items of Collateral.
19. REPRESENTATIONS BY CUSTODIAN. Custodian hereby represents and warrants
----------------------------
that it does not have, and will not assert, any security interest, lien, claim
or other adverse interest against the Required Documents or any other item of
Collateral. Custodian represents that it has the authority to enter into this
Agreement and that this Agreement has legality, validity, binding effect and
enforceability with respect to Custodian.
20. DUTIES OF CUSTODIAN. Custodian shall have no duties or responsibilities,
-------------------
and shall be under no responsibility or duty with respect to the disposition of
any Required Documents while such Required Documents are not in its possession,
except those that are specifically set forth herein or mutually agreed to with
Nikko in writing. If Custodian shall request instructions from Nikko with
respect to any act, action or failure to act in connection with this Agreement,
Custodian shall be entitled to refrain from taking such action and continue to
refrain from acting unless and until Custodian shall have received written
instructions from Nikko without incurring any liability therefor to Nikko,
Customer or any other person.
If Custodian shall at any time receive conflicting instructions from Nikko and
Customer with respect to the Required Documents and the conflict between such
instructions cannot be resolved by reference to the terms of this Agreement,
Custodian shall be entitled to rely on the instructions of Nikko. In the
absence of bad faith, negligence or wilful misconduct on the part of Custodian,
Custodian may conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon any request, instruction,
certificate, opinion or other document furnished to Custodian, reasonably
believed by Custodian to be genuine and to have been signed or presented by the
proper party or parties and conforming to the requirements of this Agreement.
Custodian may rely upon the validity of documents delivered to it, without
investigation as to their authenticity or legal effectiveness, and Customer will
hold Custodian
7
<PAGE>
harmless from any claims that may arise or be asserted against Custodian because
of the invalidity of any such documents or their failure to fulfill their
intended purpose. Custodian shall not be responsible to Nikko or any other party
for recitals, statements or warranties or representations of Customer or Nikko
contained herein or in any document, or be bound to ascertain or inquire as to
the performance or observance of any of the terms of this Agreement or any other
agreement on the part of any party, except as may otherwise be specifically set
forth herein. No provision of this Agreement shall require Custodian to expend
or risk its own funds or otherwise incur financial liability in the performance
of its duties under this Agreement if it shall have reasonable grounds for
believing that repayment of such funds or adequate indemnity is not reasonably
assured to it. Custodian may consult with counsel with regard to legal questions
arising out of or in connection with this Agreement and the advice or opinion of
such counsel shall be full and complete authorization and protection in respect
of any action taken, omitted or suffered by Custodian in good faith in
accordance therewith.
Nikko hereby authorizes and directs Custodian to sign on behalf of Nikko each of
the Required Documents referred to in Sections 3, 4 and 5 hereof. Without
limiting the generality of the foregoing, Custodian may rely upon and shall be
protected in acting in good faith upon any notice or other communication
received by it and which it reasonably believes to be genuine and duly
authorized with respect to all matters pertaining to this Agreement and its
duties hereunder; provided, however, that nothing set forth in this section
shall relieve Custodian of its obligations set forth in Section 9 of this
Agreement.
21. INDEMNIFICATION. Customer agrees to reimburse, indemnify and hold harmless
---------------
Custodian, its directors, officers, employees or agents from and against any and
all cost, expense, loss or other liability, including reasonable fees and
expenses of counsel arising from or connected with Custodian's execution and
performance of this Agreement and any review procedures and certification
guidelines established by the respective Agency or Nikko ("Costs"), including
but not limited to the claims of any third parties, including Nikko, except in
the case of Costs resulting from negligence or wilful misconduct on the part of
Custodian. To the extent Custodian is not reimbursed, indemnified or held
harmless by Customer, Nikko will reimburse, indemnify and hold harmless
Custodian, its directors, officers, employees and agents for Costs arising from
any action or refraining from action in accordance with instructions given to
Custodian by Nikko, except in the case of Costs resulting from negligence or
wilful misconduct on the part of Custodian, and Customer shall reimburse Nikko
for any sums so expended by Nikko. Custodian may enter into a settlement
agreement with respect to any matter for which indemnity is granted pursuant to
this paragraph. The foregoing indemnification shall survive any resignation of
the Custodian or termination of this Agreement.
22. AUTHORIZATIONS. The persons whose signatures and titles appear on the
--------------
signature page hereof ("Authorized Representatives"') are authorized, acting
singly, to act for Customer, Nikko or Custodian, as the case may be, under this
Agreement. From time to time, each party may supplement or amend the list of
Authorized Representatives and specimen signatures by notice to the other
parties, but each of the parties shall be entitled to rely conclusively on the
then current list until receipt of a superseding list. Custodian may rely, and
shall be protected in acting or refraining from action, upon any written
instruction, notice, order, request, direction, certificate, opinion or other
instrument or document believed by Custodian to be genuine and to have been
signed or presented by an Authorized Representative in the case of Customer and
Nikko and by the proper party or parties, in all other cases.
23. AMENDMENTS, ETC. Except as otherwise expressly provided herein, no
---------------
amendment or waiver of any provision of this Agreement nor consent to any
failure to comply herewith shall in any event be effective unless the same shall
be in writing and signed by all the parties hereto (provided that Nikko may
modify the Required Documents and may, if applicable, specify any additional
Required Documents to be delivered in connection with the Mortgage Loans by
giving notice of such modification or specification to Customer and Custodian,
which notice is not objected to by Customer within one (1) business day after
being given), and then such amendment, waiver or consent shall be effective only
in the specific instance and for the specific purpose for which given. This
Agreement constitutes the entire agreement and understanding of the parties with
respect to those matters and transactions contemplated by this Agreement and
supersedes any prior agreement and understandings with respect to those matters
and transactions. The provisions of this Agreement set forth the exclusive
duties of Custodian, and no implied duties shall be read into this Agreement
against Custodian. Schedule I hereto may be amended from time to time by
agreement between Nikko and Customer with notice to Custodian.
24. SEVERABILITY. If any provision of this Agreement is declared invalid by
------------
any court of competent jurisdiction, such invalidity shall not affect any other
provision, and this Agreement shall be enforced to the fullest extent permitted
by law.
8
<PAGE>
25. BINDING EFFECT; GOVERNING LAW. This Agreement shall be binding and inure
-----------------------------
to the benefit of the parties hereto and their respective successors and
assigns, provided, however, that neither Customer nor Custodian may assign this
Agreement or any of its rights or obligations hereunder, except with the prior
written consent of Nikko. Nikko may pledge or assign its security interest in
or lien on certain items of Collateral held by Custodian hereunder, whereupon
Nikko will act for the benefit of such assignee hereunder. This Agreement shall
be construed in accordance with, and governed by the law of the State of New
York, without giving effect to the conflict of law principles thereof. The
parties hereto waive trial by jury. Customer, Custodian, and Nikko each
irrevocably consent to the non-exclusive jurisdiction of any court of the State
of New York, or in the United States District Court for the Southern District of
New York in any action or proceeding arising out of or relating to this
Agreement. The parties hereby submit to, and waive any objection they may have
to personal jurisdiction and venue in, the courts of the State of New York and
the United States District Court for the Southern District of New York, over any
disputes arising out of or relating to this Agreement.
26. CONFLICTING DOCUMENTS. In the event that the written review procedures
established by the respective Agency or Nikko and Custodian conflict with this
Agreement, such review procedures shall prevail. Upon Custodian's actual
knowledge, Custodian shall immediately notify Nikko in writing of any such
conflict.
IN WITNESS WHEREOF, the parties have signed this Agreement as of the date and
year first above written.
Preferred Credit Corporation, as Customer
By: /s/ Todd A. Rodriguez
---------------------------------------
Name: Todd A. Rodriguez
-------------------------------------
Title: C.E.O.
------------------------------------
Address: 3347 Michelson Drive, Suite 400, Irvine CA 92612
Attention:
--------------------------------
Telephone: (714) 474-0700
Facsimile: (714) 660-3872
Bankers Trust Company of California, N.A., as Custodian
By: /s/ Gary Vaughan
--------------------------------
Name: Gary Vaughan
Title: Vice President
Address: 3 Park Plaza, 16th Floor, Irvine, CA 92614
Attention: Tri-Party Custody/Nikko
Telephone: (714) 253-7535
Facsimile: (714) 253-7577
Nikko Financial Services, Inc.
By: /s/ Roddy R. Ennico
--------------------------------
Name: Roddy R. Ennico
Title: Managing Director
Address: 200 Liberty Street, 28th Floor, New York, New York 10281-1092
Attention: Asset-Backed Finance Desk
Telephone: (212) 416-5421
Facsimile: (212) 416-5561
9
<PAGE>
SCHEDULE I
LIST OF AUTHORIZED PURCHASERS
BankAmerica
Bear Stearns Mortgage Capital, Inc.
Capstead Mortgage Corporation
Chase Mortgage Corporation
Citicorp Mortgage, Inc.
Countrywide Funding Corporation
Countrywide Home Loans
CWM Mortgage Holdings, Inc.
DLJ Mortgage Capital, Inc.
Federal National Mortgage Association
Federal Home Loan Mortgage Corporation
CS First Boston Corporation
First Nationwide
Flagstar Bank
Fleet Mortgage Corporation
Fleet Mortgage Group
GE Capital Mortgage Services, Inc.
Greenpoint Mortgage Corporation
Greenwich Capital Markets
Headland Mortgage Company
HomeSide Mortgage Corporation
Household Mortgage
Imperial Credit Industries, Inc.
Independent National Mortgage Corporation
Industrial Bank of Japan
Inland Mortgage
Marine Midland Mortgage
Mellon Mortgage Co.
Merrill Lynch Mortgage Capital, Inc.
Nationsbank Mortgage Corporation
North American Mortgage Co.
Norwest Mortgage, Inc.
PHH Mortgage Services
PNC Mortgage Securities Corporation of America
PNC Mortgage Corporation of America
Principal Residential Mortgage
Residential Funding Corporation
Resource Bancshares Mortgage
Saxon Mortgage Funding Corporation
Source One Mortgage
Standard Federal Bank
- --------------------------------------------
- --------------------------------------------
- --------------------------------------------
- --------------------------------------------
- --------------------------------------------
10
<PAGE>
COLLATERAL RECEIPT NUMBER __________
Date: ________________
AGGREGATE FACE VALUE: $ AGGREGATE UNPAID PRINCIPAL BALANCE $
---------- -------
Bankers Trust Company of California, N.A.
3 Park Plaza, 16th Floor
Irvine, CA 92614
RE: Delivery of Required Documents to Custodian pursuant to the Tri-Party
Custody Agreement dated June 13, 1997 (the "Custody Agreement") among Preferred
Credit Corporation ("Customer"), Bankers Trust Company of California, N.A.
("Custodian") and Nikko Financial Services, Inc. (with its successors and
assigns, "Nikko"). Capitalized terms not defined herein have the respective
meanings assigned thereto in the Custody Agreement.
In consideration of Nikko making an Advance to finance the Mortgage Loans having
an aggregate face value and unpaid principal balance as indicated above, as more
fully described in a schedule attached hereto, the undersigned duly authorized
officer of Customer hereby certifies, represents and warrants that:
(a) it does hereby convey, transfer, mortgage, hypothecate, pledge, grant and
assign to Nikko and its successors and assigns, a first priority perfected
security interest in and lien on all of Customer's right, title and
interest in, under and to the properties, estates, rights and privileges,
whether now existing or hereafter acquired in all documents related to such
Mortgage Loans (including but not limited to mortgages, insurance policies,
loan applications and appraisals) and any and all proceeds therefrom, until
the Advances secured by such Mortgage Loans are repaid in full;
(b) the Required Documents with respect to such Mortgage Loans have been or are
hereby submitted to Custodian pursuant to the Custody Agreement;
(c) all other documents related to such Mortgage Loans have been or will be
created and held by Customer in trust for Nikko;
(d) the following statements are true and correct on the date hereof: (i) each
of the representations and warranties contained in all of the documents
executed by Customer related to the Advances collateralized by the Mortgage
Loans identified herein are true and correct in all material respects, (ii)
no Default or Event of Default has occurred and is continuing, and (iii) if
applicable, Customer has delivered and validly assigned genuine and
enforceable purchase commitments to The Nikko Securities Co. International,
Inc., each in an aggregate amount equal to the face value of the relevant
mortgage pool. At the request of Nikko, all documents related to such
Mortgage Loans will be immediately delivered to Custodian, Nikko or its
assigns and may be inspected or verified at any time by such parties;
(e) except for Mortgage Loans expressly identified on the attached schedule as
being secured by second mortgages, each Mortgage Loan listed on Schedule I
hereto is secured by a valid and enforceable "first lien" (as customarily
referred to in the industry) on existing site-built residential real
property; and
(f) (check the applicable statement below:)
__ no lien exists with respect to the Mortgage Loans listed on the attached
schedule;
__ a lien secured by Mortgage Loans listed on the attached schedule is
still in effect with Nikko; or
__ a lien secured by the Mortgage Loans identified herein is currently in
effect and a Warehouse Lender's Release Letter has been delivered to
Custodian under separate cover.
Preferred Credit Corporation, as Customer
By:
---------------------------------------
Title:
------------------------------------
11
<PAGE>
WAREHOUSE LENDER'S RELEASE LETTER
Date: _______________, 199__
Nikko Financial Services, Inc.
200 Liberty Street, 28th Floor
New York, New York 10281-1092
Attn.: Operations/Asset-Backed Finance
Facsimile: (212) 416- 5531
RE: Customer: Preferred Credit Corporation
RE: Agency ___________ Identification/Pool # _________ Security Rate _____%
Maturity: __________
The undersigned (the "Warehouse Lender") hereby releases all right, interest or
claim of any kind with respect to the mortgage loans (including all related
items constituting the complete file for each such mortgage loan) constituting
the mortgage pool referenced above, as may be further described in the attached
schedule, such release to be effective automatically without any further action
by any party, upon payment for the account of Customer of $________________ in
immediately available funds to account number #_______________ at (specify Bank)
for the account of ________________________________________________.
Very truly yours,
_______________________________________________, as Warehouse Lender
By:
--------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
Telephone:
-------------------------------------
copy to:
Preferred Credit Corporation, as Customer
Address:
-------------------------------------
- ----------------------------------------------
Attention:
-----------------------------------
Note: The above dollar amount should be EQUAL TO or LESS THAN the amount being
funded.
If no lien exists, this form must still be sent - Customer should put a slash
through the form, indicate "NOT APPLICABLE" and sign.
12
<PAGE>
BAILEE LETTER
Date: _______________, 199__
Purchaser:
--------------------------
Address:
---------------------------
Attention:
--------------------------
Gentlemen:
Attached please find those mortgage loans listed separately on the attached
schedule (the "Mortgage Loans"), which Mortgage Loans are owned by Preferred
Credit Corporation ("Customer") and are being delivered to you for purchase.
The Mortgage Loans comprise a portion of the Collateral (as such term is defined
in the Tri-Party Custody Agreement ("Custody Agreement"), dated June 13, 1997,
as it may hereafter be amended, by and among Customer, Bankers Trust Company of
California, N.A. as Custodian ("Custodian"), and Nikko Financial Services, Inc.
(with its successors and assigns, "Nikko")). Each of the Mortgage Loans is
subject to a security interest in favor of Nikko, which security interest shall
be automatically released upon Nikko's receipt of the full amount of the
purchase price of such Mortgage Loan (as set forth on the schedule attached
hereto) by wire transfer to the following account maintained with Nikko:
Bankers Trust Company of California, N.A. ABA#021001033, Account #__________
for further credit to Nikko Financial Services, Inc. Settlement Account,
Reference: (Customer)
--------
Pending your purchase of each Mortgage Loan and until payment therefor is
received by Nikko, the aforesaid security interest therein will remain in full
force and effect, and you shall hold possession of such Collateral and the
documentation evidencing same as custodian, agent and bailee for and on behalf
of Custodian for Nikko. In the event any Mortgage Loan is unacceptable for
purchase, return the rejected item directly to the undersigned at the address
set forth below. In no event shall any Mortgage Loan be returned or sales
proceeds remitted to the Customer. The Mortgage Loan must be so returned or
sales proceeds remitted in full no later than twenty-one (21) days from the date
hereof, unless otherwise agreed by Custodian. If you are unable to comply with
the above instructions, please so advise the undersigned immediately.
NOTE: BY ACCEPTING THE MORTGAGE LOANS DELIVERED TO YOU WITH THIS LETTER, YOU
CONSENT TO BE THE CUSTODIAN, AGENT AND BAILEE FOR CUSTODIAN ON BEHALF OF NIKKO
ON THE TERMS DESCRIBED IN THIS LETTER. THE UNDERSIGNED REQUESTS THAT YOU
ACKNOWLEDGE RECEIPT OF THE ENCLOSED MORTGAGE LOANS AND THIS LETTER BY SIGNING
AND RETURNING THE ENCLOSED COPY OF THIS LETTER TO THE UNDERSIGNED AT THE
FOLLOWING ADDRESS: 3 PARK PLAZA, 16TH FLOOR, IRVINE, CA 92614 ATTENTION: CUSTODY
DEPARTMENT. HOWEVER, YOUR FAILURE TO DO SO DOES NOT NULLIFY SUCH CONSENT.
Sincerely, Acknowledged and Agreed:
Bankers Trust Company of -----------------------------------------
California, N.A. as Purchaser
as Custodian for Nikko,
its successors and assigns
By: By:
-------------------------------- --------------------------------------
Name: Name:
------------------------------ ------------------------------------
Title: Title:
----------------------------- ----------------------------------
13
<PAGE>
ESCROW LETTER
ADDENDUM TO ESCROW INSTRUCTIONS
-------------------------------
Dated: _______________, 199__
Escrow #: ______________________________________
Customer: ______________________________________
The funds to be used for closing this transaction may be provided via wire
transfer from Bankers Trust Company of California, N.A.
You are to hold the closing funds in trust for Bankers Trust Company of
California, N.A. until such time as the funds are disbursed in accordance with
the escrow instructions. If the loan is not funded within three (3) business
days of receipt of the funds, you are to return such funds via federal funds
wire to Bankers Trust Company of California, N.A. as follows:
Bankers Trust Company of California, N.A., ABA#021001033 for further credit to
Account #__________________ Reference: /Nikko/(Customer)
--------
Between the time the funds are received and the loan is funded you are to accept
instructions regarding the use of the funds that are in conflict with the escrow
instructions only in writing from Bankers Trust Company of California, N.A..
This Addendum to Escrow Instructions shall be irrevocable and can only be
modified with the express written approval of Bankers Trust Company of
California, N.A.
Agreed and Acknowledged:
Closing Agent: ________________________________________
By: ___________________________________________________
Escrow Officer
14
<PAGE>
DOCUMENT REQUEST
To: Bankers Trust Company of California, N.A.
Request #_______________________
Re: Tri-Party Custody Agreement, among Nikko Financial Services, Inc. (with its
successors and assigns, "Nikko"), Preferred Credit Corporation ("Customer") and
Bankers Trust Company of California, N.A. ("Custodian"), dated June 13, 1997
(the "Custody Agreement").
In connection with the Mortgage Loans held by Custodian for Nikko, Customer
hereby requests and acknowledges receipt of the Required Documents for the
Mortgage Loan described below, for the reason indicated. Custodian, Nikko and
Customer shall, by signature below, acknowledge such action as appropriate, and
Customer certifies that it has sent a copy of this Document Request to the other
parties. Customer agrees that all Required Documents received by it must be
returned or sales proceeds remitted in full to Custodian no later than eighteen
(18) calendar days from the date hereof.
Mortgagor's Name, Address and Zip Code:_________________________________________
Mortgage Loan Number: ______________________ Original Principal Amount: $______
Reason for withdrawing Required Documents (circle one):
1. Mortgage Loan has been paid in full
2. Mortgage Loan is being permanently withdrawn from the Collateral
3. Mortgage Loan is in foreclosure
4. Mortgage Loan being temporarily withdrawn for document correction (explain)
If item 1 or 2 is circled, Customer hereby certifies that the related Advance
has been repaid in full and Custodian, upon determining that the related Advance
has been repaid in full, shall release to Customer any and all documents in its
possession relating to the specified Mortgage Loan.
If item 3 or 4 is circled, Custodian shall release the specified documents to
Customer and Customer acknowledges that (a) such documents are being held by
Custodian in pledge on behalf of and as agent for Nikko pursuant to the Custody
Agreement and are subject to a security interest in favor of Nikko, and (b) it
agrees to hold such documents as custodian, agent and bailee for and on behalf
of Custodian for Nikko.
<TABLE>
<S> <C>
Date: By: as Customer
-------------------------------- -------------------------
Date: By: as Custodian
-------------------------------- -------------------------
Date: By: as Nikko (if item 3 or 4 is circled)
-------------------------------- -------------------------
Acknowledgment that documents have been released to, and received by, Customer:
Date: By: as Customer
-------------------------------- ------------------------
Acknowledgment that documents have been returned to Custodian:
Date: By: as Customer
-------------------------------- -------------------------
Date: By: as Customer
-------------------------------- -------------------------
</TABLE>
15
<PAGE>
TRUST RECEIPT
Dated: ____________________ , 199__
TRUST RECEIPT NUMBER: ORIGINAL PRINCIPAL BALANCE: $
------------ ----------------
NIKKO CUSIP NUMBER: UNPAID PRINCIPAL BALANCE: $
-------------- ----------------
(UPB to be left blank by Custodian)
The Bank of New York
One Wall Street, 5th Floor
New York, New York 10286
Re: Tri-Party Custody Agreement dated June 13, 1997, between Preferred Credit
Corporation, ("Customer"), Nikko Financial Services, Inc. (with its
successors and assigns, "Nikko") and Bankers Trust Company of California,
N.A., ("Custodian") (the "Custody Agreement").
In accordance with the provisions of the above-referenced Custody Agreement, the
undersigned, as Custodian, hereby certifies that, as to each mortgage loan
described in the schedule attached hereto ("Mortgage Loan"), it has reviewed its
required document files and has determined that (check the applicable item):
__ (a) it is in receipt of (i) the original note ("Note"), endorsed to
Custodian or in blank, and (ii) the related original assignment of mortgage,
with assignee as Custodian or in blank but otherwise in recordable form, but
not recorded ("Assignment"); or
__ (b) with respect to Wet Mortgage Loans, it has received a Wet Closing Notice
in accordance with the requirements of Section 6(f) of the Custody
Agreement.
The undersigned as custodian, hereby further certifies that (i) such Required
Documents have been reviewed by it and appear regular on their face and relate
to such Mortgage Loan, (ii) such Required Documents are in its possession, and
(iii) such Required Documents are being held by it for Nikko.
At any time, upon request of Nikko you may exchange this original Trust Receipt
for two or more trust receipts (the "Substitute Trust Receipts") each of which
will be in substantially the form of this Trust Receipt and relate to such
Mortgage Loans as may be specified by Nikko.
This Trust Receipt is not negotiable. You may only transfer this Trust Receipt
by an endorsement by Nikko provided that (i) this Trust Receipt is held by you,
acting as custodian for Nikko or under the applicable tri-party custody
agreement ("Repo Custody Agreement") in connection with the applicable Master
Repurchase Agreement (the "Repurchase Agreement") and (ii) an Event of Default
certificate (as defined in the Repo Custody Agreement) has been received by you,
or issued by you, and then you may transfer this Trust Receipt or the
appropriate Substitute Trust Receipt to the buyer under the applicable
Repurchase Agreement (the "Buyer").
We will accept and act on instructions with respect to this Trust Receipt or the
Mortgage Loans only upon surrender of this receipt at our office, located at 3
Park Plaza, 16th Floor, Irvine, CA 92614, Attention: Tri-Party Custody/Nikko.
If this Trust Receipt has been endorsed and is held by Buyer, we will accept and
act on instructions from the endorsee only if the Event of Default certificate
is executed and delivered to us stating that an Event of Default has occurred
under a Repurchase Agreement relating to this Trust Receipt between Nikko and
the Buyer. This Trust Receipt shall be superseded and voided by a more recently
delivered Trust Receipt.
Bankers Trust Company of California, N.A., as Custodian
By:
---------------------------
Name:
-------------------------
Title:
------------------------
16
<PAGE>
EXHIBIT 10.9
REVOLVING CREDIT AND SECURITY AGREEMENT
Dated as of March ___, 1997
Between
PREFERRED CREDIT CORPORATION
and
LA SALLE NATIONAL BANK
<PAGE>
REVOLVING CREDIT AND SECURITY AGREEMENT
THIS REVOLVING CREDIT AND SECURITY AGREEMENT (the "Agreement"), dated as of
March ___, 1997, is by and between Preferred Credit Corporation, a California
corporation, formerly known as T.A.R. Preferred Mortgage Corporation, having its
principal office at 3347 Michelson, Suite 400, Irvine, California 92612 (the
"Company"), and LA SALLE NATIONAL BANK, having an office at 135 South LaSalle
Street, Chicago, Illinois 60603 (the "Lender").
The Company has requested that Lender make available this secured,
revolving credit facility to permit the Company to originate single family
mortgage loans and hold such loans prior to their sale to investors (the
"Facility"). The Facility will be secured by the Mortgage Loans (as hereinafter
defined) which are funded with proceeds of the Facility and all related
collateral held by the Lender or a custodian acting on Lender's behalf.
Accordingly, the Company and the Lender hereby agree as follows:
ARTICLE 1
DEFINITIONS
1.1 Defined Terms.
-------------
Capitalized terms defined below or elsewhere in this Agreement (including
the Exhibits and Schedules hereto) shall have the following meanings:
"Adjusted Tangible Net Worth" means with respect to any Person at any date,
---------------------------
the Tangible Net Worth of such person at such date less the value of all
----
deferred excess servicing fees plus that portion of Subordinated Debt not due
----
within one year of such date plus, but only to the extent not already included
----
in Tangible Net Worth, one percent (1.0%) of the then-current aggregate
outstanding principal balance of the Mortgage Loans then being serviced by the
Company pursuant to Servicing Contracts.
"Advance" means a disbursement by the Lender under the Facility, including
-------
readvances of funds previously advanced to the Company and repaid to the Lender.
"Advance Request" has the meaning set forth in Section 2.2(a) hereof.
--------------- --------------
"Affiliate" means any Person (as defined herein) under common control or
---------
having common shareholders owning at least ten percent (10%) thereof, whether
such common control be direct or indirect. With respect to the Company, and
notwithstanding the foregoing, all of Company's officers, shareholders,
directors, parent and subsidiary
<PAGE>
corporations, joint venturers, and partners (whether general or limited) shall
be deemed Company's Affiliates for purposes of this Agreement and the other
Credit Documents.
"Agreement" means this Revolving Credit and Security Agreement, as it may
---------
from time to time be supplemented, modified or amended.
"Assignment" means a duly executed assignment to the Lender of a Pledged
----------
Mortgage, of the indebtedness secured thereby, and of all documents and rights
related to the related Mortgage Loan.
"Business Day" means any day excluding Saturday, Sunday and any day which
------------
is a legal holiday under the laws of the State of Illinois.
"Collateral" shall mean and include:
----------
(a) (1) All Mortgage Loans, including all Mortgage Notes and
Mortgages evidencing such Mortgage Loans and the related Mortgage Loan
Documents, for which an Advance has been made by the Lender hereunder
and not repaid in full, and (2) all Mortgage Loans, including all
Mortgage Notes and Mortgages evidencing such Mortgage Loans and the
related Mortgage Loan Documents, which, from time to time, are
delivered, or caused to be delivered, to the Lender (including
delivery to a third party on behalf of the Lender) as additional
security for the payment of the Note and for the performance of all of
the Company's obligations hereunder;
(b) All mortgage insurance and all commitments issued by Insurers
to insure or guaranty any Mortgage Loans included in the Pledged
Mortgages; all Purchase Commitments held by the Company covering the
Pledged Mortgages and all proceeds resulting from the sale thereof to
Investors pursuant thereto; all personal property, contract rights,
servicing and servicing fees and income, accounts and general
intangibles of whatsoever kind relating to the Pledged Mortgages, said
Insurer commitments and the Purchase Commitments, including, without
limitation, the right to receive all insurance proceeds and
condemnation awards which may be payable in respect of the premises
encumbered by any Mortgage; and all other documents or instruments
delivered to the Lender in respect of the Pledged Mortgages.
(c) All right, title and interest of the Company in and to all
files, surveys, certificates, correspondence, appraisals, computer
programs, tapes, discs, cards, accounting records, and other
information and data of the Company relating to the Collateral;
(d) All rights (but not any liabilities) of the Company with
respect to the Investors;
(e) All property of the Company, in any form or capacity now or
at any time hereafter in the possession or control of the Lender; and
2
<PAGE>
(f) All products and proceeds of any and all of the foregoing.
"Collateral Documents" shall mean and include:
--------------------
(1) Note shipping instructions, in form and content satisfactory
to Lender;
(2) An original executed Mortgage Note, endorsed by the Company
in blank, without recourse;
(3) A certified copy of the Mortgage;
(4) An original Assignment to Lender, in recordable form, with
legal description; and
(5) Such other documents which may be required by Lender with
respect to any Advance pursuant to its procedures and documentation
set forth on Exhibit B hereto.
---------
"Collateral Value" means with respect to any Mortgage Loan the lesser of
----------------
(i) the Mortgage Note Amount of such Mortgage Loan or (ii) ninety-eight percent
(98%) of the committed purchase price set forth in the Purchase Commitment for
the Mortgage Loan.
"Commitment" has the meaning set forth in Section 2.1(a) hereof.
---------- --------------
"Company" has the meaning set forth in the preamble to this Agreement.
-------
"Conventional Mortgage Loan" means a Mortgage Loan other than a FHA-insured
--------------------------
or VA-guaranteed Mortgage Loan, which meets all the requirements for sale to
FNMA or FHLMC.
"Credit Application" means that certain Warehouse Line Application
------------------
submitted by Company to Lender and dated __________ ___, 1997.
"Credit Documents" this Agreement, the Note, the Guaranty, any and all
----------------
agreements pursuant to which the Debt of the Company has been subordinated to
the Facility, and all other documents and instruments evidencing or securing the
Facility, as the same may from time to time be supplemented, modified or
amended.
"Debt" means, with respect to any Person, as of any date of determination
----
thereof, without duplication, (i) all obligations of such Person for borrowed
money, including but not limited to money borrowed from any parent, subsidiary
or affiliate of such Person, whether or not evidenced by a promissory note, (ii)
all obligations of such Person evidenced by bonds, debentures, notes or other
similar instruments, (iii) all obligations of such Person to pay the deferred
purchase price of property or services, (iv) all obligations of such Person as
lessee under capital leases, (v) all Debt of others secured by a Lien on any
asset of such Person, whether or not such Debt is assumed by such Person, (vi)
all Debt of others Guaranteed by such Person, and (vii) all indebtedness for
borrowed money or for the
3
<PAGE>
deferred purchase price of property or services secured by a Lien on any
property owned or being purchased by such Person (even though such Person has
not assumed or otherwise become liable for the payment of such indebtedness) to
the extent that such indebtedness would not be otherwise counted as a liability
for purposes of determining the Tangible Net Worth of such Person and to the
extent that such indebtedness does not exceed the net book value for such
property.
"Default" means the occurrence of any event or existence of any condition
-------
which, but for the giving of notice, the lapse of time, or both, would
constitute an Event of Default.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended from time to time and any successor statute.
"Event of Default" means any of the conditions or events set forth in
----------------
Section 8.1 hereof.
- -----------
"Facility Fee" has the meaning set forth in Section 2.9 hereof.
------------ -----------
"FHA" means The Federal Housing Administration of the United States
---
Department of Housing and Urban Development and any successor thereto.
"FHLMC" means The Federal Home Loan Mortgage Corporation and any successor
-----
thereto.
"FICA" means the Federal Insurance Contributions Act.
----
"FNMA" means The Federal National Mortgage Association and any successor
----
thereto.
"GAAP" means generally accepted accounting principles set forth in the
----
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession, which are applicable to the circumstances as of the date of
determination.
"GNMA" means Government National Mortgage Association or any successor
----
thereto.
"Guarantee" means, with respect to any Person, any obligation, contingent
---------
or otherwise, of such Person directly or indirectly guaranteeing any Debt of any
other Person or in any manner providing for the payment of any Debt of any other
Person or otherwise protecting the holder of such Debt against loss (whether by
agreement to keep-well, to purchase assets, goods, securities or services, to
take-or-pay or otherwise), provided that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business or
customary contingent repurchase or other obligations with respect to Mortgage
Loans sold by the Company. The term "Guarantee" used as a verb has a
correlative meaning.
4
<PAGE>
"Guarantor" means Todd A. Rodriguez or Walter Villaume, III. "Guarantors"
---------
shall collectively refer to each Guarantor.
"Guaranty" has the meaning set forth in Section 4.1.
-------- -----------
"HUD" means the United States Department of Housing and Urban Development
---
or any successor thereto.
"Indemnified Liabilities" has the meaning set forth in Article 10 hereof.
----------------------- ----------
"Ineligible Mortgage Loan" shall mean any Mortgage Loan which (a) has a
------------------------
Mortgage Note dated more than forty-five (45) days prior to the date of the
Advance made by Lender with respect thereto, unless otherwise approved in
advance in writing by Lender, in its sole discretion, on a case by case basis,
(b) was pledged as Collateral for a prior Advance which has since been repaid,
or (c) was collateral for another warehouse line or previously pledged to
another creditor of the Company.
"Insurer" means FHA, VA or a private mortgage insurer, as applicable.
-------
"Internal Revenue Code" means the Internal Revenue Code of 1986, or any
---------------------
subsequent federal income tax law or laws, as any of the foregoing have been or
may from time to time be amended.
"Investor" means FNMA, FHLMC or GNMA or a financially responsible
--------
institution (which is deemed acceptable by the Lender in its sole discretion)
purchasing (whether through a gestation repurchase facility or otherwise) or
refinancing Mortgage Loans from the Company pursuant to a Purchase Commitment.
"Lender" has the meaning set forth in the preamble to this Agreement.
------
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
----
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof, and any agreement to give
any security interest).
"Margin Stock" has the meaning assigned to that term in Regulation U of the
------------
Board of Governors of the Federal Reserve System as in effect from time to time.
"Mortgage" means a first or second lien mortgage, deed of trust, security
--------
deed or similar instrument on improved real property.
"Mortgage Loan" means any loan evidenced by a Mortgage Note, having a
-------------
stated maturity of ten (10) to twenty (20) years and secured by a Mortgage
covering improved real property containing a one-to-four family residence.
"Mortgage Loan Documents" means the Mortgage, Mortgage Note, credit and
-----------------------
closing packages, disclosures, and all other files, records and documents
necessary to establish the eligibility of the Mortgage Loans for mortgage
insurance or guarantee by an Insurer or for purchase by an Investor.
5
<PAGE>
"Mortgage Note" means a note secured by a Mortgage and evidencing a
-------------
Mortgage Loan.
"Mortgage Note Amount" means the outstanding unpaid principal amount of a
--------------------
Mortgage Note at the time such Mortgage Note is pledged to the Lender.
"Mortgaged Property" means, with respect to any Mortgage, the real
------------------
property, personal property (tangible and intangible) and fixtures which are
encumbered by the lien and security interests of such Mortgage.
"Multiemployer Plan" means a "multiemployer plan" as defined in Section
------------------
4001(a)(3) of ERISA which is maintained for employees of the Company or a
Subsidiary of the Company.
"Note" has the meaning set forth in Section 2.3 hereof.
---- -----------
"Notices" has the meaning set forth in Article 9 hereof.
------- ---------
"Officer's Certificate" means a certificate executed on behalf of the
---------------------
Company by its chief financial officer or its treasurer.
"Person" means and includes natural persons, corporations, limited
------
partnerships, general partnerships, limited liability companies, joint stock
companies, joint ventures, associations, companies, trusts, banks, trust
companies, land trusts, business trusts or other organizations, whether or not
legal entities, and governments and agencies and political subdivisions thereof.
"Plans" has the meaning set forth in Section 5.12 hereof.
----- ------------
"Pledged Mortgage" means a Mortgage Loan, including the Mortgage Note and
----------------
Mortgage evidencing such Mortgage Loan and the related Mortgage Loan Document,
which has been pledged as Collateral hereunder and not released to an Investor
or the Company.
"Purchase Commitment" means a written commitment (including a gestation
-------------------
repurchase agreement), in form and substance satisfactory to the Lender, issued
in favor of the Company by an Investor pursuant to which that Investor commits
to purchase or refinance one or more Mortgage Loans by repaying the Advance(s)
made in connection with such Mortgage Loan(s), together with all related
documents and instruments by and between the Company and the Investor, in form
and substance satisfactory to the Lender, governing the terms and conditions of
any such purchases or refinancings. To the extent any such commitment does not
establish a purchase price, or establishes a variable purchase price based on
changes in interest rates generally prior to the purchase (or refinancing) date,
the Lender will not deem such commitment to be unsatisfactory so long as the
Company has a hedging program, satisfactory to Lender in its sole discretion,
protecting the Company against the interest rate risk associated with holding
such Mortgage Loans pending sale or refinancing.
"Redemption Amount" has the meaning set forth in Section 3.3 hereof.
----------------- -----------
6
<PAGE>
"Restricted Reserve Account" has the meaning set forth in Section 3.5.
-------------------------- -----------
"Restricted Reserve Account Required Balance" shall mean, for each calendar
-------------------------------------------
month, an amount equal to the aggregate amount of accrued interest, as of the
last day of the preceding calendar month, on all Advances which, as of the last
day of such preceding calendar month, had been outstanding for more than thirty
(30) days.
"Servicing Contracts" means the rights and obligations of the Company, as
-------------------
servicer, pursuant to the Servicing Contracts identified on Schedule 1.1
------------
attached hereto or made part hereof, as the same may be revised from time to
time, or such other servicing contracts to which Company is or may be a party,
to administer, collect the payments for the reduction of principal and
application of interest, pay taxes and insurance, remit collected payments,
provide foreclosure services, provide full escrow administration and any other
obligations required by any Investor or Insurer in, of or for the Mortgage Loans
pursuant to the Servicing Contracts, together with the right to receive the
servicing fee and any ancillary fees arising from or connected to the Mortgage
Loans.
"Statement Date" has the meaning set forth in Section 4.1(a)(7) hereof.
-------------- ---------
"Subordinated Debt" means Debt of the Company which has been subordinated
-----------------
as provided in Sections 4.1(b) or 6.10 hereof.
-----------------------
"Subsidiary" means any corporation, association or other business entity in
----------
which more than fifty percent (50%) of the total voting power or shares of stock
entitled to vote in the election of directors, managers or trustees thereof is
at the time owned or controlled, directly or indirectly, by any Person or one or
more of the other Subsidiaries of that Person or a combination thereof.
"Tangible Net Worth" means with respect to any Person at any date, the
------------------
excess of the total assets over total liabilities of such Person on such date,
each to be determined in accordance with GAAP consistent with those applied in
the preparation of the financial statements referred to in Section 5.4 hereof,
-----------
less the sum of the following (without duplication): (a) the book value of all
- ----
investments in non-consolidated subsidiaries, and (b) any other assets of the
Company and consolidated subsidiaries which would be treated as intangibles
under GAAP including, without limitation, good-will, research and development
costs, trademarks, trade names, copyrights, patents, rights to refunds and
indemnification, and unamortized debt discount and expenses; provided further
that, to the extent not already excluded, there shall be excluded from Tangible
Net Worth, those assets of any Person which, if such Person were a HUD
mortgagee, would be deemed by HUD to be non-acceptable in calculating adjusted
net worth in accordance with its requirements in effect as of such date, as such
requirements appear in the "Audit Guide for Use by Independent Public
Accountants in Audits of HUD-Approved Nonsupervised Mortgagees, Loan
Correspondents, and Coinsuring Mortgagee" or any successor or replacement audit
guide published by HUD.
"VA" means the Department of Veterans Affairs and any successor thereto.
--
"Wet Settlement" means a closing or settlement of a Mortgage Loan wherein
--------------
the Lender is requested by the Company to make an Advance for the Company to a
closing
7
<PAGE>
agent based upon delivery of the Collateral Documents to a third person as agent
for or on behalf of the Lender, but prior to examination or receipt of the
Collateral Documents by the Lender.
1.2 Other Definitional Provisions.
-----------------------------
(a) Accounting terms not otherwise defined herein shall have the meanings
given them under GAAP.
(b) Defined terms may be used in the singular or the plural, as the context
requires.
ARTICLE 2
THE CREDIT
2.1 The Commitment.
--------------
(a) Subject to the terms and conditions of this Agreement and provided no
Default has occurred and is continuing, the Lender agrees, from time to time
during the period from the date hereof to the expiration date (unless such
period is earlier determined pursuant hereto) make Advances to the Company,
provided the total aggregate principal amount which is outstanding at any one
time of all such Advances shall not exceed Fifteen Million Dollars
($15,000,000). The obligation of the Lender to make Advances hereunder up to
such limit or the amount to which such limit may be reduced pursuant to Section
-------
2.7(b) hereof, is hereinafter referred to as the "Commitment". Within the
- ------
Commitment, the Company may borrow, repay and reborrow.
(b) Advances shall be used by the Company solely for the purpose of funding
the origination and/or purchase of Mortgage Loans and shall be made at the
request of the Company, in the manner hereinafter provided in Section 2.2,
-----------
against the pledge of such Mortgage Loans. No Advance shall be made against any
Mortgage Loan which is not covered by a Purchase Commitment. Such Purchase
Commitment shall include a direction by the Company to the Investor of such
Mortgage Loan to pay the purchase price of such Mortgage Loan to the Lender.
(c) Each Advance shall cover only one Mortgage Loan. No Advance shall
exceed the Collateral Value of the related Mortgage Loan for which the Advance
is made, unless such excess is collateralized by cash in a restricted cash and
collateral account with the Lender.
(d) The aggregate amount of all outstanding Advances funded through Wet
Settlements shall not, at any time, exceed $3,000,000.
2.2 Procedures for Advances.
-----------------------
(a) The Company may obtain an Advance hereunder, subject to the
satisfaction of the conditions set forth in Sections 4.1 and 4.2 hereof, upon
--------------------
compliance with the procedures
8
<PAGE>
set forth in this Section 2.2. Requests for Advances shall be initiated by the
-----------
Company by delivering to the Lender a completed and signed request for an
Advance (an "Advance Request") in the form attached hereto as Exhibit A. The
---------
Lender shall have the right to revise or supplement the form of Advance Request
(Exhibit A hereto) by giving notice thereof to the Company.
---------
(b) The procedures to be followed by the Company in making an Advance
Request and shall consist of those set forth in Exhibit B attached hereto. The
---------
Collateral Documents to be delivered to the Lender shall consist of those
identified in the definition of Collateral Documents herein together with any
additional required documents identified in Exhibit B attached hereto. The
---------
Lender shall have the right to modify said Exhibit B to conform to current legal
---------
requirements or Lender practices, and, as so modified, said Exhibit B shall be
---------
deemed part hereof.
(c) Before funding any Advance, the Lender shall have not less than one (1)
Business Day (or such greater period as Lender may require) to examine each
Advance Request and the Collateral Documents to be delivered to the Lender with
respect to the Advance; provided, however, with respect to any Wet Settlement,
the Borrower may deliver those Collateral Documents identified below in this
subsection (c) after the funding of the Advance, but within the time period set
- --------------
forth below. The Lender may reject any documents which do not meet the
requirements of this Agreement or of the related Purchase commitment. With
respect to any Wet Settlement, within two (2) Business Days (or such longer
period as Lender may permit, in its sole discretion) after the date of the Wet
Settlement, the following Collateral Documents shall be delivered to the Lender:
(i) note shipping instructions, in form and content satisfactory to Lender; (ii)
an original executed Mortgage Note, endorsed by the Company in blank, without
recourse; (iii) a certified copy of the Mortgage; and (iv) an original
Assignment to Lender, in recordable form, with legal description.
(d) To make an Advance, the Lender shall wire funds to the closing agent
(for Wet Settlements) or authorize payment of the Company's draft upon
compliance by the Company with the terms of this Agreement.
(e) All Advances under this Agreement shall constitute a single
indebtedness and all of the Collateral shall be security for the Note and for
the performance of all obligations of the Company to the Lender.
2.3 Note. The Company's obligation to pay the principal of, and interest
----
on, all Advances made by the Lender is evidenced by the secured promissory note
(the "Note") of the Company dated as of the date hereof. The term "Note" shall
include all extensions, renewals and modifications of the Note and all
substitutions therefor. All terms and provisions of the Note are incorporated
herein.
2.4 Interest & Transaction Fees.
---------------------------
(a) The unpaid amount of each Advance shall bear interest at the applicable
rate of interest set forth in the Note.
9
<PAGE>
(b) The Company shall pay the Lender a transaction fee equal to twenty-five
dollars ($25) for each Advance processed under the terms of this Agreement.
(c) All accrued interest and transaction fees for each Advance shall be due
and payable on the earlier of (i) demand or (ii) except as otherwise provided
for in this subsection (c), at the time the outstanding principal amount of the
--------------
Advance is payable under Section 2.5 below. In the case of clause (ii),
-----------
interest and accrued transaction fees will be deducted from the proceeds
remitted from the applicable Investor to the Lender with respect to the related
Mortgage Loan. In the event the total sum of the Advance plus such fees and
interest exceeds the remittance amount received from the applicable Investor,
the Company shall immediately pay to Lender any shortfall without notice or
demand; Lender may also withdraw the amount of such shortfall from the
Restricted Reserve Account and apply the same to repay the Advance and pay the
fees and interest.
2.5 Principal Payments.
------------------
(a) The outstanding principal amount of each Advance shall be payable in
full upon the earliest to occur of (i) demand, (ii) the occurrence of any event
described in Section 2.5(b) hereof with respect to such Advance or (iii)
--------------
expiration or termination of the Commitment.
(b) The Company shall be obligated to pay to the Lender, without the
necessity of prior demand or notice from the Lender, and the Company authorizes
the Lender to charge its account(s) for, the amount of any outstanding Advance
against a specific Mortgage Loan, upon the occurrence of any of the following
events:
(1) Sixty (60) days elapse from the date the Mortgage Loan (with
respect to which the Advance was made) was delivered to an Investor for
examination and purchase, without the purchase being made unless an
extension is granted by the Lender in its sole discretion;
(2) Ninety (90) days (or such longer period as Lender may permit, in
its sole discretion) elapse from the date the Advance was made;
(3) The Investor rejects for purchase the Mortgage Loan with respect
to which the Advance was made;
(4) Ten (10) Business Days elapse from the date a Collateral Document
was delivered to the Company for correction or completion, without being
returned to the Lender;
(5) One of the Collateral Documents for such Advance requires
correction or completion and the aggregate outstanding balance of all
Advances for which a related Collateral Document has been delivered to the
Company for correction or completion, without being returned to the Lender,
then exceeds, or would exceed, with the delivery of such Collateral
Document for correction or completion, $500,000;
10
<PAGE>
(6) With respect to any Advance which was funded through a Wet
Settlement, the Company fails to deliver to the Lender the Collateral
Documents identified in Section 2.4(c) above (relating to the Mortgage Loan
--------------
against which the Advance was made) within two (2) Business Days (or such
longer period as Lender may permit, in its sole discretion), or such
Collateral Documents, upon examination by the Lender, are found not to be
in compliance with the requirements of this Agreement or the related
Purchase Commitment;
(7) A default occurs under the Mortgage Loan with respect to which
such Advance was made and remains uncured for a period of thirty (30) days;
(8) Lender determines, in its sole judgment, that the related Mortgage
Loan against which the Advance is made is an Ineligible Mortgage Loan; and
(9) Upon sale of the Mortgage Loan with respect to which such Advance
was made.
Upon making such payment to the Lender, the Company shall be deemed to have
redeemed such Mortgage Loan from pledge, and the Collateral Documents relating
thereto shall be released by the Lender to the Company or to the Investor.
2.6 Expiration and/or Termination of Commitment.
-------------------------------------------
(a) Unless terminated earlier as permitted hereunder, the Commitment shall
expire of its own terms, and without the necessity of action by the Lender, on
the date which is 364 days from the date of this Agreement.
(b) The Lender shall have the right, without cause, at any time to
terminate the Commitment on not less than sixty (60) days' notice to the
Company.
(c) The Lender shall have the right to terminate the Commitment upon any
adverse material change in the Company's financial condition, as determined by
the Lender in its sole discretion. Without limiting the generality of the
foregoing, the occurrence of any one or more of the events listed in Section 6.6
-----------
hereto shall be deemed an adverse material change in the Company's financial
condition.
(d) The Lender shall have the right from time to time and in its sole
discretion, to extend the term of the Commitment. The length of any such
extension shall also be determined in the Lender's sole discretion. Such
extension may be made subject to the renegotiation of the terms hereunder and to
any other such conditions as the Lender may deem necessary. Under no
circumstances shall such an extension by the Lender be interpreted or construed
as the Lender's forfeiture of any of its rights, entitlements or interest
created hereunder. The Company acknowledges and understands that the Lender is
under no obligation whatsoever to extend the term of the Commitment beyond its
expiration date as originally stated in Section 2.6(a) above.
--------------
11
<PAGE>
2.7 Method of Making Payments; Reductions in Commitment.
---------------------------------------------------
(a) Except as otherwise specifically provided herein, all payments
hereunder shall be received by the Lender on the date when due and shall be made
in lawful money of the United States of America in immediately available funds
at the office of the Lender, at 135 South LaSalle Street, Chicago, Illinois,
60603, or at such other place as the Lender from time to time shall designate.
Whenever any payment to be made hereunder or under the Note shall be stated to
be due on a day which is not a Business Day, the due date thereof shall be
extended to the next succeeding Business Day, and, with respect to payments of
principal, the interest thereon shall be payable at the applicable rate during
such extension. Funds received by the Lender after 12:00 noon (Chicago,
Illinois time) on a Business Day shall be deemed to have been paid by the
Company on the next succeeding Business Day.
(b) The Company shall have the right, at any time and from time to time,
effective as of the first day of any calendar month, to terminate in whole or
permanently reduce in part, without premium or penalty, the amount of the
Commitment in excess of the then outstanding principal amount of all Advances
hereunder. The Company shall give written notice to the Lender designating the
date of such termination or reduction not less than five (5) Business Days'
prior to the date such termination or reduction is to take effect, and the
amount of any partial reduction of the Commitment shall be in an aggregate
minimum amount of One Million Dollars ($1,000,000) or integral multiples of One
Hundred Thousand Dollars ($100,000) in excess of that amount.
2.8 Late Payment Fees. In the event the Company fails to make any payment
-----------------
(whether of principal, interest or any other sum) on the date such payment is
due and payable hereunder or under the Note, and such failure continues for more
than five (5) days, the Company shall pay to the Lender, upon demand therefor, a
late payment fee equal to five percent (5%) of the amount of such payment.
2.9 Facility Fee. As a condition to obtaining the Commitment, the Company
------------
agrees to pay to the Lender quarterly, in advance, commencing April 1, 1997 and
on the first day of each subsequent calendar quarter, a Facility Fee equal to
one-eighth percent (0.125%) per annum of the total Commitment; provided,
however, no Facility Fee shall be payable with respect to the period from the
date of the first Advance under this Facility through and until the date which
is thirty (30) days from the date of the first Advance under this Facility.
With respect to any calendar quarter during which the Commitment is only
outstanding for a portion thereof or during which the Facility Fee is only
payable for a portion thereof, the Facility Fee shall be prorated based upon the
number of days the Commitment will be outstanding or the number of days for
which the Facility Fee is payable, as applicable, to the number of days in the
calendar quarter. The Facility Fee shall be deemed earned when paid.
2.10 Net Payments; Reduced Return.
----------------------------
(a) All payments with respect to any Advance shall be made in such amounts
as may be necessary in order that all such payments after withholding for or on
account of any present or future taxes, levies, imports, duties or other similar
charges of whatsoever nature imposed by any government or any political
subdivision or taxing authority hereof, other than any taxes on or measured by
the net income of the Lender pursuant to the state, federal
12
<PAGE>
and local tax laws of the jurisdiction where the Lender's principal office or
offices or lending office or offices are located, compensate Lender for any
additional cost or reduced amount receivable of making or maintaining advances
as a result of such taxes, imports, duties or other charges.
(b) If, after the date hereof, the Lender shall have determined that the
adoption of any applicable law, rule or regulation regarding capital adequacy,
or any change therein, or any change in the interpretation or administration
thereof by any governmental authority, central bank or comparable agency charged
with the interpretation or administration thereof, or compliance by the Lender
with any request or directive regarding capital adequacy (whether or not having
the force of law) of any such authority, central bank or comparable agency, has
or would have the effect of reducing the rate or return on the Lender's capital
as a consequence of its obligations hereunder to a level below that which the
Lender could have achieved but for such adoption, change or compliance (taking
into consideration the Lender's policies with respect to capital adequacy) by an
amount deemed by the Lender to be material, then from time to time, within
thirty (30) days after demand by the Lender the Company shall pay to the Lender
such additional amount or amounts as will compensate the Lender for such
reduction. In determining such amount, the Lender may use any reasonable
averaging and attribution methods.
ARTICLE 3
COLLATERAL
3.1 Assignments and Grant of Security Interest. As security for the
------------------------------------------
payment of the Note and for the performance of all of the Company's obligations
hereunder, the Company hereby grants to the Lender a security interest in all
rights and interest of the Company in and to all Collateral whether presently
existing or hereafter arising. Upon the request of the Lender, the Company
shall execute any further document or instrument requested by the Lender to
further evidence or effectuate the assignments set forth in this Section.
3.2 Delivery of Additional Collateral or Mandatory Prepayment. In the
---------------------------------------------------------
event that the Lender shall determine, in its sole discretion, at any time that
the Collateral Value of the Pledged Mortgages (such value being determined at
such time as if then being pledged under Section 3.1 hereof) is less than the
-----------
aggregate amount of the Advances then outstanding hereunder, the Company shall
immediately (a) deliver to the Lender for pledge hereunder additional Mortgage
Loans satisfactory to the Lender and/or cash, in aggregate amounts sufficient to
cover the difference between the Collateral Value of the then existing Pledged
Mortgages and the aggregate amount of Advances outstanding hereunder, or (b)
repay the Advances in an amount sufficient to reduce the aggregate outstanding
balance thereof to or below the Collateral Value of the Pledged Mortgages.
3.3 Right of Redemption from Pledge. Provided no Default has occurred and
-------------------------------
is continuing, the Company may redeem a Mortgage Loan from pledge, by either (i)
paying, or causing an Investor to pay, to the Lender, for application to
prepayment of the principal balance of the Note, an amount (the "Redemption
Amount") equal to the Collateral Value of the Mortgage Loan to be released, but
in no event less than the amount of the Advance made
13
<PAGE>
with respect to such Mortgage Loan, or (ii) delivering to the Lender for pledge
hereunder additional Mortgage Loans satisfactory to the Lender and/or cash, in
aggregate amounts sufficient to cover the amount by which the aggregate amount
of Advances then outstanding hereunder exceeds Collateral Value of the Pledged
Mortgages (excluding the Mortgage Loan(s) to be released).
3.4 Collection and Servicing Rights. So long as no Event of Default shall
-------------------------------
have occurred, the Company shall be entitled to service, receive and collect
directly all sums payable to the Company in respect of the Collateral, except
amounts payable to the Company for the purchase by any Investor under a Purchase
Commitment of any Mortgage Loans which are funded in whole or in part with the
proceeds of any Advance, which amounts shall be paid directly to the Lender.
The Company shall direct each Investor to pay the amounts payable for the
purchase of such Mortgage Loans directly to the Lender. Following the
occurrence of any Event of Default, the Lender shall thereafter be entitled to
service, receive and collect all sums payable to the Company in respect of the
Collateral, and in such case (a) the Lender in its discretion may, in its own
name or in the name of the Company or otherwise, demand, sue for, collect or
receive any money or property at any time payable or receivable on account of or
in exchange for any of the Collateral, but shall be under no obligation to do
so, (b) the Company shall, if the Lender so requests, forthwith pay to the
Lender at its principal office or such other place as the Lender may designate
all amounts thereafter received by the Company upon or in respect of any of the
Collateral, advising the Lender as to the source of such funds, and (c) all
amounts so received and collected by the Lender shall be held by it as part of
the Collateral.
3.5 Restricted Reserve Account. (a) On or prior to the date hereof, the
--------------------------
Company shall establish with the Lender an account ("Restricted Reserve
Account"). The Company hereby assigns and grants to the Lender a security
interest in, and pledge of, the Restricted Reserve Account and any funds held
therein from time to time. The Company agrees to execute and deliver (or cause
to be executed and delivered) all documents requested by the Lender to confirm
and perfect such security interest and pledge upon the Lender's reasonable
request from time to time.
(b) On the fifth (5th) day of each calendar month following the date
hereof, the Company shall deposit into the Restricted Reserve Account that
amount of funds necessary to establish and maintain a balance therein which is
not less than the Restricted Reserve Account Required Balance (for such month).
Provided there is no then existing Default, upon written request by the Company,
the Lender shall promptly pay over to the Company, upon its written request,
that amount of funds, if any, held in the Restricted Reserve Account which
exceeds the Restricted Reserve Account Required Balance for such calendar month.
(c) Without limiting the remedies of the Lender under this Agreement, if an
Event of Default shall exist hereunder, the Lender may (but shall not be
obligated to) apply any cash Collateral held in the Restricted Reserve Account
to any of the obligations and indebtedness of the Company hereunder and under
the other Credit Documents in such order as the Lender may elect.
3.6 Return of Collateral at End of Commitment. If (i) the Commitment
-----------------------------------------
shall have expired or been terminated, and (ii) no Advances, interest or other
amounts evidenced by the
14
<PAGE>
Note or due under this Agreement shall be outstanding and unpaid, the Lender
shall deliver or release all Collateral, including, without limitation, and
funds held in the Restricted Reserve Account, in its possession to the Company.
The receipt of the Company for any Collateral released or delivered to the
Company pursuant to any provision of this Agreement shall be a complete and full
acquittance for the Collateral so returned, and the Lender shall hereafter be
discharged from any liability or responsibility therefor.
ARTICLE 4
CONDITIONS PRECEDENT
Section 4.1 Initial Advance. The obligation of the Lender to make the
---------------
initial Advance hereunder is subject to the satisfaction, as determined by the
Lender in its sole discretion, of the following conditions precedent:
(a) The Lender shall have received the following, all of which must be
satisfactory in form and content to the Lender, in its sole discretion:
(1) The Note duly executed by the Company;
(2) A guaranty from each of the Guarantors (collectively, the
"Guaranty");
(3) Certified copies of the Company's articles of incorporation and
bylaws and a certificate of good standing dated no less recently than one
(1) month prior to the date hereof;
(4) A written opinion of counsel to the Company and each of the
Guarantors, in form and content satisfactory to the Lender in its sole
discretion, dated as of the date hereof;
(5) An original resolution of the board of directors of the Company,
certified as of the date hereof by its corporate secretary, authorizing the
execution, delivery and performance of this Agreement and the Note, and all
other instruments or documents to be delivered by the Company pursuant to
this Agreement;
(6) A certificate of the Company's corporate secretary as to the
incumbency and authenticity of the signatures of the officers of the
Company executing this Agreement and the Note and each Advance Request and
all other instruments or documents to be delivered pursuant hereto (the
Lender being entitled to rely thereon until a new such certificate has been
furnished to the Lender);
(7) Original independently audited financial statements of the Company
(and its Subsidiaries, on a consolidated basis) for the most recent fiscal
year end (the "Statement Date"), containing a balance sheet and related
statements of income and retained earnings and changes in financial
position for the period ended on the Statement Date, all prepared in
accordance with GAAP, applied on a basis consistent with prior periods, and
otherwise acceptable to the Lender;
15
<PAGE>
(8) Financial statements of each of the Guarantors, signed by them,
dated no less recently than three (3) months prior to the date of the
initial Advance;
(9) Copies of the certificates, documents or other written instruments
which evidence the Company's eligibility described in Section 5.13 hereof,
------------
all in form and substance satisfactory to the Lender;
(10) Copies Purchase Commitments with Investors which have sufficient
availability, in Lender's sole discretion, together with and certificates,
documents or other written instruments related thereto;
(11) Copies of the Company's errors and omissions insurance policy or
mortgage impairment insurance policy and blanket bond coverage policy, or
certificates in lieu of policies, all in form and content satisfactory to
the Lender, showing compliance by the Company with the related provisions
of Section 6.8 hereof;
-----------
(12) Copies of the Company's licenses, permits and approvals to
operate each place of business; and
(13) An interlender agreement executed by each of the Company's
creditors providing warehouse lines of credit to the Company; provided,
however, if Borrower is unable to deliver the interlender agreement on or
prior to the date of this Agreement, Borrower shall deliver the same within
two (2) weeks of the date of this Agreement and if Lender makes any Advance
hereunder prior to receipt of an interlender agreement, such action shall
not be deemed a waiver of the requirement that Borrower furnish the
interlender agreement.
(b) The Lender shall have received evidence satisfactory to it as to the
due filing and recording in all appropriate offices of all financing statements
and other instruments as may be necessary to perfect the security interest of
the Lender in the Collateral under the Uniform Commercial Code of the State of
Illinois or other applicable law.
(c) The Company shall furnish to Lender an executed subordination
agreement, in form and substance satisfactory to Lender in its sole discretion,
from each Guarantor and each Subsidiary and each Affiliate of the Company which,
as of the date of this Agreement, is a creditor of the Company. Each such
subordination agreement shall, among other thing, subordinate Company's
obligations to such Person to the repayment in full of the Facility and the
security interests granted hereunder and under the other Credit Documents.
(d) The Company shall have established the Restricted Reserve Account.
4.2 Each Advance. The obligation of the Lender to make the initial and
------------
each subsequent Advance is subject to the satisfaction, as determined by the
Lender in its sole discretion, of the following additional conditions precedent:
(a) The Company shall have delivered to the Lender the Advance Request, and
Collateral Documents called for under, and shall have satisfied the procedures
set forth in,
16
<PAGE>
Section 2.2 hereof and the applicable Exhibits hereto described in that Section.
- -----------
All items delivered to the Lender must be satisfactory to the Lender in form and
content, and the Lender may reject such of them as do not meet the requirements
of this Agreement or of the related Purchase Commitment.
(b) Not later than 12:00 p.m. on the day of an Advance, the Lender shall
have received:
(1) An original Advance Request, signed by an authorized officer of
the Company;
(2) An inventory control sheet, signed by an authorized officer of
the Company, identifying each mortgagor, the amount of the
Mortgage Loan for each Advance, and the total amount of all
Advances requested for the day;
(3) a copy of irrevocable instructions to the Investor stating that
payment for the Mortgage Loan will be remitted to the Lender,
such instructions to be in the form of Exhibit C; and
---------
(4) For each Mortgage Loan which exceeds $500,000, a copy of pre-
underwriting approval from an Investor or evidence of mortgage
insurance.
(c) The representations and warranties of the Company contained in Article
-------
5 hereof shall be true and correct in all material respects as if made on and as
- -
of the date of each Advance.
(d) The Company and each of the Guarantors shall have performed all
agreements to be performed by them hereunder and under the Guaranty,
respectively, and after giving effect to the requested Advance, there shall
exist no Default hereunder.
(e) The Company shall not have (i) incurred any material liabilities,
direct or contingent, other than in the ordinary course of its business, since
the dates of the Company's most recent financial statements theretofore
delivered to the Lender or (ii) experienced any other material adverse change in
its business or operations.
(f) If requested by the Lender in its sole discretion, the Lender shall
have received from counsel to the Company an updated opinion, in form and
substance satisfactory to the Lender in its sole discretion, covering such of
the matters set forth in Section 4.1(a)(4) hereto as the Lender may request.
-----------------
Acceptance of the proceeds of the requested Advance by the Company shall be
deemed a representation by the Company that all conditions set forth in this
Section 4.2 shall have been satisfied as of the date of such Advance.
- -----------
17
<PAGE>
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
In order to induce the Lender to enter into this Agreement and make
each Advance, the Company hereby represents and warrants to the Lender, as of
the date of this Agreement and as of the date of each Advance Request, that:
5.1 Organization; Good Standing; Subsidiaries. The Company and each
-----------------------------------------
Subsidiary of the Company is a corporation duly organized, validly existing and
in good standing under the laws of the jurisdiction of its incorporation, has
the full legal power and authority to own its property and to carry on its
business as currently conducted and is duly qualified as a foreign corporation
to do business and is in good standing in each jurisdiction in which the
transaction of its business makes such qualification necessary, except in
jurisdictions, if any, where a failure to be in good standing has no material
adverse effect on the business, operations, assets or financial condition of the
Company or any such Subsidiary. The Company has no Subsidiaries except as set
forth on Schedule 5.1 hereto. Schedule 5.1 sets forth the name of each such
------------ ------------
Subsidiary, place of incorporation, each state in which qualified as a foreign
corporation and the percentage ownership of the capital stock of each such
Subsidiary by the Company.
5.2 Authorization and Enforceability. The Company has the power and
--------------------------------
authority to execute, deliver and perform this Agreement, the Note and all other
documents contemplated hereby or thereby. The Guarantors each have the power
and capacity to execute, deliver and perform the Guaranty. The execution,
delivery and performance by the Company of this Agreement, the Note and all
other documents contemplated hereby or thereby and the making of the borrowing
hereunder and thereunder, have been duly and validly authorized by all necessary
corporate action on the part of the Company (none of which actions have been
modified or rescinded, and all of which actions are in full force and effect)
and do not and will not (i) conflict with or violate any provision of law or of
the articles of incorporation or by-laws of the Company, (ii) conflict with or
result in a breach of or constitute a default or require any consent under, or
result in or require the acceleration of any indebtedness of the Company
pursuant to, any agreement, instrument or indenture to which the Company is a
party or by which the Company or its property may be bound or affected, or (iii)
result in the creation of any Lien upon any property or assets of the Company.
This Agreement, the Note and all other documents contemplated hereby or thereby
and the Guaranty constitute legal, valid, and binding obligations of the Company
or of the Guarantors, respectively, enforceable in accordance with their
respective terms, except as limited by bankruptcy, insolvency or other such laws
affecting the enforcement of creditors' rights.
5.3 Approvals. The execution and delivery of this Agreement, the
---------
Note and all other documents contemplated hereby or thereby and the performance
of the Company's obligations hereunder and thereunder do not require any
license, consent, approval or other action of any state or federal agency or
governmental or regulatory authority.
5.4 Financial Condition. The balance sheet of the Company (and, if
-------------------
applicable, its Subsidiaries, on a consolidated basis) as of the Statement Date,
and the related statements of income and changes in shareholders' equity for the
fiscal year ended on the Statement Date,
18
<PAGE>
heretofore furnished to the Lender, fairly present the financial condition of
the Company (and its Subsidiaries) as at the Statement Date and the results of
its operations for the fiscal period ended on the Statement Date. The Company
had, on the Statement Date, no liabilities, direct or indirect, fixed or
contingent, matured or unmatured, known or unknown, or liabilities for taxes,
long-term leases or unusual forward or long-term commitments not disclosed by,
or reserved against in, said balance sheet and related statements, and at the
present time there are no material unrealized or anticipated losses from any
loans, advances or other commitments of the Company except as heretofore
disclosed to the Lender in writing. Said financial statements were prepared in
accordance with GAAP applied on a consistent basis throughout the periods
involved. Since the Statement Date, there has been no material adverse change
in the business, operations, assets or financial condition of the Company (and
its Subsidiaries), nor is the Company aware of any state of facts which (with or
without notice or lapse of time or both) would or could result in any such
material adverse change.
5.5 Litigation. There are no actions, claims, suits or proceedings
----------
pending, or to the knowledge of the Company, threatened or reasonably
anticipated against or affecting the Company or any Subsidiary of the Company in
any court or before any arbitrator or before any government commission, board,
bureau or other administrative agency which, if adversely determined, may
reasonably be expected to result in any material and adverse change in the
business, operations, assets, licenses, qualifications or financial condition of
the Company (and its Subsidiaries) as a whole.
5.6 Compliance with Laws. Neither the Company nor any Subsidiary of
--------------------
the Company is in violation of any provision of any law, or of any judgment,
award, rule, regulation, order, decree, writ or injunction of any court or
public regulatory body or authority which might have a material adverse effect
on the business, operations, assets or financial condition of the Company (and
its Subsidiaries) as a whole.
5.7 Regulation U. The Company is not engaged principally, or as one
------------
of its major activities, in the business of extending credit for the purpose of
purchasing or carrying Margin Stock, and no part of the proceeds of any Advances
made hereunder will be used to purchase or carry any Margin Stock or to extend
credit to others for the purpose of purchasing or carrying any Margin Stock.
5.8 Investment Company Act. The Company is not an "investment
----------------------
company," or a company controlled by an "investment company," within the meaning
of the Investment Company Act of 1940, as amended.
5.9 Payment of Taxes. The Company has filed or caused to be filed
----------------
all federal, state and local income, excise, property and other tax returns with
respect to the operations of the Company and its Subsidiaries which are required
to be filed, all such returns are true and correct, and the Company has paid or
caused to be paid all taxes as shown on such returns or on any assessment, to
the extent that such taxes have become due.
5.10 Agreements. Neither the Company nor any Subsidiary of the
----------
Company is a party to any agreement, instrument or indenture or subject to any
restriction materially and adversely affecting its business, operations, assets
or financial condition, except as disclosed
19
<PAGE>
in the financial statements described in Section 5.4 hereof. Neither the
-----------
Company nor any Subsidiary of the Company is in default in the performance,
observance or fulfillment of any of the obligations, covenants or conditions
contained in any agreement, instrument, or indenture which default could have a
material adverse effect on the business, operations, properties or financial
condition of the Company as a whole. No holder of any indebtedness of the
Company or of any of its Subsidiaries has given notice of any asserted default
thereunder, and no liquidation or dissolution of the Company or of any of its
Subsidiaries and no receivership, insolvency, bankruptcy, reorganization or
other similar proceedings relative to the Company or of any of its Subsidiaries
or any of its properties is pending, or to the knowledge of the Company,
threatened.
5.11 Title to Properties. The Company and each Subsidiary of the
-------------------
Company has good, valid, insurable (in the case of real property) and marketable
title to all of its properties and assets (whether real or personal, tangible or
intangible) reflected on the financial statements described in Section 5.4
-----------
hereof, except for such properties and assets as have been disposed of since the
date of such financial statements as no longer used or useful in the conduct of
its business or as have been disposed of in the ordinary course of business, and
all such properties and assets are free and clear of all Liens except as
disclosed in such financial statements.
5.12 ERISA. All plans ("Plans") of a type described in Section 3(3)
-----
of ERISA in respect of which the Company or any Subsidiary of the Company is an
"Employer", as defined in Section 3(8) of ERISA, are in substantial compliance
with ERISA, and none of such Plans is insolvent or in reorganization, has an
accumulated or waived funding deficiency within the meaning of Section 412 of
the Internal Revenue Code, and neither the Company nor any Subsidiary of the
Company has incurred any material liability (including any material contingent
liability) to or on account of any such Plan pursuant to Sections 4062, 4063,
4064, 4201 or 4204 of ERISA; and no proceedings have been instituted to
terminate any such plan, and no condition exists which presents a material risk
to the Company or a Subsidiary of the Company of incurring a liability to or on
account of any such Plan pursuant to any of the foregoing Sections of ERISA. No
Plan or trust forming a part thereof has been terminated since September 1,
1974.
5.13 Eligibility. The Company has all state and local permits,
-----------
licenses, approvals, registrations and qualifications which it is required to
have in order to make, purchase, sell or service the Mortgage Loans. The
Company is qualified and in good standing as a lender or seller/servicer, and
meets all requirements applicable to its status as a:
(a) HUD approved lender, eligible to originate, purchase, hold and sell
FHA-insured Mortgage Loans (and to participate in HUD's Direct
Endorsement Mortgage Insurance Program).
(b) Lender in good standing under the VA loan guarantee program eligible
to originate (on an "prior approval" basis), purchase, hold and sell
VA-guaranteed Mortgage Loans.
20
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If at any time after the date hereof the Company becomes a GNMA approved
issuer of Mortgage Loans guaranteed by GNMA, the Company shall thereafter remain
qualified, in good standing, and meet all requirements applicable to its status
as a GNMA approved issuer of Mortgage Loans guaranteed by GNMA.
If at any time after the date hereof the Company becomes a FNMA or FHLMC
approved seller of Mortgage Loans, eligible to originate, purchase, hold and
sell Mortgage Loans to be sold to FNMA or FHLMC, respectively, the Company shall
thereafter remain qualified, in good standing, and meet all requirements
applicable to its status as a FNMA or FHLMC approved seller of Mortgage Loans,
eligible to originate, purchase, hold and sell Mortgage Loans to be sold to FNMA
or FHLMC, as the case may be.
If at any time after the date hereof the Company becomes a GNMA, FNMA or
FHLMC approved servicer of Mortgage Loans, the Company shall thereafter remain
qualified, in good standing, and meet all requirements applicable to its status
as a GNMA, FNMA or FHLMC approved servicer of Mortgage Loans, as the case may
be.
5.14 Principal Place of Business; Other Identity; Absence of Bankruptcies.
--------------------------------------------------------------------
The principal office and place of business of the Company for purposes of
Section 9-103 of the Uniform Commercial Code is located at the address set forth
at the front of this Agreement. The Company shall provide the Lender written
notice at least thirty (30) days in advance of any change in the Company's
principal office or place of business. Except for "Preferred Mortgage
Corporation", "T.A.R. Preferred Mortgage Corporation" and "Direct Capital", the
Company has no trade name. During the preceding five years, the Company has not
been known by or done business under any other name, corporate or fictitious,
and has not filed or had filed against it any bankruptcy receivership or similar
petitions nor has it made any assignments for the benefit of creditors.
5.15 Accuracy of Information. All written information supplied by the
-----------------------
Company to the Lender relating to the Company and its Subsidiaries, including,
without limitation, all information set forth in the Credit Application, is
true, accurate and complete. was true, complete and accurate in all material
respects when made, and there has been no material adverse change in the
condition, financial or otherwise, of the Company and its Subsidiaries from the
time such information was provided to the Lender.
5.16 Perfected Liens. This Agreement, together with possession of the
---------------
Mortgage Notes and a duly filed financing statement, creates a valid and
perfected first priority security interest in the Collateral, securing the
payment of the Obligations, and all filings and other actions necessary or
desirable to perfect and protect such security interest have been duly taken or
shall be taken at the time of the initial Advance hereunder.
5.17 No Adverse Liens. The Company owns the Collateral free and clear of
----------------
any lien, security interest, charge or encumbrance except for the security
interest created by this Agreement. No effective financing statement or other
instrument similar in effect covering all or any part of the Collateral is on
file in any recording office, except such as may have been filed in favor of
Lender relating to this Agreement.
21
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5.18 No Approvals. No authorization, approval or other action by, and no
------------
notice to or filing with, any governmental authority or regulatory body is
required (and has not been obtained, delivered or filed, as applicable) either
(i) for the grant by the Company of the security interest granted hereby or for
the execution, delivery or performance of this Agreement by the Company or (ii)
for the perfection of or the exercise by Lender of its rights and remedies
hereunder, other than the filing of a financing statement which has been duly
executed by the Company and delivered to Lender for filing.
5.19 Terminated Credit Facilities. The Company's former credit facilities
----------------------------
with Southern Pacific Thrift and Loan Association, Associates Commercial
Corporation (d/b/a First Collateral Services) and Pacific Southwest Bank
(collectively, the "Prior Creditors") have terminated and the Company has fully
paid and performed all obligations under such terminated facilities. The
Company has no existing borrowing arrangement with any of the Prior Creditors
and the Company shall, within 30 days of the date of this Agreement, cause to be
terminated of record the financing statements filed by each of the Prior
Creditors.
5.20 Special Representations and Warranties Concerning Collateral. The
------------------------------------------------------------
Company hereby represents and warrants to the Lender, as of the date of this
Agreement and as of the date of each Advance Request, that:
(a) Each Mortgage Loan is covered by a Purchase Commitment, does not exceed
the availability under such Purchase Commitment (taking into consideration
Mortgage Loans which have been purchased by the respective Investor under the
Purchase Commitment and Mortgage Loans which the Company has identified to the
Lender as being covered by such Purchase Commitment) and conforms to the
requirements and the specifications set forth in such Purchase Commitment and
the related regulations, rules, requirements and/or handbooks of the applicable
Investor and is eligible for sale to and insurance or guaranty by, respectively,
the applicable Investor and the applicable insurer.
(b) The Mortgage Loan Documents have been duly executed and delivered by
the mortgagor and create valid and legally binding obligations of the mortgagor,
enforceable in accordance with their terms, except as may be limited by
bankruptcy or other laws affecting the enforcement of creditors' rights
generally, and there are no rights of rescission, set-offs, counterclaims or
other defenses with respect thereto. The full original principal amount of each
Mortgage Loan (net of any discounts) has been fully advanced or disbursed to the
mortgagor named therein. There is no requirement for future advances and any
and all requirements as to completion of any on-site or off-site improvements
and as to disbursements of any escrow funds therefor have been satisfied. To
Company's knowledge and except as disclosed to Lender, there is no default,
breach, violation or event of acceleration existing under the Mortgage or the
related Mortgage Note, and no event has occurred which, with the passage of time
or with notice and the expiration of any grace or cure period, would constitute
a default, breach, violation or event of acceleration; and the Company has not
waived any default, breach, violation or event of acceleration. The terms of
the Mortgage Loan have in no way been waived, impaired, changed or modified. To
Company's knowledge and except as disclosed to Lender, all tax identifications
and property descriptions are legally sufficient; tax segregation, where
required, has been completed. All taxes, governmental assessments, insurance
premiums, water, sewer and municipal charges, leasehold payments or ground rents
which previously became due and owing have been paid,
22
<PAGE>
or an escrow of funds has been established in an amount sufficient to pay for
every such item which remains unpaid. The Pledged Mortgage has been duly
recorded and complies with all applicable state or local recording, registration
and filing laws and regulations.
(c) The Company has in its possession all Mortgage Loan Documents other
than those documents and instruments which are in the possession of the Lender
or in the possession of an Investor to whom delivery was made pursuant to a
bailee letter substantially in the form attached hereto as Exhibit D.
---------
(d) Each of the Mortgage Loans has been originated, made and serviced in
material compliance with all industry standards, applicable Investor and Insurer
requirements and all applicable federal, state and local statutes, regulations
and rules, including, without limitation, the Federal Truth-in-Lending Act of
1968, as amended, and Regulation Z thereunder, the Federal Fair Credit Reporting
Act, the Federal Equal Credit Opportunity Act, the Federal Real Estate
Settlement Procedures Act of 1974, as amended, and Regulation X thereunder, and
all applicable usury, licensing, real property, consumer protection and other
laws.
(e) Each Conventional Mortgage Loan is insured as to payment defaults by a
policy of primary mortgage guaranty insurance in the amount required where
applicable, and by an insurer approved, by the applicable Investor and all
provisions of such primary mortgage guaranty insurance policy have been and are
being complied with, such policy is in full force and effect, and all premiums
due thereunder have been paid. Each Mortgage Loan which is represented by the
Company to have, or to be eligible for, FHA insurance is insured, or eligible to
be insured, pursuant to the National Housing Act. Each Mortgage Loan which is
represented by the Company to be guaranteed, or to be eligible for guaranty, by
the VA is guaranteed, or eligible to be guaranteed, under the provisions of
Chapter 37 of Title 38 of the United States Code. As to each FHA insurance
certificate or each VA guaranty certificate, the Company has complied with
applicable provisions of the insurance for guaranty contract and federal
statutes and regulations, all premiums or other charges due in connection with
such insurance or guarantee have been paid, there has been no act or omission
which would or may invalidate any such insurance or guaranty, and the insurance
or guaranty is, or when issued, will be, in full force and effect with respect
to each Mortgage Loan. There are no defenses, counterclaims, or rights of
setoff affecting the Mortgage Loans or affecting the validity or enforceability
of any private mortgage insurance or FHA insurance applicable to the Mortgage
Loans or any VA guaranty with respect to the Mortgage Loans.
(f) (1) With respect to each Mortgage Loan which is secured by a first
lien on the Mortgaged Property: Each of the Mortgage Loans presently is covered
by a policy of hazard insurance (and flood insurance and insurance against other
insurable risks and hazards as required by the applicable Investor and the
agreements applicable to such Mortgage Loans), in amounts not less than
outstanding principal balance of the Mortgage Loans or such maximum lesser
amount as permitted by applicable law, all in a form usual and customary in the
industry and which is in full force and effect, and all amounts required to have
been paid under any such policy have been paid prior; and all taxes,
assessments, ground rents or other applicable charges or fees due and payable as
to each Mortgage Loan
23
<PAGE>
have been paid. Each Loan is covered by a valid and assignable, full fee, life
of loan tax service contract, in full force and effect.
(2) With respect to each Mortgage Loan which is secured by a second
lien on the Mortgaged Property: Pursuant to the terms of the Mortgage, the
Mortgaged Property is subject to fire and casualty insurance with a standard
mortgagee clause and extended coverage which provides guaranteed replacement
value of the improvements securing such Mortgage Loan, or coverage in the amount
of the full replacement value of the improvements securing such Mortgage Loan or
the amount of the unpaid principal balance of the Mortgage Loan (plus the unpaid
principal balance of the first mortgage), whichever is less. The fire and
casualty insurance is standard in the industry for property similar (in terms of
the property type, value and location) to the Mortgaged Property. If the
Mortgaged Property is in an area identified in the Federal Registered by the
Federal Emergency Management Agency as having special flood hazards (and such
flood insurance has been made available), a flood insurance policy is in effect
with respect to the Mortgaged Property meeting the requirements of the current
guidelines of the Federal Insurance Administration with a generally acceptable
insurance carrier, in an amount representing coverage not less than the least of
(i) the unpaid principal balance of the Mortgage Loan (plus the unpaid principal
balance of the first mortgage), (ii) the full insurable value of the Mortgaged
Property, or (iii) the maximum amount of insurance available under the Flood
Disaster Protection Act of 1973. To the best of the Company's knowledge, all
such insurance policies (collectively, the "hazard insurance policy") meet the
requirements of the current guidelines of the Federal Insurance Administration,
conform to the requirements for the FNMA Sellers' Guide and the FNMA Services'
Guide, and a standard policy of insurance for the locale where the Mortgaged
Property is located. Such insurance is with insurers approved by the applicable
Investor and that no earthquake or other additional insurance is to be required
of any mortgagor thereunder or to be maintained on property acquired in respect
of a defaulted loan, other than pursuant to such applicable laws and regulations
as shall at any time be in force and as shall require such additional insurance.
The hazard insurance policy names (and will name) the mortgagor as the insured
and contains a standard mortgage loss payable clause in favor of the Company,
and its successors and assigns. The Company has caused and will cause to be
performed any and all acts required to be performed to preserve the rights and
remedies of the Company in any hazard insurance policies applicable to the
Mortgage Loans including, without limitation, any necessary notifications of
insurers and assignments of policies or interests therein.
(g) (1) With respect to each Mortgage Loan which is secured by a first
lien on the Mortgaged Property: A valid and enforceable title policy currently
in full force and effect has been issued for each such Mortgage Loan in an
amount not less than the original principal amount of such Mortgage Loan, which
title policy insures that the Mortgage relating thereto is a valid first lien on
the property therein described and that the mortgaged property is free and clear
of all encumbrances and liens having priority over the lien of the Mortgage, and
otherwise in compliance with the requirements of the applicable Investor. All
taxes, assessments, ground rents or other applicable charges or fees due and
payable as to each Mortgage Loan have been paid.
(2) With respect to each Mortgage Loan which is secured by a second
lien on the Mortgaged Property: Each Mortgage Loan is covered by a limited
liability lender's title
24
<PAGE>
insurance policy or other generally acceptable form of policy of insurance (i)
issued by a title insurer qualified to do business in the jurisdiction where the
Mortgaged Property is located, insuring the Company, its successors and assigns,
as to the priority of its lien of the Mortgage in the original principal amount
of the Mortgage Loan and that the mortgaged property is free and clear of all
encumbrances and liens having priority over the lien of the Mortgage (other than
a first lien mortgage if the Mortgage Loan is a second mortgage) and (ii) in
compliance with the requirements of the applicable Investor. The Company and
its successors and assigns are the sole insureds of such lender's title
insurance policy. Such lender's title insurance policy is in full force and
effect, no claims have been made under such lender's title insurance policy and
no prior holder of the Mortgage, including the Company, has done, by act or
omission, anything which would impair the coverage of such lender's title
insurance policy. All taxes, assessments, ground rents or other applicable
charges or fees due and payable as to each Mortgage Loan have been paid.
(h) All escrow/custodial accounts have been established in accordance with
the requirements of FHA, VA and the applicable Investor and Insurer and all
other applicable laws and by the terms of the related Mortgages.
(i) There are no accrued liabilities of the Company with respect to the
Mortgage Loans.
(j) The Company, all prior servicers and, if different, the originating
mortgagee, have performed all obligations required of them to be performed under
or pursuant to each of the Servicing Contracts and related requirements of the
applicable Investor and Insurer and each other document or agreement relating to
the Mortgage Loans by which the Company is bound, and no event has occurred and
is continuing which, under the provisions of any such Servicing Contracts and
related requirements of the applicable Investor or other document or agreement,
but for the passage of time or the giving of notice, or both, would constitute
an event of default thereunder.
(k) The books, records, accounts and reports of the Company with respect to
the Mortgage Loans and Servicing Contracts have been prepared and maintained in
accordance with all applicable Investor and Insurer requirements.
(l) Each Mortgage Loan has been correctly described in the Advance Request
submitted to the Lender in respect of such Mortgage Loan. No Mortgage Loan for
which an Advance has been made hereunder is an Ineligible Mortgage Loan.
(m) Each Assignment (i) has been duly authorized by all necessary corporate
action by the Company, duly executed and delivered by the Company and is the
legal, valid and binding obligation of the Company enforceable in accordance
with its terms, and (ii) complies with all applicable laws including all
applicable recording, filing and registration laws and regulations and is
adequate and legally sufficient for the purpose intended to be accomplished
thereby, including, without limitation, the assignment of all of the rights,
powers and benefits of the Company as mortgagee.
(n) Upon the recordation of each Assignment, if Lender elects to do so, and
assuming the possession of the related Mortgage Note by the Lender, the Lender
will have a
25
<PAGE>
valid and perfected first or second priority security interest in such Pledged
Mortgage and all proceeds, products and profits derived therefrom, including,
without limitation, all moneys, goods, insurance proceeds and other tangible or
intangible property received upon liquidation thereof, subject to applicable
bankruptcy, insolvency, reorganization, moratorium and other laws affecting the
enforcement of creditors' rights generally and to general principles of equity.
ARTICLE 6
AFFIRMATIVE COVENANTS
The Company agrees that so long as the Commitment is outstanding or there
remain any obligations of the Company to be paid or performed under this
Agreement or under the Note, the Company shall:
6.1 Payment of Note. Punctually pay or cause to be paid the principal
---------------
and interest on and all other amounts due and payable hereunder and under the
Note in accordance with the terms hereof and thereof.
6.2 Financial Statements and Other Reports. Deliver to the Lender:
--------------------------------------
(a) Upon request by the Lender, statements of income and changes in
shareholders' equity of the Company (and, if applicable, its Subsidiaries, on a
consolidated basis) for the immediately preceding month, and related balance
sheet as of the end of the immediately preceding month, all in reasonable detail
and certified by the chief financial officer of the Company, subject, however,
to year-end audit adjustments.
(b) As soon as available and in any event within sixty (60) days after the
close of each of the first three fiscal quarters of the Company in each fiscal
year: statements of income and changes in shareholders' equity of the Company
(and, if applicable, its Subsidiaries, on a consolidated basis) for the period
from the beginning of such fiscal year to the end of such fiscal quarter, and
the related balance sheet as at the end of such fiscal quarter, all in
reasonable detail and certified by the chief financial officer of the Company,
subject, however, to year-end audit adjustments.
(c) As soon as available and in any event within ninety (90) days after the
close of each fiscal year: audited financial statements of the Company,
including, a statement of income and changes in shareholders' equity of the
Company (and, if applicable, its Subsidiaries, on a consolidated basis) for such
year, and the related balance sheet as at the end of such year (setting forth in
comparative form the corresponding figures for the preceding fiscal year), all
in reasonable detail and accompanied by an opinion of an independent accounting
firm reasonably satisfactory to the Lender and a certificate signed by the chief
financial officer of the Company stating that said financial statements fairly
present the financial condition and results of operations of the Company (and,
if applicable, its Subsidiaries) as of the end of, and for, such year.
(d) Together with each delivery of financial statements pursuant to
Sections 6.2(b) and 6.2(c) hereof, an Officer's Certificate stating that the
- ---------------------------------
signatory or signatories thereto
26
<PAGE>
have reviewed the terms of this Agreement and have made, or caused to be made
under their supervision, a review in reasonable detail of the transactions and
conditions of the Company (and, if applicable, its Subsidiaries) during the
accounting period covered by such financial statements and that such review has
not disclosed the existence during or at the end of such accounting period, and
that the signatory or signatories thereto do not have knowledge of the existence
as of the date of the Officer's Certificate, of any Default, or if any Default
existed or exists, specifying the nature and period of the existence thereof and
what action the Company has taken, is taking and proposes to take with respect
thereto.
(e) As soon as available and in any event within ninety (90) days after the
close of each fiscal year of the Company, current financial statements of each
of the Guarantors, signed by each of them, and dated not more than ninety (90)
days prior to the date of required delivery to the Lender hereunder.
(f) Such other reports in respect of the Mortgage Loans, in such detail and
at such times as the Lender in its discretion may request at any time or from
time to time.
(g) Copies of all regular or periodic financial and other reports, if any,
which the Company shall file with the Securities and Exchange Commission or any
governmental agency successor thereto.
(h) Copies of all audits, examinations and reports concerning the
operations of the Company from any Investor, Insurer or licensing authority.
(i) Any and all changes to the information set forth in the Credit
Application to assure that the same continues to be true, accurate and complete.
(j) From time to time, with reasonable promptness, such further information
regarding the business, operations, properties or financial condition of the
Company as the Lender may reasonably request.
All financial statements and reports furnished to the Lender hereunder
shall be prepared in accordance with GAAP, applied on a basis consistent with
that applied in preparing the financial statements as of, and for the period
ended on, the Statement Date (except to the extent otherwise required to conform
to good accounting practice).
6.3 Maintenance of Existence; Conduct of Business. Preserve and maintain
---------------------------------------------
its corporate existence in good standing and all of its rights, privileges,
licenses, qualifications and franchises necessary or desirable in the normal
conduct of its business, including, without limitation, its eligibility as an
approved lender and issuer as described under Section 5.13 hereof; conduct its
------------
business in an orderly and efficient manner; continuously maintain a net worth
of acceptable assets as required by its Investors for maintaining the Company's
status as a FHA approved lender; and make no change in the nature or character
of its business or engage in any business in which it was not engaged on the
date of this Agreement.
6.4 Compliance with Applicable Laws. Comply with the requirements of all
-------------------------------
applicable laws, rules, regulations and orders of any governmental authority and
prudent
27
<PAGE>
industry standards, a breach of which could materially adversely affect its
business, operations, assets, or financial condition or which could materially
adversely impair the ability of Company to perform its obligation hereunder,
except where contested in good faith and by appropriate proceedings.
6.5 Inspection of Properties and Books. Permit authorized representatives
----------------------------------
of the Lender to discuss the business, operations, assets and financial
condition of the Company and its Subsidiaries with their officers and employees
and to examine their books of account and make copies or extracts thereof, all
at such reasonable times as the Lender may request. The Company will provide
its accountants with a copy of this Agreement promptly after the execution
hereof and will instruct its accountants to answer candidly and fully any and
all questions that the officers of the Lender or any authorized representatives
of the Lender may address to them in reference to the financial condition or
affairs of the Company and its Subsidiaries. The Company may have its
representatives in attendance at any meetings between the officers or other
representatives of the Lender and the Company accountants held in accordance
with this authorization.
6.6 Notice. Give prompt written notice, in reasonable detail, to the
------
Lender of (a) any material action, suit or proceeding instituted by or against
the Company or any of its Subsidiaries in any federal or state court or before
any commission or other regulatory body (federal, state or local, domestic or
foreign), or any such material action, suit or proceeding threatened against the
Company or any of its Subsidiaries, (b) the filing, recording or assessment of
any federal, state or local tax lien against it, or any of its assets or any of
its Subsidiaries, (c) the occurrence of any Event of Default hereunder or the
occurrence of any Default and continuation thereof for five (5) days, (d) the
actual or threatened suspension, revocation or termination of the Company's
eligibility, in any respect, as an approved lender and issuer as described under
Section 5.13 hereof, (e) the suspension, revocation or termination of any
- ------------
existing credit or investor relationship made to the Company to facilitate the
sale and/or origination of residential mortgages, (f) the transfer or loss of
any Servicing Contract to which the Company is a party, or which is held for the
benefit of the Company, and the reason for such transfer or loss, if known to
the Company, (g) any demand by any Investor or Insurer for either the repurchase
of a mortgage loan or indemnification, and (h) any other action, event or
condition of any nature which may lead to or result in a material adverse effect
upon the business, operations, assets, or financial condition of the Company and
its Subsidiaries or which, with or without notice or lapse of time or both,
would constitute a default under any other agreement, instrument or indenture to
which the Company is a party or to which the Company, its properties or assets
may be subject.
6.7 Payment of Debt, Taxes, etc. Pay and perform all obligations of the
---------------------------
Company, and cause to be paid and performed all obligations of its Subsidiaries,
promptly and in accordance with the terms thereof and pay and discharge or cause
to be paid and discharged promptly all taxes, assessments and governmental
charges or levies imposed upon the Company or its Subsidiaries or upon their
respective income, receipts or properties before the same shall become past due,
as well as all lawful claims for labor, materials and supplies or otherwise
which, if unpaid, might become a Lien or charge upon such properties or any part
thereof; provided, however, that the Company and its Subsidiaries shall not be
required to pay taxes, assessments or governmental charges or levies or claims
for labor, materials or supplies for which the Company or its Subsidiaries shall
have obtained an
28
<PAGE>
adequate bond or adequate insurance or which are being contested in good faith
and by proper proceedings which are being reasonably and diligently pursued.
6.8 Insurance. Will maintain (a) errors and omissions insurance or
---------
mortgage impairment insurance and blanket bond coverage, with such companies and
in such amounts as satisfy prevailing FNMA, GNMA or FHLMC requirements
applicable to a qualified mortgage originating institution, and (b) liability
insurance and fire and other hazard insurance on its properties, with
responsible insurance companies approved by the Lender, in such amounts and
against such risks as is customarily carried by similar businesses and otherwise
acceptable to the Lender; and (c) within thirty (30) days after notice from the
Lender, such additional insurance as the Lender shall reasonably require, all at
the sole expense of the Company. Copies of all such policies shall be furnished
to the Lender, without charge, upon request of the Lender.
6.9 Insured Closings. Except when prohibited by applicable law, if
----------------
required by Lender, will obtain and maintain in effect at all times an insured
closing letter from each title insurance company from which mortgagee title
insurance is procured, indemnifying and holding the Company harmless from and
against the failure of the agents and approved title attorneys of such title
insurance companies to comply with the written closing instructions of the
Company as to the Mortgage Loans pledged hereunder and will provide the Lender
with evidence of the same from time to time upon request; provided, however, an
insured closing letter shall not be required in connection with any advance on a
Mortgage Loan secured by a second lien on the Mortgaged Property. The Company
agrees to indemnify and hold the Lender harmless from and against any loss,
including reasonable attorneys' fees and costs, attributable to the failure of
such title insurance company, agent or approved attorney to comply with the
disbursement or instruction letter or letters of the Company or of the Lender
relating to such Mortgage Loan. The Lender shall have the right to pre-approve
the closing instructions of the Company to the title insurance company, agent or
attorney in any case where the Mortgage Loan to be created at settlement is
intended to be warehoused by the Company pursuant hereto.
6.10 Subordination of Certain Indebtedness. Will cause any indebtedness of
-------------------------------------
the Company, incurred after the date of this Agreement, to any Guarantor or to
any Subsidiary or Affiliate of the Company to be subordinated to all obligations
of the Company under this Agreement and the Note, by the execution of a
subordination agreement, in form and substance satisfactory to the Lender in its
sole discretion.
6.11 Other Loan Obligations. Will perform all obligations under the terms
----------------------
of each loan agreement, note, mortgage, security agreement or debt instrument by
which the Company is bound or to which any of its property is subject, and will
promptly notify the Lender in writing of any default under, or the cancellation
or reduction of, any of its other mortgage warehousing lines of credit or
agreements with any other lender. The Company shall, within 30 days of the date
of this Agreement, cause to be terminated of record the financing statements
filed by each of the Prior Creditors.
6.12 Use of Proceeds of Advances. Will use the proceeds of each Advance
---------------------------
solely for the purpose of financing related Mortgage Loans.
29
<PAGE>
6.13 Special Affirmative Covenants Concerning Collateral.
----------------------------------------------------
(a) The Company warrants and will defend the right, title and interest of
the Lender in and to the Mortgage Loans against the claims and demands of all
persons whomsoever.
(b) The Company shall service or cause to be serviced all Mortgage Loans in
accordance with the standard requirements of the Investors under the respective
Purchase Commitments covering the same and all applicable governmental
requirements, including, without limitation, taking all actions necessary to
enforce the obligations of the obligors under such Mortgage Loans. The Company
shall hold all escrow funds collected in respect of Mortgage Loans in trust,
without commingling the same with non-custodial funds, and apply the same for
the purposes for which such funds were collected.
(c) The Company shall execute and deliver to the Lender such Uniform
Commercial Code financing statements with respect to the Collateral as the
Lender may request. The Company shall also execute and deliver to the Lender
such further instruments of sale, pledge or assignment or transfer, and such
powers of attorney, as required by the Lender, and shall do and perform all
matters and things necessary or desirable to be done or observed, for the
purpose of effectively creating, maintaining and preserving the security and
benefits intended to be afforded the Lender under this Agreement. The Lender
shall have all the rights and remedies of a secured party under the Uniform
Commercial Code of the State of Illinois, or any other applicable law, in
addition to all rights provided for herein.
(d) The Company shall immediately notify the Lender of any default under,
or of the termination of, or the rejection for purchase under, any Purchase
Commitment relating to any Mortgage Loan.
(e) The Company will promptly comply in all respects with the terms and
conditions of all Purchase Commitments, and all extensions, renewals and
modifications or substitutions thereof or thereto. Not later than the earlier
of the expiration of a Purchase Commitment or the deadline for acquisition of
any Mortgage Loan by the Investor thereunder, the Company will cause to be
delivered to the Investor and/or the Company, as applicable, all forms, letters,
documents, instruments, authorizations, releases, schedules and other materials
which may be required by the applicable Investor and/or the Lender, as
applicable, in connection with the acquisition of the Mortgage Loan by the
Investor.
(f) The Company shall maintain, at its principal office or in a regional
office approved by the Lender, or in the office of a computer service bureau
engaged by the Company and approved by the Lender, and, upon request, shall make
available to the Lender the copies of all Mortgage Notes and Mortgages included
in Mortgage Loans, Purchase Commitments, and all related Mortgage Loan
Documents and instruments, and all files, surveys, certificates, correspondence,
appraisals, computer programs, tapes, discs, cards, accounting records and other
information and data relating to the Collateral.
30
<PAGE>
ARTICLE 7
NEGATIVE COVENANTS
The Company agrees that so long as the Commitment is outstanding or
there remains any obligation of the Company to be paid or performed hereunder or
under the Note, the Company shall not, either directly or indirectly, without
the prior written consent of the Lender:
7.1 Contingent Liabilities. Assume, guarantee, endorse, or otherwise
----------------------
become liable for the obligation of any person or entity except by endorsement
of negotiable instruments for deposit or collection in the ordinary course of
business.
7.2 Sale or Pledge of Servicing Contracts. Sell, pledge or grant a
-------------------------------------
security interest in any existing or future Servicing Contracts, or omit to take
any action required to keep all such Servicing Contracts in full force and
effect.
7.3 Merger; Sale of Assets; Acquisitions; Change in Control; Change
------------------------------------ --------------------------
of Senior Management. Liquidate, dissolve, consolidate or merge or sell,
- --------------------
transfer or otherwise dispose of, any substantial part of its assets, nor
acquire substantially all of the assets of another, nor permit a change in any
of the following: (i) either ownership beneficially or of record of more than
ten percent (10%) of the voting stock of Company, (ii) either ownership
beneficially or of record of more than ten percent (10%) of the voting stock of
any Person which controls the Company, or (iii) senior management of the Company
or of any Person which controls the Company.
7.4 Deferral of Subordinated Debt. Pay in advance of the stated
-----------------------------
maturity thereof any Subordinated Debt of the Company or, if an Event of Default
hereunder shall have occurred, make any payment of any kind thereafter on such
Subordinated Debt until all obligations of the Company hereunder and under the
Note have been paid and performed in full.
7.5 Loss of Eligibility. Take, or fail to take, any action that
-------------------
would cause the Company to lose all or any part of its status as an eligible
lender, as described under Section 5.13 hereof.
------------
7.6 Debt to Adjusted Tangible Net Worth Ratio. Permit the ratio of
-----------------------------------------
Debt to Adjusted Tangible Net Worth of the Company (and its Subsidiaries, on a
consolidated basis) at any time to exceed 12 to 1 (12:1).
7.7 Minimum Tangible Net Worth. Permit Adjusted Tangible Net Worth
--------------------------
of the Company (and its Subsidiaries, on a consolidated basis) at any time to be
less than Four Million Two Hundred Thousand Dollars ($4,200,000).
7.8 Loans to Officers, Employees and Shareholders. Make any personal
---------------------------------------------
loans or advances to any officers, employees or shareholders.
7.9 Distributions. Declare any dividend or incur any liability to
-------------
make any other payment or distribution of cash or other property or assets to
the holders of the Company's
31
<PAGE>
stock (a) which exceeds, in any calendar year, in the aggregate, fifty percent
(50%) of the prior year's net income (as determined in accordance with GAAP),
(b) if an Event of Default exists and is continuing, or (c) if such declaration
or incurrence of liability would cause a Default to exist.
7.10 Special Negative Covenants Concerning Collateral.
------------------------------------------------
(a) The Company shall not amend or modify, or waive any of the terms
and conditions of, or settle or compromise any claim in respect of, any Mortgage
Loan pledged hereunder.
(b) The Company shall not sell, assign, transfer or otherwise dispose
of, or grant any option with respect to, or pledge or otherwise encumber (except
pursuant to this Agreement) any of the Collateral or any interest therein.
(c) The Company shall not make any compromise, adjustment or
settlement in respect of any of the Collateral or accept other than cash in
payment or liquidation of the Collateral.
ARTICLE 8
DEFAULTS; REMEDIES
8.1 Events of Default. The occurrence of any of the following
-----------------
conditions or events shall be an event of default ("Event of Default"):
(a) Failure to pay the principal of any Advance when due, whether at
stated maturity, by acceleration, or otherwise; or failure to pay any
installment of interest on any Advance or any other amount due under this
Agreement when due; or
(b) Failure of the Company or any of its Subsidiaries to pay, or any
default in the payment of any principal or interest on, any other indebtedness
or in the payment of any contingent obligation beyond any period of grace
provided; or breach or default with respect to any other material term of any
other indebtedness or of any loan agreement, note, mortgage, security agreement,
indenture or other agreement relating thereto, if the effect of such failure,
default or breach is to cause, or to permit the holder or holders thereof (or a
trustee on behalf of such holder or holders) to cause, indebtedness of the
Company or its Subsidiaries in the aggregate amount of $100,000 or more to
become or be declared due prior to its stated maturity (upon the giving or
receiving of notice, lapse of time, both, or otherwise); or
(c) Failure of the Company to perform or comply with any term or
condition applicable to it contained in Section 2.9, Sections 6.1 through 6.13,
----------- -------------------------
inclusive, or Sections 7.1 through 7.8, inclusive, of this Agreement; or
------------------------
(d) Any of the Company's representations or warranties made herein or
in any statement or certificate at any time given by the Company in writing
pursuant hereto or in connection herewith shall be false in any material respect
on the date as of which made; or
32
<PAGE>
(e) The Company shall default in the performance of or compliance with
any term contained in this Agreement other than those referred to above in
subsections 8.1(a), (c) or (d) and such default shall not have been remedied or
- ------------------------------
waived within thirty (30) days after receipt of notice from the Lender of such
default; or
(f) (1) A court having jurisdiction shall enter a decree or order for
relief in respect of the Company or any of its Subsidiaries or of any Guarantor
in an involuntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, which decree or order is not stayed; or
(2) any other similar relief shall be granted under any applicable federal or
state law; or a decree or order of a court having jurisdiction for the
appointment of a receiver, liquidator, sequestrator, trustee, custodian or other
officer having similar powers over the Company or any of its Subsidiaries or of
any Guarantor, or over all or a substantial part of their respective property,
shall have been entered; or the involuntary appointment of an interim receiver,
trustee or other custodian of the Company or any of its Subsidiaries or of any
Guarantor for all or a substantial part of their respective property; or the
issuance of a warrant of attachment, execution or similar process against any
substantial part of the property of the Company or any of its Subsidiaries or of
any Guarantor, and the continuance of any such events in this clause (2) for
sixty (60) days unless dismissed, bonded off or discharged; or
(g) The Company or any of its Subsidiaries or any Guarantor shall have
an order for relief entered with respect to it or commence a voluntary case
under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or shall consent to the entry of an order for relief in an
involuntary case, or to the conversion to an involuntary case, under any such
law, or shall consent to the appointment of or taking possession by a receiver,
trustee or other custodian for all or a substantial part of its property; the
making by the Company or any of its Subsidiaries or any Guarantor of any
assignment for the benefit of creditors; or the inability or failure of the
Company or any of its Subsidiaries or of any Guarantor, or the admission by the
Company or any of its Subsidiaries or any Guarantor in writing of its inability
to pay its debts as such debts become due; or
(h) Any money judgment, writ or warrant of attachment, or similar
process involving in any case an amount in excess of $25,000 shall be entered or
filed against the Company or any of its Subsidiaries or any Guarantor or any of
their respective assets and shall remain undischarged, unvacated, unbonded or
unstayed for a period of thirty (30) days or in any event later than five (5)
days prior to the date of any proposed sale thereunder; or
(i) Any order, judgment or decree shall be entered against the Company
decreeing the dissolution, liquidation or split up of the Company and such
order shall remain undischarged or unstayed for a period in excess of twenty
(20) days; or
(j) Any Plan maintained by the Company or any of its Subsidiaries
shall be terminated within the meaning of Title IV of ERISA or a trustee shall
be appointed by an appropriate United States district court to administer any
Plan, or the Pension Benefit Guaranty Corporation (or any successor thereto)
shall institute proceedings to terminate any Plan or to appoint a trustee to
administer any Plan if as of the date thereof the Company's liability or any
such Subsidiary's liability (after giving effect to the tax consequences
thereof) to the Pension Benefit Guaranty Corporation (or any successor thereto)
for unfunded
33
<PAGE>
guaranteed vested benefits under the Plan exceeds the then current value of
assets accumulated in such Plan by more than $25,000 (or in the case of a
termination involving the Company or any of its Subsidiaries as a "substantial
employer" (as defined in Section 4001(a)(2) of ERISA) the withdrawing employer's
proportionate share of such excess shall exceed such amount); or
(k) The Company or any of its Subsidiaries as employer under a
Multiemployer Plan shall have made a complete or partial withdrawal from such
Multiemployer Plan and the plan sponsor of such Multiemployer Plan shall have
notified such withdrawing employer that such employer has incurred a withdrawal
liability in an annual amount exceeding $25,000; or
(l) Any default shall occur (and shall continue beyond the applicable
cure period therefor, if any) under the terms of any note, loan or credit
agreement, mortgage, pledge, guaranty, indemnity or other instrument which
evidences obligations or other indebtedness of the Company; or
(m) The Company shall purport to disavow its obligations hereunder or
shall contest the validity or enforceability of this Agreement or Lender's
security interest in any Collateral; or the Lender's security interest in any
portion of the Collateral shall become unenforceable or otherwise impaired.
8.2 Remedies.
--------
(a) Upon the occurrence of any Event of Default described in Section
-------
8.1(f) or (g) the unpaid principal amount of and accrued interest on the Note
- -------------
shall automatically become due and payable, without presentment, demand or other
requirements of any kind, all of which are hereby expressly waived by the
Company.
(b) Upon the occurrence of any Event of Default (other than those
described in Section 8.1(f) or (g)), the Lender may, by written notice to the
---------------------
Company declare all or any portion of the Advances to be due and payable
whereupon the same shall forthwith become due and payable, together with all
accrued interest thereon, and the obligation of the Lender to make Advances
shall thereupon terminate.
(c) Upon the occurrence of any Event of Default, the Lender may also
do any one or more or all of the following:
(1) Foreclose upon or otherwise enforce its security interest in and
Lien on all of the Collateral or on any portion thereof to secure all
payments and performance of obligations owed by the Company under this
Agreement.
(2) Notify all obligors of Collateral or on any portion thereof that
the Collateral has been assigned to the Lender and that all payments
thereon are to be made directly to the Lender or such other party as may be
designated by the Lender; settle, compromise, or release, in whole or in
part, any amounts owing on the Collateral, any such obligor or Investor or
any portion of the Collateral, on terms acceptable to the Lender; enforce
payment and prosecute any action or proceeding with respect to and any and
all Collateral; and where any such Collateral is in default,
34
<PAGE>
foreclose on and enforce security interests in, such Collateral by any
available judicial procedure or without judicial process and sell property
acquired as a result of any such foreclosure.
(3) Act, or contract with a third party to act, as servicer of all or
any item of Collateral requiring servicing and perform all obligations
required in connection with Purchase Commitments, such third party's fees
to be paid by the Company.
(4) Exercise all rights and remedies of a secured creditor under the
Uniform Commercial Code of the State of Illinois or the state in which the
Collateral is located, including but not limited to selling the Collateral
at public or private sale. The Lender shall give the Company not less than
ten (10) days' notice of any such public sale or of the date after which
private sale may be held. The Company agrees that ten (10) days' notice
shall be reasonable notice. At any such sale the Collateral may be sold as
an entirety or in separate parts, as the Lender may determine. The Lender
may, without notice or publication, adjourn any public or private sale or
cause the same to be adjourned from time to time by announcement at the
time and place fixed for the sale, and such sale may be made at any time or
place to which the same may be so adjourned. In case of any sale of all or
any part of the Collateral on credit or for future delivery, the Collateral
so sold may be retained by the Lender until the selling price is paid by
the purchaser thereof, but the Lender shall not incur any liability in case
of the failure of such purchaser to take up and pay for the Collateral so
sold and, in case of any such failure, such Collateral may again be sold
upon like notice. Lender shall have the right upon any such public sale or
sales, and, to the extent permitted by law, upon any such private sale or
sales, to purchase the whole or any part of said Collateral so sold, free
of any right or equity of redemption, which equity of redemption the
Company hereby releases. The Lender may, however, instead of exercising
the power of sale herein conferred upon it, proceed by a suit or suits at
law or in equity to collect all amounts due upon all or any portion of the
Collateral or to foreclose the pledge and sell all or any portion of the
Collateral under a judgment or decree of a court or courts of competent
jurisdiction, or both.
(5) Proceed against the Company on the Note or against the Guarantors
under the Guaranty or both.
(6) Pursue any rights and/or remedies available at law or in equity
against the Company or the Guarantors or both.
(d) The Lender shall incur no liability as a result of the sale of the
Collateral, or any part thereof, at any private sale. The Company hereby waives
any claims it may have against the Lender arising by reason of the fact that the
price at which the Collateral may have been sold at such private sale was less
than the price which might have been obtained at a public sale or was less than
the aggregate amount of the outstanding Advances and the unpaid interest accrued
thereon, even if the Lender accepts the first offer received and does not offer
the Collateral, or any part thereof, to more than one offeree.
(e) The Company waives any right to require the Lender to (1) proceed
against any Person, (2) proceed against or exhaust all or any of the Collateral
or pursue its rights
35
<PAGE>
and remedies as against the Collateral in any particular order, or (3) pursue
any other remedy in its power. The Lender shall not be required to take any
steps necessary to preserve any rights of the Company against holders of
mortgages prior in lien to the Lien of any Mortgage included in the Collateral
or to preserve rights against prior parties.
(f) The Lender may, but shall not be obligated to, advance any sums or do
any act or thing necessary to uphold and enforce the Lien and priority of, or
the security intended to be afforded by, any Mortgage included in the
Collateral, including, without limitation, payment of delinquent taxes or
assessments and insurance premiums. All advances, charges, costs and expenses,
including reasonable attorneys' fees and disbursements, incurred or paid by the
Lender in exercising any right, power or remedy conferred by this Agreement, or
in the enforcement hereof, together with interest thereon, at the rate of
interest specified in the Note, from the time of payment until repaid, shall
become a part of principal balance outstanding under the Note.
(g) No failure on the part of the Lender to exercise, and no delay in
exercising, any right, power or remedy provided hereunder, at law or in equity
shall operate as a waiver thereof; nor shall any single or partial exercise by
the Lender of any right, power or remedy provided hereunder, at law or in equity
preclude any other or further exercise thereof or the exercise of any other
right, power or remedy. Without intending to limit the foregoing, all defenses
based on the statute of limitations are hereby waived by the Company. The
remedies herein provided are cumulative and are not exclusive of any remedies
provided at law or in equity.
8.3 Application of Proceeds. The proceeds of any sale or other
-----------------------
enforcement of the Lender's security interest in all or any part of the
Collateral shall be applied by the Lender:
First, to the payment of the costs and expenses of such sale or
-----
enforcement, including reasonable compensation to the Lender's agents and
counsel, and all expenses, liabilities and advances made or incurred by or
on behalf of the Lender in connection therewith;
Second, to the payment of any other amounts due (other than principal
------
and interest) under the Note or this Agreement;
Third, to the payment of interest accrued and unpaid on the Note;
-----
Fourth, to the payment of the outstanding principal balance of the
------
Note; and
Finally, to the payment to the Company, or to its successors or
-------
assigns, or as a court of competent jurisdiction may direct, of any surplus
then remaining from such proceeds. If the proceeds of any such sale are
insufficient to cover the costs and expenses of such sale, as aforesaid,
and the payment in full of the Note and all other amounts due hereunder,
the Company shall remain liable for any deficiency.
8.4 Lender Appointed Attorney-in-Fact. The Lender is hereby appointed the
---------------------------------
attorney-in-fact of the Company, with full power of substitution, for the
purpose of carrying
36
<PAGE>
out the provisions hereof and taking any action and executing any instruments
which the Lender may deem necessary or advisable to accomplish the purposes
hereof, which appointment as attorney-in-fact is irrevocable and coupled with an
interest. Without limiting the generality of the foregoing, the Lender shall
have the right and power to give notices of its security interest in the
Collateral to any Person, either in the name of the Company or in its own name,
to endorse all Mortgage Loans payable to the order of the Company, or to
receive, endorse and collect all checks made payable to the order of the Company
representing any payment on account of the principal of or interest on, or the
proceeds of sale of, any of the Mortgage Loans or and to give full discharge for
the same.
8.5 Right of Set-Off. If the Company shall default in the payment of the
----------------
Note, any interest accrued thereon, or any other sums which may become payable
hereunder when due, or in the performance of any of its other obligations or
liabilities under this Agreement, the Lender, shall have the right, at any time
and from time to time, without notice, to set-off and to appropriate or apply
any and all deposits of money or property or any other indebtedness at any time
held or owing by the Lender to or for the credit of the account of the Company
against and on account of the obligations and liabilities of the Company under
the Note and this Agreement, irrespective of whether or not the Lender shall
have made any demand hereunder and whether or not said obligations and
liabilities shall have matured, provided, however, that the aforesaid right of
set-off shall not apply to any deposits of escrow monies being held on behalf of
the mortgagors under Mortgage Loans or other third parties.
8.6 Reasonable Assurances. If, at any time during the term of the
---------------------
Agreement, Lender has reason to believe that Company is not conducting its
business in accordance with, or otherwise is not satisfying: (i) all applicable
statutes, regulations, rules, and notices of federal, state, or local
governmental agencies or instrumentalities, all applicable requirements of
Investors and Insurers and prudent industry standards or (ii) all applicable
requirements of Lender, as set forth in this Agreement, then, Lender shall have
the right to demand, pursuant to written notice from Lender to Company
specifying with particularity the alleged act, error or omission in question,
reasonable assurances from Company that such a belief is in fact unfounded, and
any failure of Company to provide to Lender such reasonable assurances in form
and substance reasonably satisfactory to Lender, within the time frame specified
in such written notice, shall itself constitute an Event of Default hereunder.
Company hereby authorizes Lender to take such actions as may be necessary or
appropriate to confirm the continued eligibility of Company for Advances
hereunder, including without limitation (i) ordering credit reports and (ii)
contacting mortgagors, licensing authorities and Investors or Insurers.
ARTICLE 9
REIMBURSEMENT OF EXPENSES; INDEMNITY
The Company shall:
9.1 Cost of Enforcement. Pay all out-of-pocket costs and expenses of the
-------------------
Lender, including reasonable attorney's fees, in connection with the enforcement
and administration
37
<PAGE>
of this Agreement, the Note, and other documents and instruments related hereto
and the making and repayment of the Advances and the payment of interest
thereon.
9.2 Payments of Taxes. Pay, and hold the Lender and any holder of the
-----------------
Note harmless from and against, any and all present and future stamp,
documentary and other similar taxes with respect to the foregoing matters and
save the Lender and the holder or holders of the Note harmless from and against
any and all liabilities with respect to or resulting from any delay or omission
to pay such taxes.
9.3 Indemnification. Indemnify, pay and hold harmless the Lender and any
---------------
of its officers, directors, employees or agents and any subsequent holder of the
Note from and against any and all liabilities, obligations, losses, damages,
penalties, judgments, suits, costs, expenses and disbursements of any kind
whatsoever (the "Indemnified Liabilities") which may be imposed upon, incurred
by or asserted against the Lender or such holder in any way relating to or
arising out of this Agreement, the Note, or any other document referred to
herein or any of the transactions contemplated hereby or thereby, except for
liabilities, losses and damages solely resulting from the gross negligence or
wilful misconduct of the Lender.
ARTICLE 10
DELIVERIES OF COLLATERAL DOCUMENTS
The Lender exclusively shall deliver Pledged Mortgages to the Investor
under the Purchase Commitment with respect thereto for its examination and
purchase, against a bailee letter substantially in the form attached hereto as
Exhibit D. The Lender may deliver any document relating to the Collateral to
- ---------
the Company for correction or completion against a properly executed trust
receipt in the form approved by the Lender with instructions to the Company to
either return the corrected document to the Lender within ten (10) Business Days
after such delivery or redeem the Mortgage Loan from pledge. In the case of
deliveries of Pledged Mortgages by the Lender, the Company shall deliver to the
Lender a letter, to accompany the delivery, confirming the security interest of
the Lender and designating the Lender as payee under any Purchase Commitment.
ARTICLE 11
MISCELLANEOUS
11.1 Relationship of Parties. The relationship between Lender and the
-----------------------
Company is limited to that of creditor/secured party, on the one hand, and
borrower, on the other hand. The provisions herein for compliance with
financial covenants and delivery of financial statements, are intended solely
for the benefit of Lender to protect its interests as lender in assuring
performance of the obligations hereunder, and nothing contained in this
Agreement shall be construed as permitting or obligating Lender to act as a
financial or business advisor or consultant to the Company, as permitting or
obligating the Lender to control the Company or to conduct the Company's
operations, as creating any joint venture, agency, fiduciary, trustee, or other
relationship between the parties other than as explicitly and specifically
stated in this Agreement. The Company acknowledges that it has had the
opportunity to obtain the advice of experienced counsel of its own choosing in
connection with the
38
<PAGE>
negotiation and execution of this Agreement and to obtain the advice of such
counsel with respect to all matters contained herein. The Company further
acknowledges that it is experienced with respect to financial and credit matters
and has made its own independent decision to execute and deliver this Agreement.
11.2 Recourse. The Company acknowledges and agrees that it is fully liable
--------
for repayment of all Advances and all sums due hereunder or under the Note and
for performance of all obligations contained in this Agreement.
11.3 Notices. All notices, demands, consents, requests and other
-------
communications required or permitted to be given or made hereunder
(collectively, "Notices") shall be in writing and shall be mailed (first class,
return receipt requested and postage prepaid) or delivered in person or by
overnight delivery service or by facsimile, addressed to the respective parties
hereto at their respective addresses set forth below or, as to any such party,
at such other address as may be designated by it in a Notice to the other:
If to the Company:
Preferred Credit Corporation
3347 Michelson, Suite 400
Irvine, California 92612
Attention: Todd A. Rodriguez, CEO
Facsimile No. (714) 474-0111
with a copy to:
_________________________
_________________________
_________________________
Attention: _______________
Facsimile No. _______________
If to the Lender:
LaSalle National Bank
135 South LaSalle Street
Chicago, Illinois 60603
Attention: Mr. Gary D. Timmerman
Facsimile No: (312) 904-6382
with a copy to:
Sonnenschein Nath & Rosenthal
8000 Sears Tower
Chicago, Illinois 60606
Attention: Scott L. Hammel, Esq.
Facsimile No: (312) 876-7934
All Notices shall be conclusively deemed to have been properly given or made
when duly delivered, if delivered in person or by overnight delivery service or
by facsimile, or on the third (3rd) Business Day after being deposited in the
mail, if mailed in accordance herewith.
39
<PAGE>
11.4 Terms Binding Upon Successors; Survival. The terms and provisions of
---------------------------------------
this Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns. All representations,
warranties, covenants and agreements herein contained on the part of the Company
shall survive the making of any Advance and the execution of the Note, and shall
be effective so long as the Commitment is outstanding or there remains any
obligation of the Company hereunder or under the Note to be paid or performed.
11.5 Assignment. This Agreement may not be assigned by the Company. This
----------
Agreement and the Note, along with the Lender's security interest in any or all
of the Collateral, may, at any time, be transferred or assigned, in whole or in
part, by the Lender, and any such transferee or assignee thereof may enforce
this Agreement, the Note and such security interest.
11.6 Amendments. This Agreement and the Exhibits hereto may be modified or
----------
amended by the Lender at any time upon thirty (30) days notice to the Company.
Such modification or amendment will not take effect if, within fifteen (15) days
from the date of such notice, the Lender receives a written objection to such
modification or amendment from the Company. If no such objection is received by
the Lender such modification or amendment will automatically become effective
upon the thirtieth (30th) day from the date of such notice by the Lender.
Notwithstanding the foregoing, Lender may at any time, upon written notice to
the Company, modify any funding procedures, documentation or times set forth
herein or in any exhibit hereto and the Company hereby consents to any such
modifications.
11.7 No Waiver; Remedies Cumulative. No failure or delay on the part of
------------------------------
the Company or the Lender or any holder of the Note in exercising any right,
power or privilege hereunder and no course of dealing between the Company and
the Lender or the holder of the Note shall operate as a waiver thereof; nor
shall any single or partial exercise of any right, power or privilege hereunder
or under the Note preclude any other or further exercise thereof or the exercise
of any other right, power or privilege hereunder. The rights and remedies
herein expressly provided are cumulative and not exclusive of any rights or
remedies which the Company or the Lender or the holder of the Note would
otherwise have. No notice to or demand on the Company in any case shall entitle
the Company to any other or further notice or demand in similar or other
circumstances or constitute a waiver of the rights of the Lender or the holder
of the Note to any other or further action in any circumstances without notice
or demand.
11.8 Invalidity. In case any one or more of the provisions contained in
----------
this Agreement shall for any reason be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions hereof, and this Agreement shall be
construed as if such invalid, illegal or unenforceable provision had not been
included.
11.9 Participations. The Lender may from time to time sell or otherwise
--------------
grant participations in the Commitment and the Note, and the holder of any such
participation, if the participation agreement so provides, (i) shall, with
respect to its participation, be entitled to all of the rights of the Lender and
(ii) may exercise any and all rights of setoff or banker's
40
<PAGE>
lien with respect thereto, in each case as fully as though the Company were
directly indebted to the holder of such participation in the amount of such
participation; provided, however, that the Company shall not be required to send
or deliver to any of the participants other than the Lender any of the materials
or notices required to be sent or delivered by it under the terms of this
Agreement, nor shall it have to act except in compliance with the instructions
of the Lender.
11.10 Integration. This Agreement, together with the Note, and other
-----------
documents executed pursuant to the terms hereof, constitute the entire agreement
between the parties hereto, with respect to the subject matter hereof.
11.11 Additional Instruments, etc. The Company shall execute and deliver
---------------------------
such further instruments and shall do and perform all matters and things
necessary or expedient to be done or observed for the purpose of effectively
creating, maintaining and preserving the security and benefits intended to be
afforded by this Agreement.
11.12 Governing Law. This Agreement and the rights and obligations of the
-------------
parties hereunder and under the Note shall be construed in accordance with and
governed by the laws of the State of Illinois.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
41
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
COMPANY: PREFERRED CREDIT CORPORATION, a California
corporation
By:
-----------------------------------------
Name:
---------------------------------------
Its:
----------------------------------------
LENDER: LA SALLE NATIONAL BANK
By:
-----------------------------------------
Name:
---------------------------------------
Its:
----------------------------------------
42
<PAGE>
EXHIBITS
Exhibit A - Form of Advance Request
Exhibit B - Procedures and Documentation
Exhibit C - Form of Investor Instructions
Exhibit D - Form of Bailee Letter
SCHEDULES
Schedule 1.1 - List of Servicing Contracts
Schedule 5.1 - List of Subsidiaries
43
<PAGE>
EXHIBIT A
---------
FORM OF ADVANCE REQUEST
-----------------------
44
<PAGE>
EXHIBIT B
---------
PROCEDURES AND DOCUMENTATION
----------------------------
45
<PAGE>
EXHIBIT C
---------
FORM OF INVESTOR INSTRUCTIONS
-----------------------------
46
<PAGE>
EXHIBIT D
---------
FORM OF BAILEE LETTER
---------------------
[Investor Name & Address]
-----------------------
Re: SECURITY INTEREST OF LA SALLE NATIONAL BANK IN MORTGAGE NOTES
Dear Sir or Madam:
Pursuant to the purchase contracts entered and to be entered into between
you and Preferred Credit Corporation ("the Company"), formerly known as T.A.R.
Preferred Mortgage Corporation, the enclosed mortgage note and related documents
("Mortgage Collateral") are being sent to you for purchase. Security interests
in the Mortgage Collateral have been granted by the Company to LaSalle National
Bank (the "Lender"), to secure the Company's warehouse borrowings. The Mortgage
Collateral constitutes collateral for such warehouse borrowings.
The Mortgage Collateral is being sent to you on the understanding that you
will hold it for the Lender, as its agent and bailee, subject to the direction
and control of only the Lender, in order to preserve the Lender's security
interests in the Mortgage Collateral until it is purchased by you or returned to
the Lender. Further, you may not take any orders or directions from the Company
with respect to the Mortgage Collateral or take any action with respect to the
Mortgage Collateral that may be inconsistent with the terms of this letter
without the prior written consent of the Lender.
By your receipt of the Mortgage Collateral, you agree that you will hold
the Mortgage Collateral sent to you only as the agent and bailee of the Lender,
and as such will take no action with respect to the Mortgage Collateral other
than to hold it for examination for no longer than thirty (30) days from the
date it is sent to you. Prior to the expiration of such 30-day period, you
agree to (i) remit the purchase price, without set-off or deduction, to the
Lender in the manner described below immediately upon settlement or (ii) return
the Mortgage Collateral to the Lender immediately upon your determination that
you will not be purchasing such Mortgage Collateral. Prior to remitting payment
for the Mortgage Collateral, you agree not surrender or transfer any the
Mortgage Collateral to any party other than the Lender. Further, upon receipt
of a written notice from the Lender prior to settlement of your purchase, you
agree to return to the Lender, or such other person as the Lender designates in
the notice, all Mortgage Collateral then held by you.
Upon receipt of Mortgage Collateral sent to you for purchase pursuant to
the terms of the purchase contracts and this letter, you may purchase such
Mortgage Collateral only by forwarding the purchase price, without set-off or
deduction, in immediately available funds by wire transfer to LaSalle National
Bank, Attention: ____________________ for the account of Preferred Credit
Corporation, referring to the specific Mortgage Collateral.
47
<PAGE>
Any Mortgage Collateral that does not conform to your requirements should
be immediately returned to Lender at 135 South LaSalle Street, Chicago, Illinois
60603, Attention: ____________________, referring to Preferred Credit
Corporation.
The express terms of this letter will not be altered by any prior dealings
or course of conduct. If the Lender must institute legal action against you to
recover the Mortgage Collateral or the proceeds thereof as a result of your
failure to comply with the terms of this letter, the Lender shall be entitled to
recover all attorneys' fees and costs and expenses incurred in connection
therewith.
PLEASE CONFIRM YOUR AGREEMENT TO THE TERMS OF THIS LETTER BY SIGNING
AND RETURNING A COPY OF THIS LETTER TO THE LENDER. YOUR FAILURE TO DO SO WILL
NOT IN ANY WAY REDUCE YOUR OBLIGATIONS WITH RESPECT TO THE MORTGAGE COLLATERAL
AS STATED HEREIN.
Very truly yours,
LA SALLE NATIONAL BANK
By:
-----------------------------------------
Name:
---------------------------------------
Its:
----------------------------------------
ACKNOWLEDGEMENT
---------------
The undersigned hereby agrees to the terms and conditions set forth in the
above letter.
[Investor Name]
By:
-----------------------------------------
Name:
---------------------------------------
Its:
----------------------------------------
48
<PAGE>
SCHEDULE 1.1
------------
LIST OF SERVICING CONTRACTS
---------------------------
49
<PAGE>
SCHEDULE 5.1
------------
LIST OF SUBSIDIARIES
--------------------
50
<PAGE>
EXHIBIT 10.10
CS FIRST BOSTON
Park Avenue Plaza
New York, New York 10055
October 2, 1996
T.A.R. Preferred Mortgage Corporation
19782 MacArthur Blvd. - Suite 250
Irvine, CA 92715
Attention: Mr. Todd A. Rodriguez
Chief Executive Officer
Ladies and Gentlemen:
This letter agreement confirms our understanding that T.A.R. Preferred Mortgage
Corporation ("Preferred") has engaged CS First Boston Corporation ("CS First
Boston"), under the terms set forth herein, to assist Preferred in the
structuring and marketing of a program of offerings (the "Offerings") of AAA- or
Aaa-rated asset backed securities (the "Securities") evidencing ownership of, or
secured in whole or in part by, closed end first or second home equity mortgages
(the "Loans") originated or purchased by Preferred, and Preferred has agreed to
enter into a Repurchase Facility, as defined herein, with CS First Boston
Mortgage Capital Corp. ("CS First Boston Mortgage", and each of CS First Boston
and CS First Boston Mortgage, a "CSFB Entity").
Capitalized terms not defined in this letter agreement shall have the meanings
set forth in the Master Repurchase Agreement between Preferred and CS First
Boston Mortgage dated October 2, 1996 (the "Master Repurchase Agreement").
1. Terms of Assignment
-------------------
As of the later of (a) the MLI Release Date (as defined below) or (b)
October 2, 1996 (such later date the "Start Date"), Preferred hereby
appoints CS First Boston as Preferred's exclusive lead agent, lead
underwriter or financial advisor, as the case may be, in connection with
the structuring and marketing of the Offerings during the period commencing
on the Start Date and ending on December 31, 1997 (the "Exclusive Period").
CS First Boston accepts such appointment, subject to all terms and
conditions of this letter. Preferred agrees to (x) cause at least $400
million of public (or, if specified by CS First Boston, private placement)
Offerings of Securities to be underwritten by CS First Boston during the
Exclusive Period and (y) use commercially reasonable efforts to cause at
least an additional $400 million to be so underwritten, and if such
additional amount shall not be so underwritten during the Exclusive Period,
to use commercially reasonable efforts to cause any shortfall in such
additional amount to be
<PAGE>
so underwritten as soon as practicable in 1998. Preferred and CS First
Boston shall enter into an underwriting agreement, in respect of Offerings
pursuant to a Preferred shelf registration statement or public offerings
made otherwise, in respect of each Offering (the "Underwriting Agreement")
or, if specified by CS First Boston a placement agent agreement (the
"Placement Agent Agreement"). The terms of the Placement Agent Agreement or
Underwriting Agreement, as the case may be, in respect of each Offering
shall supersede those in this letter agreement.
As part of its engagement, CS First Boston will undertake such of the
following as are appropriate under the circumstances:
(i) advise Preferred in the structuring and rating of each Offering;
(ii) assist Preferred with the systems development relating to the
Offerings;
(iii) assist Preferred and their lawyers in drafting the appropriate
documents;
(iv) make arrangements for the selection and appointment of a trustee;
(v) in conjunction with Preferred's accountants, assist Preferred in
evaluating the accounting and tax implications of the Offerings;
(vi) advise on the merits of obtaining a rating on the securities and
accordingly, assist with the ratings process; and
(vii) market and place or underwrite the Offerings.
Notwithstanding anything herein to the contrary, CS First Boston shall have
no obligation, expressed or implied, to underwrite or act as placement
agent for the Offerings if, in its sole good faith judgment, (a) given the
prevailing circumstances, CS First Boston would be exposed to unacceptable
risk or (b) CS First Boston is not satisfied with the results of CS First
Boston's due diligence review or (c) the parties fail to agree on
documentation satisfactory to CS First Boston. CS First Boston shall
notify Preferred as soon as possible of any determination not to underwrite
or act as placement agent, in which case Preferred shall be free to
securitize the offering in the manner and with the underwriter or placement
agent it selects at its sole discretion, and no fees or expenses shall be
due CS First Boston in regard to the offering to which it declines to act
as underwriter or placement agent. In the event that CS First Boston
declines to act as placement agent or underwriter for an Offering,
Preferred will not be required to grant CS First Boston the underwriting
compensation referenced in Section 2 in respect of such specific Offering,
and this letter agreement shall be thereafter subject to termination by
Preferred pursuant to, and to the extent provided in, Section 9.
The aggregate proceeds of the sale of Securities (the "Securitization
Proceeds") for each Offering will be applied, first, to repay CS First
Boston Mortgage the Repurchase Price with respect to those Purchased
Securities (as defined in the Master Repurchase Agreement) which are the
subject of the Offering, plus any other amounts then due and payable under
the facility provided under the Master Repurchase Agreement (the
"Repurchase Facility"). The obligation of Preferred to pay the Repurchase
Price and any other amounts due under the Repurchase Facility is a general
obligation of Preferred and shall not be limited in the event that the
Securitization Proceeds are insufficient to fund such repayment.
2
<PAGE>
2. MLI Release Date; Underwriting Compensation
-------------------------------------------
Preferred has furnished CS First Boston Mortgage with a copy of its
February 16, 1996 letter agreement with Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("MLI") and hereby represents and warrants to the CSFB
Entities that MLI has breached such agreement and related agreements in
such manner that Preferred is entitled to withhold its performance under,
and terminate, such letter agreement provided, however, that, because of
the expense of litigation Preferred does not undertake to either guaranty
any result of litigation or to pursue or defend any litigation on the
matter. Preferred further represents and warrants to the CSFB Entities
that (a) there are no other agreements with MLI other than such February 16
letter agreement that would limit, restrict or conflict with CS First
Boston's ability to exclusively underwrite the Securities as contemplated
hereby; (b) there no other such agreements with any other person or entity;
(c) the information contained in the memorandum to Preferred of its
counsel, David H. Sands, dated October 2, 1996 regarding Preferred's
agreements with MLI, a copy of which was furnished to CS First Boston, is
true, correct and complete in all material respects; (d) other than the
CSFB Entities, no person or entity, including without limitation MLI, has
been granted the exclusive right to either purchase or finance (under a
repurchase arrangement or otherwise) the mortgage loan inventory of
Preferred (or any portion thereof or interest therein), except that the
February 16 letter agreement gives MLI the exclusive right to purchase or
place (but not to finance) mortgage loans to be sold to third parties
(other than MLI and its affiliates) subject to retained servicing by
Preferred, but such right does not apply to loans sold by Preferred on a
"servicing released" basis even if pursuant to such sale Advanta Mortgage
Corp. U.S.A. (or another servicer engaged by Preferred) is retained as
servicer by the buyer of such loans; and (e) Preferred has delivered to MLI
the demand letter attached hereto as Exhibit A and the notice letter
attached hereto as Exhibit B. Preferred agrees to indemnify and hold
harmless each CSFB Entity against any and all losses, claims, damages,
liabilities or expenses, including (without limitation) legal fees and
expenses, joint or several, to which they may become subject, at common law
or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) arise out of or are based upon a
breach of the representations and warranties contained in clauses (a)
through (e) of this paragraph. Preferred shall use commercially reasonable
efforts from the date hereof through December 29, 1996 to obtain as soon as
practicable release or termination by MLI of all obligations existing under
the February 16 letter agreement (such release or termination to be
reasonably satisfactory to CS First Boston, provided, however, that it need
not apply or refer to this letter agreement or either CSFB Entity) and to
promptly deliver to CS First Boston evidence of such release or termination
(the date on which such evidence is furnished to CS First Boston, the "MLI
Release Date"). In the event that the MLI Release Date does not occur, CS
First Boston Mortgage shall have the option to purchase, under the terms
and conditions of the Mortgage Loan Purchase Agreement dated August 1,
1996, Mortgage Loans that are included in the Repurchase Facility from time
to time.
Preferred will pay to CS First Boston promptly upon the closing of each
Offering during the Exclusive Period, a placement fee or underwriting
discount (as appropriate) equal to
3
<PAGE>
the product of (a) the applicable Underwriting Fee Percentage multiplied by
(b) the aggregate amount of the Securities (other than Residuals, as
defined herein) sold pursuant to Offerings (the "Underwriting Fee"). The
Underwriting Fee Percentage with respect to each Offering shall be one-half
of one percent (0.50%) for Offerings of Securities of $200 million
principal amount or greater, and shall be five-eighths of one percent
(0.625%) for Offerings of Securities of less than $200 million. In the
event that less than $400 million of Securities is underwritten by CS First
Boston during the Exclusive Period, Preferred shall pay to CS First Boston
on or before December 31, 1997 five-eighths of one percent of the amount of
the shortfall. In addition, in the event that both (x) the MLI Release
Date has occurred and (y) as of December 31, 1998 less than $800 million of
Securities has been underwritten by CS First Boston pursuant to this
letter, Preferred shall pay to CS First Boston on or before such date five-
eighths of one percent of the amount of the shortfall. It is understood
that such fees shall be earned by CS First Boston whether or not
"commercially reasonable efforts" were made by Preferred pursuant to
Section 1.
3. Expenses
--------
Preferred shall pay all reasonable costs and expenses arising from the
preparation for and execution of the Offerings (unless such Offering does
not close because of any event described in the third paragraph of Section
2) including but not limited to the fees and disbursements of legal counsel
(including CS First Boston's counsel and investor's counsel in any private
placement, if retained) rating agency fees, credit enhancement fees, SEC
registration fees (or equivalent ratable fees of a CS First Boston
affiliate in lieu thereof if such affiliate's shelf registration is
utilized), auditors' fees, due diligence expenses and trustee fees. It is
understood and agreed that Preferred may require that the parties incurring
or charging such costs and expenses agree in advance that they are payable
or reimbursable by Preferred only to a specified reasonable extent or cap.
4. Information
-----------
(a) Preferred will furnish CS First Boston with all financial and other
information concerning Preferred as CS First Boston deems reasonably
appropriate in connection with the performance of the services
contemplated by this letter and in that connection will provide CS
First Boston with reasonable access during normal business hours to
Preferred's officers, directors, employees, accountants, and other
representatives. Preferred acknowledges and confirms that CS First
Boston (i) will rely on such information in the performance of the
services contemplated by this letter without independently
investigating or verifying any of it, (ii) assumes no responsibility
for the accuracy or completeness of such information and (iii) will
not make any appraisal of any assets of Preferred.
(b) Preferred will be solely responsible for the contents of the private
placement memorandum or other offering document used in connection
with the placement of the Securities contemplated hereby (as such
private placement memorandum or other document may be amended or
supplemented and including any
4
<PAGE>
information incorporated therein by reference, the "Private Placement
Memorandum") and any and all other written communications provided by,
or authorized to be provided on behalf of, Preferred to any actual or
prospective purchaser of the Securities except to the extent such
contents of the Private Placement Memorandum are provided by CS First
Boston in writing expressly for use in the Private Placement
Memorandum and provided that any statistical, tabular or similar
information, including computer runs, initially prepared by or on
behalf of CS First Boston (but as to which CS First Boston is not
taking responsibility in the PPM) shall have been verified by
Preferred's independent public accountants. Preferred represents and
warrants that the Private Placement Memorandum and such other written
communications will not, as of the date of the offer or sale of the
Securities or the closing date of any such sale, contain any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, provided however that such representation and warranty
will not cover information provided in writing by CS First Boston for
use specifically in such Private Placement Memorandum. Preferred
authorizes CS First Boston to provide the Private Placement Memorandum
to prospective purchasers of the Securities. If at any time prior to
the completion of the offer and sale of the Securities an event occurs
as a result of which the Private Placement Memorandum (as then
supplemented or amended) would include any untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements therein, in light of the circumstances under which
they were made, not misleading, Preferred will promptly notify CS
First Boston of such event and CS First Boston will suspend
solicitations of prospective purchasers of the Securities until such
time as Preferred shall prepare (and Preferred agrees that, if it
shall have notified CS First Boston to suspend solicitations after
Preferred has accepted orders from prospective purchasers, it will
promptly prepare) a supplement or amendment to the Private Placement
Memorandum which corrects such statement or omission.
Preferred agrees to indemnify and hold harmless CS First Boston and
each person who controls CS First Boston within the meaning of either
the Securities Act of 1933, as amended (the "Act") or the Securities
Exchange Act of 1934, as amended (the "Exchange Act") against any and
all losses, claims, damages or liabilities, joint or several, suffered
or incurred which arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in the
Private Placement Memorandum or in any revision or amendment thereof
or supplement thereof or arise out of or are based upon the omission
or alleged omission to state in the Private Placement Memorandum or in
any revision or amendment thereof or supplement thereto a material
fact required to be stated therein or the omission or alleged omission
to state a material fact in the Private Placement Memorandum or in any
revision or amendment thereof or supplement thereto necessary to make
the statements therein, in the light of the circumstances under which
they were made, not misleading, and agrees to reimburse each such
indemnified party for any legal or other expenses reasonably incurred
by it or
5
<PAGE>
him in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however that Preferred
-------- -------
shall not be liable to CS First Boston or any person who controls CS
First Boston to the extent that any misstatement or alleged
misstatement or omission or alleged omission was made in reliance upon
and in conformity with the information provided in writing to
Preferred by CS First Boston specifically for inclusion in the Private
Placement Memorandum. This indemnity agreement will be in addition to
any liability which Preferred may otherwise have.
(c) All non-public information provided by Preferred to CS First Boston
will be used solely in the course of the performance of the above-
mentioned services, and will be treated confidentially. Except as
otherwise required by law, CS First Boston will not disclose this
information to any third party other than its own counsel without
Preferred's prior written consent.
(d) All financial data and other documentation prepared by CS First Boston
in connection with the transactions contemplated hereby (including,
without limitation, any computer models, cash flow analyses, and any
documentation prepared by counsel for CS First Boston) shall be
proprietary to CS First Boston. Except as otherwise required by law,
neither Preferred, any Preferred affiliate, nor any person acting on
behalf of any of them (including, without limitation, counsel and the
independent accountants to Preferred) shall disseminate, distribute,
or otherwise make available such data or documentation without CS
First Boston's prior written consent (other than Preferred making such
data available to any Preferred affiliate, its counsel or its
independent accountants, in each case on a need-to-know basis). This
paragraph shall in all cases be subject to and limited by the
confidentiality obligations of CS First Boston contained in the
immediately preceding paragraph.
This paragraph 4 shall survive termination of this agreement.
5. Exemption from Registration; Restrictions on Offer and Sale of Same or
----------------------------------------------------------------------
Similar Securities
------------------
It is understood that, unless Preferred and CS First Boston agree
otherwise, the offer and sale of the Securities will be made under an
exemption from the registration requirements of the Act, pursuant to
Section 4(2) thereof. Preferred has not made and will not make,
directly or indirectly, any offer or sale of Securities or of
securities of the same or a similar class as the Securities if as a
result the offer and sale of Securities contemplated hereby would fail
to be entitled to the exemption from the registration requirements of
the Act provided for in such Section 4(2) (unless the parties are not
relying on such exemption). As used herein, the terms "offer" and
"sale" have the meanings specified in Section 2(3) of the Act.
6
<PAGE>
6. Additional Restrictions
-----------------------
In connection with all private offers and sales of the Securities pursuant
to an exemption from registration under the Act:
(a) Preferred will not offer or sell the Securities by means of any form
of general solicitation or general advertising that would violate the
exemption from registration under section 4(2) of the Act. Preferred
will not at any time during the term of this engagement, or for a
period of six months following completion of the placement of
Securities contemplated hereby, make any reference publicly to the
transactions contemplated hereby, by way of the issuance of a press
release, the placement of an advertisement or otherwise that would
violate the exemption from registration under the Act pursuant to
Section 4(2), without the prior consent of CS First Boston which
consent shall not be unreasonably withheld or delayed.
(b) Neither Preferred nor CS First Boston will offer or sell the
Securities to any person who is not an "accredited investor" as
defined in Rule 501 under the Act or a "qualified institutional buyer"
as defined under Rule 144A under Act.
(c) Preferred and CS First Boston will exercise reasonable care to ensure
that the purchasers of the Securities are not underwriters within the
meaning of Section 2(11) of the Act and, without limiting the
foregoing, that such purchases will comply with Rule 502(d) under the
Act.
(d) Preferred will not make any Form D or other filings with the
Securities and Exchange Commission with respect to the offer and sale
of the Securities without CS First Boston's prior written consent.
(e) Preferred will cause to be delivered to CS First Boston the same
opinions of counsel and accountants' letters that it provides to
purchasers of the Securities.
(f) Preferred shall be deemed to make to CS First Boston all
representations and warranties which Preferred makes to purchasers of
Securities in any purchase agreement or other documents.
7. Compliance with State Securities Laws
-------------------------------------
Preferred will take such action as is necessary to qualify the Securities
for offer and sale under the securities laws of such states and other
jurisdictions of the United States as CS First Boston may specify.
8. Indemnification
---------------
Because CS First Boston will be acting on behalf of Preferred in connection
with the engagement of CS First Boston hereunder, Preferred has entered
into a separate letter
7
<PAGE>
agreement (the "Indemnification Agreement") providing for the
indemnification by Preferred of CS First Boston and certain related persons
and entities.
9. Termination
-----------
(a) No termination of CS First Boston's engagement hereunder shall affect
Preferred's obligations under the Indemnification Agreement.
(b) In the event that (i) either CS First Boston Mortgage or the
Designated Affiliate, as defined herein, shall breach any of its
obligations in a material respect under, or terminate without cause,
any Facility Agreement, as defined herein, (ii) CS First Boston
Mortgage unreasonably withholds its consent to a change in Preferred's
loan origination, underwriting or acquisition guidelines, or (iii) CS
First Boston Mortgage exercises its right of either Unilateral
Termination or Illiquidity Termination (each as defined below) of the
Master Repurchase Agreement (any such event described in clauses (i),
(ii) or (iii), subject in the case of clause (i) to the ten-day cure
period referred to below, a "Warrant Call Event") then, provided an
Event of Default of Seller shall not have occurred and be continuing,
Preferred shall be entitled to terminate this letter agreement without
obligation or liability upon at least ten days' prior written notice
to CS First Boston unless any such breach is cured within such period.
(c) No termination by Preferred of CS First Boston's engagement hereunder
other than as discussed in Section 2 of this letter agreement, Section
9(b) of this letter agreement or for material cause shall affect
Preferred's obligation to pay fees to CS First Boston agreed in
section 2 of this letter in respect of the remaining amount of
Offerings.
(d) Subject to subparagraphs (a) and (b), the engagement of CS First
Boston hereunder (i) may be terminated at any time, with or without
cause, by either Preferred or CS First Boston, upon prior written
notice to the other of ten days and (ii) shall terminate, in any
event, upon completion of the Exclusive Period.
10. Repurchase Facility
-------------------
CS First Boston Mortgage shall provide Preferred during the Exclusive
Period with the Repurchase Facility upon the terms and conditions provided
for in this Section 10, Section 11 hereof and in the Master Repurchase
Agreement and the Custody Agreement, as defined therein (this Section 10,
Section 11 hereof the Master Repurchase Agreement and the Custody
Agreement, collectively, the "Facility Agreements"). The Facility
Agreements shall constitute the entire agreement between the parties with
respect to the transactions contemplated by this Section 10.
The Repurchase Facility available to Preferred shall be in an amount not
less than $100,000,000 of outstanding principal balance of Mortgage Loans
and $60 million aggregate Market Value of Residuals (as defined in Section
11) at any time; provided,
--------
8
<PAGE>
however, that CS First Boston Mortgage shall not be obligated to purchase,
-------
on any given Purchase Date, Mortgage Loans either (a) having an aggregate
unpaid principal balance in amount less than $5,000,000 or (b) more
frequently than twice per calendar week; and provided, further that CS
-------- -------
First Boston Mortgage may (i) refuse to purchase or (ii) require Preferred
to immediately repurchase any Mortgage Loan offered for sale under the
Master Repurchase Agreement if CS First Boston Mortgage has reason to
believe in good faith either that such Mortgage Loan fails to comply in a
material respect with the requirements of the Facility Agreements or that,
taking into account the Mortgage Loans then subject to the Repurchase
Facility, such Mortgage Loan would not be eligible for a securitization of
such Mortgage Loans without unreasonable credit enhancement. The Purchase
Price for the Mortgage Loans shall be 95% of Market Value.
CS First Boston Mortgage shall be entitled to cease to purchase Mortgage
Loans and/or Residuals (including Mortgage Loans previously purchased) if
(i) the Master Repurchase Agreement is terminated pursuant to its terms,
(ii) CS First Boston Mortgage is entitled to exercise its remedies in
accordance with Paragraph 11 of the Master Repurchase Agreement, or (iii) a
Facility Termination Event (as defined below) occurs, or (iv) CS First
Boston Mortgage determines that unilateral termination (a "Unilateral
Termination") by it of the Master Repurchase Agreement is reasonable under
the circumstances, taking into consideration, among other things, the
volatility or illiquidity of the market for the Mortgage Loans or
securities backed thereby, the extent and nature of any event which is, or
with notice or passage of time would become, a Facility Termination Event
(as defined below), or the availability of financing to CS First Boston
Mortgage;
CS First Boston Mortgage shall have the right to terminate its obligations
under this Section 10 and CS First Boston Mortgage shall no longer be
obligated to make purchases under this Section 10 and may accelerate the
Repurchase Date for all Mortgage Loans and/or Residuals then subject to
repurchase by Preferred as provided in the Master Repurchase Agreement,
immediately upon the occurrence of a Facility Termination Event (as defined
herein) irrespective of whether the Master Repurchase Agreement
specifIcally so provides with respect to a Facility Termination Event.
Upon such termination, CS First Boston Mortgage may utilize any remedy
provided for in the Facility Agreements. A Facility Termination Event (a
"Facility Termination Event") shall include any one or more of the
following:
(a) the judgment by CS First Boston Mortgage in good faith that a material
adverse change has occurred with respect to the business, properties,
assets or condition (financial or otherwise) of Preferred or the
Servicer; provided, however, that in the case of any such material
adverse change as described above with respect only to the Servicer,
such Facility Termination Event shall only be applicable until a
successor Servicer acceptable to CS First Boston Mortgage has become
the Servicer, and shall not give CS First Boston Mortgage the right to
terminate such obligations (absent a resulting material adverse change
to the business, properties, assets or condition of Preferred or a
failure by Preferred to appoint such successor within 45 days and
transfer such servicing within an additional 45 days);
9
<PAGE>
(b) CS First Boston Mortgage shall reasonably request, specifying the
reasons for such request, information, and/or written responses to
such requests, regarding the financial well-being of Preferred and
such information and/or responses shall not have been provided within
three business days of such request;
(c) Either (i) a change in control of Preferred shall have occurred other
than in connection with and as a result of the issuance and sale by
Preferred of registered, publicly offered common stock, the issuance
of employee stock options of up to 12%, or the issuance of the
Warrants (as defined below); or (ii) Mr. Todd A. Rodriguez, currently
acting in the capacity of chief executive officer of Preferred, ceases
to be employed by Preferred and functioning in such capacity;
(d) There is (i) a material breach by Preferred of any representation and
warranty contained in the Master Repurchase Agreement, other than a
representation or warranty relating to particular Mortgage Loans, and
CS First Boston Mortgage has reason to believe in good faith either
that such breach is not curable within 30 days or that such breach may
not have been cured in all material respects at the expiration of 30
days following discovery thereof by Preferred or (ii) a failure by
--
Preferred to make any payment (or transfer of Additional Purchased
Securities) payable (or required to be transferred) by it under the
Facility Agreements or (iii) any other failure by Preferred to observe
--
and perform in any material respect its material covenants, agreements
and obligations with CS First Boston Mortgage, including without
limitation those contained in the Facility Agreements, and CS First
Boston Mortgage has reason to believe in good faith that such failure
may not have been cured in all material respects at the expiration of
30 days following discovery thereof by Preferred;
(e) There occurs a catastrophic event or events resulting in the effective
absence of a "repo market" for a period of thirty (30) consecutive
days respecting mortgage loans and/or Residuals and the same results
in CS First Boston Mortgage not being able to finance any purchase
through the repo market with CS First Boston Mortgage's traditional
repo counterparties (an "Illiquidity Termination");
(f) Preferred, without the prior written consent of CS First Boston
Mortgage (which shall not be unreasonably withheld), amends its loan
origination or acquisition guidelines or practices;
(g) With respect to the Mortgage Loans which are held by CS First Boston
Mortgage pursuant to the Facility Agreements (i) Mortgage Loans
constituting more than 1% (when measured by aggregate unpaid principal
balance) of all such Mortgage Loans held by CS First Boston Mortgage
experience annualized net losses, and (ii) Mortgage Loans constituting
more than 4% (when measured by aggregate unpaid principal balance) of
all such Mortgage Loans held by CS First Boston Mortgage are more than
sixty (60) days delinquent as to a scheduled payment of principal and
interest.
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<PAGE>
Notwithstanding any other provision of this Section 10, any grace or notice
period provided herein in respect of a notice to be given or action to be taken
by CS First Boston Mortgage may be shortened or eliminated by CS First Boston
Mortgage if, in its sole good faith discretion, it is unreasonable to do so
under the circumstances, taking into consideration, among other things, the
volatility of the market for the Mortgage Loans or other Securities involved,
the extent and nature of any Facility Termination Event (or events which with
the giving of such notice and passage of time would constitute Facility
Termination Events) and the risks inherent in deferring the exercise of remedies
for the otherwise applicable grace or notice period.
CS First Boston Mortgage's obligations hereunder with respect to a Purchase Date
are all subject to each of the following conditions:
I. At or prior to the first Purchase Date:
(a) a blanket UCC financing statement acceptable to CS First Boston
Mortgage, suitable for filing in the jurisdiction in which
Preferred's principal place of business is located, and
identifying CS First Boston Mortgage as the secured party and all
Mortgage Loans to be Purchased by CS First Boston Mortgage
hereunder as collateral, shall have been filed by Preferred and
evidence of such filing to CS First Boston Mortgage;
(b) there shall have been delivered to CS First Boston Mortgage such
favorable opinion or opinions of counsel and a certificate of the
secretary of Preferred, in each case as are reasonably requested
by CS First Boston Mortgage; and
(c) there shall have been delivered to CS First Boston Mortgage a
Servicing Agreement and a fully executed Assignment, Assumption
and Recognition Agreement with respect thereto (the
"Assignment"), each in form acceptable to CS First Boston
Mortgage.
II. In the case of each Purchase Date:
(a) there shall have been delivered to CS First Boston Mortgage a
Trust Receipt with a Mortgage Loan Schedule attached;
(b) Preferred shall have, if requested by CS First Boston Mortgage,
disclosed information satisfactory to CS First Boston Mortgage
regarding the amounts (balances, credit limits, etc.), scheduled
maturities and termination provisions of, and creditors under,
all outstanding credit facilities and debt of Preferred reflected
in its financial and accounting records; and
(c) Preferred shall have provided to CS First Boston Mortgage such
other documents which are then required to have been delivered
under the
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<PAGE>
Facility Agreements or which are reasonably requested by CS First
Boston Mortgage, which other documents may include another UCC
financing statement, another favorable opinion or opinions of
counsel with respect to matters which are reasonably requested by
CS First Boston Mortgage, and/or an officers' or secretary's
certificate from Preferred.
11. Additional Collateral
---------------------
In connection with entering into a particular Placement Agent Agreement or
Underwriting Agreement pursuant to this letter, Preferred may require CS
First Boston Mortgage or an affiliate (the "Designated Affiliate") to
undertake to enter into reverse repurchase transactions under a Master
Repurchase Agreement with CS First Boston (Hong Kong) Limited substantially
in the form annexed hereto as Exhibit C for the balance of the Exclusive
Period with respect to a maximum of $60 million of Market Value, as
determined in good faith by CS First Boston, of certain interest-only or
REMIC residual securities (collectively, "Residuals") backed by the related
Mortgage Loans and retained by Preferred in connection with the related
Offering. It is understood that such an Offering must have been
underwritten by CS First Boston. The provisions of Section 10 shall be
applicable to such undertaking, provided, however, that (i) the Pricing
Rate shall be LIBOR plus 325 basis points; (ii) the Buyer's Margin Amount
percentage will be 200%; (iii) there will be rolling 30-day Repurchase
Dates; (iv) a UCC financing statement reasonably acceptable to CS First
Boston, describing the particular Purchased Securities as collateral, will
be filed; and (v) references to CS First Boston Mortgage in Section 10
shall be deemed as applicable to refer to CS First Boston (Hong Kong)
Limited. This Section 11 shall cease to be applicable whenever the
outstanding aggregate Market Value of the Residuals then the subject of
Transactions is $60 million.
12. General
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CS First Boston agrees to perform its duties and responsibilities hereunder
with the exercise of such standard due care as is customary for similarly
situated investment banking firms. Other than the Master Repurchase
Agreement, the Custody Agreement, that certain Fee Agreement letter dated
August 20, 1996 and those certain common stock warrants evidenced by that
certain Warrant No. 1 issued as of the date hereof by Preferred to CS First
Boston Mortgage (the "Warrants"), to the extent that each party hereto has
executed the same, this letter and the Indemnification Agreement contain
the entire agreement of the parties with respect to the subject matter
hereof and supersede and take precedence over all prior agreements or
understandings, whether oral or written, between CS First Boston and
Preferred with respect to the subject matter hereof.
It is understood and agreed that the sale and delivery by Preferred of
Mortgage Loans pursuant to the Repurchase Facility does not satisfy in
whole or in part the obligations of Preferred under the Purchase Price and
Terms Letter dated June 27, 1996 or the related purchase agreement to be
dated August 30, 1996 with respect to whole loans sales.
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<PAGE>
The invalidity or unenforceability of any provision of this letter shall
not affect the validity or enforceability of any other provisions of this
agreement or the Indemnification Agreement, which shall remain in full
force and effect.
This letter agreement may not be amended or modified except in writing
signed by each of the parties hereto.
This agreement shall be governed by and construed in accordance with the
laws of the State of New York (without regard to its conflicts of laws
principles).
We are delighted to accept this engagement and look forward to working with you
on the foregoing. Please confirm that the foregoing is in accordance with your
understanding by signing this letter of agreement and two enclosed copies and
returning to us the enclosed copies. The letter signed by you shall constitute a
binding agreement between us as of the date first above written.
Yours sincerely,
By:_________________________
Name:_______________________
Title:______________________
CS FIRST BOSTON MORTGAGE CAPITAL CORP.
By:_________________________
Name:_______________________
Title:______________________
ACCEPTED AND AGREED TO
AS OF THE DATE FIRST ABOVE WRITTEN:
T.A.R. PREFERRED MORTGAGE CORPORATION
By:_________________________
Todd A. Rodriquez
Title: Chief Executive Officer
13
<PAGE>
EXHIBIT A
Notice to Merrill Lynch of the intention of PMC to terminate the agreement set
forth in the Engagement letter and the underlying Repurchase Agreement date
February 16, 1996.
14
<PAGE>
EXHIBIT 10.11
MASTER REPURCHASE AGREEMENT
Dated as of October 2, 1996
Between:
T.A.R. Preferred Mortgage Corporation ("Seller")
- ------------------------------------------------
and
CS First Boston Mortgage Capital Corp. ("Buyer")
1. APPLICABILITY
From time to time the parties hereto may enter into transactions in which
one party ("Seller") agrees to transfer to the other ("Buyer") securities or
financial instruments ("Securities") against the transfer of funds by Buyer,
with a simultaneous agreement by Buyer to transfer to Seller such Securities at
a date certain or on demand against the transfer of funds by Seller. Each such
transaction shall be referred to herein as a "Transaction" and shall be governed
by this Agreement, including any supplemental terms or conditions contained in
Annex I hereto, unless otherwise agreed in writing.
2. DEFINITIONS
(a) "Act of Insolvency", with respect to any party, (i) the
commencement by such party as debtor of any case or proceeding under any
bankruptcy, insolvency, reorganization, liquidation, dissolution or similar law,
or such party seeking the appointment of a receiver, trustee, custodian or
similar official for such party or any substantial part of its property, or (ii)
the commencement of any such case or proceeding against such party, or another
seeking such an appointment, or the filing against a party of an application for
a protective decree under the provisions of the Securities Investor Protection
Act of 1970, which (A) is consented to or not timely contested by such party,
(B) results in the entry of an order for relief, such an appointment, the
issuance of such a protective decree or the entry of an order having a similar
effect, or (C) is not dismissed within 15 days, (iii) the making by a party of a
general assignment for the benefit of creditors, or (iv) the admission in
writing by a party of such party's inability to pay Such party's debts as they
become due;
(b) "Additional Purchased Securities", Securities provided by Seller
to Buyer pursuant to Paragraph 4(a) hereof;
(c) "Buyer's Margin Amount", with respect to any Transaction as of
any date, the amount obtained by application of a percentage (which may be equal
to the percentage that is agreed to as the Seller's Margin Amount under
subparagraph (q) of this Paragraph), agreed to by Buyer and Seller prior to
entering into the Transaction to the Repurchase Price for such Transaction as of
such date;
(d) "Confirmation", the meaning specified in Paragraph 3(b) hereof;
(e) "Income", with respect to any Security at any time, any principal
thereof then payable and all interest, dividends or other distributions thereon;
(f) "Margin Deficit', the meaning specified in Paragraph 4(a) hereof;
(g) "Margin Excess", the meaning specified in Paragraph 4(b) hereof;
<PAGE>
(h) "Market Value", with respect to any Securities as of any date,
the price for such Securities on such date obtained from a generally recognized
source agreed to by the parties or the most recent closing bid quotation from
such a source, plus accrued Income (c) the extent not included therein (other
than any Income credited or transferred to, or applied to the obligations of,
Seller pursuant to Paragraph 5 hereof) as of such date (unless contrary to
market practice for such Securities);
(i) "Price Differential", with respect to any Transaction hereunder
as of any date the aggregate amount obtained by daily application of the Pricing
Rate for such Transaction to the Purchase Price for such Transaction on a 360
day per year basis for the actual number of days during the period commencing on
(and including) Purchase Date for such Transaction and ending on (but excluding)
the date of determination (reduced by any amount of such Price Differential
previously paid by Seller to Buyer with respect to such Transaction);
(j) "Pricing Rate", the per annum percentage rate for determination
of the Price Differential;
(k) "Prime Rate", the prime rate of U.S. money center commercial
banks as published in the Wall Street Journal;
(l) "Purchase Date", the date on which Purchased Securities are
transferred by Seller to Buyer;
(m) "Purchase Price", (i) on the Purchase Date, the price at which
Purchased Securities are transferred by Seller to Buyer, and (ii) thereafter,
such price increased by the amount of any cash transferred by Buyer to Seller
pursuant to Paragraph 4(b) hereof and decreased by the amount of any cash
transferred by Seller to Buyer pursuant to Paragraph 4(a) hereof or applied to
reduce Sellers obligations under clause (ii) of Paragraph. 5 hereof;
(n) "Purchased Securities", the Securities transferred by Seller to
Buyer in a transaction hereunder, any Securities substituted therefor in
accordance with Paragraph 9 hereof. The term "Purchased Securities" with
respect to any Transaction at any time also shall include Additional Purchased
Securities delivered pursuant to Paragraph 4(a) and shall exclude Securities
returned pursuant to Paragraph 4(b);
(o) "Repurchase Date", the date on which Seller is to repurchase the
Purchased Securities from Buyer, including any date determined by application of
the provisions of Paragraphs 3(c) or 11 hereof;
(p) "Repurchase Price", the price at which Purchased Securities are
to be transferred from Buyer to Seller upon termination of a Transaction, which
will be determined in each case (including Transactions terminable upon demand)
as the sum of the Purchase Price and the Price Differential as of the date of
such determination, increased by any amount determined by the application of the
provisions of Paragraph 11 hereof;
(q) "Sellers Margin Amount", with respect to any Transaction as of
any date, the amount obtained by application of a percentage (which may be equal
to the percentage that is agreed to as the Buyer's Margin Amount under
subparagraph (c) of this Paragraph), agreed to by Buyer and Seller prior to
entering into the Transaction, to the Repurchase Price for such Transaction as
of such date.
3. INITIATION; CONFIRMATION; TERMINATION
(a) An agreement to enter into a Transaction may be made orally or in
writing at the initiation of either Buyer or Seller. On the Purchase Date for
the Transaction, the
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<PAGE>
Purchased Securities shall be transferred to Buyer or its agent against the
transfer of the Purchase Price to an account of Seller.
(b) Upon agreeing to enter into a Transaction hereunder, Buyer or
Seller (or both), as shall be agreed, shall promptly deliver to the other party
a written confirmation of each Transaction (a "Confirmation"). The Confirmation
shall describe the Purchased Securities (including CUSIP number, if any),
identify Buyer and Seller and set forth (i) the Purchase Date, (ii) the Purchase
Price, (iii) the Repurchase Date, unless the Transaction is to be terminable on
demand, (iv) the Pricing Rate or Repurchase Price applicable to the Transaction,
and (v) any additional terms or conditions of the Transaction not inconsistent
with this Agreement. The Confirmation, together with this Agreement, shall
constitute conclusive evidence of the terms agreed between Buyer and Seller with
respect to the Transaction to which the confirmation relates, unless with
respect to the Confirmation specific objection is made promptly after receipt
thereof. In the event of any conflict between the terms of such Confirmation
and this Agreement this Agreement shall prevail.
(c) In the case of Transactions terminable upon demand, such demand
shall be made by Buyer or Seller, no later than such time as is customary in
accordance with market practice, by telephone or otherwise on or prior to the
business day on which such termination will be effective. On the date specified
in such demand, or on the date fixed for termination in the case of Transactions
having a fixed term, termination of the Transaction will be effected by transfer
to Seller or its agent of the Purchased Securities and any Income in respect
thereof received by Buyer (and not previously credited or transferred to, or
applied to the obligations of, Seller pursuant to Paragraph 5 hereof) against
the transfer of the Repurchase Price to an account of Buyer.
4. MARGIN MAINTENANCE
(a) If at any time the aggregate Market Value of all Purchased
Securities subject to all Transactions in which a particular party hereto is
acting as Buyer is less than the aggregate Buyers Margin Amount for all such
Transactions (a "Margin Deficit"), then Buyer may by notice to Seller require
Seller in such Transactions, at Seller's option, to transfer to Buyer cash or
additional Securities reasonably acceptable to Buyer ("Additional Purchased
Securities"), so that the cash and aggregate Market Value of the Purchased
Securities, including any such Additional Purchase Securities, will thereupon
equal or exceed such aggregate Buyer's Margin Amount (decreased by the amount of
any Margin Deficit as of such date arising from any Transactions in which such
Buyer is acting as Seller).
(b) If at any time aggregate Market Value of all Purchased Securities
subject to all Transactions in which a particular party hereto is acting as
Seller exceeds the aggregate Seller's Margin Amount for all such Transactions at
such time (a "Margin Excess"), then Seller may by notice to Buyer require Buyer
in such Transactions, at Buyer's option, to transfer cash or Purchased
Securities to Seller, so that the aggregate Market Value of the Purchased
Securities after deduction of any such cash or any Purchased Securities so
transferred will thereupon not exceed such aggregate Seller's Margin Amount
(increased by the amount of any Margin Excess as of such date arising from any
Transactions in which such Seller is acting as Buyer).
(c) Any cash transferred pursuant to this Paragraph shall be
attributed to such Transactions as shall be agreed upon by Buyer and Seller.
3
<PAGE>
(d) Seller and Buyer may agree, with respect to any or all
Transactions hereunder, that the respective rights of Buyer or Seller (or both)
under subparagraphs (a) and (b) of this Paragraph may be exercised only where a
Margin Deficit or Margin Excess exceeds a specified dollar amount or a specified
percentage of the Repurchase Prices for such Transactions (which amount or
percentage shall be agreed to by Buyer and Seller prior to entering into any
such Transactions).
(e) Seller and Buyer may agree, with respect to any or all
Transactions hereunder, that the respective rights of Buyer and Seller under
subparagraphs (a) and (b) of this Paragraph to require the elimination of a
Margin Deficit or a Margin Excess, as the case may be, may be exercised whenever
such a Margin Deficit or Margin Excess exists with respect to any single
Transaction hereunder (calculated without regard to any other Transaction
outstanding under this Agreement).
5. INCOME PAYMENTS
Where a particular Transaction's term extends over an Income payment date
on the Securities subject to that Transaction, Buyer shall, as the parties may
agree with respect to such Transaction (or, in the absence of any agreement, as
Buyer shall reasonably determine in its discretion), on the date such Income is
payable either (i) transfer to or credit to the account of Seller an amount
equal to such Income payment or payments with respect to any Purchased
Securities subject to such Transaction or (ii) apply the Income payment or
payments to reduce the amount to be transferred to Buyer by Seller upon
termination of the Transaction. Buyer shall not be obligated to take any action
pursuant to the preceding sentence to the extent that such action would result
in the creation of a Margin Deficit, unless prior thereto or simultaneously
therewith Seller transfers to Buyer cash or Additional Purchased Securities
sufficient to eliminate such Margin Deficit.
6. SECURITY INTEREST
Although the parties intend that all Transactions hereunder be sales and
purchases and not loans, in the event any such Transactions are deemed to be
loans, Seller shall be deemed to have pledged to Buyer as security for the
performance by Seller of its obligations under each such Transaction, and shall
be deemed to have granted to Buyer a security interest in, [sic] all of the
Purchased Securities with respect to all Transactions hereunder and all proceeds
thereof.
7. PAYMENT AND TRANSFER
Unless otherwise mutually agreed, all transfers of funds hereunder shall be
in immediately available funds. All Securities transferred by one party hereto
to the other party (i) shall be in suitable form for transfer or shall be
accompanied by duly executed instruments of transfer or assignment in blank and
such other documentation as the party receiving possession may reasonably
request, (ii) shall be transferred on the book-entry system of a Federal Reserve
Bank, or (iii) shall be transferred by any other method mutually acceptable to
Seller and Buyer. As used herein with respect to Securities, "transfer" is
intended to have the same meaning as when used in Section 8-313 of the New York
Uniform Commercial Code or, where applicable, in any federal regulation
governing transfers of the Securities.
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<PAGE>
8. SEGREGATION OF PURCHASED SECURITIES
To the extent required by applicable law, all Purchased Securities in the
possession of Seller shall be segregated from other securities in its possession
and shall be identified as subject to this Agreement. Segregation may be
accomplished by appropriate identification on the books and records of the
holder, including a financial intermediary or a clearing corporation. Title to
all Purchased Securities shall pass to Buyer and, unless otherwise agreed by
Buyer and Seller, nothing in this Agreement shall preclude Buyer from engaging
in repurchase transactions with the Purchased Securities or otherwise pledging
or hypothecating the Purchased Securities, but no such transaction shall relieve
Buyer of its obligations to transfer Purchased Securities to Seller pursuant to
Paragraphs 3, 4 or 11 hereof, or of Buyer's obligation to credit or pay Income
to, or apply Income to the obligations of, Seller pursuant to Paragraph 5
hereof.
- --------------------------------------------------------------------------------
REQUIRED DISCLOSURE FOR TRANSACTIONS IN WHICH THE SELLER RETAINS CUSTODY OF
THE PURCHASED SECURITIES
Seller is not permitted to substitute other securities for those subject to
this Agreement and therefore must keep Buyer's securities segregated at all
times, unless in this Agreement. Buyer grants Seller the right to substitute
other securities. If Buyer grants the right to substitute, this means that
Buyer's securities will likely be commingled with Seller's own securities
during the trading day. Buyer is advised that, during any trading day that
Buyer's securities are commingled with Seller's securities, they [will]*
[may]** be subject to liens granted by Seller to [its clearing bank]* [third
parties]** and may be used by Seller for deliveries on other securities
transactions. Whenever the securities are commingled, Seller's ability to
resegregate substitute securities for Buyer will be subject to Seller's
ability to satisfy [the clearing]* [any]** lien or to obtain substitute
securities.
- --------------------------------------------------------------------------------
*Language to be used under 17 C.F.R. (S) 403.4(e) if Seller is a government
securities broker or dealer other than a financial institution.
**Language to be used under 17 C.F.R. (S) 403.5(d) if Seller is a financial
institution.
9. SUBSTITUTION
(a) Seller may, subject to agreement with and acceptance by Buyer,
substitute other Securities for any Purchased Securities. Such substitution
shall be made by transfer to Buyer of such other Securities and transfer to
Seller of such Purchased Securities. After substitution, the substituted
Securities shall be deemed to be Purchased Securities.
(b) In Transactions in which the Seller retains custody of Purchased
Securities, the parties expressly agree that Buyer shall be deemed, for purposes
of subparagraph (a) of this Paragraph, to have agreed to and accepted in this
Agreement substitution by Seller of other Securities for Purchased Securities;
provided, however, that such other Securities shall have a Market Value at least
equal to the Market Value of the Purchased Securities for which they are
substituted.
5
<PAGE>
10. REPRESENTATIONS
Each of Buyer and Seller represents and warrants to the other that (i) it
is duly authorized to execute and deliver this Agreement, to enter into the
Transactions contemplated hereunder and to perform its obligations hereunder and
has taken all necessary action to authorize such execution, delivery and
performance, (ii) it will engage in such Transactions as principal (or, if
agreed in writing in advance of any Transaction by the other party hereto, as
agent for a disclosed principal), (iii) the person signing this Agreement on its
behalf is duly authorized to do so on its behalf (or on behalf of any such
disclosed principal), (iv) it has obtained all authorizations of any
governmental body required in connection with this Agreement and the
Transactions hereunder and such authorizations are in full force and effect and
(v) the execution, delivery and performance of this Agreement and the
Transactions hereunder will not violate any law, ordinance, charter, by-law or
rule applicable to it or any agreement by which it is bound or by which any of
its assets are affected. On the Purchase Date for any Transaction Buyer and
Seller shall each be deemed to repeat all the foregoing representations made by
it.
11. EVENTS OF DEFAULT
In the event that (i) Seller fails to repurchase or Buyer fails to transfer
Purchased Securities upon the applicable Repurchase Date, (ii) Seller or Buyer
fails, after one business day's notice, to comply with Paragraph 4 hereof, (iii)
Buyer fails to comply with Paragraph 5 hereof, (iv) an Act of Insolvency occurs
with respect to Seller or Buyer, (v) any representation made by Seller or Buyer
shall have been incorrect or untrue in any material respect when made or
repeated or deemed to have been made or repeated, or (vi) Seller or Buyer shall
admit to the other its inability to, or its intention not to, perform any of its
obligations hereunder (each an "Event of Default"):
(a) At the option of the nondefaulting party, exercised by written
notice to the defaulting party (which option shall be deemed to have been
exercised, even if no notice is given, immediately upon the occurrence of an Act
of Insolvency), the Repurchase Date for each Transaction hereunder shall be
deemed immediately to occur.
(b) In all Transactions in which the defaulting party is acting as
Seller, if the nondefaulting party exercises or is deemed to have exercised the
option referred to in subparagraph (a) of this Paragraph, (i) the defaulting
party's obligations hereunder to repurchase all Purchased Securities in such
Transactions shall thereupon become immediately due and payable, (ii) to the
extent permitted by applicable law, the Repurchase Price with respect to each
such Transaction shall be increased by the aggregate amount obtained by daily
application of (x) the greater of the Pricing Rate for such Transaction or the
Prime Rate to (y) the Repurchase Price for such Transaction as of the Repurchase
Date as determined pursuant to subparagraph (a) of this Paragraph (decreased as
of any day by (A) any amounts retained by the nondefaulting party with respect
to such Repurchase Price pursuant to clause (iii) of this subparagraph, (B) any
proceeds from the sale of Purchased Securities pursuant to subparagraph (d)(i)
of this Paragraph, and (C) any amounts credited to the account of the defaulting
party pursuant to subparagraph (e) of this Paragraph) on a 360 day per year
basis for the actual number of days during the period from and including the
date of the Event of Default giving rise to such option to but excluding the
date of payment of the Repurchase Price as so increased, (iii) all Income paid
after such exercise or deemed exercise shall be retained by the nondefaulting
party and applied to the aggregate unpaid Repurchase Prices owed by the
defaulting party, and (iv) the defaulting party
6
<PAGE>
shall immediately deliver to the nondefaulting party any Purchased Securities
subject to such Transactions then in the defaulting party's possession.
(c) In all Transactions in which the defaulting party is acting as
Buyer, upon tender by the nondefaulting party of payment of the aggregate
Repurchase Prices for all such Transactions, the defaulting party's right, title
and interest in all Purchased Securities subject to such Transactions shall be
deemed transferred to the nondefaulting party, and the defaulting party shall
deliver all such Purchased Securities to the nondefaulting party.
(d) After one business day's notice to the defaulting party (which
notice need not be given if an Act of Insolvency shall have occurred, and which
may be the notice given under subparagraph (a) of this Paragraph or the notice
referred to in clause (ii) of the first sentence of this Paragraph), the
nondefaulting party may:
(i) as to Transactions in which the defaulting party is acting
as Seller, (A) immediately sell, in a recognized market at such price
or prices as the nondefaulting party may reasonably deem satisfactory,
any or all Purchased Securities subject to such Transactions and apply
the proceeds thereof to the aggregate unpaid Repurchase Prices and any
other amounts owing by the defaulting party hereunder or (B) in its
sole discretion elect, in lieu of selling all or a portion of such
Purchased Securities, to give the defaulting party credit for such
Purchased Securities in an amount equal to the price therefor on such
date, obtained from a generally recognized source or the most recent
closing bid quotation from such a source, against the aggregate unpaid
Repurchase Prices and any other amounts owing by the defaulting party
hereunder; and
(ii) as to Transactions in which the defaulting party is acting
as Buyer, (A) purchase securities ("Replacement Securities") of the
same class and amount as any Purchased Securities that are not
delivered by the defaulting party to the nondefaulting party as
required hereunder or (B) in its sole discretion elect, in lieu of
purchasing Replacement Securities, to be deemed to have purchased
Replacement Securities at the price therefor on such date, obtained
from a generally recognized source or the most recent closing bid
quotation from such a source.
(e) As to Transactions in which the defaulting party is acting as
Buyer, the defaulting party shall be liable to the nondefaulting party (1) with
respect to Purchased Securities (other than Additional Purchased Securities),
for any excess of the price paid (or deemed paid) by the nondefaulting party for
Replacement Securities therefor over the Repurchase Price for such Purchased
Securities and (ii) with respect to Additional Purchased Securities, for the
price paid (or deemed paid) by the nondefaulting party for the Replacement
Securities therefor. In addition, the defaulting party shall be liable to the
nondefaulting party for interest on such remaining liability with respect to
each such purchase (or deemed purchase) of Replacement Securities from the date
of such purchase (or deemed purchase) until paid in full by Buyer. Such
interest shall be at a rate equal to the greater of the Pricing Rate for such
Transaction or the Prime Rate.
(f) For purposes of this Paragraph 11, the Repurchase Price for each
Transaction hereunder in respect of which the defaulting party is acting as
Buyer shall not increase above the amount of such Repurchase Price for such
Transaction determined as of the date of the exercise or deemed exercise by the
nondefaulting party of its option under subparagraph (a) of this Paragraph.
7
<PAGE>
(g) The defaulting party shall be liable to the nondefaulting party
for the amount of all reasonable legal or other expenses incurred by the
nondefaulting party in connection with or as a consequence of an Event of
Default, together with interest thereon at a rate equal to the greater of the
Pricing Rate for the relevant Transaction or the Prime Rate.
(h) The nondefaulting party shall have, in addition to its rights
hereunder, any rights otherwise available to it under any other agreement or
applicable law.
12. SINGLE AGREEMENT
Buyer and Seller acknowledge that, and have entered hereinto and will enter
into each Transaction hereunder in consideration of and in reliance upon the
fact that, all Transactions hereunder constitute a single business and
contractual relationship and have been made in consideration of each other.
Accordingly, each of Buyer and Seller agrees (i) to perform all of its
obligations in respect of each Transaction hereunder, and that a default in the
performance of any such obligations shall constitute a default by it in respect
of all Transactions hereunder, (ii) that each of them shall be entitled to set
off claims and apply property held by them in respect of any Transaction against
obligations owing to them in respect of any other Transactions hereunder and
(iii) that payments, deliveries and other transfers made by either of them in
respect of any Transaction shall be deemed to have been made in consideration of
payments, deliveries and other transfers in respect of any other Transactions
hereunder, and the obligations to make any such payments, deliveries and other
transfers may be applied against each other and netted.
13. NOTICES AND OTHER COMMUNICATIONS
Unless another address is specified in writing by the respective party to
whom any notice or other communication is to be given hereunder, all such
notices or communications shall be in writing or confirmed in writing and
delivered at the respective addresses set forth in Annex II attached hereto.
14. ENTIRE AGREEMENT; SEVERABILITY
This Agreement shall supersede any existing agreements between the parties
containing general terms and conditions for repurchase transactions. Each
provision and agreement herein shall be treated as separate and independent from
any other provision or agreement herein and shall be enforceable notwithstanding
the unenforceability of any such other provision or agreement.
15. NON-ASSIGNABILITY; TERMINATION
The rights and obligations of the parties under this Agreement and under
any Transaction shall not be assigned by either party without the prior written
consent of the other party. Subject to the foregoing, this Agreement and any
Transactions shall be binding upon and shall inure to the benefit of the parties
and their respective successors and assigns. This Agreement may be cancelled by
either party upon giving written notice to the other, except that this Agreement
shall, notwithstanding such notice, remain applicable to any Transactions then
outstanding.
16. GOVERNING LAW
This Agreement shall be governed by the laws of the State of New York
without giving effect to the conflict of law principles thereof.
8
<PAGE>
17. NO WAIVERS, ETC.
No express or implied waiver of any Event of Default by either party shall
constitute a waiver of any other Event of Default and no exercise of any remedy
hereunder by any party shall constitute a waiver of its right to exercise any
other remedy hereunder. No modification or waiver of any provision of this
Agreement and no consent by any party to departure herefrom shall be effective
unless and until such shall be in writing and duly executed by both of the
parties hereto. Without limitation on any of the foregoing, the failure to give
a notice pursuant to subparagraphs 4(a) or 4(b) hereof will not constitute a
waiver of any right to do so at a later date.
18. USE OF EMPLOYEE PLAN ASSET
(a) If assets of an employee benefit plan subject to any provision of
the Employee Retirement Income Security Act of 1974 ("ERISA") are Intended to be
used by either party hereto (the "Plan Party") in a Transaction, the Plan Party
shall so notify the other party prior to the Transaction. The Plan Party shall
represent in writing to the other party that the Transaction does not constitute
a prohibited transaction under ERISA or is otherwise exempt therefrom and the
other party may proceed in reliance thereon but shall not be required so to
proceed.
(b) Subject to the last sentence of subparagraph (a) of this
Paragraph any such Transaction shall proceed only if Seller furnishes or has
furnished to Buyer its most recent available audited statement of its financial
condition and its most recent subsequent unaudited statement of its financial
condition.
(c) By entering into a Transaction pursuant to this Paragraph, Seller
shall be deemed (i) to represent to Buyer that since the date of Seller's latest
such financial statements, there has been no material adverse change in Seller's
financial condition which Seller has not disclosed to Buyer, and (ii) to agree
to provide Buyer with future audited and unaudited statements of its financial
condition as they are issued, so long as it is a Seller in any outstanding
Transaction involving a Plan Party.
19. INTENT
(a) The parties recognize that each Transaction is a "repurchase
agreement" as that term is defined in Section 101 of Title 11 of the United
States Code, as amended (except insofar as the type of Securities subject to
such Transaction or the term of such Transaction would render such definition
inapplicable), and a "securities contract" as that term is defined in Section
741 of Title 11 of the United States Code, as amended.
(b) It is understood that either party's right to liquidate
Securities delivered to it in connection with Transactions hereunder or to
exercise any other remedies pursuant to Paragraph 11 hereof, is a contractual
right to liquidate such Transaction as described in Sections 555 and 559 of
Title 11 of the United States Code, as amended.
20. DISCLOSURE RELATING TO CERTAIN FEDERAL PROTECTIONS
The parties acknowledge that they have been advised that:
(a) in the case of Transactions in which one of the parties is a
broker or dealer registered with the Securities and Exchange Commission ("SEC")
under Section 15 of the Securities Exchange Act of 1934 ("1934 Act"), the
Securities Investor Protection Corporation
9
<PAGE>
has taken the position that the provisions of the Securities Investor Protection
Act of 1970 ("SIPA") do not protect the other party with respect to any
Transaction hereunder;
(b) in the case of Transactions in which one of the parties is a
government securities broker or a government securities dealer registered with
the SEC under Section 15C of the 1934 Act, SlPA will not provide protection to
the other party with respect to any Transaction hereunder; and
(c) in the case of Transactions in which one of the parties is a
financial institution, funds held by the financial institution pursuant to a
Transaction hereunder are not a deposit and therefore are not insured by the
Federal Deposit Insurance Corporation, the Federal Savings and Loan Insurance
Corporation or the National Credit Union Share Insurance Fund, as applicable.
[NAME OF PARTY] [NAME OF PARTY]
T.A.R. PREFERRED MORTGAGE CS FIRST BOSTON MORTGAGE CAPITAL
CORPORATION CORP.
By ____________________________ By _____________________________
Title _________________________ Title __________________________
Date __________________________ Date ___________________________
10
<PAGE>
ANNEX I
SUPPLEMENTAL TERMS AND CONDITIONS
11
<PAGE>
ANNEX I
SUPPLEMENTAL TERMS AND CONDITIONS
The MASTER REPURCHASE AGREEMENT between CS FIRST BOSTON MORTGAGE CAPITAL CORP.
("Buyer") and T.A.R. PREFERRED MORTGAGE CORPORATION ("Seller"), dated as of
October 2, 1996, is amended and supplemented as set forth below. All
capitalized terms used herein that are defined in the Master Repurchase
Agreement are used herein as defined therein except to the extent such terms are
amended or supplemented herein.
1. Paragraph 1 of the Master Repurchase Agreement is amended by
adding the following after the word "instruments" and before the parenthetical
"("Securities")" in the second line thereof:
"or whole mortgage loans or any interests in any whole
mortgage loans, including, without limitation, mortgage
participation certificates and mortgage pass-through
certificates".
2. Subparagraph 2(a) of the Master Repurchase Agreement is amended
by adding the following after the word "any" and before the word "bankruptcy" in
the second line thereof:
"conservatorship or receivership (within the meaning of the
Financial Institution Reform, Recovery, and Enforcement Act of
1989),".
3. Subparagraph 2(a) of the Master Repurchase Agreement is further
amended by adding the following after the word "a" and before the word
"receiver" in the third line thereof:
"conservator,".
4. Subparagraph 2(h) of the Master Repurchase Agreement is amended
by adding at the end thereof:
"except that the Market Value of any Securities that are loans
-------
secured by mortgages or deeds of trust on residential dwellings (such
loans, "Mortgage Loans") as of any date shall be the dollar amount
ascribed to such Mortgage Loans on that date by Buyer in good faith,
and shall not include any Income on such Mortgage Loans paid to and
held by Seller pursuant to Paragraph 5 hereof, and the Market Value of
any Additional Purchased Securities shall be the fair market value
thereof as determined by Buyer in its sole discretion"
<PAGE>
2
5. Subparagraph 3(b) of the Master Repurchase Agreement is amended
by adding at the end of the first sentence of Paragraph 3(b):
"In the case of Transactions involving Securities that are
Mortgage Loans, (a) the Mortgage Loans shall be serviced for Buyer in
accordance with the terms and provisions of a Servicing Agreement
dated March 8, 1996 (the "Servicing Agreement") between Seller and
Advanta Mortgage Corp. USA (the "Servicer") and an assignment to Buyer
of Seller's rights (but not obligations) thereunder pursuant to a
Custody Agreement dated of even date herewith (the "Custody
Agreement") among the Seller, the Buyer, the Servicer and Bankers
Trust Company of California, N.A. (the "Custodian"), (b) the
Confirmation, if any, shall be sent by Buyer to Seller, and a
Transaction Notice, in the form attached hereto as Exhibit C
("Transaction Notice") shall be sent by Seller to Buyer at least two
business days prior to the related Purchase Date, (c) pursuant to the
Custody Agreement, certain primary legal documents evidencing the
Mortgage Loans shall be delivered to and held by the Custodian, which
shall, among other things, issue Trust Receipts, as defined in the
Custody Agreement (the "Trust Receipts"), (d) unless otherwise
expressly stated in the Confirmation, the Repurchase Date shall be the
earlier of (i) the twenty-fifth (25th) day of each calendar month, or
if such day is not a business day, the following business day and (ii)
the date determined by application of Paragraph 11 of the Master
Repurchase Agreement or Section 18 hereof and (e) unless otherwise
expressly stated in the related Confirmation, the Pricing Rate for
each Transaction shall be a per annum rate equal to the sum of (i) the
offered rate for United States dollars with a maturity of one month
which appears on Telerate as of 9:00 A.M. New York City time on the
day that is the first LIBOR Business Day of the calendar month in
which the Purchase Date for such Transaction occurs, and (ii) 200
basis points (2.00%); provided, if such rate does not appear on the
---------
Dow Jones Telerate Service page 3750 (or such other page as may
replace that page on that service) or if such service is no longer
offered, the rate for United States dollars with a maturity of one
month quoted by such other service as may be selected by the Buyer and
which is comparable, to the extent practicable as determined by Buyer
in good faith, to such originally selected rate. "LIBOR Business Day"
means any day other than a Saturday, Sunday or any other day on which
banking institutions in the City of London, England are required or
authorized by law to be closed.
6. Paragraph 3(b) of the Master Repurchase Agreement is further
amended by deleting the last sentence and replacing it with the following:
<PAGE>
3
"In the event of any conflict between the terms of such
Confirmation and this Agreement, the terms of such Confirmation shall
prevail if the information therein is consistent with that set forth
in the related Transaction Notice."
7. Paragraph 4 of the Master Repurchase Agreement is amended by
adding a new subparagraph (f) as follows:
"(f) In the case of Transactions involving Securities that are
Mortgage Loans, (i) the percentage used in calculating Buyer's Margin
Amount for such Transaction shall be 105.3% unless otherwise
determined by Buyer in its sole discretion and (ii) unless otherwise
agreed from time to time, Additional Purchased Securities shall be
limited to obligations issued by the United States government or
mortgaged-backed securities issued by the Federal National Mortgage
Association ("FNMA") or guaranteed by the Government National Mortgage
Association ("GNMA") and otherwise acceptable to Buyer in its sole
discretion, and (iii) the provisions of subparagraphs (b), (d) and (e)
of this Paragraph shall not apply."
8. Paragraph 6 of the Master Repurchase Agreement is amended by
adding the following after the word "the" and before the words "Purchased
Securities" in the fourth line thereof:
"Seller's right (including the power to convey title thereto),
title and interest in and to the".
9. Paragraph 6 of the Master Repurchase Agreement is amended by
adding the following after the words "Purchased Securities" and before the word
"with" in the fourth line thereof:
", the contractual right to receive payments, including the right
to payments of principal and interest and the right to enforce such
payments, arising from or under any of the Purchased Securities, the
contractual right to service each Mortgage Loan, any servicing
agreements with respect to each Mortgage Loan, and all documents and
instruments relating to in each Mortgage Loan,".
10. Paragraph 6 of the Master Repurchase Agreement is amended by
adding the following after the word "all" and before the word "proceeds" in the
fifth line thereof:
"income, payments, products and".
<PAGE>
4
11. Paragraph 6 of the Master Repurchase Agreement is amended by
adding the following after the word "thereof" and before the period in the fifth
line thereof:
"(the "Collateral")".
12. Paragraph 6 of the Master Repurchase Agreement is amended by
adding the following at the end of the last sentence of Paragraph 6:
"In such event, the parties hereto intend to create for the
benefit of Buyer, as secured party, a legally valid and enforceable
first priority perfected security interest in the Collateral, and
Seller hereby grants Buyer a first priority security interest in the
Collateral. On or prior to the initial Purchase Date, Seller shall
cause to be filed in the appropriate filing offices of the
jurisdiction in which Seller maintains its place of business, or its
chief executive office if Seller has more than one place of business,
in accordance with applicable law, Uniform Commercial Code financing
statements naming Seller as debtor, Buyer as secured party, and the
Collateral as collateral and in form and substance reasonably
acceptable to Buyer."
13. Paragraph 7 of the Master Repurchase Agreement is amended by
adding the following at the end of the last sentence of Paragraph 7:
"In the case of Transactions involving Securities that are
Mortgage Loans, the transfer of such Mortgage Loans for the purposes
of this Paragraph 7 shall include the delivery to the Custodian of the
documents required and provided for in the Custody Agreement.
14. Paragraph 8 of the Master Repurchase Agreement is amended by
deleting the last sentence of Paragraph 8 and substituting the following:
"Title to all Purchased Securities (except for Securities that
are Mortgage Loans) shall pass to Buyer. In the case of Purchased
Securities that are Mortgage Loans, upon transfer of the Mortgage
Loans to Buyer as set forth in Paragraph 3(a) of this Agreement and
until termination of any Transactions as set forth in Paragraphs 3(c)
or 11 of this Agreement, ownership of each Mortgage Loan, including
each document in the related Mortgage File, is vested in Buyer. Upon
transfer of the Mortgage Loans to Buyer as set forth in Paragraph 3(a)
of this Agreement and until termination of any Transactions as set
forth in Paragraphs 3(c) or 11 of this Agreement and prior to the
recordation of the assignments of mortgage to the Custodian provided
for in the Custody Agreement, record title in the name of Seller to
each Mortgage shall be retained by Seller in trust, for the
<PAGE>
5
benefit of Buyer, for the sole purpose of facilitating the servicing
and the supervision of the servicing of the Mortgage Loans. Unless
otherwise agreed by Buyer and Seller, nothing in this Agreement shall
preclude Buyer from engaging in repurchase transactions with the
Purchased Securities or otherwise pledging or hypothecating the
Purchased Securities, but no such transaction shall relieve Buyer of
its obligations to transfer Purchased Securities (and, with respect to
the Mortgage Loans, not substitutes therefor) to Seller pursuant to
Paragraphs 3, 4 or 11 hereof. Upon termination of any Transactions as
set forth in Paragraph 3(c) of this Agreement, Buyer agrees to execute
promptly endorsements of the Mortgage Notes, assignments of the
Mortgages and UCC-3 assignments, to the extent that such documents are
prepared by Seller for Buyer's execution, are delivered to Buyer by
Seller and are necessary and appropriate, as reasonably determined by
Seller, to reconvey, without recourse, to Seller and perfect title of
like tenor to that conveyed to Buyer to the related Mortgage Loans.
15. Subparagraph 9b) of the Master Repurchase Agreement is amended by
adding the following after the word "substituted" and before the period in the
fifth line thereof:
"; provided, further, that, in the case of Transactions involving
-----------------
Securities that are Mortgage Loans, the retention by Seller of custody
of any document in relating to any Mortgage Loan shall be in trust
Buyer for purposes of servicing or supervising the servicing of such
Mortgage Loan and shall not be deemed to constitute Seller's retention
of custody of the Purchased Securities for purposes of this
subparagraph".
16. Paragraph 10 of the Master Repurchase Agreement is amended by
adding the following clauses at the end of the first sentence of Paragraph 10
after the word "affected" and before the period:
", and (vi) Seller and Buyer have entered into the Transaction
described in each Confirmation contemporaneously with the sale of the
Purchased Securities by Seller to Buyer and the transfer of the
Purchase Price by Buyer to Seller, or, in the event that the
Transaction is deemed to constitute a loan, contemporaneously with the
grant of the security interest in the Collateral by Seller to Buyer
pursuant to Paragraph 6 hereof and the transfer of the consideration
therefor, consisting of the extension of the Purchase Price, which
represents the loan proceeds, by Buyer to Seller".
17. Paragraph 11 is amended by deleting the text of clause (ii) of
the first sentence thereof and replacing it with the words "Seller fails to
comply with Paragraph 4 hereof by 4:00 p.m. New York time on the date notice is
given pursuant to such Paragraph".
<PAGE>
6
18. Paragraph 11 is further amended by inserting the words ", other
than any representation made by Seller as to a particular Mortgage Loan," after
the words "made by Seller or Buyer" on the fourth line thereof.
19. Paragraph 11 is further amended by deleting the word "or"
immediately preceding clause (vi) and by adding at the end of such clause,
immediately preceding the parenthesis, the following:
(vii) Buyer shall have reasonably determined that Seller is or
will (prior to the expiration of any applicable notice and
cure provisions) be unable to meet its commitments under
this Agreement, the Custody Agreement, the letter agreement
dated October 2, 1996 among Buyer, Seller and CS First
Boston Corporation, and those certain common stock warrants
of Seller issued to Buyer on the date hereof or any other
agreement between Seller and either Buyer or one of Buyer's
affiliates (this Agreement and such agreements,
collectively, the "Related Documents") and shall have
notified Seller of such determination and Seller shall not
have responded with appropriate information to the contrary
to the satisfaction of Buyer within one (1) business day;
(viii) Subject to Paragraph 6, the Master Repurchase Agreement
shall for any reason cease to create a valid, first priority
security interest in any of the Purchased Securities
purported to be covered thereby;
(ix) A final judgment by any competent court in the United States
of America for the payment of money in an amount of at least
$100,000 is rendered against Seller, and the same remains
undischarged for a period of 30 days during which execution
of such judgment is not effectively stayed;
(x) Seller shall fail to observe or perform in a material
respect any of the material covenants or agreements under
any Related Document;
(xi) Any event of default or any event which with notice, the
passage of time or both shall constitute an event of default
shall occur and be continuing under any repurchase or other
financing agreement for borrowed funds or indenture for
borrowed funds by which Seller is bound or affected shall
occur and be continuing and which default actually results
in the acceleration of amounts due for which Seller's
liability exceeds $25,000;
<PAGE>
7
(xii) In the reasonable judgment of Buyer, a material adverse
change shall have occurred in the business, operations,
properties, prospects or condition (financial or otherwise)
of Seller;
(xiii) Any representation or warranty made by Seller in any Related
Document shall have been incorrect or untrue in any material
respect when made or repeated or when deemed to have been
made or repeated;
(xiv) Seller shall fail to promptly notify Buyer of (i) the
acceleration of any debt obligation or the termination of
any credit facility of Seller, respectively; (ii) the amount
and maturity of any such debt assumed after the date hereof;
(iii) any material and adverse developments with respect to
pending or future litigation involving Seller, respectively;
and (iv) any other developments which might materially and
adversely affect the financial condition of Seller; or
(xv) Seller's audited annual financial statements or the notes
thereto or other opinions or conclusions stated therein
shall be qualified or limited by reference to Seller's
status as a "going concern."
20. Subparagraph 11(d) of the Master Repurchase Agreement is
amended by deleting the words that precede Subparagraph 11(d)(i) and replacing
them with the words "The non-defaulting party may with concurrent notice to the
defaulting party:".
21. Subparagraph 1 l(d)(i) of the Master Repurchase Agreement is
amended by inserting the words "or in any other commercially reasonable manner"
after the word "market" and before the word "at", on the second line thereof.
22. Subparagraph 1 l(d)(i) of the Master Repurchase Agreement is
amended by adding the following after the word "hereunder" and before the semi-
colon:
"and in either case upon the determination and receipt by
Buyer, in a manner deemed final and complete by Buyer in its sole
discretion, of the aggregate unpaid Repurchase Prices and any other
amounts owing by the defaulting party, including, without limitation,
any unpaid fees, expenses (including, without limitation, expenses of
terminating any servicer so that Mortgage Loans could be sold on a
servicing-released basis, if applicable) or other amounts owing to the
Custodian under the Custody Agreement, or to which Buyer is otherwise
entitled hereunder, Buyer shall transfer the portion of the Purchased
Securities and proceeds thereof, including without limitation, any
<PAGE>
8
proceeds of a sale of the servicing rights to the Mortgage Loans, held
by Buyer following such receipt to either (i) Seller, if in Buyer's
sole discretion Seller is legally entitled thereto, (ii) such other
party or person as is in Buyer's reasonable judgment is legally
entitled thereto, or (iii) if Buyer determines that it cannot identify
the person or party entitled thereto, a court of competent
jurisdiction."
23. Paragraph 11 of the Master Repurchase Agreement is amended by
adding a new Subparagraph (i) as follows:
"(i) Seller acknowledges that any delay in the ability of Buyer
to exercise its remedies pursuant to Paragraph 11 hereof shall result
in irreparable injury to Buyer."
24. Paragraph 13 of the Master Repurchase Agreement is amended by
deleting the text thereof and replacing it with the following:
"Any notice or communication in respect of this Agreement will
be sufficiently given to a party if in writing and delivered in
person, sent by certified or registered mail, return receipt
requested, or by overnight courier or given by facsimile transfer at
the following address or facsimile number:
If to Buyer:
CS First Boston Mortgage Capital Corp.
55 East 52nd Street
New York, New York 10055
Attention: Mr. Walter P. Fekula, Director-Credit
Facsimile No.: (212) 318-0533
If to Seller:
T.A.R. Preferred Mortgage Corporation
19782 MacArthur Blvd.
Suite 250
Irvine, CA 92714
Attention: Mr. Todd A. Rodriguez
Facsimile No.: (714) 660-3872
A notice or communication will be effective:
<PAGE>
9
(i) if delivered by hand or sent by overnight courier, on the
day and time it is delivered;
(ii) If sent by facsimile transfer on a machine that provides for
automatic confirmation of receipt, on the day and time such
confirmation is received; or
(iii) if sent by certified or registered mail, return receipt
requested, three days after dispatch.
Either party may by notice to the other change the address or
facsimile number at which notices or communications are to be given to
it."
25. Paragraph 14 of the Master Repurchase Agreement is amended by
inserting the words "with respect to Securities that consist of mortgage loans"
after the word "transactions" and before the period on the second line thereof.
26. Subparagraph 20(c) is amended by deleting the words "the
Federal Savings and Loan Insurance Corporation" in the third line thereof and
substituting therefor the following:
"through either the Bank Insurance Fund or the Savings
Association Insurance Fund,".
27. This Annex is executed and shall be construed as an agreement
supplemental to the Master Repurchase Agreement and, as provided in the Master
Repurchase Agreement, this Annex I forms a part thereof.
28. All of the covenants, stipulations, promises and agreements in
this Annex I shall bind the successors and assigns of the parties hereto,
whether expressed or not.
29. This Annex I may be executed in any number of counterparts,
each of which shall be an original but such counterparts shall together
constitute but one and the same instrument.
30. Buyer is hereby appointed the attorney-in-fact of Seller for
the sole and limited purpose of executing or endorsing any instruments that
Buyer may deem necessary or advisable to accomplish the sale, transfer and
assignment of the Collateral to Buyer, including, without limitation, completing
or correcting any endorsement of a mortgage note or assignment of a mortgage,
which appointment as attorney-in-fact is irrevocable and coupled with an
interest. In this connection, Buyer shall have the right and power during the
occurrence and continuation
<PAGE>
10
of any Event of Default to receive, endorse and collect all checks made payable
to the order of Seller representing any payment on account of the principal of
or interest on any of the Collateral and to give full discharge for the same.
31. Seller shall promptly pay as and when payment is due all, and
Buyer shall not be liable for any, expenses, fees and charges incurred by Buyer
or Seller (other than the salaries and overhead of Buyer and its affiliates)
arising out of or related in any way to this Agreement, including, without
limitation, the negotiation and enforcement of this Agreement or the Custody
Agreement ("Costs"), including, without limitation, reasonable legal expenses,
the reasonable fees and expenses of the Custodian, recording and filing fees and
any reasonable costs associated with reconveyance of the Purchased Securities
and, in the event that any Costs are incurred by Buyer, Seller shall reimburse
Buyer on demand of Buyer accompanied by a statement describing the circumstances
and the nature of the Cost, by wire transfer of immediately available federal
funds, provided, however, that it is understood and agreed that Seller shall not
be responsible for more than $65,000 of the legal fees and disbursements of
Buyer's attorneys in preparing and negotiating the Related Documents.
32. (a) Each party represents and warrants, and shall on and as of
the Purchase Date of any Transaction and on and as of each
date thereafter through the related Repurchase Date be
deemed to represent and warrant, as follows:
i) The execution, delivery and performance of this
Agreement and the performance of each Transaction do
not and will not result in or require the creation of
any lien, security interest or other charge or
encumbrance (other than pursuant hereto) upon or with
respect to any of its properties; and
ii) This Agreement is, and each Transaction when entered
into under this Agreement will be, a legal, valid and
binding obligation of it enforceable against it in
accordance with the terms of this Agreement.
(b) Seller hereby makes, and on and as of the Purchase Date of
any Transaction and on and as of each date thereafter
through the related Repurchase Date shall be deemed to have
made, the representations and warranties to Buyer set forth
in Exhibit A and Exhibit B hereto. The representations and
warranties set forth herein shall survive transfer of the
Purchased Securities to the Buyer and shall continue until
the Agreement has terminated.
<PAGE>
11
(c) Upon discovery by the Seller of a breach of any of the
representations set forth in Exhibit A or Exhibit B, the
Seller shall give prompt written notice thereof to the
Buyer.
(d) Seller hereby indemnifies and holds harmless Buyer for any
loss, liability, expense (including attorney fees) or damage
suffered or incurred by Buyer arising from or in any way
related to a breach by Seller of any representation or
warranty of Seller in this Agreement.
<PAGE>
33. This Annex I shall supersede any existing annex to or
modification of the Master Repurchase Agreement.
<TABLE>
<CAPTION>
<S> <C>
T.A.R. PREFERRED MORTGAGE CS FIRST BOSTON
CORPORATION MORTGAGE CAPITAL CORP.
By: /s/ Todd Rodriguez By: /s/ Michael A. Commaroto
------------------------ ------------------------
Name: Todd Rodriguez Name: Michael A. Commaroto
---------------------- ----------------------
Title: C.E.O. Title: C.E.O.
-------------------- --------------------
Date: 9-18-96 Date: 9-18-96
------------------ ------------------
</TABLE>
<PAGE>
EXHIBIT A
REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER
I. Seller represents, warrants and covenants, as of the date hereof
and as of each day during the term of the Agreement, as follows:
(a) Due Organization and Qualification. Seller is a corporation duly
-----------------------------------
organized, validly existing and in good standing under the laws of the state of
California. Seller is duly qualified to do business, is in good standing and
has obtained all necessary licenses, permits, charters, registrations and
approvals (together, "approvals") necessary for the conduct of its business as
---------
currently conducted and the performance of its obligations under the Related
Documents, in each jurisdiction in which the failure to be so qualified or to
obtain such approvals would render any Mortgage Loan unenforceable in any
respect or would otherwise have a material adverse effect upon any Transaction.
(b) Power and Authority. Seller has all necessary power and authority
-------------------
to conduct its business as currently conducted, to execute, deliver and perform
its obligations under the Related Documents and to consummate the Transactions.
(c) Due Authorization. The execution, delivery and performance of the
-----------------
Related Documents by Seller have been duly authorized by all necessary corporate
action and do not require any additional approvals or consents or other action
by or any notice to or filing with any person.
(d) Noncontravention. None of the execution and delivery of the
----------------
Related Documents by Seller, the consummation of the transactions contemplated
thereby or the satisfaction of the terms and conditions of the Related
Documents:
(i) conflicts with or results in any breach or violation of
any provision of the articles or certificate of incorporation or by-
laws of Seller or any law, rule, regulation, order, writ, judgment,
injunction, decree, determination or award currently in effect having
applicability to Seller, or any of its properties, including
regulations issued by an administrative agency or other governmental
authority having supervisory powers over Seller;
(ii) constitutes a material default by Seller under or a
material breach of any provision of any loan agreement, mortgage,
indenture or other material agreement or instrument to which Seller or
any of its affiliates is a party or by which it or any of its
properties is or may be bound or affected; or
A-1
<PAGE>
(iii) results in or requires the creation of any lien upon or
in respect of any of the assets of Seller or any of its affiliates
except as otherwise expressly contemplated by the Related Documents.
(e) Legal Proceedings. There is no action, proceeding or
------------------
investigation by or before any court, governmental or administrative agency or
arbitrator against or affecting all or any of the Mortgage Loans, Seller or any
of its affiliates, or any properties or rights of Seller or any of its
affiliates, pending or threatened, which, in any case, if decided adversely,
would have a material adverse effect with respect to Seller or any Mortgage
Loan.
(f) Valid and Binding Obligations. Each of the Related Documents to
------------------------------
which Seller is a party when executed and delivered by Seller will constitute
the legal, valid and binding obligations of Seller, enforceable in accordance
with their respective terms, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally and general equitable principles.
(g) Financial Statements. The Financial Statements of Seller, copies
---------------------
of which have been furnished to Buyer, (i) are, as of the dates and for the
periods referred to therein, complete and correct in all material respects, (ii)
present fairly the financial condition and results of operations of each of
Seller as of the dates and for the periods indicated and (iii) have been
prepared in accordance with generally accepted accounting principles
consistently applied, except as noted therein (subject as to interim statements
to normal year-end adjustments). Since the date of the most recent Financial
Statements, there has been no material adverse change in such financial
condition or results of operations. Except as disclosed in the Financial
Statements, Seller is not subject to any contingent liabilities or commitments
that, individually or in the aggregate, have a material possibility of causing a
material adverse change in the business or operations of Seller.
(h) ERISA. Seller is in compliance with ERISA and has not incurred
------
and does not reasonably expect to incur any liabilities to the PBGC under ERISA
in connection with any Plan or Multiemployer Plan or to contribute now or in the
future in respect of any Plan or Multiemployer Plan.
(i) Accuracy of Information. None of the documents or information
------------------------
provided by Seller to Buyer in connection with the Agreement or the Transactions
thereunder contain any statement of a material fact with respect to Seller or
the Transactions that was untrue or misleading in any material respect when
made; mortgage loan legal and servicing files shall not constitute such
documents or information for this purpose. Since the furnishing of such
documents or information, there has been no change, nor any development or event
involving a prospective change known to Seller that would render any of such
documents or information untrue or misleading in any material respect. There is
no fact known to Seller which has a material possibility of causing a material
adverse change with respect to Seller.
A-2
<PAGE>
(j) Related Documents. Each of the representations and warranties of
------------------
Seller contained in the Related Documents is true and correct in all material
respects.
(k) No Consents. No consent, license, approval or authorization from,
-----------
or registration, filing or declaration with, any regulatory body, administrative
agency, or other governmental instrumentality, nor any consent, approval, waiver
or notification of any creditor, lessor or other nongovernmental person, is
required in connection with the execution, delivery and performance by Seller of
this Agreement or of any other Transaction Document, except such as have been
obtained and are in full force and effect and those as to which the failure to
so obtain does not have a material adverse effect on Seller.
(l) Compliance With Law. Etc. No practice, procedure or policy
-------------------------
employed or proposed to be employed by Seller in the conduct of its businesses
violates any law, regulation, judgment, agreement, order or decree applicable to
it which, if enforced, would result in a material adverse effect upon Seller.
(m) Solvency; Fraudulent Conveyance. Seller is solvent and will not
--------------------------------
be rendered insolvent by the Transaction and, after giving effect to such
Transaction, Seller will not be left with an unreasonably small amount of
capital with which to engage in its business. Seller does not intend to incur,
or believe that it has incurred, debts beyond its ability to pay such debts as
they mature. Seller is not contemplating the commencement of insolvency,
bankruptcy, liquidation or consolidation proceedings or the appointment of a
receiver, liquidator, conservator, trustee or similar official in respect of
Seller or any of its assets. The amount of consideration being received by the
Seller upon the sale of the Mortgage Loans to Buyer and thereafter upon the sale
of any Mortgage Loans by the Seller to the Buyer constitutes reasonably
equivalent value and fair consideration for such Mortgage Loans. Seller is not
transferring any Mortgage Loans with any intent to hinder, delay or defraud any
of its creditors.
(n) Investment Company Act Compliance. Seller is neither required to
----------------------------------
be registered as an "investment company" as defined under the Investment Company
Act nor under the control of an "investment company" as defined under the
Investment Company Act.
(o) Good Title; Valid Transfer; Absence of Liens; Security Interest.
----------------------------------------------------------------
Immediately prior to the sale of the Mortgage Loans to the Buyer pursuant to the
Agreement on the Purchase Date, Seller was the owner of, and had good and
marketable title to, such property free and clear of all liens and restrictions
on transferability, and had full right, power and lawful authority to assign,
transfer and pledge such Mortgage Loans. The Agreement constitutes a valid
sale, transfer and assignment of the Mortgage Loans to the Buyer enforceable
against creditors of Seller.
(p) Perfection of Liens and Security Interest. On the Purchase Date,
------------------------------------------
the lien and security interest in favor of the Buyer with respect to the
Mortgage Loans will be perfected by the delivery of the Mortgage Loans to the
Custodian (assuming such Mortgage Loans will
A-3
<PAGE>
be held by the Custodian on behalf of the Buyer), and the filing of financing
statements on Form UCC-1 in each jurisdiction where such recording or funding is
necessary for the perfection of the security interest in favor of the Buyer and
no other flings in any jurisdiction or any other actions (except as expressly
provided herein) are necessary to perfect the Buyer's first priority lien on and
security interest in the Mortgage Loans as against any third parties.
(q) Taxes. Seller has and each of its affiliates have filed all
------
federal and state tax returns which are required to be filed and paid all taxes,
including any assessments received by it, to the extent that such taxes have
become due. Any taxes, fees and other governmental charges payable by Seller in
connection with the Transaction and the execution and delivery of the Related
Documents have been paid.
(r) Licenses. Other than as set forth in Schedule I hereto, Buyer
---------
will not be required as a result of purchasing Mortgage Loans to be licensed,
registered or approved or to obtain permits or otherwise qualify (i) to do
business in any state in which it currently [sic] so required or (ii) under any
state consumer lending, fair debt collection or other applicable state statute
or regulation.
II. Seller hereby agrees that during the term of the Agreement, unless
Buyer shall otherwise expressly consent in writing:
(a) Compliance With Agreements and Applicable Laws. Seller shall
-----------------------------------------------
perform each of its obligations under the Related Documents and shall comply
with all material requirements of any law, rule or regulation applicable to it
or thereto, or that are required in connection with its performance under any of
the Related Documents.
(b) Financial Statements; Accountant's Reports: Other Information.
--------------------------------------------------------------
Seller shall keep or cause to be kept in reasonable detail books and records of
account of its assets and business and shall clearly reflect therein the
transfer of Additional Mortgage Loans to the Buyer. Seller shall furnish or
cause to be furnished to Buyer:
(i) Annual Financial Statements. As soon as available to
---------------------------
the public generally or the Seller's stockholders, and in any event
within 120 days after the close of each fiscal year Seller, the
audited balance sheets of Seller as of the end of such fiscal year and
the audited statements of income and changes in equity of Seller for
such fiscal year, all in reasonable detail and stating in comparative
form the respective figures for the corresponding date and period in
the preceding fiscal year, prepared in accordance with generally
accepted accounting principles, consistently applied, and accompanied
by the certificate of Seller's independent accountants (who shall be,
in each case, a nationally recognized firm or otherwise acceptable to
Buyer).
A-4
<PAGE>
(ii) Orderly Financial Statements. As soon as available to
----------------------------
the public generally or the Seller's stockholders, and in any event
within 45 days after the close of each of the first three quarters of
each fiscal year of Seller, the unaudited balance sheets of Seller as
of the end of such quarter and the unaudited statements of income and
changes in equity of Seller for the portion of the fiscal year then
ended, all in reasonable detail and stating in comparative form the
respective figures for the corresponding date and period in the
preceding fiscal year, prepared in accordance with generally accepted
accounting principles, consistently applied (subject to normal year-
end adjustments).
(iii) Monthly Financial Statements. As soon as available to
----------------------------
the public generally or the Seller's stockholders, and in any event
within 30 days after the last day of each calendar month, the
unaudited balance sheets of Seller as of the end of such calendar
month and the unaudited statements of income and changes in equity of
Seller for the portion of the fiscal year then ended, all in
reasonable detail and prepared in accordance with generally accepted
accounting principles, consistently applied (subject to normal year-
end adjustments).
(iv) Annual Budgets; Business Plans. Such annual budgets,
------------------------------
monthly and annual comparisons of conformity of operations with annual
budgets, three-year projections of financial and operations results,
strategic business plans and other internal reports prepared or
reviewed by Executive Management as may [sic] CSFB may reasonably
request and may be lawfully provided.
(v) Other Information. Promptly upon receipt thereof,
-----------------
copies of all reports, statements, certifications, schedules, or other
similar items delivered to or by Seller pursuant to the terms of the
Related Documents and, promptly upon request, such other data as Buyer
may reasonably request. Seller shall, upon the request of Buyer,
permit Buyer or its authorized agents (A) to inspect the books and
records of Seller as they may relate to the Mortgage Loans, the
obligations of Seller under the Related Documents, the Transactions
and Seller's business; (B) to discuss the affairs, finances and
accounts of Seller with its respective Chief Operating Officer and
Chief Financial Officer, no more frequently than annually, unless an
Event of Default has occurred; and (C) to discuss the affairs,
finances and accounts of Seller with its independent accountants,
provided that an officer of Seller shall have the right to be present
--------
during such discussions. Such inspections and discussions shall be
conducted during normal business hours and shall not unreasonably
disrupt the business of Seller. In addition, Seller shall promptly
(but in no case more than 30 days following issuance or receipt)
provide to Buyer a copy of all correspondence between Seller or any
affiliate and the PBGC, IRS, Department of Labor or the administrators
of a Multiemployer Plan relating to any Reportable Event or the
underfunded status, termination or possible termination of a Plan or a
Multiemployer Plan. The books and records
A-5
<PAGE>
of Seller will be maintained at the respective addresses designated
herein for receipt of notices, unless Seller shall otherwise advise
Buyer in writing.
(vi) promptly after the filing or sending thereof, copies of
all proxy statements, financial statements, reports and registration
statements which Seller files, or delivers to, the Internal Revenue
Service, the Securities and Exchange Commission, or any other federal,
state or foreign government agency, authority or body which supervises
the issuance of securities by Seller or any national securities
exchange.
(c) Compliance Certificate. Seller shall deliver to Buyer
-----------------------
concurrently with the delivery of the annual and quarterly financial statements
required by paragraphs II.(b)(i) and II.(b)(ii) of this Exhibit A a certificate
signed by the Chief Financial Officer of Seller stating that:
(i) a review of Seller's performance under the Related
Documents during such period has been made under such officer's
supervision;
(ii) to the best of such officer's knowledge, no Event of
Default has occurred, or if an Event of Default has occurred,
specifying the nature thereof and, if Seller has a right to cure any
such Event of Default, stating in reasonable detail the steps, if any,
being taken by Seller to cure such Event of Default or to otherwise
comply with the terms of the agreement to which such Event of Default
relates; and
(ii) the attached financial reports are complete and correct
in all material respects and present fairly the financial condition
and results of operations of Seller as of the dates and for the
periods indicated, in accordance with generally accepted accounting
principles consistently applied (subject as to interim statements to
normal year-end adjustments).
(d) Notice of Material Events. Seller shall promptly inform (unless,
--------------------------
in the case of clause (i) only, prohibited by applicable law) Buyer in
writing of the occurrence of any of the following:
(i) the submission of any claim or the initiation of any
legal process, litigation or administrative or judicial investigation
(A) against Seller pertaining to the Mortgage Loans in general, (B)
with respect to a material portion of the Mortgage Loans or (C) in
which a request has been made for certification as a class action (or
equivalent relief) that would involve a material portion of the
Mortgage Loans;
A-6
<PAGE>
(ii) any change in the location of Seller's principal office
or any change in the location of Seller's books and records;
(iii) the occurrence of any Event of Default; or
(iv) any other event, circumstance or condition that has
resulted, or has a material possibility of resulting, in a material
adverse effect upon Seller.
(e) Further Assurances. Seller will file or cause to be filed all
-------------------
necessary financing statements, assignments or other instruments, and any
amendments or continuation statements relating thereto, necessary to be
kept and filed in such manner and in such places as may be required by law
to preserve and protect fully the lien on and first priority security
interest in the Mortgage Loans.
(f) Independent Entity. Seller is a separate and independent
-------------------
corporate entity from the custodian named in the Custodial Agreement,
Seller does not own a controlling interest in such custodian either
directly or through affiliates and no director or officer of Seller is also
a director or officer of such custodian;
(g) Regulation T. None of the Purchase Price for any Purchased
-------------
Securities will be used either directly or indirectly to acquire any
security, as that term is defined in Regulation T of the Regulations of the
Board of Governors of the Federal Reserve System, and the Seller has not
taken any action that might cause any Transaction to violate any regulation
of the Federal Reserve Board;
(h) Corporate Existence. Seller shall preserve and maintain its
--------------------
existence, rights, franchises and privileges and shall at all times
continue to be duly organized under the laws of the jurisdiction of its
organization, and qualify and remain qualified in good standing in each
jurisdiction where the failure to preserve and maintain such existence,
rights, franchises, privileges and qualifications would have a reasonable
likelihood having a material adverse effect on the business or properties
of the Seller.
(i) Maintenance of Licenses. Seller shall maintain all licenses,
------------------------
permits, charters and registrations as are material to the performance by
Seller of its business or its obligations under the Related Documents.
[(j) Keeping of Records and Books of Account. Seller shall maintain
----------------------------------------
and implement administrative and operating procedures (including, an
ability to recreate records evidencing the Mortgage Loans in the event of
the destruction of the originals thereof), and shall keep and maintain, or
cause to be kept or maintained, all documents, books, records and other
information which, in the reasonable determination of Buyer, are necessary
or advisable in accordance with prudent industry practice and custom for
transactions of this type for the collection of all Mortgage Loans. Seller
shall maintain
A-7
<PAGE>
or cause to be maintained at all times accurate and complete books, records
and accounts relating to the Mortgage Loans, which books and records shall
be marked to indicate the transfer of the Mortgage Loans under the
Agreement.] [sic]
(k) Minimum Net Worth. Seller shall maintain at all times on and
------------------
after September 1, 1996 a minimum Net Worth of not less than $5 million and
$10 million after December 31, 1996. The "Net Worth" of the Seller as of
any date of determination shall be equal to the sum of (i) the par value of
its capital stock, (ii) additional paid-in capital plus retained earnings
(or minus accumulated deficit) of Seller on a consolidated basis, each item
to be determined in accordance with generally accepted accounting
principles, less (x) amounts attributable to stock that may be redeemed at
the option of the holder and with respect to which such holder has elected
to have such stock redeemed and (y) intangible assets.
(l) Limitations on Debt. The ratio of the total Debt of the Seller
--------------------
and its consolidated subsidiaries to the Net Worth of the Seller plus the
outstanding principal amount of any subordinate Debt of the Borrower on and
after December 31, 1996 shall not be more than 15 to 1. "Debt" shall mean
any indebtedness, contingent or otherwise, in respect of borrowed money
(whether or not the recourse of the lender is to the whole of the assets of
Seller or such consolidated subsidiary or only to a portion thereof), or
evidenced by bonds, notes, debentures or similar instruments or letters of
credit or representing the balance deferred and unpaid of the purchase
price of any property (except any such balance that constitutes a trade
payable and an accrued liability arising in the ordinary course of business
that is not overdue by more than 90 days or that is being contested in good
faith), if and to the extent any of the foregoing indebtedness would appear
as a liability upon a consolidated balance sheet of Seller prepared in
accordance with generally accepted accounting principles, and shall also
include, to the extent not otherwise included, indebtedness secured by a
lien or mortgage to which the property or assets owned or held by Seller or
such consolidated subsidiary is subject (whether or not the obligations
secured thereby shall have been assumed), guarantees of items that would be
included within this definition (without regard to whether such items would
appear upon such balance sheet), and obligations in respect of interest
rate swap obligations. The amount of Debt of Seller and its consolidated
subsidiaries at any date shall be the outstanding balance at such date of
all unconditional obligations as described above and the maximum liability
of any such contingent obligations at such date. Seller's "Net Worth"
shall have the meaning assigned thereto in paragraph (k) above.
A-8
<PAGE>
EXHIBIT B
REPRESENTATIONS AND WARRANTIES
OF SELLER REGARDING MORTGAGE LOANS
(Capitalized terms used but not defined in this Exhibit B shall have
the respective meanings given to them in the Seller's Warranties and
Interim Servicing Agreement dated as of March 31, 1996 between the Buyer
(as Purchaser) and the Seller (as Company).
As to each Mortgage Loan, the Seller hereby represents and warrants to
the Buyer that as of the related Purchase Date and (except as expressly
stated) each date thereafter up to the related Repurchase Date:
(a) Mortgage Loans as Described. The information set forth in the
----------------------------
Mortgage Loan Schedule is complete, true and correct;
(b) Payments Current. All payments required to be made for the
-----------------
Mortgage Loan under the terms of the Mortgage Note have been made and credited
prior to the Due Date of the succeeding Monthly Payment. No payment required
under the Mortgage Loan is delinquent (except as permitted by the preceding
sentence) nor has any payment under the Mortgage Loan been so delinquent at any
time since the origination of the Mortgage Loan;
(c) No Outstanding Charges. There are no defaults in complying with
-----------------------
the terms of the Mortgages, and all taxes, governmental assessments, insurance
premiums, water, sewer and municipal charges, leasehold payments or ground rents
which previously became due and owing have been paid, or an escrow of funds 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. The
Seller has not advanced funds, or induced, solicited or knowingly received any
advance of funds by a party other than the Mortgagor, directly or indirectly,
for the payment of any amount required under the Mortgage Loan, except for
interest accruing from the date of the Mortgage Note or date of disbursement of
the Mortgage Loan proceeds, whichever is greater, to the day which precedes by
one month the Due Date of the first installment of principal and interest;
(d) Original Terms Unmodified. The terms of the Mortgage Note and
--------------------------
Mortgage have not been impaired, waived, altered or modified in any respect,
except by a written instrument which has been recorded, if necessary to protect
the interests of the Buyer and which has been delivered to the Custodian. The
substance of any such waiver, alteration or modification has been approved by
the title insurer, to the extent required by the policy, and its terms are
reflected on the Mortgage Loan Schedule. No Mortgagor has been released, in
whole or in part, except in connection with an assumption agreement approved by
the title insurer, to the extent required by the policy, and which assumption
agreement is part of the
B-1
<PAGE>
Mortgage Loan File delivered to the Custodian and the terms of which are
reflected in the Mortgage Loan Schedule;
(e) No Defenses. The Mortgage Loan is not subject to any right of
------------
rescission, set-off, counterclaim or defense, including without limitation the
defense of usury, nor will the operation of any of the terms of the Mortgage
Note or the Mortgage, or the exercise of any right thereunder, render either the
Mortgage Note or the Mortgage unenforceable, in whole or in part, and no such
right of rescission, set-off, counterclaim or defense has been asserted with
respect thereto; and no Mortgagor was a debtor in any state or federal
bankruptcy or insolvency proceeding at the time the Mortgage Loan was
originated;
(f) Hazard Insurance. Pursuant to the terms of the Mortgage, all
-----------------
buildings or other improvements upon the Mortgaged Property are insured by a
generally acceptable insurer against loss by fire, hazards of extended coverage
and such other hazards as are customary in the area where the Mortgaged Property
is located pursuant to insurance policies conforming to the requirements of [the
Servicing Agreement]. If upon origination of the Mortgage Loan, the Mortgaged
Property was in an area identified in the Federal Register by the Federal
Emergency Management Agency as having special flood hazards (and such flood
insurance was required by federal regulation and such flood insurance has been
made available) a flood insurance policy meeting the requirements of the current
guidelines-of the Federal Insurance Administration is in effect which policy
conforms to the requirements of [the Servicing Agreement]. [sic] All individual
insurance policies contain a standard mortgagee clause naming the Seller and its
successors and assigns as mortgagee, and all premiums thereon have been paid.
The Mortgage obligates the Mortgagor thereunder to maintain the hazard insurance
policy at the Mortgagor's cost and expense, and on the Mortgagor's failure to do
so, authorizes the holder of the Mortgage to obtain and maintain such insurance
at such Mortgagor's cost and expense, and to seek reimbursement therefor from
the Mortgagor. Where required by state law or regulation, the Mortgagor has
been given an opportunity to choose the carrier of the required hazard
insurance, provided the policy is not a "master" or "blanket" hazard insurance
policy covering a condominium, or any hazard insurance policy covering the
common facilities of a planned unit development. The hazard insurance policy is
the valid and binding obligation of the insurer, is in full force and effect,
and will be in full force and effect and inure to the benefit of the Buyer upon
the consummation of the transactions contemplated by this Agreement. The Seller
has not engaged in, and has no knowledge of the Mortgagor's having engaged in,
any act or omission which would impair the coverage of any such policy, the
benefits of the endorsement provided for herein, or the validity and binding
effect of either including, without limitation, no unlawful fee, commission,
kickback or other unlawful compensation or value of any kind has been or will be
received, retained or realized by an attorney, firm or other person or entity
and no such unlawful items have been received, retained or realized by the
Seller;
(g) Compliance with Applicable Laws. Any and all requirements of any
--------------------------------
federal, state or local law including, without limitation, usury, truth-in-
lending, real estate settlement procedures, consumer credit protection, equal
credit opportunity or disclosure laws
B-2
<PAGE>
applicable to the Mortgage Loan have been complied with in all material
respects, the consummation by Seller of the transactions contemplated hereby
will not involve the violation of any such laws or regulations, and the Seller
shall maintain in its possession, available for the Buyer's inspection, to the
extent required by law, and shall deliver to the Buyer upon demand, evidence of
compliance with all such requirements;
(h) No Satisfaction of Mortgage. The Mortgage has not been satisfied,
---------------------------
cancelled, subordinated (other than as expressly set forth in paragraph (j) of
this Section 3.02) or rescinded, in whole or in part, and the Mortgaged Property
has not been released from the lien of the Mortgage, in whole or in part, nor
has any instrument been executed that would effect any such release,
cancellation, subordination (other than in connection with the first lien
referenced in paragraph (j) of this Section 3.02) or rescission. The Seller has
not waived the performance by the Mortgagor of any action, if the Mortgagor's
failure to perform such action would cause the Mortgage Loan to be in default,
nor has the Seller waived any default resulting from any acting or inaction by
the Mortgagor;
(i) Location and Type of Mortgaged Property. The Mortgaged Property
----------------------------------------
is located in the state identified in the Mortgage Loan Schedule and consists of
a parcel of real property with a detached single family residence erected
thereon, or a two- to four-family dwelling, or an individual condominium unit in
a low-rise condominium project, or an individual unit in a planned unit
development or a de minimis planned unit development, provided, however, that no
residence or dwelling is a mobile home or a manufactured dwelling. No portion
of the Mortgaged Property is used for commercial purposes;
(j) Valid Second Lien. The Mortgage is a valid, subsisting,
------------------
enforceable, and perfected second lien on the Mortgaged Property, including all
buildings on the Mortgaged Property and all installations and mechanical,
electrical, plumbing, heating and air conditioning systems located in or annexed
to such buildings, and all additions, alterations and replacements made at any
time with respect to the foregoing. The lien of the Mortgage is subject only
to:
(1) the lien of current real property taxes and assessments not
yet due and payable;
(2) covenants, conditions and restrictions, rights of way,
easements and other matters of the public record as of the date of
recording acceptable to mortgage lending institutions generally and
specifically referred to in the lender's title insurance policy
delivered to the originator of the Mortgage Loan and (i) referred to
or to otherwise considered in the appraisal (if any) made for the
originator of the Mortgage Loan or (ii) which do not adversely affect
the appraised value of the Mortgaged Property set forth in such
appraisal;
(3) other matters to which like properties are commonly subject
which do not materially interfere with the benefits of the security
intended to be
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<PAGE>
provided by the Mortgage or the use, enjoyment, value or marketability
of the related Mortgaged Property; and
(4) a First Lien on the Mortgaged Property.
Any security agreement, chattel mortgage or equivalent document related to
and delivered in connection with the Mortgage Loan establishes and creates a
valid, subsisting and enforceable second lien and second priority security
interest on the property described therein and the Seller has full right to sell
and assign the same to the Buyer. The Mortgaged Property was not, as of the
date of origination of the Mortgage Loan, subject to a mortgage, deed of trust,
deed to secure debt or other security instrument creating a lien subordinate to
the lien of the Mortgage;
(k) Validity of Mortgage Documents. The Mortgage Note, the Mortgage
-------------------------------
and any other agreement executed and delivered by a Mortgagor in connection with
a Mortgage Loan are genuine, and each is the legal, valid and binding obligation
of the maker thereof enforceable in accordance with its terms. All parties to
the Mortgage Note, the Mortgage and any other related agreement had legal
capacity to enter into the Mortgage Loan and to execute and deliver the Mortgage
Note, the Mortgage and any such agreement, and the Mortgage Note, the Mortgage,
and any other such related agreement have been duly and properly executed by
other such related parties. The Seller has reviewed all of the documents
constituting the Servicing File and has made such inquiries as it deems
necessary to make and conform the accuracy of the representations set forth
herein;
(l) Full Disbursement of Proceeds. The proceeds of the Mortgage Loan
------------------------------
have been fully disbursed and there is no requirement for future advances
thereunder, and any and all requirements as to completion of any on-site or off-
site improvement and as to disbursements of any escrow funds therefor have been
complied with. All costs, fees and expenses incurred in making or closing the
Mortgage Loan and the recording of the Mortgage were paid, and the Mortgagor is
not entitled to any refund of any amounts paid or due under the Mortgage Note or
Mortgage;
(m) Ownership. Immediately prior to the related Purchase Date: (i)
----------
the Seller was the sole owner of record and holder of the Mortgage Loan; (ii)
the Mortgage Loan was not assigned or pledged, and the Seller has good
indefeasible and marketable title thereto, and had full right to transfer and
sell the Mortgage Loan therein to the Buyer free and clear of any encumbrance,
equity, participation interest, lien, pledge, charge, claim or security
interest, and had full right and authority subject to no interest or
participation of, or agreement with, any other party, to sell and assign each
Mortgage Loan pursuant to this Agreement and following the sale of each Mortgage
Loan, subject to the terms of provisions of this Agreement, the Buyer will own
such Mortgage Loan free and clear of any encumbrance, equity, participation
interest, lien, pledge, charge, claim or security interest. After the related
Purchase Date, the Seller will have no right to modify or alter the terms of the
sale of the Mortgage Loan and the Seller will
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<PAGE>
have no obligation or right to repurchase the Mortgage Loan or substitute
another Mortgage Loan, except as provided in this Agreement;
(n) Doing Business. All parties which have had any interest in the
---------------
Mortgage Loan, whether as mortgagee, assignee, pledgee or otherwise, are (or,
during the period in which they held and disposed of such interest, were) (1) in
compliance with any and all applicable licensing requirements of the laws of the
state wherein the Mortgaged Property is located, and (2) organized under the
laws of such state, or (3) qualified to do business in such state, or (4) a
federal savings and loan association, savings bank or a national bank having its
principal office in such state, or (5) not doing business in such state;
(o) LTV. The LTV and CLTV are as identified in the applicable
----
Mortgage Loan Schedule.
(p) Title Insurance. The Mortgage Loan is covered by a limited
----------------
liability lender's title insurance policy or other generally acceptable form of
policy of insurance for loans similar to the Mortgage Loans issued by a title
insurer qualified to do business in the jurisdiction where the Mortgaged
Property is located, insuring the Seller, its successors and assigns, as to the
priority of its lien of the Mortgage in the original principal amount of the
Mortgage Loan, and subject only to the exceptions contained in clauses (1), (2),
(3) and (4) of paragraph (j) above. Where required by state law or regulation,
the Mortgagor has been given the opportunity to choose the carrier of the
required mortgage title insurance. Immediately prior to the sale of the
Mortgage Loan to the Buyer under the terms of this Agreement, the Seller, its
successors and assigns were the sole insureds of such lender's title insurance
policy. Such lender's title insurance policy is in full force and effect and
will be in force and effect upon the consummation of the transactions
contemplated by this Agreement. No claims have been made under such lender's
title insurance policy, and no prior holder of the Mortgage, including the
Seller, has done, by act or omission, anything which would impair the coverage
of such lender's title insurance policy. In connection with the issuance of
such lender's title insurance policy, no unlawful fee, commission, kickback or
other unlawful compensation or value of any kind has been or will be received,
retained or realized by any attorney, firm or other persons or entity, and no
such unlawful items have been received, retained or realized by the Company;
(q) No Defaults. There is no default, breach, violation or event of
------------
acceleration existing under the Mortgage or the Mortgage Note and no event
which, with the passage of time or with notice and the expiration of any grace
or cure period, would constitute a default, breach, violation or event of
acceleration, and neither the Seller nor its predecessors have waived any
default, breach, violation or event of acceleration. To the best of the
Seller's knowledge the First Lien is in full force and effect. There is no
default, breach, violation or event of acceleration existing under such First
Lien mortgage or the related-mortgage note, and no event which, with the passage
of time or with notice and the expiration of any grace or cure period, would
constitute a default, breach, violation or event of acceleration thereunder.
Either (i) the First Lien mortgage contains a provision which allows or (ii)
applicable law requires, the
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<PAGE>
mortgagee under the second lien Mortgage Loan to receive notice of, and affords
such mortgagee an opportunity to cure any default under the First Lien mortgage;
(r) No Mechanics' Liens. There are no mechanics' or similar liens or
--------------------
claims which have been filed for work, labor or material (and no rights are
outstanding that under the law could give rise to such liens) affecting the
related Mortgaged Property which are or may be liens prior to, or equal or
coordinate with, the lien of the related Mortgage;
(s) Location of Improvements; No Encroachments. All improvements
-------------------------------------------
which were considered in determining the Appraised Value of the Mortgaged
Property lay wholly within the boundaries and building restriction lines of the
Mortgaged Property and no improvements on adjoining properties encroach upon the
Mortgaged Property. No improvement located on or being part of the Mortgaged
Property is in violation of any applicable zoning law or regulation;
(t) Origination: Payment Terms. At the time the Mortgage Loan was
---------------------------
originated, the originator was a mortgagee approved by the Secretary of Housing
and Urban Development pursuant to Section 203 and 211 of the National Housing
Act or a savings and loan association, a savings bank, a commercial bank credit
union, insurance company or similar banking institution which is supervised and
examined by a federal or state authority. Principal payments on the Mortgage
Loan commenced no more than sixty days after funds were disbursed in connection
with the Mortgage Loan. The documents, instruments and agreements submitted for
loan underwriting were not falsified and contain no untrue statement of material
fact or omit to state a material fact required to be stated therein or necessary
to make the information and statements therein not misleading. The Mortgage
Note has the terms identified in the applicable Mortgage Loan Schedule;
(u) Customary Provisions. The Mortgage contains customary and
---------------------
enforceable provisions such as to render the rights and remedies of the holder
thereof adequate for the realization against the Mortgaged Property of the
benefits of the security provided thereby, including, (i) in the case of a
Mortgage designated as a deed of trust, by trustee's sale, and (ii) otherwise by
judicial foreclosure. Upon default by a Mortgagor on a Mortgage Loan and
foreclosure on, or trustee's sale of, the Mortgaged Property pursuant to the
proper procedures, the holder of the Mortgage Loan will be able to deliver good
and marketable title to the Mortgaged Property. There is no homestead or other
exemption available to a Mortgagor which would interfere with the right to sell
the Mortgaged Property at a trustee's sale or the right to foreclose the
Mortgage;
(v) Conformance with Agency Standards. The Mortgage Loan was
----------------------------------
underwritten in accordance with and the Mortgage Loan and Mortgaged Property
conform to the Seller's Underwriting Guidelines. The Mortgage Note and Mortgage
are on forms acceptable to FHLMC or FNMA;
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<PAGE>
(w) Occupancy of the Mortgaged Property. The Mortgaged Property is
------------------------------------
lawfully occupied under applicable law. All material inspections, licenses and
certificates required to be made or issued with respect to all occupied portions
of the Mortgaged Property and, with respect to the use and occupancy of the
same, including but not limited to certificates of occupancy and fire
underwriting certificates, have been made or obtained from the appropriate
authorities. The Mortgagor represented at the time of origination of the
Mortgage Loan that the Mortgagor would occupy the Mortgaged Property as the
Mortgagor's primary residence;
(x) No Additional Collateral. The Mortgage Note is not and has not
-------------------------
been secured by any collateral except the lien of the corresponding Mortgage and
the security interest of any applicable security agreement or chattel mortgage
referred to in (j) above;
(y) Deeds of Trust. In the event the Mortgage constitutes a deed of
---------------
trust, a trustee, duly qualified under applicable law to serve as such, has been
properly designated and currently so serves and is named in the Mortgage, and no
fees or expenses are or will become payable by the Buyers to the trustee under
the deed of trust, except in connection with a trustee's sale after default by
the Mortgagor;
(z) Acceptable Investment. No circumstances or conditions exist with
----------------------
respect to the Mortgage, the Mortgaged Property, the Mortgagor or the
Mortgagor's credit standing that can reasonably be expected to cause private
institutional investors which invest in mortgage loans similar to the Mortgage
Loans to regard the Mortgage Loan as an unacceptable investment, cause the
Mortgage Loan to become delinquent, or adversely affect the value or
marketability of the Mortgage Loan;
(aa) Delivery of Mortgage Documents. The Mortgage Note, the Mortgage,
-------------------------------
the Assignment of Mortgage and any other documents required to be delivered for
the Mortgage Loan by the Seller under the Custodial Agreement have been
delivered to the Custodian. The Servicer is in possession of a complete, true
and accurate Mortgage File in compliance with Exhibit B, except for such
documents the originals of which have been delivered to the Custodian;
(bb) [Reserved].
-----------
(cc) Assignment of Mortgage. The Assignment of Mortgage is in
-----------------------
recordable form and is acceptable for recording under the laws of the
jurisdiction in which the Mortgaged Property is located;
(dd) Due on Sale. The Mortgage contains an enforceable provision for
------------
the acceleration of the payment of the unpaid principal balance of the Mortgage
Loan in the event that the Mortgaged Property is sold or transferred without the
prior written consent of the mortgagee thereunder;
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<PAGE>
(ee) No Buydown Provisions: No Graduated Payments or Contingent
----------------------------------------------------------
Interests. The Mortgage Loan does not contain provisions pursuant to which
- ----------
Monthly Payments are paid or partially paid with funds deposited in any separate
account established by the Seller, the Mortgagor or anyone on behalf of the
Mortgagor, or paid by any source other than the Mortgagor nor does it contain
any other similar provisions currently in effect which may constitute a
"buydown" provision. The Mortgage Loan is not a graduated payment mortgage loan
and the Mortgage Loan does not have a shared appreciation or other contingent
interest feature;
(ff) Consolidation of Future Advances. Any future advances made after
---------------------------------
origination of the Mortgage Loan have been consolidated with the outstanding
principal amount secured by the Mortgage, and the secured principal amount, as
consolidated, bears a single interest rate and single repayment term. The lien
of the Mortgage securing the consolidated principal amount is expressly insured
as having second lien priority by a title insurance policy, an endorsement to
the policy insuring the mortgagee's consolidated interest or by other title
evidence satisfying (p) above. The consolidated principal amount does not
exceed the original principal amount of the Mortgage Loan;
(gg) Mortgaged Property Undamaged: Condemnation. The Mortgaged
-------------------------------------------
Property is undamaged by waste, fire, earthquake or earth movement, windstorm,
flood, tornado or other casualty so as to affect adversely the value of the
Mortgaged Property as security for the Mortgage Loan or the use for which the
premises were intended and each Mortgaged Property is in good repair, provided,
however that the representation contained in this sentence shall be deemed made
only "to the Seller's knowledge" to the extent that both (i) the original
principal balance was $35,000 or less and (ii) the related FICO score was 660 or
above. There have not been any condemnation proceedings with respect to the
Mortgaged Property and the Seller has no knowledge of any such proceedings in
the future;
(hh) Collection Practices; Escrow Deposits. The origination and
--------------------------------------
collection practices used with respect to the Mortgage Loan have been in all
respects in compliance with Accepted Servicing Practices, applicable laws and
regulations, and have been in all respects legal and proper. With respect to
escrow deposits and Escrow Payments, to the extent such Escrow Payments are not
collected by the mortgagee or its designee under the First Lien, all such
payments are in the possession of, or under control of, the Seller and there
exist no deficiencies in connection therewith for which customary arrangements
for repayment thereof have not been made. All Escrow Payments have been
collected in full compliance with state and federal law. An escrow of funds is
not prohibited by applicable law and, to the extent such Escrow Payments are not
collected by the mortgagee or its designee under the First Lien, has been
established in an amount sufficient to pay for every item that remains unpaid
and has been assessed but is not yet due and payable. No escrow deposits or
Escrow Payments or other charges or payments due the Seller have been
capitalized under the Mortgage or the Mortgage Note. Any interest required to
be paid pursuant to state and local law has been properly paid and credited;
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<PAGE>
(ii) Appraisal. The Mortgage File contains an appraisal of the
----------
related Mortgaged Property signed prior to the approval of the Mortgage Loan
application by a qualified appraiser, duly appointed by the Seller, who had no
interest, direct or indirect in the Mortgaged Property or in any loan made on
the security thereof, and whose compensation is not affected by the approval or
disapproval of the Mortgage Loan;
(jj) Soldiers' and Sailors' Relief Act. The Mortgagor has not
----------------------------------
notified the Seller, and the Seller has no knowledge of any relief requested or
allowed to the Mortgagor under the Soldiers' and Sailors' Civil Relief Act of
1940;
(kk) Environmental Matters. To the best of the Seller's knowledge,
----------------------
the Mortgaged Property is free from any and all toxic or hazardous substances
and there exists no violation of any local, state or federal environmental law,
rule or regulation;
(ll) Construction or Rehabilitation of Mortgaged Property. No
-----------------------------------------------------
Mortgage Loan was made in connection with the construction or rehabilitation of
a Mortgaged Property or facilitating the trade-in or exchange of a Mortgaged
Property;
(mm) Ground Leases. Except for a Mortgage Loan secured by Mortgaged
--------------
Property located in the State of Hawaii, no Mortgage Loan is secured by a
Mortgage on a leasehold estate. With respect to Mortgage Loans in the state of
Hawaii that are secured by a leasehold estate, (i) the lease is valid, in full
force and effect, and conforms to all of FNMA's requirements for leasehold
estates; (ii) all rents and other payments due under the lease have been paid;
(iii) the lessee is not in default under any provision of the lease; (iv) the
term of the lease exceeds the maturity date of the related Mortgage Loan by at
least ten years; and (v) the mortgagee under the Mortgage Loan is given notice
and an opportunity to cure any defaults under the lease;
(nn) No Defense to Insurance Coverage. No action has been taken or
---------------------------------
failed to be taken, no event has occurred and no state of facts exists or has
existed (whether or not known to the Seller on or prior to such date) which has
resulted or will result in an exclusion from, denial of, or defense to coverage
under any applicable pool policy, special hazard insurance policy, or bankruptcy
bond (including, without limitation, any exclusions, denials or defenses which
would limit or reduce the availability of the timely payment of the full amount
of the loss otherwise due thereunder to the insured), whether arising out of
actions, representations, errors, omissions, negligence, or fraud of the Seller,
the related Mortgagor or any party involved in the application for such
insurance or coverage, including the appraisal, plans and specifications and
other exhibits or documents submitted therewith to the insurer or under any such
insurance policy, or for any other reason under such coverage, but not including
the failure of the insurer to pay by reason of the insurer's breach of the
insurance policy or the insurer's financial inability to pay. In connection
with the placement of any insurance or coverage, no commission, fee or other
compensation has been or will be received by the Seller or by any officer,
director, or employee of the Seller or any designee of the Seller or any
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<PAGE>
corporation in which the Seller or any officer, director or employee had a
financial interest at the time of placement of such insurance;
(oo) Value of Mortgage Property. The Seller has no knowledge of any
---------------------------
circumstances existing that could reasonably be expected to adversely affect the
value or the marketability of any Mortgaged Property or Mortgage Loan or to
cause the Mortgage Loans to prepay during any period materially faster or slower
than the Mortgage Loans originated by the Seller generally;
(pp) Section 32 Mortgages: Overages. The Seller has provided the
-------------------------------
related Mortgagor with all disclosure materials required by Section 226.32 of
the Federal Reserve Board Regulation Z with respect to any Mortgage Loans
subject to such Section of the Federal Reserve Board Regulation Z. The Seller
has not made or caused to be made any payment in the nature of an "overage" or
"yield spread premium" to a mortgage broker or like Person which has not been
fully disclosed to the Mortgagor; and
(qq) Servicer. The Mortgage Loan is one of the loans that are the
---------
subject of the Servicing Agreement, has been serviced since origination in
accordance therewith and is subject to no other servicing agreement or
arrangement.
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<PAGE>
EXHIBIT 10.12
CUSTODY AGREEMENT
This CUSTODY AGREEMENT dated as of October 2, 1996, by and among CS FIRST
BOSTON MORTGAGE CAPITAL CORP., a Delaware corporation, having an address at Park
Avenue Plaza, 55 East 52nd Street, New York, New York 10055 ("Buyer"), BANKERS
TRUST COMPANY OF CALIFORNIA, N.A., a national association, having an address at
3 Park Plaza, 16th Floor, Irvine, California 92614 ("Custodian"), T.A.R.
PREFERRED MORTGAGE CORPORATION, having an address at 19782 MacArthur Boulevard,
Suite 250, Irvine, California 92715 ("Seller") and ADVANTA MORTGAGE CORP. USA,
having an address at 16875 West Bernardo Drive, San Diego, California 92127
("Servicer").
WITNESSETH:
WHEREAS, the Seller and the Buyer may from time to time enter into
transactions (each, a "Transaction") in which the Buyer agrees to purchase from
the Seller certain mortgage loans (the "Mortgage Loans"), with a simultaneous
agreement by the Seller to repurchase such Mortgage Loans on a specified date as
provided in a Master Repurchase Agreement, dated as of October 2, 1996, between
the Seller and the Buyer (the "Master Repurchase Agreement"), a Confirmation
between the Seller and the Buyer (the "Confirmation" and a Transaction Notice
between the Seller and the Buyer (the "Transaction Notice"); as to each
Transaction, the related Confirmation, the Transaction Notice and the Master
Repurchase Agreement are referred to collectively as the "Repurchase
Agreement");
WHEREAS, pursuant to the terms of this Agreement and a Servicing Agreement,
dated as of March 8, 1996, between the Seller and the Servicer (the "Servicing
Agreement"), the Servicer will service the Mortgage Loans for the Buyer; and
WHEREAS, the Seller has agreed to deliver certain documents with respect to
the Mortgage Loans subject to each Transaction to the Custodian, and the
Custodian has agreed to take possession of such documents in accordance with the
terms and conditions thereof;
NOW, THEREFORE, in consideration of the mutual undertakings herein
expressed, the parties hereto agree as follows:
1. At least three Business Days (as defined herein) before the effective
date for each Transaction (the "Purchase Date"), the Seller shall deliver, or
cause to be delivered, to the Custodian and the Buyer a schedule of Mortgage
Loans subject to such Transaction containing the information set forth on
Exhibit 1 hereto, in both hard copy and on floppy disk or other electronic
medium acceptable to the Custodian and the Buyer ("Mortgage Loan Schedule"), and
the Seller shall deliver, or shall cause to be delivered, and shall release to
the Custodian the following documents pertaining to each of the Mortgage Loans
identified in the Mortgage Loan Schedule, which documents the Custodian shall
hold for the benefit of the Buyer, its successors or assigns, as the owner
thereof:
<PAGE>
(i) the original mortgage note or other evidence of indebtedness
(the "Mortgage Note") of the obligor thereon (each such obligor, a "Mortgagor"),
endorsed to the order of or assigned to the Seller by the holder/payee thereof,
without recourse, and endorsed by Seller, without recourse, in blank, together
with all intervening endorsements showing a complete chain of endorsements from
the originator of the Mortgage Loan to the Seller;
(ii) the original recorded mortgage, deed of trust or other
instrument (the "Mortgage") creating a lien on the underlying property securing
the Mortgage Loan (the "Mortgaged Property"), naming Seller as the "mortgagee"
or "beneficiary" thereof, and bearing on the face thereof the address of Seller,
or, if the Mortgage does not name Seller as the mortgagee/beneficiary, the
Mortgage, together with an instrument of assignment assigning the Mortgage,
individually or together with other Mortgages, to Seller and bearing on the face
thereof the address of Seller, and, in either case, bearing evidence that such
instruments have been recorded in the appropriate jurisdiction where the
Mortgaged Property is located as determined by Seller (or, in lieu of the
original of the Mortgage or the assignment thereof, a duplicate or conformed
copy of the Mortgage or the instrument of assignment, if any, together with a
certificate of receipt from the Seller or the settlement agent who handled the
closing of the Mortgage Loan, certifying that such copy or copies represent true
and correct copy(ies) of the original(s) and that such original(s) have been or
are currently submitted to be recorded in the appropriate governmental recording
office of the jurisdiction where the Mortgaged Property is located) or a
certification or receipt of the recording authority evidencing the same;
(iii) an original assignment of Mortgage, with the assignee's name
left blank, which assignment appears to be in form and substance acceptable for
recording and, in the event that the Seller acquired the Mortgage Loan in a
merger, the assignment must be by "[Seller], successor by merger to [name of
predecessor] ";
(iv) the original of any intervening assignment of the Mortgage
not included in (ii) above, including any warehousing assignment, with evidence
of recording thereon;
(v) the originals of any assumption, modification, extension or
guaranty agreement with evidence of recording thereon, if applicable;
(vi) Limited liability lender's title insurance policy, or, if
such policy has not been issued or local state law does not require it, a
written commitment or interim binder issued by the title insurance company
evidencing that the required title insurance coverage is in effect and
unconditionally guaranteeing the holder of the Mortgage Loan that such limited
liability lender's title insurance policy will be issued, or an attorney's title
opinion in jurisdictions where such evidence of title is customary as determined
by the Seller;
(vii) if the Mortgage Note or Mortgage or any other material
document or instrument relating to the Mortgage Loan has been signed by a person
on behalf of the Mortgagor, the original power of attorney or other instrument
that authorized and empowered
2
<PAGE>
such person to sign bearing evidence that such instrument has been recorded, if
so required, in the appropriate jurisdiction where the Mortgaged Property is
located as determined by Seller (or, in lieu thereof, a duplicate or conformed
copy of such instrument, together with a certificate of receipt from the
recording office, certifying that such copy represents a true and complete copy
of the original and that such original has been or is currently submitted to be
recorded in the appropriate governmental recording office of the jurisdiction
where the Mortgaged Property is located);
(viii) the original of any security agreement, chattel mortgage or
equivalent document executed in connection with the Mortgage, if any; and
(ix) other such documents as the Buyer may reasonably require
(based on Seller's approved underwriting guidelines) after notice to the Seller
and the Custodian which the Custodian shall have consented to review.
As used herein, "Business Day" shall mean any day excluding Saturday, Sunday and
any day on which banks located in the states of New York or California are
authorized or permitted to close for business. From time to time, the Servicer
shall forward to the Custodian additional original documents evidencing an
assumption or modification of a Mortgage Loan approved by the Servicer. All
documents held by the Custodian as to each Mortgage Loan pursuant to this
Paragraph 1 are referred to herein as the "Custodian's Mortgage File". On the
Business Day immediately preceding the respective Purchase Date for each
Transaction, the Seller shall deliver to the Buyer and the Custodian an original
Notice of Sale and Trust Receipt, in the form attached hereto as Exhibit 2
(each, a "Trust Receipt"), executed by the Seller, with respect to all of the
Mortgage Loans to be sold to the Buyer in connection with such Transaction.
2. The Buyer hereby appoints the Custodian, in its independent corporate
capacity, as the custodian of the Buyer and any successor to or assignee of the
Buyer, and the Custodian hereby accepts and agrees to act as custodian for the
Buyer and any successor to or assignee of the Buyer in accordance with the terms
and conditions of this Agreement. With respect to each Custodian's Mortgage
File delivered to the Custodian, the Custodian is solely and exclusively the
custodian for the Buyer or its successor or assignee for all purposes
(including, but not limited to, the perfection of the security interest of the
Buyer in such Mortgage Loans granted by Seller pursuant to Paragraph 6 of the
Repurchase Agreement). The Custodian shall hold in its possession all
Custodian's Mortgage Files received by it from the Seller from time to time for
the sole and exclusive use and benefit of the Buyer and the Buyer's successors
and assignees as provided herein and, except as otherwise provided herein, shall
make disposition thereof only in accordance with the written instructions of the
Buyer. The Custodian shall segregate and maintain continuous custody of all
documents constituting the Custodian's Mortgage Files received by it in secure
and fire-resistant facilities, all in accordance with this Agreement and
customary standards for such custody.
3. When the Custodian has received from the Seller possession of each
Custodian's
3
<PAGE>
Mortgage File for the related Transaction, the Custodian shall verify that,
except as noted on the Schedule of Exceptions, if any, attached to the related
Trust Receipt:
(a) all documents described in subparagraphs (i)-(iii), (vi) and (ix)
of Section 1 of this Agreement are in the Custodian's possession;
(b) such documents have been reviewed by the Custodian and appear
regular on their face and relate to the Mortgage Loans;
(c) based only on the Custodian's examination of the foregoing
documents:
(i) the information set forth on the Mortgage Loan Schedule
with respect to each Mortgage Loan, to the extent of
items 1, 2, 3, 8, 9, 11 and 13 on Exhibit 1 accurately
reflects the information contained in the documents
contained in each Custodian's Mortgage File;
(ii) the Mortgage Note and the Mortgage each bear an
original signature or signatures purporting to be the
signature or signatures of the person or persons named
as the maker and mortgagor or grantor or, in the case
of certified copies of the Mortgage permitted under
paragraph l(ii), that such copies bear a reproduction
of such signature or signatures;
(iii) the principal amount of the indebtedness secured by the
Mortgage is identical to the original principal amount
of the Mortgage Note;
(iv) if the Mortgage Note does not name "[Seller]" as the
holder or payee, the Mortgage Note bears original
endorsements that complete the chain of ownership from
the original holder or payee to "[Seller]"; and
(v) if the Mortgage does not name "[Seller]" as the
mortgagee or beneficiary, the original of the
Assignment of Mortgage and any intervening assignments
of mortgage bear the original signature purporting to
be the signature of the named mortgagee or beneficiary
(and any other necessary party including subsequent
assignors) or in the case of copies permitted under
paragraph 1 (ii), that such copies bear a reproduction
of such signature or signatures and that the Assignment
of Mortgage and any intervening assignments of mortgage
complete the chain of title from the originator to
"[Seller]";
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(d) each Mortgage Note has been endorsed as noted in paragraph 1(i)
herein and each Assignment of Mortgage has been completed as
noted in paragraph l(iii) herein; and
(e) the limited liability Lender's title insurance policy, or written
commitment to issue or interim binder for such policy, is for not
less than the original principal amount of the Mortgage Note.
In making such verification, the Custodian may rely conclusively on the Mortgage
Loan Schedule and the documents constituting the Custodian's Mortgage File, and
the Custodian shall have no obligation to independently verify the correctness
of such Mortgage Loan Schedule or any document. Upon completing such
verification, the Custodian shall advise the Buyer of its receipt of all such
Custodian's Mortgage Files and shall promptly forward to the Buyer the related
original trust receipt, in the form attached hereto as Exhibit 2 (each, a "Trust
Receipt") executed by the Custodian. If the Custodian has not received the
Custodian's Mortgage Files and Mortgage Loan Schedule in a sufficiently timely
manner to permit it to forward to the Buyer an original trust receipt for
delivery on the Purchase Date, it shall be the obligation of the Seller to
effect such delivery on the Purchase Date. If the Custodian determines from
such verification that any discrepancy or deficiency exists with respect to a
Custodian's Mortgage File, the Custodian shall note such discrepancy on the
Schedule of Exceptions attached to the Trust Receipt and the Custodian shall
deliver a copy of the Schedule of Exceptions to the Seller and the Buyer.
During the life of the Mortgage Loans, in the event the Custodian discovers any
defect with respect to the Custodian's Mortgage File, the Custodian shall give
written specification of such defect to the Seller and the Buyer. Except as
specifically provided above, the Custodian shall be under no duty to review,
inspect or examine such documents to determine that any of them are enforceable
or appropriate for their prescribed purpose.
The Seller shall be solely responsible for providing each and every
document required for each Custodian's Mortgage File to the Custodian in a
timely manner and for completing or correcting any missing, incomplete or
inconsistent documents, and the Custodian shall not be responsible or liable for
taking any such action, causing the Seller or any other person or entity to do
so or notifying the Buyer that any such action has or has not been taken.
The Custodian shall examine the documents received by the Custodian
hereunder and shall make the verification specifically provided above. However,
the Custodian shall not be responsible for, and shall not certify as to, the
value, form, substance, validity, perfection, priority, recordability,
genuineness, effectiveness or enforceability of any such documents or be
responsible for determining whether any of such documents comply with the
definition thereof set forth herein or in the Repurchase Agreement.
4. Each Trust Receipt, upon initial issuance by the Custodian to the
Buyer or reissuance upon transfer, shall be dated the date of issuance thereof
and shall evidence the receipt and possession of the Custodian's Mortgage File
by the Custodian on behalf of the holder
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of the Trust Receipt and the holder's right to possess the Custodian's Mortgage
File with respect to which that Trust Receipt is issued. Prior to due surrender
of a Trust Receipt pursuant to Paragraph 5, the Custodian shall treat the
individual person or entity in whose name any Trust Receipt is issued as the
individual person or entity entitled to possession of the Custodian's Mortgage
File evidenced by such Trust Receipt for all purposes whatsoever, subject to the
terms of this Agreement, and the Custodian shall not be affected by notice of
any facts to the contrary. No Trust Receipt shall be valid for any purpose
unless substantially in the form set forth in Exhibit 2 to this Agreement and
executed by manual signature of an authorized officer of the Custodian, and such
signature upon any Trust Receipt shall be conclusive evidence, and the only
evidence, that such Trust Receipt has been duly delivered under this Agreement.
Trust Receipts bearing the manual signatures of individuals who were, at the
time when such signatures were affixed, authorized to sign on behalf of the
Custodian shall bind the Custodian, notwithstanding that such individuals or any
of them have ceased to be so authorized prior to the delivery of those Trust
Receipts. Each Trust Receipt shall have attached thereto a schedule, in the
format of the Mortgage Loan Schedule, identifying the Mortgage Loans for which
the Trust Receipt is issued. The Custodian shall keep a register in which the
Custodian shall provide for the registration of transfers of Trust Receipts as
herein provided and in which it shall record the name and address of the person
to whom each Trust Receipt is issued. In the event that the Trust Receipt is
lost, stolen, mutilated or destroyed, the Custodian shall issue a new Trust
Receipt to the registered holder of such lost, stolen, mutilated or destroyed
Trust Receipt upon receiving a reasonably satisfactory (as determined by the
Custodian) commitment from such holder to indemnify the Custodian and hold the
Custodian harmless in respect of the issuance of such new Trust Receipt.
5. (a) The Custodian acknowledges that the Buyer may, but need not,
transfer its interest in all or any portion of the Mortgage Loans to one or more
subsequent purchasers. In the event the Buyer sells all or a portion of the
Mortgage Loans to one or more subsequent Buyers, the Buyer shall, at least one
(1) Business Day prior to the desired receipt date of one or more new Trust
Receipts in connection with such sale, deliver to the Custodian written notice
that such Buyer will transfer to a subsequent purchaser on the effective date
specified therein its interest in the Mortgage Loans identified on a schedule to
such notice (the "Notice Schedule") and on the date of such receipt surrender to
the Custodian the applicable Trust Receipt. The notice sent by the Buyer to the
Custodian shall specify (i) the name of the subsequent purchaser, (ii) the
address of the subsequent purchaser (which may be an address in care of the
Buyer), (iii) the date of sale, (iv) the original Trust Receipt or Trust
Receipts for such Mortgage Loans and (v) the Notice Schedule. Within one (1)
Business Day after receipt of a notice from the Buyer as descried herein, the
Custodian shall (i) upon the written direction of the Buyer, either deliver the
applicable Custodian's Mortgage Files to the subsequent purchaser or issue a
Trust Receipt in the name of such purchaser and (ii) make appropriate notations
in the Custodian's books and records reflecting that the Custodian's Mortgage
Files identified in the Notice Schedule are owned by such subsequent purchaser.
The Custodian shall then deliver to the Buyer a new Trust Receipt reflecting all
Mortgage Loans with respect to which the Custodian still holds the related
Custodian's Mortgage Files on behalf of the Buyer. Every Trust Receipt
presented or
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surrendered for transfer shall be duly endorsed by the holder thereof, or be
accompanied by a written instrument of transfer, duly executed by the holder
thereof and such holder's prospective transferee. No service charge against the
presenter of a Trust Receipt shall be made for any registration or transfer of
any Trust Receipt, but the Custodian may require payment of a sum sufficient to
cover any tax or governmental charge that may be imposed in connection with any
transfer of any Trust Receipt, which shall be paid by the transferee. Each
Trust Receipt surrendered for registration of transfer shall be canceled by the
Custodian. Any purchaser of a Mortgage Loan shall succeed to all the rights and
obligations of the Buyer under this Agreement with respect to such Mortgage Loan
and the related Custodian's Mortgage File including in respect of payment of the
fees and expenses of the Custodian.
(b) Written instructions as to the method of shipment and shipper(s) that
the Custodian is directed to utilize in connection with (i) the transmission of
Custodian's Mortgage Files to Buyer in accordance with this Agreement or (ii)
the release of documents to Buyer in any Custodian's Mortgage Files pursuant to
Paragraph 6 hereof shall be included by the Buyer in the applicable instructions
or consent to release as applicable. The Seller will arrange for the provision
of such shipment services to Buyer at its sole cost and expense (or, at the
Custodian's option, reimburse the Custodian for all costs and expenses incurred
by the Custodian consistent with such instructions) and will maintain such
insurance against loss or damage to the Custodian's Mortgage Files as the Seller
deems appropriate. Without limiting the generality of the provisions of
Sections 16 and 17 hereof, it is expressly agreed that in no event shall the
Custodian have any liability for any losses or damages to any person, including
without limitation, the Seller, the Servicer or the Buyer, arising out of
actions of the Custodian consistent with the instructions of Buyer.
6. The Seller hereby assigns to the Buyer all of its right, title and
interest in, to and under the Servicing Agreement to the extent of the Mortgage
Loans. Notwithstanding such assignment, the Seller shall not be relieved hereby
of its obligations under the Servicing Agreement to the extent of the Mortgage
Loans, and the Seller alone (and not the Buyer) shall be obligated to the
Servicer under and to the extent provided in the Servicing Agreement. From and
after the date hereof, upon written notice to the Servicer from the Buyer
directing the Servicer to do so with respect to specified Mortgage Loans (upon
which notice the Seller authorizes the Servicer to conclusively rely), the
Servicer shall recognize the Buyer as the owner of the Mortgage Loans and will
service the Mortgage Loans for the Buyer. It is the intention of the Seller,
the Servicer and the Buyer that this Agreement will be a separate and distinct
servicing agreement having the provisions stated in this Section 6 and the
Servicing Agreement, provided, however, that the provisions of this Section 6
shall not be construed to limit the Servicer's right to payment (including, but
not limited to, payment of Servicing Fees, Additional Servicing Compensation and
termination fees under the Servicing Agreement) or to reimbursement from the
"Collection Account" as provided in the Servicing Agreement. Such agreement
shall be the entire agreement between the Servicer and the Buyer to the extent
of the Mortgage Loans and shall be binding upon and for the benefit of the
respective successors and assigns of the parties hereto. From and after the
date hereof and until the Seller repurchases the
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<PAGE>
Mortgage Loans from the Buyer pursuant to the Repurchase Agreement, the Buyer
hereby authorizes and directs the Servicer to remit all income from, and all
proceeds of, the Mortgage Loans to the Seller and to otherwise deal with the
Seller in all respects pursuant to the Servicing Agreement as if the Seller were
the sole party in interest thereunder (as incorporated hereunder and made a part
hereof), in each case until otherwise notified in writing by the Buyer. The
Buyer shall so notify the Servicer only (a) with respect to Mortgage Loans that
are then subject to the Repurchase Agreement (it being that the Servicer is
hereby directed and authorized by Seller to accept the Buyer's statement thereof
as determinative and to conclusively rely thereon) and (b) in the event that the
Buyer determines that the Seller is in default under the Repurchase Agreement or
the related agreements, and such notification shall also constitute Buyer's
agreement to assume all obligations of "Owner" under the Servicing Agreement
from and after such date but not including any representations or warranties or
other obligations of T.A.R. Preferred Mortgage Corporation ("Preferred") as
such "Owner" which are then outstanding or accrued (for any breach of which
Preferred shall remain liable to the Servicer). As between the Buyer and the
Seller, the receipt of such income and proceeds by the Seller shall not create
nor imply any interest or right whatsoever of the Seller in or to the Mortgage
Loans or such income or proceeds. Notwithstanding the foregoing, the Seller
shall have no right to terminate or consent to the termination or resignation of
the Servicer as servicer of the Mortgage Loans or amend the Servicing Agreement
(as incorporated hereunder and made a part hereof) without the prior written
consent of the Buyer (which consent shall not be unreasonably withheld).
In the event that any specific Mortgage Loan document is required by the
Servicer pursuant to the Servicing Agreement, either (a) because such Mortgage
Loan has been paid in full and is to be released by the Servicer to the maker of
the respective Mortgage Note, or (b) to facilitate enforcement and collection
procedures with respect to any Mortgage Note, the Servicer shall send to the
Custodian and the Buyer a certificate in the form of Exhibit 3. Any Trust
Receipt issued while any documents are outstanding with the Servicer shall
reflect that the Custodian holds such documents as custodian for the Buyer
pursuant to this Agreement, but the Schedule of Exceptions shall specify that
the Custodian has released such documents to the Servicer, pursuant to this
paragraph. All documents so released to the Servicer shall be held by it in
trust for the benefit of the Buyer in accordance with the Servicing Agreement.
In the case of documents released pursuant to clause (b) above, the Servicer
shall return to the Custodian the Custodian's Mortgage File, or such other
documents that have been released to the Servicer, when the Servicer's need
therefor in connection with such enforcement or collection procedures no longer
exists, unless the Mortgage Loan shall be liquidated, in which case, upon
receipt of a certification to this effect from the Servicer to the Custodian in
the form annexed hereto as Exhibit 3, the Servicer's receipt shall be released
by the Custodian to the Servicer, and the Custodian shall thereupon reflect any
such liquidation on the list of Mortgage Loans maintained by it pursuant to
Section 12 of this Agreement.
7. It is understood that Custodian will charge such fees for its services
under this Agreement as are set forth in a separate agreement between the
Custodian and the Seller, the payment of which, together with the Custodian's
expenses in connection herewith, shall be solely
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<PAGE>
the obligation of the Seller (except as otherwise provided for herein.)
8. The Buyer, with or without cause, may (i) require the Custodian to
complete the endorsements on the Mortgage Notes, and to complete the Assignments
of Mortgages and/or (ii) upon sixty (60) days written notice, remove and
discharge the Custodian, or any successor Custodian thereafter appointed, from
the performance of its duties under this Agreement by written notice from the
Buyer to the Custodian or the successor Custodian, with a copy of such notice to
the Seller and the Servicer. Having given notice of such removal, the Buyer
shall promptly appoint by written instrument a successor Custodian reasonably
acceptable to Seller to act on behalf of the Buyer. One original counterpart of
such instrument shall be delivered to the Servicer, and one copy shall be
delivered to the Seller and one copy shall be delivered to the successor
Custodian. In the event of any such removal, the Custodian shall promptly
transfer to the successor Custodian, as directed by the Buyer, all of the
Custodian's Mortgage Files being administered under this Agreement and shall
complete the Assignments of Mortgage and endorse the Mortgage Notes to the
successor Custodian, if, and in the form, directed by the Buyer. In the event
of any such appointment without cause, the Seller shall not be responsible for
any costs of transfer or fees of the successor Custodian in excess of the fees
formerly paid to the Custodian. Notwithstanding the foregoing, if the Buyer
fails to appoint a successor Custodian within sixty (60) days after written
notice is given as provided above, the Custodian shall deliver all of the
Custodian's Mortgage Files to the Buyer at the expense of the Buyer upon the
expiration of such thirty-day period.
9. The Custodian may terminate its obligations under this Agreement upon
at least sixty (60) days written notice to the Seller, the Servicer and the
Buyer. In the event of such termination, the Seller shall appoint a successor
Custodian, subject to approval by the Buyer. If the Seller is unable to appoint
a successor Custodian within a reasonable period of time, the Buyer shall
appoint a successor Custodian. The payment of such successor Custodian's fees
and expenses shall be the sole responsibility of the Seller. Upon such
appointment, the Custodian shall promptly transfer to the successor Custodian,
as directed, all Custodian's Mortgage Files being administered under this
Agreement and shall complete the Assignments of Mortgage and endorse the
Mortgage Notes as, and if, requested by the Buyer. Notwithstanding the
foregoing, if the Seller and the Buyer are unable to appoint a successor
Custodian within 60 days after written notice of termination is given as
provided above, the Custodian shall deliver all of the Custodian's Mortgage
Files to the Buyer at the expense of the Seller upon the expiration of such 60
day period. The Custodian's obligations hereunder shall not in any event be
terminated until the Custodian's Mortgage Files have been delivered to the
successor Custodian or to the Buyer. In the event of termination by the
Custodian, the Custodian shall pay the cost of transporting the Mortgage Files
to the successor custodian or the Buyer, as applicable.
10. Upon reasonable prior written notice to the Custodian, the Buyer and
the Servicer, and their agents, accountants, attorneys and auditors will be
permitted during normal business hours to examine the Custodian's Mortgage
Files.
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11. The Custodian shall, at its own expense, maintain at all times during
the existence of this Agreement and keep in full force and effect fidelity
insurance and document hazard insurance. All such insurance shall be in
amounts, with standard coverage and subject to deductibles, as are customary for
insurance typically maintained by institutions that act as custodian in similar
transactions.
12. Monthly, on or before the tenth (10th) day of the month, as to
Mortgage Loans in the Custodian's possession at the end of the immediately
preceding month, and within one (1) Business Day of the reasonable request of
the Buyer or Seller at any other time, the Custodian shall provide to the Buyer
and the Servicer, a list of all the Mortgage Loans for which Custodian holds a
Custodian's Mortgage File pursuant to this Agreement and a list of documents
missing from each Custodian's Mortgage File. Such list may be in the form of a
copy of the Mortgage Loan Schedules with manual deletions to specifically denote
any Mortgage Loans paid off, liquidated or repurchased since the date of this
Agreement. In addition, twice monthly on such dates as Custodian and Buyer may
agree, the Custodian shall provide to the Buyer an aging report in a form to be
mutually agreed upon by Buyer and Custodian.
13. Upon the reasonable request, and at the expense, of the Buyer at any
time, the Custodian shall provide the Buyer with copies of the Mortgage Notes,
Mortgages, Assignments of Mortgage and other documents contained in the
Custodian's Mortgage File relating to one or more of the Mortgage Loans.
14. By execution of this Agreement, the Custodian warrants that it does
not currently hold, and during the existence of this Agreement shall not hold,
any adverse interest, by way of security or otherwise, in any Mortgage Loan, and
hereby waives and releases any such interest that it may have in any Mortgage
Loan as of the date hereof. Notwithstanding any other provisions of this
Agreement and without limiting the generality of the foregoing, the Custodian
shall not at any time exercise or seek to enforce any claim, right or remedy,
including any statutory or common law rights of set-off, if any, that the
Custodian may otherwise have against all or any part of a Custodian's Mortgage
File, Mortgage Loan or proceeds of either.
15. Each authorized representative (an "Authorized Representative") of the
Buyer is authorized to give and receive notices, requests and instructions and
to deliver certificates and documents in connection with this Agreement on
behalf of the Buyer and the specimen signature for each such Authorized
Representative of the Buyer initially authorized hereunder is set forth on
Exhibit 4 hereof. From time to time, the Buyer shall deliver to the Custodian a
revised Exhibit 4, reflecting changes in the information previously given, but
the Custodian shall be entitled to rely conclusively on the last Exhibit 4 until
receipt of a superseding Exhibit 4. Each Authorized Representative of the
Seller is authorized to give and receive notices, requests and instructions and
to deliver certificates and documents in connection with this Agreement on
behalf of the Seller and the specimen signature for each such Authorized
Representative of the Seller initially authorized hereunder is set forth on
Exhibit 5 hereof. From time to time, the Seller shall deliver to the Custodian
a revised Exhibit 5, reflecting changes in the information
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previously given, but the Custodian shall be entitled to rely conclusively on
the last Exhibit 5 until receipt of a superseding Exhibit 5. Each Authorized
Representative of the Servicer is authorized to give and receive notices,
requests and instructions and to deliver certificates and documents in
connection with this Agreement on behalf of the Servicer and the specimen
signature for each such Authorized Representative of the Servicer and its agent
initially authorized hereunder is set forth on Exhibit 6 hereof. From time to
time, the Servicer shall deliver to the Custodian a revised Exhibit 6,
reflecting changes in the information previously given, but the Custodian shall
be entitled to rely conclusively on the last Exhibit 6 until receipt of a
superseding Exhibit 6.
16. The Seller hereby agrees to reimburse, indemnify and hold harmless the
Custodian, its directors, officers, employees or agents from and against any and
all liability, loss cost and expense, including reasonable fees and expenses of
counsel, arising from or in connection with or relating to the Custodian's
execution and performance of this Agreement, unless such liability, loss, cost
or expense was imposed on, incurred by or asserted against the Custodian because
of the breach by the Custodian of its obligations hereunder, which breach was
caused by lack of good faith, negligence or willful misconduct on the part of
the Custodian or any of its directors, officers, employees or agents; provided
that, in the event that any liability is imposed by a final judgment by a court
of competent jurisdiction on the Custodian due to the negligence of the
Custodian or any of its directors, officers, employees or agents, which court
has determined that other third parties shared the liability of the Custodian
due to their contributory negligence, then the Seller shall reimburse the
Custodian for the amount, if any, paid by the Custodian in excess of the
percentage of such liability attributable to the negligence of the Custodian or
any of its directors, officers, employees or agents to the extent such amount
has not been recovered and is not recoverable by the Custodian from any third
party. The foregoing indemnification shall survive any termination of this
Agreement and the Custodian hereunder.
17. The duties and obligations of the Custodian shall be determined solely
by the express provisions of this Agreement. The Custodian shall not be liable
except for the performance of such duties and obligations as are specifically
set forth in this Agreement or as set forth in a written amendment to this
Agreement executed by the parties hereto or their successors or assigns. The
Custodian shall not assign, transfer, pledge or grant a security interest in any
of its rights, benefits or privileges hereunder, nor shall the Custodian
delegate or appoint any other person or entity to perform or carry out any of
its duties, responsibilities or obligations under this Agreement (except as
provided in Paragraph 17(g) hereof) without the prior written consent of the
Seller and the Buyer, which consent shall not be unreasonably withheld. No
representations, warranties, covenants (other than those expressly made by the
Custodian in this Agreement) or obligations of the Custodian shall be implied
with respect to this Agreement or the Custodian's services hereunder. Without
limiting the generality of the foregoing, the Custodian:
(a) shall have no duties or obligations other than those specifically set
forth herein
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or as may subsequently be agreed in writing by the parties hereto, shall be
under no responsibility or duty with respect to the disposition of any Mortgage
Loan documents while such Mortgage Loan documents are not in its possession and
shall use the same degree of care and skill as is reasonably expected of
financial institutions acting in comparable capacities;
(b) may conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon any request, instructions,
certificate, opinion or other document or, to the extent permitted hereby,
communication by fax furnished to the Custodian, reasonably believed by the
Custodian to be genuine and to have been signed or presented or, to the extent
permitted hereby, communicated by fax by the proper party or parties and
conforming to the requirements of this Agreement. The Custodian may rely upon
the validity of documents and, to the extent permitted hereby, communications by
fax executed by an Authorized Representative of the Seller, the Servicer or the
Buyer, delivered to it without investigation as to their authenticity or legal
effectiveness, and the Seller, will hold the Custodian harmless from any claims
which may arise or be asserted against the Custodian because of the invalidity
of any such documents or communications by fax. The Custodian shall not be
responsible to the Buyer or any other party for recitals, statements or
warranties or representations of the Seller or the Servicer contained herein, or
in any document or be bound to ascertain or inquire as to the performance or
observance of any of the terms of this Agreement or any other agreement on the
part of any party, except as may otherwise be specifically set forth herein;
(c) may request instructions from the Buyer with respect to any act,
action or failure to act in connection with this Agreement, and shall be
entitled to refrain from taking such action and continue to refrain from acting
unless and until the Custodian shall have received written instructions from the
Buyer without incurring any liability thereof or to the Buyer, the Seller or any
other person;
(d) if the Custodian shall have at any time received conflicting
instructions from the Buyer and the Seller with respect to any of the
Custodian's Mortgage Files and the conflict between such instructions cannot be
resolved by reference to the terms of this Agreement, the Custodian shall be
entitled to rely on the instructions of the Buyer;
(e) may consult counsel satisfactory to it (including counsel for the
Seller and the Buyer) and the opinion of such counsel shall be full and complete
authorization and protection in respect of any action taken, suffered, or
omitted by it hereunder in good faith and in furtherance of its duties
hereunder, in accordance with the opinion of such counsel;
(f) shall not be liable for any error of judgment, or for any act done or
step taken or omitted by it, in good faith, or for any mistake of fact or law,
or for anything that it may do or refrain from doing in connection therewith,
except in the case of its grossly negligent performance or omission or wilful
misconduct; and
(g) may execute any of the trusts or powers hereunder or perform any
duties
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hereunder either directly or through agents or attorneys, provided, however,
that the execution of such trusts or powers by any such agents or attorneys
shall not diminish, or relieve the Custodian for, responsibility therefor to the
same degree as if the Custodian itself had executed such trusts or powers.
18. For the purpose of facilitating the execution of this Agreement and
for other purposes, this Agreement may be executed simultaneously in any number
of counterparts, each of which shall be deemed to be an original, and together
shall constitute and be one and the same instrument.
19. The Buyer shall have the right, without the consent of the Custodian,
the Seller or the Servicer, to assign, in whole or in part, its interests under
this Agreement in all of the Mortgage Loans subject to any Transaction, and
designate any person to exercise any rights of the Buyer, hereunder, and the
assignee or designee shall accede to the rights and obligations hereunder of the
Buyer with respect to such Mortgage Loans. All references to the Buyer shall be
deemed to include its assignee or designee. In connection with any such
assignment, the Custodian may require that arrangements reasonably satisfactory
to it be made for the exchange of previously executed and outstanding Trust
Receipts for a Trust Receipt representing such assignment.
20. This Agreement shall terminate with respect to any Transaction upon
the earlier of (a) the repurchase of all of the Mortgage Loans subject to such
Transaction by the Seller pursuant to the Repurchase Agreement, which repurchase
shall be evidenced by a notice from the Buyer to the Custodian and the Servicer
stating that beneficial ownership of the Mortgage Loans has been transferred to
the Seller, and following such notice from the Buyer, the Custodian and the
Servicer are authorized to follow the Seller's instructions with respect
thereto, or (b) the Buyer's election to obtain possession of the Mortgage Loans
subject to a Transaction following an Event of Default (as defined in the
Repurchase Agreement) by the Seller, which election shall be evidenced by a
notice from the Buyer to the Custodian stating that the Seller is in default
under the Repurchase Agreement, a copy of which notice shall be simultaneously
delivered to the Seller and the Servicer, and delivery of the Custodian's
Mortgage Files pursuant to the Buyer's instructions.
21. Neither the failure nor any delay on the part of any party hereto to
exercise any right, remedy, power or privilege under this Agreement shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, remedy, power or privilege preclude any other or further exercise of the
same or any other right, remedy, power or privilege, nor shall any waiver of any
right, remedy, power or privilege with respect to any occurrence be construed as
a waiver of such right, remedy, power or privilege with respect to any other
occurrence. No waiver shall be effective unless it is in writing and is signed
by the party or parties purportedly granting such waiver.
22. The provisions of this Agreement are independent of and severable from
each
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other, and no provision shall be affected or rendered invalid or unenforceable
by virtue of the fact that for any reason any other provision or provisions may
be invalid or unenforceable in whole or in part.
23. This Agreement constitutes the entire agreement and understanding of
the parties with respect to the matters and transactions contemplated by this
Agreement and supersedes any prior agreement and understandings with respect to
those matters and transactions.
24. This Agreement shall be construed in accordance with the laws of the
State of California without regard to any conflict of laws provisions and the
obligations, rights and remedies of the parties hereunder shall be determined in
accordance with such laws.
25. This Agreement and all documents relating thereto, including, without
limitation, (a) consents, waivers and modifications that may hereafter be
executed, (b) documents received by any party at the closing, and (c) financial
statements, certificates and other information previously or hereafter
furnished, may be reproduced by any photographic, photostatic, microfilm, micro-
card, miniature photographic or other similar process. Any such reproduction
shall be admissible in evidence as the original itself in any judicial or
administrative proceeding, whether or not the original is in existence and
whether or not such reproduction was made by a party in the regular course of
business, and that any enlargement, facsimile or further reproduction of such
reproduction shall likewise be admissible in evidence.
26. The exhibits to this Agreement are hereby incorporated and made a part
hereof and are an integral part of this Agreement.
27. Any notice, demand or consent, required or permitted by this Agreement
shall be in writing and shall be effective and deemed delivered only when
received by the party to which it is sent. Any such notice, demand or consent
shall be (i) sent by telecopy, (ii) delivered in person or (iii) transmitted by
a recognized private (overnight) courier service, and shall be addressed as set
forth in the front page hereof (or such other address as may hereafter be
furnished to the other parties hereto, in writing, by such party wishing to
change its address).
28. For purposes of this Agreement, except as otherwise expressly provided
or unless the context otherwise requires:
(a) the terms defined in this Agreement have the meanings assigned to
them in this Agreement and include the plural as well as the singular,
and the use of any gender herein shall be deemed to include the other
gender;
(b) accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with generally accepted accounting
principles;
(c) references herein to "Articles", "Sections", "Subsections",
"Paragraphs", and
14
<PAGE>
other subdivisions without reference to a document are to designated
Articles, Sections, Subsections, Paragraphs and other subdivisions of
this Agreement;
(d) a reference to a Subsection without further reference to a Section is
a reference to such Subsection as contained in the same Section in
which the reference appears, and this rule shall also apply to
Paragraphs and other subdivisions;
(e) the words "herein", "hereof", "hereunder" and other words of similar
import refer to this Agreement as a whole and not to any particular
provision; and
(f) the term "include" or "including" shall mean without limitation by
reason of enumeration.
15
<PAGE>
IN WITNESS WHEREOF, Seller, Servicer, Buyer and the Custodian have caused
their names to be signed hereto by their respective officers thereunto duly
authorized, all as of the date first written above.
T.A.R. PREFERRED MORTGAGE CORPORATION,
as Seller
By: /s/ Todd Rodriguez
----------------------------------------
Name: Todd Rodriguez
----------------------------------------
Title: C.E.O.
----------------------------------------
ADVANTA MORTGAGE CORP. USA,
as Servicer
By:
----------------------------------------
Name:
----------------------------------------
Title:
----------------------------------------
CS FIRST BOSTON MORTGAGE CAPITAL CORP.,
as Buyer
By: /s/ Michael A. Commaroto
----------------------------------------
Name: Michael A. Commaroto
----------------------------------------
Title: Vice President
----------------------------------------
BANKERS TRUST COMPANY OF CALIFORNIA, N.A.,
as Custodian
By:
----------------------------------------
Name:
----------------------------------------
Title:
----------------------------------------
<PAGE>
IN WITNESS WHEREOF, Seller, Servicer, Buyer and the Custodian have caused
their names to be signed hereto by their respective officers thereunto duly
authorized, all as of the date first written above.
T.A.R. PREFERRED MORTGAGE CORPORATION,
as Seller
By:
----------------------------------------
Name:
----------------------------------------
Title:
----------------------------------------
ADVANTA MORTGAGE CORP. USA,
as Servicer
By: /s/ William P. Garland
----------------------------------------
Name: William P. Garland
----------------------------------------
Title: SVP
----------------------------------------
CS FIRST BOSTON MORTGAGE CAPITAL CORP.,
as Buyer
By:
----------------------------------------
Name:
----------------------------------------
Title:
----------------------------------------
BANKERS TRUST COMPANY OF CALIFORNIA, N.A.,
as Custodian
By:
----------------------------------------
Name:
----------------------------------------
Title:
----------------------------------------
<PAGE>
IN WITNESS WHEREOF, Seller, Servicer, Buyer and the Custodian have caused
their names to be signed hereto by their respective officers thereunto duly
authorized, all as of the date first written above.
T.A.R. PREFERRED MORTGAGE CORPORATION,
as Seller
By:
----------------------------------------
Name:
----------------------------------------
Title:
----------------------------------------
ADVANTA MORTGAGE CORP. USA,
as Servicer
By:
----------------------------------------
Name:
----------------------------------------
Title:
----------------------------------------
CS FIRST BOSTON MORTGAGE CAPITAL CORP.,
as Buyer
By:
----------------------------------------
Name:
----------------------------------------
Title:
----------------------------------------
BANKERS TRUST COMPANY OF CALIFORNIA, N.A.,
as Custodian
By: /s/ Michelle Lambott
-------------------------------------------
Name: Michelle Lambott
-------------------------------------------
Title: AVP
-------------------------------------------
<PAGE>
EXHIBIT 1
CONTENTS OF LOAN SCHEDULE
The Mortgage Loan Schedule shall include each of the following items with
respect to each Mortgage Loan (capitalized terms not defined in this Custody
Agreement have the meanings given to them in the Mortgage Loan Purchase
Agreement dated as of March 31, 1996 between the Buyer and the Seller and the
Custodial Agreement of even date among the Buyer, the Seller and the Custodian):
(1) the Seller's Mortgage Loan identifying number; (2) the Mortgagor's
name; (3) the street address of the Mortgaged Property including the state
and the zip code; (4) a code indicating whether the Mortgaged Property is
owner occupied; (5) the number and type of residential units constituting
the Mortgaged Property; (6) the original months to maturity or the
remaining months to maturity from the Cut-off Date, in any case based on
the original amortization schedule, and if different, the maturity
expressed in the same manner but based on the actual amortization schedule;
(7) the Loan-to-Value Ratio at origination; (8) the Mortgage Interest Rate
at the time of origination; (9) the Due Date for the first payment on the
Mortgage Loan; (10) the stated maturity date; (11) the amount of the
Monthly Payment at the time of origination; (12) the last Due Date for
which a Monthly Payment was actually applied to the outstanding principal
balance; (13) the original principal amount of the Mortgage Loan; (14) the
unpaid principal balance of the Mortgage Loan; (15) a code indicating the
purpose of the Mortgage Loan; (16) the Mortgagor's debt to income ratio;
(17) the Mortgagor's credit score; (18) the outstanding principal balance
of the First Lien; and (19) the Combined LTV at origination. With respect
to the Mortgage Loans described in such schedule in the aggregate, the
Mortgage Loan Schedule shall set forth the following information, as of the
Cut-off Date: (1) the number of Mortgage Loans; (2) the current aggregate
outstanding principal balance of the Mortgage Loans; (3) the weighted
average Mortgage Interest Rate of the Mortgage Loans; and (4) the weighted
average maturity of the Mortgage Loans.
<PAGE>
EXHIBIT 2
TRUST RECEIPT
TRANSACTION NUMBER ___________
___________________, 199____
To: CF First Boston Mortgage Capital Corp. No. of Mortgage Loans
Five World Trade Center Unpaid Principal
New York, New York 10048 Balance $____________
Attn: Mr. Christian Bolarte
Facsimile:
Reference is made to the Custody Agreement among CS First Boston Mortgage
Capital Corp. (the "Buyer"), T.A.R. Preferred Mortgage Corporation (the
"Seller"), Advanta Mortgage Corp. U.S.A., as servicer and Bankers Trust Company
of California, N.A., as custodian (the "Custodian") dated as of October 2, 1996
(the "Custody Agreement"), pursuant to which the Seller has delivered to the
Custodian, with respect to each Mortgage Loan set forth on Schedule A hereto
(the "Mortgage Loan Schedule"), the documents set forth in Section 2 of the
Custody Agreement.
With respect to each Mortgage Loan listed on the Mortgage Loan Schedule
and except as otherwise noted on the Schedule of Exceptions set forth on
Schedule B hereto, the Custodian confirms that (1) the Custodian has received
all of the documents required to be delivered to the Custodian pursuant to items
(i) through (iii), (vi) and, to the extent provided, (iv), (v) and (vii) of
Section 1 of the Custody Agreement, (2) the Custodian has reviewed each
Custodian's Mortgage File in accordance with Section 3 of the Custody Agreement,
and the documents contained in each Custodian's Mortgage File conform to the
requirements set forth in Section 3 of the Custody Agreement, and (3) the
Custodian has physical possession of the documents in each Custodian's Mortgage
File and will continue to hold each Custodian's Mortgage File as bailee of and
agent for, and for the sole and exclusive use and benefit of, the addressee of
this Trust Receipt, until such addressee directs the Custodian to the contrary
in accordance with the Custody Agreement.
The Custodian shall examine the documents received by the Custodian
hereunder and shall make the verification specifically provided above. However,
the Custodian shall not be responsible for, and shall not certify as to, the
value, form, substance, validity, perfection, priority, recordability,
genuineness, effectiveness or enforceability of any such documents or be
responsible for determining whether any of such documents comply with the
definition thereof set forth herein or in the Repurchase Agreement.
All terms used herein and not otherwise defined herein shall have the
respective meaning ascribed to such term in the Custody Agreement.
BANKERS TRUST COMPANY OF CALIFORNIA, N.A.
By: ______________________________
Name: ______________________________
Title: ______________________________
<PAGE>
SCHEDULE A
MORTGAGE LOAN SCHEDULE
<PAGE>
SCHEDULE B
SCHEDULE OF EXCEPTIONS
<PAGE>
EXHIBIT 3
REQUEST FOR RELEASE OF DOCUMENTS
To: [CUSTODIAN]
Re: Custody Agreement, dated as of ___________, 1996, among CS First
Boston Mortgage Capital Corp. ("Buyer"), ____________________________
("Seller"), _________________________ ("Servicer") and
_____________________ ("Custodian")
In connection with the administration of the Mortgage Loans held by you as
Custodian for the Buyer pursuant to the above-captioned Custody Agreement, we
request the release, and hereby acknowledge receipt, of the (Custodian's
Mortgage File/[specify documents]) for the Mortgage Loan described below, for
the reason indicated.
Mortgage Loan Number:
- ---------------------
Reason for Requesting Documents (check one)
- -------------------------------
____ 1. Mortgage Loan Paid in Full
(Servicer hereby certifies that all amounts received in
connection therewith will be held in trust for the Buyer as
provided in the Master Repurchase Agreement, dated as of
________________, 1996, between the Seller and the Buyer (the
"Repurchase Agreement").
____ 2. Mortgage Loan Liquidated by
(Servicer hereby certifies that all proceeds of foreclosure,
insurance or other liquidation have been finally received and
will be held in trust for the Buyer as provided in the Repurchase
Agreement.)
____ 3. Mortgage Loan in Foreclosure.
____ 4. Other (explain) _____________________________________________________
_____________________________________________________
If box 1 or 2 above is checked, and if all or part of the Custodian's
Mortgage File was previously released to us, please release to us our previous
receipt on file with you, as well as any additional documents in your possession
relating to the above specified Mortgage Loan.
<PAGE>
2
If box 3 or 4 above is checked, upon our return of all of the above
documents to you as Custodian, please acknowledge your receipt by signing in the
space indicated below, and returning this form.
------------------------------------------,
Servicer
By: ________________________________________
Name: ________________________________________
Title: ________________________________________
Date: ________________________________________
[Release of documents consented to:
[BUYER] Shipping Instructions:
----------------------
By: ________________________________________
Name: ________________________________________
Title: ________________________________________
Date: ________________________________________]
Documents returned
to Custodian (Item 3 or 4):
[CUSTODIAN]
By: ________________________________________
Name: ________________________________________
Title: ________________________________________
Date: ________________________________________
<PAGE>
EXHIBIT 4
AUTHORIZED REPRESENTATIVES OF THE BUYER
Name Specimen Signature
- ----------------------------- -------------------------------
- ----------------------------- -------------------------------
- ----------------------------- -------------------------------
<PAGE>
EXHIBIT 5
AUTHORIZED REPRESENTATIVES OF THE SELLER
Name Specimen Signature
- ----------------------------- -------------------------------
- ----------------------------- -------------------------------
- ----------------------------- -------------------------------
<PAGE>
EXHIBIT 6
AUTHORIZED REPRESENTATIVES OF THE SERVICER
Name Specimen Signature
<PAGE>
EXHIBIT C
TRANSACTION NOTICE
[Date]
CS First Boston Mortgage Transaction No.____________
Capital Corp. Requested Purchase Price: $____
55 East 52nd Street Requested Purchase Date: $______
New York, NY 10055
Ladies and Gentlemen:
The undersigned executes and delivers this Transaction Notice pursuant to
the requirements of the Master Repurchase Agreement, dated as of, 1996 (the
"Agreement") between CS First Boston Mortgage Capital Corp. ("Buyer") and T.A.R.
Preferred Mortgage Corporation ("Seller") and in connection with the submission
for sale thereunder on ___________________, 199___ (the "Purchase Date") of the
mortgage loans ("Mortgage Loans") identified on the Schedule of Mortgage Loans
attached hereto as Schedule I. The Mortgage Files are held by Bankers Trust
Company of California, N.A. ("Custodian") pursuant to the Custody Agreement. All
capitalized terms used in this Transaction Notice without definition shall have
the same meanings herein as they have in the Agreement.
Seller hereby represents and certifies to Buyer as follows:
1. As of this date, Seller is in compliance with all of the terms
and conditions of the Agreement.
2. Except as otherwise previously disclosed in writing to Buyer,
Seller's representations and warranties set forth in the Agreement, and any
other related document are true and accurate as of the date of this Certificate.
3. The Mortgage Loans, which are identified on [Schedule I] [the
computer file enclosed herewith], satisfy the requirements of the eligibility
set forth in the Agreement and all related agreements between Buyer and Seller.
4. Pursuant to the purchase by Buyer of any or all of the Mortgage
Loans, all of the Seller's right (including the power to convey title thereto),
title and interest in and to each document constituting the Mortgage File and
the Supplemental Mortgage File, delivered to and/or held by Custodian (the
Mortgage File) or, held by or on behalf of Seller with respect to each purchased
Mortgage Loan (the Supplemental Mortgage File), shall be transferred, assigned,
set over and otherwise conveyed to Buyer.
T.A.R. PREFERRED MORTGAGE CORPORATION
By: _______________________________
Name: _______________________________
Title: _______________________________
C-1
<PAGE>
ANNEX II
Names and Addresses for Communications Between Parties
<PAGE>
for C.S. First Boston
Patrick McGrath
C.S. First Boston Corporation Park Avenue Plaza
55 East 52nd Street
New York, New York 10055
Telephone: (212) 909-3556
Facsimile: (212) 318-1427
for T.A.R. Preferred Mortgage Corporation
Mr. Todd A. Rodriguez
T.A.R. Preferred Mortgage Corporation
19782 MacArthur Boulevard, Suite 250
Irvine, CA 92715
Telephone: (714) 474-0700
Facsimile: (714) 660-3872
<PAGE>
EXHIBIT 10.14
================================================================================
CS FIRST BOSTON MORTGAGE CAPITAL CORP.
Purchaser
and
T.A.R. PREFERRED MORTGAGE CORPORATION
Seller
_____________________________________
MORTGAGE LOAN PURCHASE AGREEMENT
Dated as of August 1, 1996
_____________________________________
Conventional Residential Fixed Rate Second Lien Mortgage Loans
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 1. DEFINITIONS................................... 1
SECTION 2. AGREEMENT TO PURCHASE......................... 1
SECTION 3. MORTGAGE SCHEDULES............................ 2
SECTION 4. PURCHASE PRICE................................ 2
SECTION 5. EXAMINATION OF MORTGAGE FILES................. 3
SECTION 6. REPRESENTATIONS, WARRANTIES AND AGREEMENT
OF SELLER..................................... 3
SECTION 7. REPRESENTATIONS, WARRANTIES AND AGREEMENT
OF PURCHASER.................................. 5
SECTION 8. CLOSING....................................... 5
SECTION 9. CLOSING DOCUMENTS............................. 6
SECTION 10. COSTS......................................... 8
SECTION 11. SERVICING..................................... 8
SECTION 12. FINANCIAL STATEMENTS.......................... 9
SECTION 13. MANDATORY DELIVERY, GRANT OF SECURITY INTEREST 9
SECTION 14. PROTECTION OF CONFIDENTIAL INFORMATION........ 10
SECTION 15. NOTICES....................................... 10
SECTION 16. SEVERABILITY CLAUSE........................... 10
SECTION 17. COUNTERPARTS.................................. 11
SECTION 18. PLACE OF DELIVERY AND GOVERNING LAW........... 11
SECTION 19. FURTHER AGREEMENTS............................ 11
SECTION 20. INTENTION OF THE PARTIES...................... 11
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 21. SUCCESSORS AND ASSIGNS; ASSIGNMENT OF
PURCHASE AGREEMENT............................ 12
SECTION 22. WAIVERS; OTHER AGREEMENTS..................... 12
SECTION 23. EXHIBITS...................................... 12
SECTION 24. GENERAL INTERPRETIVE PRINCIPLES............... 12
SECTION 25. REPRODUCTION OF DOCUMENTS..................... 13
SECTION 26. RESERVE FUND..................................
SECTION 27. PURCHASE OPTION...............................
</TABLE>
EXHIBITS
--------
EXHIBIT 1 FORM OF SELLER'S OFFICER'S CERTIFICATE
EXHIBIT 2 FORM OF OPINION OF COUNSEL TO THE SELLER
EXHIBIT 3 FORM OF OPINION OF COUNSEL TO THE CUSTODIAN
EXHIBIT 4 FORM OF SECURITY RELEASE CERTIFICATION
EXHIBIT 5 FORM OF SECURITY RELEASE CERTIFICATION
EXHIBIT 6 SCHEDULE OF MORTGAGE LOANS
-ii-
<PAGE>
MORTGAGE LOAN PURCHASE AGREEMENT
--------------------------------
This is a Mortgage Loan Purchase Agreement (the "Agreement"), dated as
---------
of August 1, 1996, by and between CS First Boston Mortgage Capital Corp., having
an office at Park Avenue Plaza, 55 East 52nd Street, New York, New York 10055
(the "Purchaser") and T.A.R. Preferred Mortgage Corporation, having an office at
---------
19782 MacArthur Boulevard, Suite 250, Irvine, California 92715 (the "Seller").
------
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, the Seller agrees to sell, from time to time, to the
Purchaser, and the Purchaser agrees to purchase, from time to time, from the
Seller certain conventional residential fixed rate second lien mortgage loans
(the "Mortgage Loans") on a servicing released basis as described herein and
--------------
which shall be delivered on various dates as provided herein (each a "Closing
Date");
WHEREAS, the Mortgage Loans shall be delivered as whole loans;
WHEREAS, the parties intend hereby to set forth the terms and
conditions upon which the proposed transactions will be effected;
NOW THEREFORE, in consideration of the promises and the mutual
agreements set forth herein, the parties hereto agree as follows:
SECTION 1. Definitions. All capitalized terms not otherwise defined
-----------
herein have the respective meanings set forth in the Seller's Warranties
Agreement, dated as of the date herewith (the "Seller's Warranties Agreement").
-----------------------------
The following terms are defined as follows (except as otherwise agreed by the
parties):
Closing Date: The dates or dates on which the Purchaser from time to
------------ time shall purchase and the Seller from time to time
shall sell, the Mortgage Loans listed on the related
Mortgage Schedule with respect to the related Closing
Date. The Closing Date for such Mortgage Loans shall be
as respectively set forth on the Mortgage Loan Schedule
or such other date or dates as are mutually agreed upon
by the parties; provided that a Closing Date shall not
occur more than once during any week.
Cut-off Date: The first day of the month in which the related Closing
------------ Date occurs.
SECTION 2. Agreement to Purchase. The Seller agrees to sell, from
---------------------
time to time, and the Purchaser agrees to purchase, from time to time, Mortgage
Loans having
<PAGE>
an aggregate principal balance on the related Cut-off Date in an amount as set
forth in the Purchase Price and Terms Letter, or in such other amount as agreed
by the Purchaser and the Seller as evidenced by the actual aggregate principal
balance of the Mortgage Loans accepted by the Purchaser on the related Closing
Date. The Mortgage Loans will be delivered pursuant to a Seller's Warranties
Agreement, between the Purchaser and the Seller.
SECTION 3. Mortgage Schedules. The Seller, from time to time, shall
------------------
provide the Purchaser with certain information constituting a preliminary
listing of the Mortgage Loans to be purchased on each Closing Date in accordance
with the related Purchase Price and Terms Letter (the "Preliminary Mortgage
--------------------
Schedule"). The Purchaser shall select from among the Mortgage Loans listed on
- --------
the Preliminary Mortgage Schedule such Mortgage Loans that satisfy the pool
parameters individually and in the aggregate as set forth in [the Purchase Price
and Terms Letter] and shall create a schedule describing such Mortgage Loans
(the "Mortgage Loan Schedule") substantially in the form attached hereto as
----------------------
Exhibit 6. Following such selection and any additional adjustments as specified
- ---------
in the following paragraph, and prior to the related Closing Date, the Seller
and the Purchaser shall agree upon a final mortgage schedule (the "Closing
-------
Schedule"), setting forth all of the Mortgage Loans to be purchased under this
- --------
Agreement. The Closing Schedule shall conform to the definition of "Mortgage
Loan Schedule" under the Seller's Warranties Agreement. The Closing Schedule
shall be used as the Mortgage Loan Schedule under the Seller's Warranties
Agreement with respect to such Closing Date.
The Seller shall deliver the Closing Schedule to the Purchaser three
(3) Business Days prior to the related Closing Date. The Closing Schedule shall
be the Mortgage Loan Schedule with the following adjustments: (a) the Seller
shall delete (i) those Mortgage Loans identified by the Purchaser prior to the
related Closing Date as not conforming to its requirements (ii) those Mortgage
Loans which have been prepaid in full prior to the related Closing Date, or as
to which the representations and warranties of the Seller (as described in
Section 6 hereof) cannot be made as of the related Closing Date; and (b) the
Seller may substitute, for those Mortgage Loans deleted in (a) above, those
Mortgage Loans acceptable to the Purchaser.
SECTION 4. Purchase Price. The purchase price for the Mortgage Loans
--------------
(the "Purchase Price") shall be the percentage of par as stated in the
--------------
applicable Purchase Price and Terms Letter (subject to adjustment as provided
therein) multiplied by the aggregate principal balance, as of the related Cut-
off Date, of the Mortgage Loans listed on the related Closing Schedule, after
application of actual payments received on or before the related Cut-off Date.
In addition to the Purchase Price as described above, the Purchaser
shall pay to the Seller, at each closing, accrued interest on the initial
principal amount of each Mortgage Loan at the applicable Mortgage Interest Rate
from the date interest was last paid thereon through the day prior to the
related Closing Date, inclusive.
The Purchaser shall be entitled to (1) all principal received after
the related Cut-off Date, (2) all other recoveries of principal collected after
the related Cut-off Date, and (3)
-2-
<PAGE>
all payments of interest on the Mortgage Loans at the Mortgage Interest Rate.
The principal balance of each Mortgage Loan as of the related Cut-off Date is
determined after application of payments of principal received on or before such
Cut-off Date..
SECTION 5. Examination of Mortgage Files. Prior to the related
-----------------------------
Closing Date, the Seller shall (a) deliver to the Purchaser in escrow, for
examination, the Mortgage File for each Mortgage Loan, including a copy of the
Assignment of Mortgage, pertaining to each Mortgage Loan, or (b) make the
Mortgage Files available to the Purchaser for examination at the Seller's
offices or such other location as shall otherwise be agreed upon by the
Purchaser and the Seller. Such examination may be made by the Purchaser, or by
any prospective purchaser of the Mortgage Loans from the Purchaser, at any time
before or after the related Closing Date upon prior reasonable notice to the
Seller. If the Purchaser makes such examination prior to the related Closing
Date and identifies any Mortgage Loans which do not conform to its requirements,
such Mortgage Loans shall be deleted from the related Closing Schedule, and,
pursuant to Section 3 of this Agreement, may be replaced by substitute Mortgage
Loans acceptable to the Purchaser. The Purchaser may, at its option and without
notice to the Seller, purchase all or part of the Mortgage Loans without
conducting any partial or complete examination. The fact that the Purchaser or
any prospective purchaser of the Mortgage Loans has conducted or has failed to
conduct any partial or complete examination of the Mortgage Files shall not
affect the Purchaser's (or any of its successor's) rights to demand repurchase,
substitution or other relief as provided under the related Seller's Warranties
Agreement.
SECTION 6. Representations, Warranties and Agreements of Seller. (a)
----------------------------------------------------
The Seller agrees and acknowledges that it shall, as a condition to the
consummation of the transactions contemplated hereby, make the representations
and warranties specified in Section 3.01 and 3.02 of the Seller's Warranties
Agreement, as of the related Closing Date. The Seller's Warranties Agreement
shall require the Seller to repurchase any Mortgage Loan with respect to which a
material breach of a representation or warranty is discovered and cannot be
cured and shall require the Seller to indemnify the Purchaser therefor.
Notwithstanding anything to the contrary set forth in the Seller's Warranties
Agreement, in the event that the percentage of par used to calculate the
Purchase Price is greater than par, the price for such repurchase shall be equal
to the sum of (a)(i) the outstanding principal balance of the Mortgage Loan to
be repurchased multiplied by (ii) the percentage of par used to calculate the
Purchase Price (the "Purchase Price Percentage") as set forth in the related
-------------------------
Purchase Price and Terms Letter and (b) accrued interest on the outstanding
principal balance of such Mortgage Loan from the date on which interest has last
been paid to the date of repurchase (the "Repurchase Price"). The foregoing
----------------
provision shall survive each Closing Date and shall be independently enforceable
by the Purchaser.
In the event that the Purchaser resells any or all of the Mortgage
Loans to any subsequent purchaser (each a "Subsequent Purchaser") and (i) the
--------------------
Seller is provided with notice of a breach of a representation or warranty of a
Mortgage Loan(s); (ii) such notice results in a repurchase by the Seller of a
Mortgage Loan(s) from the Subsequent Purchaser and
-3-
<PAGE>
(iii) the Purchaser is required to remit to any Subsequent Purchaser any sum
(which represents any or all of the excess over par paid by such Subsequent
Purchaser for such Mortgage Loan(s); such sum, the "Excess Amount"), then the
-------------
Seller shall remit to the Purchaser within 3 Business Days of receipt of notice
from the Purchaser, the difference between the Purchase Price Percentage and
par, multiplied by the then outstanding unpaid principal balance of the
Repurchased Mortgage Loan. In connection with the requirements of this
paragraph, in no event will the Seller be required to pay in the aggregate with
respect to any Mortgage Loan any amount in excess of the Repurchase Price set
forth in the preceding paragraph. The foregoing provision shall survive the
related Closing Date and shall be independently enforceable by the Purchaser.
(b) The Seller, without conceding that the Mortgage Loans are
securities, hereby makes the following additional representations, warranties
and agreements which shall be deemed to have been made as of the related Closing
Date:
i) neither the Seller nor anyone acting on its behalf has offered,
transferred, pledged, sold or otherwise disposed of any Mortgage Loans, any
interest in any Mortgage Loans or any other similar security to, or solicited
any offer to buy or accept a transfer, pledge or other disposition of any
Mortgage Loans, any interest in any Mortgage Loans or any other similar security
from, or otherwise approached or negotiated with respect to any Mortgage Loans,
any interest in any Mortgage Loans or any other similar security with, any
person in any manner, or made any general solicitation by means of general
advertising or in any other manner, or taken any other action which would
constitute a distribution of the Mortgage Loans under the Securities Act of 1933
(the "1933 Act") or which would render the disposition of any Mortgage Loans a
--------
violation of Section 5 of the 1933 Act or require registration pursuant thereto,
nor will it act, nor has it authorized or will it authorize any person to act,
in such manner with respect to the Mortgage Loans; and
ii) the Seller has not dealt with any broker or agent or anyone else
who might be entitled to a fee or commission in connection with this transaction
other than the Purchaser.
(c) Notwithstanding anything to the contrary set forth herein, and in
addition to all rights and remedies set forth herein and in the Seller's
Warranties Agreement, at any time from each Closing Date until the 180th day
after the final Closing Date hereunder (or if such 180th day is not a Business
Day, the next succeeding Business Day), the Purchaser shall have the right to
cause the Seller to repurchase any or all of the Mortgage Loans purchased on
such Closing Date hereunder by giving notice to the Seller at least one (1)
Business Day prior to such date of repurchase. Any repurchase by the Seller
pursuant to this paragraph shall be at the Repurchase Price set forth in Section
6(a) of this Purchase Agreement, notwithstanding any provision to the contrary
set forth in the Seller's Warranties Agreement, which Repurchase Price shall be
remitted to the Purchaser in accordance with the second paragraph of Section
3.03 of the Seller's Warranties Agreement. Any repurchased Mortgage Loans shall
be removed from the terms of this Agreement and the Seller's
-4-
<PAGE>
Warranties Agreement in accordance with Section 3.03 thereof. The foregoing
provision shall survive each Closing Date and shall be independently enforceable
by the Purchaser.
SECTION 7. Representations, Warranties and Agreement of Purchaser.
------------------------------------------------------
The Purchaser, without conceding that the Mortgage Loans are securities, hereby
makes the following representations, warranties and agreements, which shall have
been deemed to have been made as of the related Closing Date:
a) the Purchaser understands that the Mortgage Loans have not been
registered under the 1933 Act or the securities laws of any state;
b) the Purchaser is acquiring the Mortgage Loans for its own account
only and not for any other person;
c) the Purchaser considers itself a substantial, sophisticated
institutional investor having such knowledge and experience in financial and
business matters that it is capable of evaluating the merits and risks of
investment in the Mortgage Loans;
d) the Purchaser has been furnished with all information regarding
the Mortgage Loans which it has requested from the Seller or the Company; and
e) neither the Purchaser nor anyone acting on its behalf has
offered, transferred, pledged, sold or otherwise disposed of any Mortgage Loan,
any interest in any Mortgage Loan or any other similar security to, or solicited
any offer to buy or accept a transfer, pledge or other disposition of any
Mortgage Loan, any interest in any Mortgage Loan or any other similar security
from, or otherwise approached or negotiated with respect to any Mortgage Loan,
any interest in any Mortgage Loan or any other similar security with, any person
in any manner, or made any general solicitation by means of general advertising
or in any other manner, or taken any other action which would constitute a
distribution of the Mortgage Loans under the 1933 Act or which would render the
disposition of any Mortgage Loan a violation of Section 5 of the 1933 Act or
require registration pursuant thereto, nor will it act, nor has it authorized or
will it authorize any person to act, in such manner with respect to the Mortgage
Loans.
SECTION 8. Closing. The closing for the purchase and sale of each
-------
Mortgage Loan, shall take place on the related Closing Date. At the Purchaser's
option, the Closings shall be either: by telephone, confirmed by letter or wire
as the parties shall agree; or conducted in person, at such place as the parties
shall agree.
Each closing shall be subject to each of the following conditions:
a) all of the representations and warranties of the Seller under
this Agreement and under the Seller's Warranties Agreement shall
be true and correct as of the related Closing Date and no event
shall have occurred which, with notice or the passage of time,
would constitute a
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<PAGE>
default under this Agreement or an Event of
Default under the Seller's Warranties Agreement;
b) the Purchaser shall have received, or the Purchaser's attorneys
shall have received in escrow, all Closing Documents as specified
in Section 9 of this Agreement, in such forms as are agreed upon
and acceptable to the Purchaser, duly executed by all signatories
other than the Purchaser as required pursuant to the respective
terms thereof;
c) the Seller shall have delivered and released to the Custodian
under the Seller's Warranties Agreement all documents required
pursuant to the Custodial Agreement;
d) the Seller shall have deposited the Reserve Amount in the Reserve
Fund;
e) the Purchaser and Advanta Mortgage Corp. USA shall have executed
the Loan Servicing Agreement, in form and substance acceptable to
the Purchaser; and
f) all other terms and conditions of this Agreement shall have been
complied with.
Subject to the foregoing conditions, the Purchaser shall pay to the
Seller on the related Closing Date the Purchase Price pursuant to Section 4 of
this Agreement, by wire transfer of immediately available funds to the account
designated by the Seller.
SECTION 9. Closing Documents. The Closing Documents shall consist of
-----------------
fully executed originals of the following documents:
A. With respect to the initial Closing Date:
1. the Seller's Warranties Agreement, dated as of the Cut-off Date,
in three counterparts;
2. this Agreement, dated as of the Cut-off Date, in three
counterparts;
3. the Custodial Agreement, dated as of the Cut-off Date, in four
counterparts, in the form attached as an exhibit to the Seller's
Warranties Agreement;
4. the Loan Servicing Agreement, between the Purchaser and Advanta
Mortgage Corp. USA, dated as of the Cut-off Date, in three
counterparts;
5. the Assignment and Conveyance, substantially in the form of
Exhibit H to the Seller's Warranties Agreement, in three
---------
counterparts;
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<PAGE>
6. the related Closing Schedule, one copy to be attached to the
Assignment and Conveyance and to the Custodial Agreement, as the
Mortgage Loan Schedule thereto;
7. a Custodian's Trust Receipt, as required under the Custodial
Agreement in the form of Exhibit 1 to the Custodial Agreement;
---------
8. a Custodial Account Certification or Custodial Account Letter
Agreement as required under the Loan Servicing Agreement;
9. an Escrow Account Certification or Escrow Account Letter
Agreement, as required under the Loan Servicing Agreement;
10. an Officer's Certificate of the Seller, in the form of Exhibit 1
---------
hereto, including all attachments thereto;
11. an Opinion of Counsel of the Seller, in the form of Exhibit 2
---------
hereto;
12. an Opinion of Counsel of the Custodian, in the form of Exhibit 3
hereto;
13. a Security Release Certification, in the form of Exhibit 4 hereto
---------
(for a Seller which is a member of the Federal Home Loan Bank
System), executed by the applicable regional Federal Home Loan
Bank and, if applicable, in the form of Exhibit 5 hereto executed
---------
by any other person, as requested by the Purchaser, if any of the
Mortgage Loans have at any time been subject to any security
interest, pledge or hypothecation for the benefit of such person;
14. a Certificate of the Seller and an opinion of counsel of the
Seller stating that the related Mortgage Loans are not subject to
any security interest, claim, pledge, hypothecation or lien; and
15. a Certificate of other evidence of merger or change of name,
signed or stamped by the applicable regulatory authority, if any
of the Mortgage Loans were acquired by the Seller by merger or
acquired or originated by the Seller while conducting business
under a name other than its present name.
B. With respect to each subsequent Closing Date:
1. the Assignment and Conveyance, substantially in the form of
Exhibit H to the Seller's Warranties Agreement, in three
---------
counterparts;
2. the related Closing Schedule, one copy to be attached to the
Assignment and Conveyance and to the Custodial Agreement, as the
Mortgage Loan Schedule thereto;
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<PAGE>
3. a Custodian's Trust Receipt, as required under the Custodial
Agreement in the form of Exhibit 1 to the Custodial Agreement;
---------
4. at the Purchaser's option, an Officer's Certificate of the
Seller, in the form of Exhibit 1 hereto, including all
---------
attachments thereto;
5. at the Purchaser's option, an Opinion of Counsel of the Seller,
in the form of Exhibit 2 hereto;
---------
6. a Security Release Certification, in the form of Exhibit 4 hereto
---------
(for a Seller which is a member of the Federal Home Loan Bank
System), executed by the applicable regional Federal Home Loan
Bank and, if applicable, in the form of Exhibit 5 hereto executed
---------
by any other person, as requested by the Purchaser, if any of the
Mortgage Loans have at any time been subject to any security
interest, pledge or hypothecation for the benefit of such person;
8. a Certificate of the Seller and an opinion of counsel of the
Seller stating that the Mortgage Loans are not subject to any
security interest, claim, pledge, hypothecation or lien; and
9. a Certificate of other evidence of merger or change of name,
signed or stamped by the applicable regulatory authority, if any
of the Mortgage Loans were acquired by the Seller by merger or
acquired or originated by the Seller while conducting business
under a name other than its present name.
SECTION 10. Costs. The Purchaser shall pay any commissions due its
-----
salesmen and the legal fees and expenses of its attorneys. All other costs and
expenses incurred in connection with the transfer and delivery of the Mortgage
Loans, including custodial fees, recording fees, fees for title policy
endorsements and continuations and the Seller's attorney's fees, shall be paid
by the Seller.
SECTION 11. Servicing. The Mortgage Loans have been sold by the
---------
Seller to the Purchaser on a servicing released basis. Subject to, and upon the
terms and conditions of this Agreement and the Seller's Warranties Agreement,
the Seller shall sell, transfer, assign and deliver to the Purchaser the
Servicing Rights.
SECTION 12. Financial Statements. The Seller understands that in
--------------------
connection with the Purchaser's marketing of the Mortgage Loans, the Purchaser
shall make available to prospective purchasers a Consolidated Statement of
Operations of the Seller for the most recently completed five fiscal years
respecting which such a statement is available, as well as a Consolidated
Statement of Condition at the end of the last two fiscal years covered by such
Consolidated Statement of Operations. The Purchaser shall also make available
any comparable interim statements to the extent any such statements have been
prepared by the
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<PAGE>
Seller in a format intended or otherwise suitable for the public at large. The
Seller, if it has not already done so, agrees to furnish promptly to the
Purchaser copies of the statements specified above. The Seller shall also make
available information on its servicing performance with respect to loans in its
own portfolio and loans serviced for others (if any), including loss and
delinquency ratios.
The Seller also agrees to allow access to a knowledgeable (as shall be
determined by the Seller) financial or accounting officer for the purpose of
answering questions asked by any prospective purchaser regarding recent
developments affecting the Seller or the financial statements of the Seller.
SECTION 13. Mandatory Delivery, Grant of Security Interest. (a) The
----------------------------------------------
sale and delivery on each Closing Date of the Mortgage Loans described on the
related Closing Schedule is mandatory, it being specifically understood and
agreed that each Mortgage Loan is unique and identifiable on the date hereof and
that an award of money damages would be insufficient to compensate the Purchaser
for the losses and damages incurred by the Purchaser (including damages to
prospective purchasers of the Mortgage Loans) in the event of the Seller's
failure to deliver the Mortgage Loans on or before the related Closing Date.
The Seller hereby grants to the Purchaser a lien on and a continuing security
interest in each Mortgage Loan and each document and instrument evidencing each
such Mortgage Loan to secure the performance by the Seller of its obligation
hereunder, and the Seller agrees that it holds such Mortgage Loans in custody
for the Purchaser subject to the Purchaser's (i) right to reject any Mortgage
Loan under the terms of this Agreement and to accept at the Purchaser's sole
option another Mortgage Loan to be substituted therefor, and (ii) obligation to
pay the Purchase Price for the Mortgage Loans. All rights and remedies of the
Purchaser under this Agreement are distinct from, and cumulative with, any other
rights or remedies under this Agreement or afforded by law or equity and all
such rights and remedies may be exercised concurrently, independently or
successively.
(b) The Seller and the Purchaser intend that the transactions
hereunder be sales to the Seller of the Mortgage Loans and not loans from the
Purchaser to the Seller secured by the Mortgage Loans. However, in order to
preserve the Purchaser's rights under this Agreement in the event that a court
or other forum recharacterizes the transactions hereunder as loans and as
security for the performance by the Seller of all of the Seller's obligations to
the Purchaser under this Agreement and the transactions entered into pursuant to
this Agreement, the Seller grants to the Purchaser a first priority security
interest in all of the Mortgage Loans, this Agreement, the Reserve Fund and in
account # 21070 maintained with the Custodian, and any other contract rights,
general intangibles and other assets relating to the Mortgage Loans or any
interest in the Mortgage Loans as of each applicable Closing Date, with respect
to all transactions hereunder and all proceeds thereof.
SECTION 14. Protection of Confidential Information. (a) The Seller
--------------------------------------
shall keep confidential and shall not divulge to any party, without the
Purchaser's prior written consent, the Purchase Price paid by the Purchaser for
the Mortgage Loans, except to the extent
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<PAGE>
that it is appropriate for the Seller to do so in working with legal counsel,
auditors, taxing authorities or other governmental agencies. The Seller agrees
that the Purchaser has or will introduce buyers of mortgage loans to the Seller,
that buyers of mortgage loans are customers of the Purchaser and that the
relationship of the Purchaser to the buyers of mortgage loans are confidential.
The Seller agrees, for a period of two years following each Closing Date with
respect to a particular buyer of mortgage loans, the Seller will not, for the
purpose of buying and selling other mortgage loans, communicate with or sell
such other mortgage loans to such buyer unless such buyer (or an affiliate of
the buyer) is or has been independently introduced to, or independently
solicited the Seller or has engaged in mortgage banking transactions with the
Seller prior to each Closing Date, provided, however, that the foregoing shall
not apply to a buyer of mortgage loans which is the Federal National Mortgage
Association or the Federal Home Loan Mortgage Corporation.
(b) The Purchaser shall keep confidential and shall not divulge to
any party, without the Seller's written consent, any financial information
regarding the Seller obtained by the Purchaser from the Seller, except to the
extent that (i) such information is publicly available, (ii) the Purchaser
discloses such information in connection with a resale of some or all of the
Mortgage Loans to a potential purchaser, or in connection with a securitization
of some or all of the Mortgage Loans, to rating agencies, or other Persons
involved in any such securitization, or (iii) it is appropriate for the
Purchaser to do so in working with legal counsel, auditors, taxing authorities
or other governmental agencies, or (iv) such disclosure is required by law.
SECTION 15. Notices. All demands, notices and communications
-------
hereunder shall be in writing and shall be deemed to have been duly given if
mailed, by registered or certified mail, return receipt requested, or, if by
other means, when received by the other party at the address shown on the first
page hereof, or such other address as may hereafter be furnished to the other
party by like notice. Any such demand, notice or communication hereunder shall
be deemed to have been received on the date delivered to or received at the
premises of the addressee (as evidenced, in the case of registered or certified
mail, by the date noted on the return receipt).
SECTION 16. Severability Clause. Any part, provision, representation
-------------------
or warranty of this Agreement which is prohibited or which is held to be void or
unenforceable shall be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof. Any
part, provision, representation or warranty of this Agreement which is
prohibited or unenforceable or is held to be void or unenforceable in any
jurisdiction shall be ineffective, as to such jurisdiction, to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction as to any Mortgage Loan shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent permitted
by applicable law, the parties hereto waive any provision of law which prohibits
or renders void or unenforceable any provision hereof. If the invalidity of any
part, provision, representation or warranty of this Agreement shall deprive any
party of the economic benefit intended to be
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<PAGE>
conferred by this Agreement, the parties shall negotiate, in good-faith, to
develop a structure the economic effect of which is as close as possible to the
economic effect of this Agreement without regard to such invalidity.
SECTION 17. Counterparts. This Agreement may be executed
------------
simultaneously in any number of counterparts. Each counterpart shall be deemed
to be an original, and all such counterparts shall constitute one and the same
instrument.
SECTION 18. PLACE OF DELIVERY AND GOVERNING LAW. THIS AGREEMENT
-----------------------------------
SHALL BE DEEMED IN EFFECT WHEN A FULLY EXECUTED COUNTERPART THEREOF IS RECEIVED
BY THE PURCHASER IN THE STATE OF NEW YORK AND SHALL BE DEEMED TO HAVE BEEN MADE
IN THE STATE OF NEW YORK. THE AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF
THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK, EXCEPT TO THE EXTENT PREEMPTED BY FEDERAL LAW.
SECTION 19. Further Agreements. The Purchaser and the Seller each
------------------
agree to execute and deliver to the other such additional documents, instruments
or agreements as may be necessary or appropriate to effectuate the purposes of
this Agreement.
Without limiting the generality of the foregoing, the Seller shall
cooperate with the Purchaser in connection with the initial resales of the
Mortgage Loans by the Purchaser. In that connection, the Seller shall provide
to the Purchaser: (i) any and all information and appropriate verification of
information, whether through letters of its auditors and counsel or otherwise,
as the Purchaser shall reasonably request; and (ii) such additional
representations, warranties, covenants, opinions of counsel, letters from
auditors, and certificates of public officials or officers of the Seller as are
reasonably believed necessary by the Purchaser in connection with such resales.
Prior to incurring any out-of-pocket expenses pursuant to this paragraph, the
Seller shall notify the Purchaser in writing of the estimated amount of such
expense. The Purchaser shall reimburse the Seller for any such expense
following its receipt of appropriate details thereof.
SECTION 20. Intention of the Parties. It is the intention of the
------------------------
parties that the Purchaser is purchasing, and the Seller is selling, an
undivided 100% ownership interest in the Mortgage Loans and not a debt
instrument of the Seller or another security. Accordingly, the parties hereto
each intend to treat the transaction for Federal income tax purposes as a sale
by the Seller, and a purchase by the Purchaser, of the Mortgage Loans.
Moreover, the arrangement under which the Mortgage Loans are held shall be
consistent with classification of such arrangement as a grantor trust in the
event it is not found to represent direct ownership of the Mortgage Loans. The
Purchaser shall have the right to review the Mortgage Loans and the related
Mortgage Loan Files to determine the characteristics of the Mortgage Loans which
shall affect the Federal income tax consequences of owning the Mortgage Loans
and the Seller shall cooperate with all reasonable requests made by the
Purchaser in the course of such review.
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<PAGE>
SECTION 21. Successors and Assigns; Assignment of Purchase Agreement.
--------------------------------------------------------
This Agreement shall bind and inure to the benefit of and be enforceable by the
Seller and the Purchaser and the respective successors and assigns of the Seller
and the Purchaser. This Agreement shall not be assigned, pledged or
hypothecated by the Seller to a third party without the consent of the
Purchaser.
SECTION 22. Waivers; Other Agreements. No term or provision of this
-------------------------
Agreement may be waived or modified unless such waiver or modification is in
writing and signed by the party against whom such waiver or modification is
sought to be enforced.
SECTION 23. Exhibits. The exhibits to this Agreement are hereby
--------
incorporated and made a part hereof and are an integral part of this Agreement.
SECTION 24. General Interpretive Principles. For purposes of this
-------------------------------
Agreement, except as otherwise expressly provided or unless the context
otherwise requires:
(a) the terms defined in this Agreement have the meanings assigned to
them in this Agreement and include the plural as well as the singular, and the
use of any gender herein shall be deemed to include the other gender;
(b) accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with generally accepted accounting principles;
(c) references herein to "Articles", "Sections", "Subsections",
"Paragraphs", and other subdivisions without reference to a document are to
designated Articles, Sections, Subsections, Paragraphs and other subdivisions of
this Agreement;
(d) a reference to a Subsection without further reference to a
Section is a reference to such Subsection as contained in the same Section in
which the reference appears, and this rule shall also apply to Paragraphs and
other subdivisions;
(e) the words "herein", "hereof", "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
provision; and
(f) the term "include" or "including" shall mean without limitation
by reason of enumeration.
SECTION 25. Reproduction of Documents. This Agreement and all
-------------------------
documents relating thereto, including, without limitation, (a) consents, waivers
and modifications which may hereafter be executed, (b) documents received by any
party at the closing, and (c) financial statements, certificates and other
information previously or hereafter furnished, may be reproduced by any
photographic, photostatic, microfilm, micro-card, miniature photographic or
other similar process. The parties agree that any such reproduction shall be
admissible in evidence as the original itself in any judicial or administrative
proceeding, whether or not the original is in existence and whether or not such
reproduction
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<PAGE>
was made by a party in the regular course of business, and that any enlargement,
facsimile or further reproduction of such reproduction shall likewise be
admissible in evidence.
SECTION 26. Reserve Fund. In addition to the Seller's obligations
------------
as set forth in the Seller's Warranties Agreement, on each Closing Date upon
receipt of the Purchase Price from the Purchaser, the Seller shall deposit with
the Custodian in immediately available funds to an account maintained with the
Custodian for the benefit of and in the name of the Purchaser (the "Reserve
-------
Fund"), a portion of such Purchase Price received from the Purchaser in an
amount equal to 50 basis points (0.50%) multiplied by the aggregate outstanding
principal balance of the Mortgage Loans being purchased by the Seller on the
related Closing Date (such amount, the "Reserve Amount"). The Purchaser shall
--------------
own the Reserve Amount in its entirety and shall be entitled, in its sole
discretion, to withdraw all or a portion of the Reserve Amount from the Reserve
Fund at any time for any reason including, without limitation, in order to
reimburse itself for any actual losses incurred by it with respect to the
Mortgage Loans (other than for a breach of a representation and warranty set
forth in the Seller's Warranties Agreement, for which the Purchaser's sole
recourse shall be a repurchase of the related Mortgage Loan and indemnification,
as provided in Section 3.03 of the Seller's Warranties Agreement, or losses
resulting from the Purchaser's breach of this Agreement or any other agreement
between the Purchaser and the Seller), or as credit enhancement in connection
with any securitization or resale of all or a portion of the Mortgage Loans
(such amount allocated to credit enhancement being limited to 50 basis points
(0.50%) multiplied by the aggregate outstanding principal balance of the
Mortgage Loans being securitized or resold), notwithstanding any termination of
the Seller's Warranties Agreement in connection with such securitization. The
Purchaser shall have the exclusive right to withdraw funds from the Reserve Fund
and the Reserve Fund shall be a "no access" account to the Seller.
Notwithstanding anything to the contrary set forth herein, in the event the
Seller is required to repurchase a Mortgage Loan from the Purchaser pursuant to
Section 6(c) hereof, at the Seller's option either that portion of the Reserve
Amount which relates to the repurchased Mortgage Loan shall be remitted by the
Purchaser to the Seller within three (3) Business Days following the repurchase
of the Mortgage Loan by the Seller or such amount shall be offset against the
Repurchase Price and the Purchaser shall have the right to withdraw the same
from the Reserve Fund. Upon the termination of the Seller's Warranties
Agreement, all funds remaining in the Reserve Fund shall be the sole and
exclusive property of the Purchaser, provided, however, that upon the payment in
full or liquidation of all of the Mortgage Loans, all funds remaining in the
Reserve Fund shall be remitted by the Purchaser to the Seller within three (3)
Business Days following receipt by the Purchaser of evidence from the Seller
that a payment in full or liquidation has occurred with respect to all of the
Mortgage Loans. The Custodian shall invest any funds deposited in the Reserve
Fund in investments as directed by the Purchaser to the Custodian in writing.
All interest earned on funds deposited in the Reserve Fund shall remain in the
Reserve Fund and shall be part of the Reserve Amount. The establishment of the
Reserve Fund shall in no way relieve or excuse the Seller from its obligations
under this Agreement or the Seller's Warranties Agreement, including, but not
limited to, the Seller's obligation to repurchase a Mortgage Loan and indemnify
the Purchaser
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<PAGE>
as set forth in the Seller's Warranties Agreement. The foregoing provision shall
survive each Closing Date and shall be independently enforceable by the
Purchaser.
SECTION 27. Purchase Option. The Purchaser and the Seller agree
---------------
that, for a period beginning on the final Closing Date identified in that
certain Purchase Price and Terms Letter, dated June 27, 1996 between the Seller
and the Purchaser (the "Original Commitment Letter") and ending December 30,
--------------------------
1997 (the "Option Period"), the Purchaser shall have the right to purchase any
-------------
mortgage loans originated by the Seller until the Purchaser purchases mortgage
loans in an amount not to exceed $600,000,000 in the aggregate (such amount, the
"Option Amount"), which meet the Underwriting Guidelines or any underwriting
-------------
guidelines substantially similar to the Underwriting Guidelines during such
Option Period (the "Additional Mortgage Loans"), on the terms and conditions set
-------------------------
forth below. On any Closing Date for the purchase and sale of Additional
Mortgage Loans, the weighted average gross coupon for the Additional Mortgage
Loans being sold on such Closing Date shall be approximately equal to (which
shall mean for purposes of this Section 27, plus or minus 10 basis points) the
offer side yield for the "on the run" five year U.S. Treasury Note as quoted on
Page 500 of Telerate plus 700 basis points. Subject to the following sentences,
the purchase price for any Additional Mortgage Loans purchased by the Purchaser
(the "Additional Mortgage Loan Purchase Price") shall be calculated such that
---------------------------------------
the corporate bond equivalent yield for the Additional Mortgage Loans, being
sold on such Closing Date, will be equivalent to the corporate bond equivalent
yield for the straight line interpolated offer side yield of the "on the run"
four year U.S. Treasury Note plus a spread of 475 basis points, calculated using
a fifteen year stated maturity, a servicing fee of 0.375 of 1%, a 48 day delay
and a prepayment speed of 20 CPR; provided, however, in no event shall the
percentage of par used to calculate the Additional Mortgage Loan Purchase Price
be greater than the percentage of par used to calculate the Purchase Price in
the Original Commitment Letter.
In addition to the foregoing, the Purchaser shall also have the right,
to be exercised in its sole discretion, to reprice the Additional Mortgage Loans
purchased and sold hereunder each time the Purchaser has purchased Additional
Mortgage Loans having an aggregate outstanding principal balance of $100,000,000
(each group shall be designated a "Mortgage Loan Package"). Each Mortgage Loan
Package shall have the following characteristics: (i) no more than 5% of the
Additional Mortgage Loans have a CLTV equal to or greater than 125%, (ii) the
weighted average CLTV of the Additional Mortgage Loans is no greater than 92%,
(iii) no Additional Mortgage Loan has a FICO score less than 620, (iv) the
weighted average FICO score of the Additional Mortgage Loans is not less than
680, and (v) at least 80% of the Mortgage Files contain a drive-by appraisal
conducted within six months prior to the related Closing Date. In the event a
Mortgage Loan Package fails to conform to these characteristics the Purchaser
shall have the option to reprice the Additional Mortgage Loans included in the
related Mortgage Loan Package.
The Purchaser may exercise its right to purchase the Additional
Mortgage Loans originated by the Seller during the Option Period by indicating
to the Seller in writing within five (5) Business Days following the Purchaser's
completion of a due diligence review
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<PAGE>
of any Additional Mortgage Loans (which review shall be completed within fifteen
(15) Business Days following receipt by the Purchaser of all of the
documentation reasonably required by the Purchaser in order to complete its due
diligence review) that the Purchaser will purchase such Additional Mortgage
Loans from the Seller. In the event the Seller fails to deliver to the Purchaser
by June 30, 1997 Additional Mortgage Loans in an amount equal to $450,000,000,
the Purchaser shall have an exclusive right of first refusal until the earlier
to occur of (x) December 30, 1997 and (y) the purchase by the Purchaser of
Additional Mortgage Loans with an aggregate outstanding principal balance equal
to at least the Option Amount, to purchase Additional Mortgage Loans such that
the aggregate outstanding principal balance of the Additional Mortgage Loans
purchased by the Purchaser shall be at least equal to the Option Amount. In
addition to the foregoing, in the event the Seller fails to deliver to the
Purchaser by September 30, 1997 Additional Mortgage Loans with an aggregate
outstanding principal balance at least equal to the Option Amount, the Seller
shall pay to the Purchaser a pair-off fee equal to 100 basis points (1.00%)
multiplied by the difference between (a) the Option Amount and (b) the actual
amount of Additional Mortgage Loans delivered to the Purchaser by the Seller as
of September 30, 1997. In the event that as of December 30, 1997, the Seller
fails to deliver to the Purchaser Additional Mortgage Loans with an aggregate
outstanding principal balance at least equal to the Option Amount, at the
Purchaser's option, the Seller shall either (A) pay to the Purchaser a pair-off
fee equal to 200 basis points (2.00%) multiplied by the difference between (i)
the Option Amount and (ii) the actual aggregate outstanding principal balance of
Additional Mortgage Loans delivered to the Purchaser by the Seller as of
December 30, 1997, or (B) deliver to the Purchaser Additional Mortgage Loans
such that the aggregate outstanding principal balance of the Additional Mortgage
Loans delivered to the Purchaser shall at least equal the Option Amount. Any
Additional Mortgage Loans purchased by the Purchaser shall be purchased pursuant
and subject to this Agreement and the Seller's Warranties Agreement, unless
otherwise mutually agreed by the parties hereto.
Notwithstanding and in addition to the foregoing, in the event (a) the
Purchaser declines to purchase any of the Additional Mortgage Loans as described
in this Section or (b) the Purchaser causes the Seller to repurchase any of the
Mortgage Loans pursuant to Section 6(c) hereof (the "Repurchased Mortgage
--------------------
Loans") and the Seller subsequently securitizes the Repurchased Mortgage Loans,
the Purchaser shall have the exclusive right, to be exercised at its sole
option, to act as exclusive underwriter and/or placement agent on an offering by
the Seller of securities backed by any or all of the Additional Mortgage Loans
and/or the Repurchased Mortgage Loans (the "Securitization"), at an underwriting
--------------
fee which shall be equal to the underwriting fee charged by the Purchaser,
determined as of the closing date for the related Securitization, as the
Purchaser's fee for underwriting securities collateralized by mortgage loans
which were similar in size and product type as the related Securitization. The
foregoing provision shall survive each Closing Date and shall be independently
enforceable by the Purchaser.
[Signatures Commence on the Following Page]
-15-
<PAGE>
IN WITNESS WHEREOF, the Seller and the Purchaser have caused their
names to be signed hereto by their respective officers thereunto duly authorized
as of the date first above written.
CS FIRST BOSTON MORTGAGE CAPITAL
CORP.
(Purchaser)
By:_____________________________________
Name:___________________________________
Title:__________________________________
T.A.R. PREFERRED MORTGAGE
CORPORATION
(Seller)
By:_____________________________________
Name:___________________________________
Title:__________________________________
<PAGE>
EXHIBIT 1
---------
FORM OF SELLER'S OFFICER'S CERTIFICATE
I, ____________________, hereby certify that I am the duly elected
[Vice] President of T.A.R. Preferred Mortgage Corporation, a [state] [federally]
chartered institution organized under the laws of the [state of ____________]
[United States], (the "Seller") and further as follows:
1. Attached hereto as Exhibit A is a true, correct and complete copy
---------
of the charter of the Seller which is in full force and effect on the date
hereof and which has been in effect without amendment, waiver, rescission
or modification.
2. Attached hereto as Exhibit B is a true, correct and complete copy
---------
of the bylaws of the Seller which are in effect on the date hereof and
which have been in effect without amendment, waiver, rescission or
modification.
3. Attached hereto as Exhibit C is an original certificate of good
---------
standing of the Seller, issued within ten days of the date hereof, and no
event has occurred since the date thereof which would impair such standing.
4. Attached hereto as Exhibit D is a true, correct and complete copy
---------
of the corporate resolutions of the Board of Directors of the Seller
authorizing the Seller to execute and deliver each of the Purchase
Agreement, the Seller's Warranties Agreement, and the Custodial Agreement
(each as defined below) by original signature, and to endorse the Mortgage
Notes and execute the Assignments of Mortgages by original [or facsimile]
signature, and such resolutions are in effect on the date hereof and have
been in effect without amendment, waiver rescission or modification.
5. Either (i) no consent, approval, authorization or order of any
court or governmental agency or body is required for the execution,
delivery and performance by the Seller of or compliance by the Seller with
the Mortgage Loan Purchase Agreement, dated as of August 1, 1996 (the
"Purchase Agreement"), by and between the Seller and CS First Boston
-------------------
Mortgage Capital Corp. (the "Purchaser") and the Seller's Warranties
---------
Agreement, dated as of August 1, 1996, by and between the Seller and the
Purchaser (the "Seller's Warranties Agreement") and the Custodial Agreement
-----------------------------
dated as of August 1, 1996 (the "Custodial Agreement") by and among the
-------------------
Seller, the Purchaser, Advanta Mortgage Corp. USA (the "Servicer") and
--------
Bankers Trust Company of California, N.A. (the "Custodian") or the sale of
---------
the Mortgage Loans or the consummation of the transactions contemplated by
the Agreements; or (ii) any required consent, approval, authorization or
order has been obtained by the Seller.
<PAGE>
6. Neither the consummation of the transactions contemplated by, nor
the fulfillment of the terms of the Purchase Agreement, the Seller's
Warranties Agreement and the Custodial Agreement, conflicts or will
conflict with or results or will result in a breach of or constitutes or
will constitute a default under the charter or by-laws of the Seller, the
terms of any indenture or other agreement or instrument to which the Seller
is a party or by which it is bound or to which it is subject, or any
statute or order, rule, regulations, writ, injunction or decree of any
court, governmental authority or regulatory body to which the Seller is
subject or by which it is bound.
7. To the best of my knowledge, there is no action, suit, proceeding
or investigation pending or threatened against the Seller which, in my
judgment, either in any one instance or in the aggregate, may result in any
material adverse change in the business, operations, financial condition,
properties or assets of the Seller or in any material impairment of the
right or ability of the Seller to carry on its business substantially as
now conducted or in any material liability on the part of the Seller or
which would draw into question the validity of the Purchase Agreement, the
Seller's Warranties Agreement, the Custodial Agreement or the mortgage
loans or of any action taken or to be taken in connection with the
transactions contemplated hereby, or which would be likely to impair
materially the ability of the Seller to perform under the terms of the
Purchase Agreement, the Seller's Warranties Agreement or the Custodial
Agreement.
8. Each person listed on Exhibit E attached hereto who, as an
---------
officer or representative of the Seller, signed (a) the Purchase Agreement,
(b) the Seller's Warranties Agreement, (c) the Custodial Agreement, and (d)
any other document delivered prior hereto or on the date hereof in
connection with any purchase described in the Agreement was, at the
respective times of such signing and delivery, and is now, a duly elected
or appointed, qualified and acting officer or representative of the Seller,
who holds the office set forth opposite his or her name on Exhibit E, and
---------
the signatures of such persons appearing on such documents are their
genuine signatures.
9. The Seller is duly authorized to engage in the transactions
described and contemplated in the Purchase Agreement, the Seller's
Warranties Agreement and the Custodial Agreement.
10. The Mortgage Loans are not subject to any security interest,
claim, pledge, hypothecation or lien.
EXHIBIT 1 - PAGE 2
<PAGE>
IN WITNESS WHEREOF, I have hereunto signed my name and affixed the
seal of the Seller.
Dated:______________________ By:________________________________
Name:________________________________
[Seal] Title: [Vice] President
I, ________________________, an [Assistant] Secretary of T.A.R.
Preferred Mortgage Corporation, hereby certify that ____________ is the duly
elected, qualified and acting [Vice] President of the Seller and that the
signature appearing above is [her] [his] genuine signature.
IN WITNESS WHEREOF, I have hereunto signed my name.
Dated:______________________ By:________________________________
Name:________________________________
[Seal] Title: [Assistant] Secretary
EXHIBIT 1 - PAGE 3
<PAGE>
EXHIBIT E to
Seller's Officer's Certificate
Name Title Signature
---- ----- ---------
____________________
____________________
____________________
____________________
____________________
____________________
EXHIBIT 1 - PAGE 4
<PAGE>
EXHIBIT 2
---------
FORM OF OPINION OF COUNSEL TO THE SELLER
(date)
CS First Boston Mortgage Capital Corp.
Park Avenue Plaza
55 East 52nd Street
New York, New York 10055
Dear Sirs and Mesdames:
You have requested [our] [my] opinion, as [Assistant] General Counsel
to T.A.R. Preferred Mortgage Corporation (the "Seller"), with respect to certain
matters in connection with the sale by the Seller of the Mortgage Loans pursuant
to that certain Mortgage Loan Purchase Agreement by and between the Seller and
CS First Boston Mortgage Capital Corp. (the "Purchaser"), dated as of August 1,
---------
1996, (the "Purchase Agreement") which sale is in the form of whole Mortgage
------------------
Loans delivered pursuant to a Seller's Warranties Agreement, dated as of August
1, 1996 by and between the Seller and the Purchaser (the "Seller's Warranties
-------------------
Agreement") being executed contemporaneously with a Custodial Agreement by and
- ---------
among the Seller, the Purchaser, Advanta Mortgage Corp. USA (the "Servicer") and
--------
Bankers Trust Company of California, N.A. (the "Custodian") (the "Custodial
--------- ---------
Agreement"). Capitalized terms not otherwise defined herein have the meanings
- ---------
set forth in the Purchase Agreement and the Seller's Warranties Agreement.
[We] [I] have examined the following documents:
1. the Purchase Agreement;
2. the Seller's Warranties Agreement;
3. the form of Assignment of Mortgage;
4. the form of endorsement of the Mortgage Notes;
5. the Custodial Agreement; and
6. such other documents, records and papers as we have deemed
necessary and relevant as a basis for this opinion.
To the extent [we] [I] have deemed necessary and proper, [we] [I] have
relied upon the representations and warranties of the Seller contained in the
Purchase Agreement and in the Seller's Warranties Agreement. [We] [I] have
assumed the authenticity of all documents
<PAGE>
submitted to me as originals, the genuineness of all signatures, the legal
capacity of natural persons and the conformity to the originals of all
documents.
Based upon the foregoing, it is [our] [my] opinion that:
1. The Seller is a [federally chartered stock savings and loan
association] duly organized, validly existing and in good standing
under the laws of the [United States] and is qualified to transact
business in, and is in good standing under, the laws of the state of
_________________.
2. The Seller has the power to engage in the transactions contemplated by
the Purchase Agreement and the Seller's Warranties Agreement and all
requisite power, authority and legal right to execute and deliver the
Purchase Agreement, the Seller's Warranties Agreement, the Custodial
Agreement, and the Mortgage Loans and to perform and observe the terms
and conditions of such instruments.
3. Each of the Purchase Agreement, the Seller's Warranties Agreement, the
Custodial Agreement and the Mortgage Loans has been duly authorized,
executed and delivered by the Seller and is a legal, valid and binding
agreement enforceable in accordance with its respective terms against
the Seller, subject to bankruptcy laws and other similar laws of
general application affecting rights of creditors and subject to the
application of the rules of equity, including those respecting the
availability of specific performance, none of which will materially
interfere with the realization of the benefits provided thereunder or
with the Purchaser's ownership of the Mortgage Loans.
4. The Seller has been duly authorized to allow any of its officers to
execute any and all documents by original signature in order to
complete the transactions contemplated by the Purchase Agreement, the
Seller's Warranties Agreement, and the Custodial Agreement, and by
original [or facsimile] signature in order to execute the endorsements
to the Mortgage Notes and the Assignments of Mortgages, and the
original [or facsimile] signature of the officer at the Seller
executing the endorsements to the Mortgage Notes and the Assignments
of Mortgages represents the legal and valid signature of said officer
of the Seller. The Mortgage Loans are not subject to any security
interest, claim, pledge, hypothecation or lien.
5. Either (i) no consent, approval, authorization or order of any court
or governmental agency or body is required for the execution, delivery
and performance by the Seller of or compliance by the Seller with the
Purchase Agreement, the Seller's Warranties Agreement, the Custodial
Agreement or the sale and delivery of the Mortgage Loans or the
consummation of the transactions contemplated by the Purchase
Agreement and the Seller's Warranties Agreement; or (ii) any required
consent, approval, authorization or order has been obtained by the
Seller. To the extent that the Mortgage Loans
EXHIBIT 2 - PAGE 2
<PAGE>
may be deemed "securities" under the Securities Act of 1933, as
amended, the offer and sale of the Mortgage Loans by the Seller to the
Purchaser is exempt from registration pursuant to Section 4(5) of such
Act, subject to the Purchaser's representation that it will purchase
such Mortgage Loans for its own account.
6. Neither the consummation of the transactions contemplated by, nor the
fulfillment of the terms of, the Purchase Agreement, the Seller's
Warranties Agreement, the Custodial Agreement or the Mortgage Loans
conflicts or will conflict with or results or will result in a breach
of or constitutes or will constitute a default under the charter or
by-laws of the Seller, the terms of any indenture or other agreement
or instrument to which the Seller is a party or by which it is bound
or to which it is subject, or violates any statute or order, rule,
regulations, writ, injunction or decree of any court, governmental
authority or regulatory body to which the Seller is subject or by
which it is bound.
7. There is no action, suit, proceeding or investigation pending or, to
the best of [our] [my] knowledge, threatened against the Seller which,
in [our] [my] judgment, either in any one instance or in the
aggregate, may result in any material adverse change in the business,
operations, financial condition, properties or assets of the Seller or
in any material impairment of the right or ability of the Seller to
carry on its business substantially as now conducted or in any
material liability on the part of the Seller or which would draw into
question the validity of the Purchase Agreement, the Mortgage Loans,
the Seller's Warranties Agreement, the Custodial Agreement or the
Mortgage Loans or of any action taken or to be taken in connection
with the transactions contemplated thereby, or which would be likely
to impair materially the ability of the Seller to perform under the
terms of the Purchase Agreement, the Mortgage Loans, the Custodial
Agreement or the Seller's Warranties Agreement.
8. The sale of each Mortgage Note and Mortgage as and in the manner
contemplated by the Purchase Agreement and the Seller's Warranties
Agreement is sufficient fully to transfer to the Purchaser all right,
title and interest of the Seller thereto as noteholder and mortgagee.
9. The Mortgages have been duly assigned and the Mortgage Notes have been
duly endorsed as provided in the Custodial Agreement. The Assignments
of Mortgage are in recordable form, except for the insertion of the
name of the assignee, and upon the name of the assignee being
inserted, are acceptable for recording under the laws of the state
where each related Mortgaged Property is located. The endorsement of
the Mortgage Notes, the delivery to the Custodian of the Assignments
of Mortgage, and the delivery of the original endorsed Mortgage Notes
to the Custodian are sufficient to permit the Purchaser to avail
EXHIBIT 2 - PAGE 3
<PAGE>
itself of all protection available under applicable law against the
claims of any present or future creditors of the Seller, and are
sufficient to prevent any other sale, transfer, assignment, pledge or
hypothecation of the Mortgages and the Mortgage Notes by the Seller
from being enforceable.
This opinion is given to you for your sole benefit, and no other
person or entity is entitled to rely hereon except that the purchaser or
purchasers to which you initially and directly resell the Mortgage Loans may
rely on this opinion as if it were addressed to them as of its date.
Very truly yours,
------------------------------------------------
[Name]
[Assistant] General Counsel
EXHIBIT 2 - PAGE 4
<PAGE>
EXHIBIT 3
---------
FORM OF OPINION OF COUNSEL TO THE CUSTODIAN
(date)
CS First Boston Mortgage Capital Corp.
Park Avenue Plaza
New York, New York 10055
Dear Sirs and Mesdames:
[We] [I] have acted as counsel to Bankers Trust Company of California,
N.A. (the "Custodian"), in connection with the execution and delivery of the
---------
Custodial Agreement, dated as of August 1, 1996 (the "Agreement"), among T.A.R.
---------
Preferred Mortgage Corporation (the "Seller"), you, Advanta Mortgage Corp. USA
------
(the "Servicer") and the Custodian with respect to the Mortgage Loans delivered
--------
by the Seller as to which the Custodian named herein is to act as custodian.
[We] [I] have reviewed the Agreement and such other matters as we have
deemed appropriate in order to deliver the opinions contained herein.
Based upon the foregoing, it is [our] [my] opinion that:
1. The Custodian is a [federally] [state] chartered commercial bank
duly organized, validly existing and in good standing under the laws of the
[United States] [the State of ______] with full right, power and authority to
enter into, execute and deliver the Agreement.
2. The Agreement has been duly authorized, executed and delivered by
the Custodian and constitutes the legal, valid and binding agreement of and
enforceable against the Custodian in accordance with its terms, subject to
bankruptcy laws and other similar laws of general application affecting rights
of creditors and subject to the application of the rules of equity, including
those respecting the availability of specific performance, none of which will
materially interfere with the realization of the benefits provided under the
Agreement.
This opinion is given to you for your sole benefit, and no other
person or entity is entitled to rely hereon except that the purchasers to which
you initially and directly resell the Mortgage Loans may rely on this opinion as
if it were addressed to them as of its date.
Very truly yours,
<PAGE>
EXHIBIT 4
---------
FORM OF SECURITY RELEASE CERTIFICATION
___________________, 1991
Federal Home Loan Bank of
_________________________
_________________________
_________________________
_________________________
Attention:________________________________________
________________________________________
Re: Notice of Sale and Release of Collateral
----------------------------------------
Dear Sirs:
This letter serves as notice that T.A.R. Preferred Mortgage
Corporation, a [state] [federally] chartered savings and loan association [in
the state of ___________] (the "Association") has committed to sell to CS First
-----------
Boston Mortgage Capital Corp. ("First Boston") under a Purchase Agreement dated
------------
as of August 1, 1996, certain mortgage loans originated by the Association. The
Association warrants that the mortgage loans to be sold to First Boston are in
addition to and beyond any collateral required to secure advances made by you to
the Association.
The Association acknowledges that the mortgage loans to be sold to
First Boston shall not be used as additional or substitute collateral for
advances made by you. First Boston understands that the balance of the
Association's mortgage loan portfolio may be used as collateral or additional
collateral for advances made by you, and confirms that it has no interest
therein.
<PAGE>
Execution of this letter by the Federal Home Loan Bank of
_________________________ shall constitute a full and complete release of any
security interest, claim, or lien which the Federal Home Loan Bank of
_____________________ may have against the mortgage loans to be sold to First
Boston.
Very truly yours,
T.A.R. Preferred Mortgage Corporation
By:____________________________________________
Name:__________________________________________
Title:_________________________________________
Date:__________________________________________
Acknowledged and approved:
FEDERAL HOME LOAN BANK OF
__________________________
By:_______________________________
Name:_____________________________
Title:____________________________
Date:_____________________________
EXHIBIT 4 - PAGE 2
<PAGE>
EXHIBIT 5
---------
FORM OF SECURITY RELEASE CERTIFICATION
I. Release of Security Interest
----------------------------
The financial institution named below hereby relinquishes any and all
right, title and interest it may have in all Mortgage Loans to be purchased by
CS First Boston Mortgage Capital Corp. from the Seller named below pursuant to
that certain Purchase Agreement, dated as of August 1, 1996, and certifies that
all notes, mortgages, assignments and other documents in its possession relating
to such Mortgage Loans have been delivered and released to the Seller named
below or its designees, as of the date and time of the sale of such Mortgage
Loans to CS First Boston Mortgage Capital Corp.
Name and Address of Financial Institution
________________________________
(name)
________________________________
(Address)
By:_____________________________
<PAGE>
II. Certification of Release
------------------------
The Seller named below hereby certifies to CS First Boston Mortgage
Capital Corp. that, as of the date and time of the sale of the above mentioned
Mortgage Loans to CS First Boston Mortgage Capital Corp., the security interests
in the Mortgage Loans released by the above named financial institution comprise
all security interests relating to or affecting any and all such Mortgage Loans.
The Seller warrants that, as of such time, there are and will be no other
security interests affecting any or all of such Mortgage Loans.
T.A.R. Preferred Mortgage Corporation
By:_______________________________________
Title:____________________________________
Date:_____________________________________
EXHIBIT 5 - PAGE 2
<PAGE>
EXHIBIT 6
---------
SCHEDULE OF MORTGAGE LOANS
<PAGE>
EXHIBIT 10.15
- --------------------------------------------------------------------------------
CS FIRST BOSTON MORTGAGE CAPITAL CORP.,
Purchaser
and
T.A.R. PREFERRED MORTGAGE CORPORATION,
Company
_____________________________________________
SELLER'S WARRANTIES AGREEMENT
Dated as of August 1, 1996
_____________________________________________
Conventional Residential Fixed Rate Second Lien Mortgage Loans
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I DEFINITIONS.................................................................. 1
ARTICLE II CONVEYANCE OF MORTGAGE LOANS; POSSESSION OF MORTGAGE FILES;
BOOKS AND RECORDS; CUSTODIAL AGREEMENT; DELIVERY OF DOCUMENTS................ 7
2.01 Conveyance of Mortgage Loans; Possession of Mortgage Files................... 7
2.02 Books and Records; Transfers of Mortgage Loans............................... 7
2.03 Custodial Agreement; Delivery of Documents................................... 8
ARTICLE III REPRESENTATIONS AND WARRANTIES;
REMEDIES AND BREACH.......................................................... 8
3.01 Company Representations and Warranties....................................... 8
3.02 Representations and Warranties Regarding Individual Mortgage Loans........... 10
3.03 Remedies for Breach of Representations and Warranties........................ 20
3.04 Restrictions Applicable in the Event that a Mortgage Loan is Acquired
by a REMIC............................................................. 21
3.05 First Two Monthly Payments by Mortgagor...................................... 21
ARTICLE IV ADMINISTRATION AND SERVICING OF MORTGAGE LOANS............................... 22
4.01 Servicing of the Mortgage Loans.............................................. 22
ARTICLE V THE COMPANY.................................................................. 22
5.01 Indemnification.............................................................. 22
5.02 Right to Examine Company Records............................................. 22
5.03 Financial Statements......................................................... 22
5.04 Limitation on Resignation and Assignment by Company.......................... 23
ARTICLE VI MISCELLANEOUS PROVISIONS..................................................... 24
6.01 Amendment.................................................................... 24
6.02 Governing Law................................................................ 24
6.03 Notices...................................................................... 24
6.04 Severability of Provisions................................................... 24
6.05 Relationship of Parties...................................................... 25
6.06 Execution; Successors and Assigns............................................ 25
6.07 Recordation of Assignments of Mortgage....................................... 25
6.08 Assignment by Purchaser...................................................... 25
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C> <C>
6.09 Counterparts................................................................... 26
6.10 Waivers........................................................................ 26
6.11 Exhibits....................................................................... 26
6.12 General Interpretive Principles................................................ 26
6.13 Reproduction of Documents...................................................... 27
6.14 Further Agreements............................................................. 27
6.15 No Solicitation................................................................ 27
6.16 Grant of Security Interest..................................................... 27
</TABLE>
-ii-
<PAGE>
EXHIBITS
EXHIBIT A MORTGAGE LOAN SCHEDULE
EXHIBIT B CONTENTS OF EACH MORTGAGE FILE
EXHIBIT C FORM OF CUSTODIAL AGREEMENT WITH EXHIBITS
EXHIBIT D FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT
EXHIBIT E FORM OF ASSIGNMENT AND CONVEYANCE
EXHIBIT F UNDERWRITING GUIDELINES
-iii-
<PAGE>
This Seller's Warranties Agreement is entered into as of August 1,
1996, and is executed between CS First Boston Mortgage Capital Corp., as
purchaser (the "Purchaser"), and T.A.R. Preferred Mortgage Corporation, as
---------
seller (the "Company").
-------
W I T N E S S E T H
WHEREAS, the Purchaser and the Company entered into a Mortgage Loan
Purchase Agreement dated as of August 1, 1996 (the "Purchase Agreement")
pursuant to which the Purchaser agreed to purchase, from time to time, from the
Company certain conventional, residential, fixed rate residential second lien
mortgage loans (the "Mortgage Loans") to be delivered as whole loans (each a
"Mortgage Loan Package") on a servicing released basis; and;
WHEREAS, each of the Mortgage Loans is secured by a mortgage, deed of
trust or other security instrument creating a second lien on a residential
dwelling located in the jurisdiction indicated on the Mortgage Loan Schedule,
which is annexed hereto as Exhibit A; and
---------
WHEREAS, the Purchaser and the Company wish to prescribe the
representations and warranties to be given by the Company in connection with
such Mortgage Loans.
NOW, THEREFORE, in consideration of the mutual agreements hereinafter
set forth, and for other good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the Purchaser and the Company agree as
follows:
ARTICLE I
DEFINITIONS
Whenever used herein, the following words and phrases, unless the
context otherwise requires, shall have the following meanings:
Accepted Servicing Practices: With respect to any Mortgage Loan,
----------------------------
those mortgage servicing practices of prudent mortgage lending institutions
which service mortgage loans of the same type as such Mortgage Loan in the
jurisdiction where the related Mortgaged Property is located.
Agreement: This Seller's Warranties Agreement and all amendments
---------
hereof and supplements hereto.
ALTA: The American Land Title Association or any successor thereto.
----
<PAGE>
Appraised Value: With respect to a Mortgage Loan, the value of the
---------------
related Mortgaged Property based upon the drive-by appraisal made at the
origination of the Mortgage Loan in accordance with FHLMC requirements for
drive-by appraisals, provided, however, that in the case of a Refinanced
Mortgage Loan such value is based solely upon the appraisal made at the time of
origination of such Refinanced Mortgage Loan.
Assignment and Conveyance: The agreement executed by the Company
-------------------------
substantially in the form of Exhibit E hereto pursuant to which the Company
---------
assigns all of its right, title and interest in and to the Mortgage Loans and
the related Mortgage Loan Documents to the Purchaser on the applicable Closing
Date.
Assignment of Mortgage: An assignment of the Mortgage, notice of
----------------------
transfer or equivalent instrument in recordable form, sufficient under the laws
of the jurisdiction wherein the related Mortgaged Property is located to reflect
the sale of the Mortgage to the Purchaser.
Business Day: Any day other than (i) a Saturday or Sunday, or (ii) a
------------
day on which banking and savings and loan institutions in the State of New York
are authorized or obligated by law or executive order to be closed.
Closing Date: The date or dates on which the Purchaser from time to
------------
time shall purchase and the Company from time to time shall sell, the Mortgage
Loans listed on the related Mortgage Loan Schedule with respect to the related
Closing Date. The Closing Date for such Mortgage Loans shall be as respectively
set forth on the related Mortgage Loan Schedule or such other date or dates as
are mutually agreed upon by the parties, provided that a Closing Date shall not
occur more than once during a weekly period.
Code: The Internal Revenue Code of 1986, as it may be amended from
----
time to time or any successor statute thereto, and applicable U.S. Department of
the Treasury regulations issued pursuant thereto.
Combined LTV or CLTV: With respect to any Mortgage Loan, the ratio of
--------------------
(a) the Stated Principal Balance as of the related Cut-off Date of (i) the
Mortgage Loan plus (ii) the mortgage loan constituting the First Lien to (b) the
Appraised Value of the Mortgaged Property.
Company: T.A.R. Preferred Mortgage Corporation, or its successor in
-------
interest or assigns, or any successor to the Company under this Agreement
appointed as herein provided.
Condemnation Proceeds: All awards or settlements in respect of a
---------------------
Mortgaged Property, whether permanent or temporary, partial or entire, by
exercise of the power of eminent domain or condemnation, to the extent not
required to be released to a Mortgagor in accordance with the terms of the
related Mortgage Loan Documents.
-2-
<PAGE>
Custodial Account: The separate account or accounts created and
-----------------
maintained pursuant to the Servicing Agreement.
Custodial Agreement: The agreement governing the retention of the
-------------------
originals of each Mortgage Note, Mortgage, Assignment of Mortgage and other
Mortgage Loan Documents, a copy of which is annexed hereto as Exhibit C.
---------
Custodian: The Custodian under the Custodial Agreement, or its
---------
successor in interest or assigns or any successor to the Custodian under the
Custodial Agreement as provided therein.
Cut-off Date: The first day of the month in which the related Closing
------------
Date occurs.
Deleted Mortgage Loan: A Mortgage Loan which is repurchased or
---------------------
replaced by the Company in accordance with the terms of this Agreement.
Due Date: The day of the month on which the Monthly Payment is due on
--------
a Mortgage Loan, exclusive of any days of grace.
Escrow Payments: With respect to any Mortgage Loan, the amounts
---------------
constituting ground rents, taxes, assessments, water rates, sewer rents,
municipal charges, fire and hazard insurance premiums, condominium charges, and
any other payments required to be escrowed by the Mortgagor with the mortgagee
pursuant to the Mortgage or any other related document.
FHLMC: The Federal Home Loan Mortgage Corporation, or any successor
-----
thereto.
First Lien: With respect to each Mortgaged Property, the lien of the
----------
mortgage, deed of trust or other instrument securing a mortgage note which
creates a first lien on the Mortgaged Property.
FNMA: The Federal National Mortgage Association, or any successor
----
thereto.
FNMA Guides: The FNMA Mortgage-Backed Selling Guide and the FNMA
-----------
Servicing Guide and all amendments and additions thereto.
Insurance Proceeds: With respect to each Mortgage Loan, proceeds of
------------------
insurance policies insuring the Mortgage Loan or the related Mortgaged Property.
Liquidation Proceeds: Cash received in connection with the
--------------------
liquidation of a defaulted Mortgage Loan, whether through the sale or assignment
of such Mortgage Loan, trustee's sale, foreclosure sale or otherwise, or the
sale of the related REO Property (including REO Disposition Proceeds) if the
Mortgaged Property is acquired in satisfaction of the Mortgage Loan.
-3-
<PAGE>
Loan-to-Value Ratio or LTV: With respect to any Mortgage Loan, the
--------------------------
ratio of the Stated Principal Balance of the Mortgage Loan as of the related
Cut-off Date (unless otherwise indicated) to the Appraised Value of the
Mortgaged Property.
Monthly Payment: The scheduled monthly payment of principal and
---------------
interest on a Mortgage Loan.
Mortgage: The mortgage, deed of trust or other instrument securing a
--------
Mortgage Note, which creates a second lien on an unsubordinated estate in fee
simple in real property securing the Mortgage Note.
Mortgage File: The items pertaining to a particular Mortgage Loan
-------------
referred to in Exhibit B annexed hereto, and any additional documents required
---------
to be added to the Mortgage File pursuant to this Agreement.
Mortgage Interest Rate: The annual rate of interest borne on a
----------------------
Mortgage Note.
Mortgage Loan: An individual Mortgage Loan which is the subject of
-------------
this Agreement, each Mortgage Loan originally sold and subject to this Agreement
being identified on the Mortgage Loan Schedule, which Mortgage Loan includes
without limitation the Mortgage File, the Monthly Payments, Principal
Prepayments, Liquidation Proceeds, Condemnation Proceeds, Insurance Proceeds,
REO Disposition Proceeds and all other rights, benefits, proceeds and
obligations arising from or in connection with such Mortgage Loan, excluding
Deleted Mortgage Loans.
Mortgage Loan Documents: The documents listed in Section 2 of the
-----------------------
Custodial Agreement.
Mortgage Loan Schedule: A schedule of Mortgage Loans annexed hereto
----------------------
as Exhibit A, such schedule setting forth the following information with respect
---------
to each Mortgage Loan as of the related Cut-off Date: (1) the Company's
Mortgage Loan identifying number; (2) the Mortgagor's name; (3) the street
address of the Mortgaged Property including the state and the zip code; (4) a
code indicating whether the Mortgaged Property is owner occupied; (5) the number
and type of residential units constituting the Mortgaged Property; (6) the
original months to maturity or the remaining months to maturity from the Cut-off
Date, in any case based on the original amortization schedule, and if different,
the maturity expressed in the same manner but based on the actual amortization
schedule; (7) the Loan-to-Value Ratio at origination; (8) the Mortgage Interest
Rate as of the Cut-off Date; (9) the Due Date for the first payment on the
Mortgage Loan; (10) the stated maturity date; (11) the amount of the Monthly
Payment as of the Cut-off Date; (12) the last Due Date for which a Monthly
Payment was actually applied to the outstanding principal balance; (13) the
original principal amount of the Mortgage Loan; (14) the principal balance of
the Mortgage Loan as of the close of business on the Cut-off Date, after
deduction of payments of principal due on or before the Cut-off Date, whether or
not collected; (15) the Mortgage Interest Rate minus the servicing fee as of the
Cut-off Date; (16) a code indicating the purpose of the Mortgage Loan; (17) the
-4-
<PAGE>
Mortgagor's debt to income ratio; (18) the Mortgagor's credit score; (19) the
outstanding principal balance of the First Lien; and (20) the related Purchase
Price and Terms Letter. With respect to the Mortgage Loans in the aggregate,
the Mortgage Loan Schedule shall set forth the following information, as of the
Cut-off Date: (1) the number of Mortgage Loans; (2) the current aggregate
outstanding principal balance of the Mortgage Loans; (3) the weighted average
Mortgage Interest Rate of the Mortgage Loans; and (4) the weighted average
maturity of the Mortgage Loans.
Mortgage Note: The note or other evidence of the indebtedness of a
-------------
Mortgagor secured by a Mortgage.
Mortgaged Property: The real property securing repayment of the debt
------------------
evidenced by a Mortgage Note.
Mortgagor: The obligor on a Mortgage Note.
---------
Officer's Certificate: A certificate signed by the Chairman of the
---------------------
Board or the Vice Chairman of the Board or the President or a Vice President or
an assistant Vice President and by the Treasurer or the Secretary or one of the
Assistant Treasurers or Assistant Secretaries of the Company, and delivered to
the Purchaser as required by this Agreement.
Opinion of Counsel: A written opinion of counsel, who may be an
------------------
employee of the Company, reasonably acceptable to the Purchaser.
Person: Any individual, corporation, partnership, joint venture,
------
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof.
Principal Prepayment: Any payment or other recovery of principal on a
--------------------
Mortgage Loan which is received in advance of its scheduled Due Date, including
any prepayment penalty or premium thereon and which is not accompanied by an
amount of interest representing scheduled interest due on any date or dates in
any month or months subsequent to the month of prepayment.
Purchase Price and Terms Letters: Those certain letter agreements
--------------------------------
setting forth the general terms and conditions of the transactions to be
consummated hereunder and identifying the Mortgage Loans to be purchased from
time to time hereunder, by and between the Seller and the Purchaser, dated as of
the date set forth in each related Assignment and Conveyance. All of the
individual Purchase Price and Terms Letters shall collectively be referred to as
the "Purchase Price and Terms Letter".
Purchaser: CS First Boston Mortgage Capital Corp. or its successor in
---------
interest or any successor to the Purchaser under this Agreement as herein
provided.
-5-
<PAGE>
Refinanced Mortgage Loan: A Mortgage Loan which was made to a
------------------------
Mortgagor who owned the Mortgaged Property prior to the origination of such
Mortgage Loan and the proceeds of which were used, in whole or in part, to
satisfy an existing mortgage.
REMIC: A "real estate mortgage investment conduit" within the meaning
-----
of Section 860D of the Code.
Remittance Date: The 10th day (or if such 10th day is not a Business
---------------
Day, the first Business Day immediately following) of any month.
REO Disposition: The final sale by the Company of any REO Property.
---------------
REO Disposition Proceeds: All amounts received with respect to an REO
------------------------
Disposition.
REO Property: A Mortgaged Property acquired by the Company on behalf
------------
of the Purchaser through foreclosure or by deed in lieu of foreclosure.
Repurchase Price: With respect to any Mortgage Loan, a price equal to
----------------
the sum of (a) the Stated Principal Balance of the Mortgage Loan plus (b)
interest on such Stated Principal Balance at the Mortgage Interest Rate from the
date on which interest has last been paid to the date of repurchase, less
amounts received or advanced in respect of such repurchased Mortgage Loan which
are being held in the Custodial Account for distribution in the month of
repurchase.
Securities Act of 1933 or the 1933 Act: The Securities Act of 1933,
--------------------------------------
as amended.
Servicer: Advanta Mortgage Corp. USA, or its successor in interest or
--------
any successor to the Servicer under the Servicing Agreement.
Servicing Agreement: That certain Loan Servicing Agreement, dated as
--------------------
of August 5, 1996, by and between the Purchaser and the Servicer.
Stated Principal Balance: As to each Mortgage Loan, (i) the principal
------------------------
balance of the Mortgage Loan at the related Cut-off Date after giving effect to
payments of principal received on or before such date, minus (ii) all amounts
previously distributed to the Purchaser with respect to the related Mortgage
Loan representing payments or recoveries of principal.
Underwriting Guidelines: The underwriting guidelines used by the
-----------------------
Company in connection with the origination of each Mortgage Loan which
underwriting guidelines are attached hereto as Exhibit F. The Underwriting
---------
Guidelines attached hereto as Exhibit F shall not be amended or modified by the
---------
Company without the Purchaser's written consent.
-6-
<PAGE>
ARTICLE II
CONVEYANCE OF MORTGAGE LOANS; POSSESSION OF MORTGAGE FILES;
BOOKS AND RECORDS; CUSTODIAL AGREEMENT; DELIVERY OF DOCUMENTS
Section 2.01 CONVEYANCE OF MORTGAGE LOANS; POSSESSION OF MORTGAGE
----------------------------------------------------
FILES.
-----
The Company, pursuant to the applicable Assignment and Conveyance
executed on the related Closing Date, shall sell, transfer, assign, set over and
convey to the Purchaser, without recourse, but subject to the terms of this
Agreement, all the right, title and interest of the Company in and to the
related Mortgage Loans. Pursuant to Section 2.03, the Company shall have
delivered the related Mortgage Loan Documents to the Custodian.
The contents of each Mortgage File not delivered to the Custodian are
and shall be held in trust by the Company for the benefit of the Purchaser as
the owner thereof. Upon the sale of the Mortgage Loans the ownership of each
Mortgage Note, the related Mortgage and the related Mortgage File shall vest
immediately in the Purchaser, and the ownership of all records and documents
with respect to the related Mortgage Loan prepared by or which come into the
possession of the Company shall vest immediately in the Purchaser and shall be
retained and maintained by the Company, in trust, at the will of the Purchaser
and only in such custodial capacity.
On each Closing Date, the Company shall deliver to the Purchaser the
notice required pursuant to Section 226.32 of the Federal Reserve Board
Regulation Z with respect to the Mortgage Loans sold pursuant hereto: "Notice:
This is a mortgage subject to special rules under the federal Truth in Lending
Act, Purchasers or assignees of this mortgage could be liable for all claims and
defenses with respect to the mortgage that the borrower could assert against the
creditor."
Section 2.02 BOOKS AND RECORDS; TRANSFERS OF MORTGAGE LOANS.
----------------------------------------------
The sale of each Mortgage Loan shall be reflected on the Company's
balance sheet and other financial statements as a sale of assets by the Company.
The Company shall be responsible for maintaining, and shall maintain, a complete
set of books and records for each Mortgage Loan which shall be marked clearly to
reflect the ownership of each Mortgage Loan by the Purchaser.
No transfer of a Mortgage Loan may be made unless such transfer is in
compliance with the terms hereof. For the purposes of this Agreement, the
Company shall be under no obligation to deal with any person with respect to
this agreement or the Mortgage Loans unless the books and records show such
person as the owner of the Mortgage Loan. The Purchaser may, subject to the
terms of this Agreement, sell and transfer one or more of the Mortgage Loans,
provided, however, that the transferee will not be deemed to be a Purchaser
- -------- -------
hereunder binding upon the Company unless such transferee shall agree in writing
-7-
<PAGE>
to be bound by the terms of this Agreement and an original counterpart of the
instrument of transfer and an assignment and assumption of this Agreement in the
form of Exhibit D hereto executed by the transferee shall have been delivered to
---------
the Company. The Purchaser also shall advise the Company of the transfer. Upon
receipt of notice of the transfer, the Company shall mark its books and records
to reflect the ownership of the Mortgage Loans of such assignee, and shall
release the previous Purchaser from its obligations hereunder with respect to
the Mortgage Loans sold or transferred.
Section 2.03 CUSTODIAL AGREEMENT; DELIVERY OF DOCUMENTS.
------------------------------------------
Pursuant to the Custodial Agreement, on each Closing Date, the Company
shall deliver and release to the Custodian those Mortgage Loan Documents as
required by the Custodial Agreement with respect to each Mortgage Loan a list of
which is set forth in the Custodial Agreement.
On each Closing Date, the Custodian shall certify to its receipt of
all such Mortgage Loan Documents required to be delivered pursuant to the
Custodial Agreement, as evidenced by the Trust Receipt of the Custodian in the
form annexed to the Custodial Agreement. The Company shall be responsible for
maintaining the Custodial Agreement for the benefit of the Purchaser and shall
pay all fees and expenses of the Custodian.
The Company shall forward to the Custodian original documents
evidencing an assumption, modification, consolidation or extension of any
Mortgage Loan within one week of their execution, provided, however, that the
Company shall provide the Custodian with a certified true copy of any such
document submitted for recordation within one week of its execution, and shall
provide the original of any document submitted for recordation or a copy of such
document certified by the appropriate public recording office to be a true and
complete copy of the original within sixty days of its submission for
recordation.
ARTICLE III
REPRESENTATIONS AND WARRANTIES;
REMEDIES AND BREACH
Section 3.01 COMPANY REPRESENTATIONS AND WARRANTIES.
--------------------------------------
The Company represents and warrants to the Purchaser that as of the
related Closing Date:
(a) Due Organization and Authority. The Company is a corporation duly
------------------------------
organized, validly existing and in good standing under the laws of the State of
California and has all licenses necessary to carry on its business as now being
conducted and is licensed, qualified and in good standing in each state where a
Mortgaged Property is located if the laws of such state require licensing or
qualification in order to conduct business of the type
-8-
<PAGE>
conducted by the Company, and in any event the Company is in compliance with the
laws of any such state to the extent necessary to ensure the enforceability of
the related Mortgage Loan in accordance with the terms of this Agreement; the
Company has the full corporate power and authority to execute and deliver this
Agreement and to perform in accordance herewith; the execution, delivery and
performance of this Agreement (including all instruments of transfer to be
delivered pursuant to this Agreement) by the Company and the consummation of the
transactions contemplated hereby have been duly and validly authorized; this
Agreement evidences the valid, binding and enforceable obligation of the
Company, except as enforceability may be limited by (i) bankruptcy, insolvency,
liquidation, receivership, moratorium, reorganization or other similar laws
affecting the enforcement of the rights of creditors and (ii) general principles
of equity; and all requisite corporate action has been taken by the Company to
make this Agreement valid and binding upon the Company in accordance with its
terms;
(b) Ordinary Course of Business. The consummation of the transactions
---------------------------
contemplated by this Agreement are in the ordinary course of business of the
Company, and the transfer, assignment and conveyance of the Mortgage Notes and
the Mortgages by the Company pursuant to this Agreement are not subject to the
bulk transfer or any similar statutory provisions in effect in any applicable
jurisdiction;
(c) No Conflicts. Neither the execution and delivery of this
------------
Agreement, the acquisition of the Mortgage Loans by the Company, the sale of the
Mortgage Loans to the Purchaser or the transactions contemplated hereby, nor the
fulfillment of or compliance with the terms and conditions of this Agreement,
will conflict with or result in a breach of any of the terms, conditions or
provisions of the Company's charter or by-laws or any legal restriction or any
agreement or instrument to which the Company is now a party or by which it is
bound, or constitute a default or result in an acceleration under any of the
foregoing, or result in the violation of any law, rule, regulation, order,
judgment or decree to which the Company or its property is subject, or impair
the ability of the Purchaser to realize on the Mortgage Loans, or impair the
value of the Mortgage Loans;
(d) Approved Mortgagee. The Company is a HUD approved mortgagee;
------------------
(e) Solvency. The Company is solvent and the sale of the Mortgage
--------
Loans will not cause the Company to become insolvent. The sale of the Mortgage
Loans is not undertaken with the intent to hinder, delay or defraud any of the
Company's creditors;
(f) Ability to Perform. The Company does not believe, nor does it
------------------
have any reason or cause to believe, that it cannot perform each and every
covenant contained in this Agreement in all material respects;
(g) No Litigation Pending. There is no action, suit, proceeding or
---------------------
investigation pending or threatened against the Company which, either in any one
instance or in the aggregate, may result in any material adverse change in the
business, operations, financial condition, properties or assets of the Company,
or in any material impairment of the
-9-
<PAGE>
right or ability of the Company to carry on its business substantially as now
conducted, or in any material liability on the part of the Company, or which
would draw into question the validity of this Agreement or the Mortgage Loans or
of any action taken or to be taken in connection with the obligations of the
Company contemplated herein, or which would be likely to impair materially the
ability of the Company to perform under the terms of this Agreement;
(h) No Consent Required. No consent, approval, authorization or order
-------------------
of any court or governmental agency or body is required for the execution,
delivery and performance by the Company of or compliance by the Company with
this Agreement or the sale of the Mortgage Loans or the consummation of the
transactions contemplated by this Agreement, or if required, such approval has
been obtained prior to the related Closing Date;
(i) Selection Process. The Mortgage Loans were selected from among
-----------------
the outstanding fixed rate one- to four-family mortgage loans in the Company's
portfolio at the related Closing Date as to which the representations and
warranties set forth in Section 3.02 could be made and such selection was not
made in a manner so as to affect adversely the interests of the Purchaser;
(j) Pool Characteristics. The pool characteristics of the Mortgage
--------------------
Loans purchased by the Purchaser and sold by the Company shall be as set forth
on the applicable Assignment and Conveyance.
(k) No Untrue Information. Neither this Agreement nor any statement,
---------------------
report or other document (other than the Mortgage Loan Documents) furnished by
the Company or to be furnished by the Company pursuant to this Agreement or in
connection with the transactions contemplated hereby contains any untrue
statement of fact or omits to state a fact necessary to make the statements
contained therein not misleading;
(l) Sale Treatment. The Company has been advised by its independent
--------------
certified public accountants that under generally accepted accounting principles
the transfer of the Mortgage Loans may be treated as a sale on the books and
records of the Company and the Company has determined that the disposition of
the Mortgage Loans pursuant to this Agreement will be afforded sale treatment
for accounting and tax purposes; and
(m) No Commissions to Third Parties. The Company has not dealt with
-------------------------------
any broker or agent or anyone else who might be entitled to a fee or commission
in connection with this transaction other than the Purchaser.
Section 3.02 REPRESENTATIONS AND WARRANTIES REGARDING INDIVIDUAL
---------------------------------------------------
MORTGAGE LOANS.
--------------
As to each Mortgage Loan, the Company hereby represents and warrants
to the Purchaser that as of each related Closing Date:
-10-
<PAGE>
(a) Mortgage Loans as Described. The information set forth in the
---------------------------
Mortgage Loan Schedule is complete, true and correct;
(b) Payments Current. All payments required to be made up to the
----------------
related Closing Date for the Mortgage Loan under the terms of the Mortgage Note
have been made and credited. No payment required under the Mortgage Loan is
delinquent nor has any payment under the Mortgage Loan been delinquent at any
time since the origination of the Mortgage Loan;
(c) No Outstanding Charges. There are no defaults in complying with
----------------------
the terms of the Mortgages, and all taxes, governmental assessments, insurance
premiums, water, sewer and municipal charges, leasehold payments or ground rents
which previously became due and owing have been paid, or an escrow of funds 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. The
Company has not advanced funds, or induced, solicited or knowingly received any
advance of funds by a party other than the Mortgagor, directly or indirectly,
for the payment of any amount required under the Mortgage Loan, except for
interest accruing from the date of the Mortgage Note or date of disbursement of
the Mortgage Loan proceeds, whichever is greater, to the day which precedes by
one month the related Due Date of the first installment of principal and
interest;
(d) Original Terms Unmodified. The terms of the Mortgage Note and
-------------------------
Mortgage have not been impaired, waived, altered or modified in any respect,
except by a written instrument which has been recorded, if necessary to protect
the interests of the Purchaser and which has been delivered to the Custodian.
The substance of any such waiver, alteration or modification has been approved
by the title insurer, to the extent required by the policy, and its terms are
reflected on the Mortgage Loan Schedule. No Mortgagor has been released, in
whole or in part, except in connection with an assumption agreement approved by
the title insurer, to the extent required by the policy, and which assumption
agreement is part of the Mortgage Loan File delivered to the Custodian and the
terms of which are reflected in the Mortgage Loan Schedule;
(e) No Defenses. The Mortgage Loan is not subject to any right of
-----------
rescission, set-off, counterclaim or defense, including without limitation the
defense of usury, nor will the operation of any of the terms of the Mortgage
Note or the Mortgage, or the exercise of any right thereunder, render either the
Mortgage Note or the Mortgage unenforceable, in whole or in part, and no such
right of rescission, set-off, counterclaim or defense has been asserted with
respect thereto; and no Mortgagor was a debtor in any state or federal
bankruptcy or insolvency proceeding at the time the Mortgage Loan was
originated;
(f) Hazard Insurance. Pursuant to the terms of the Mortgage, all
----------------
buildings or other improvements upon the Mortgaged Property are insured by a
generally acceptable insurer rated A:VI or better in the current Best's Key
Rating Guide ("Best's") against loss by fire, hazards of extended coverage and
------
such other hazards as are customary in the area where the Mortgaged Property is
located pursuant to insurance policies in an amount which is at least
-11-
<PAGE>
equal to the lesser of (i) the maximum insurable value of the improvements
securing such Mortgage Loan and (ii) the greater of (a) sum of the outstanding
principal balance of the Mortgage Loan and the outstanding principal balance of
the First Lien and (b) an amount such that the proceeds thereof shall be
sufficient to prevent the Mortgagor or the loss payee from becoming a co-
insurer. If upon origination of the Mortgage Loan, the Mortgaged Property was in
an area identified in the Federal Register by the Federal Emergency Management
Agency as having special flood hazards (and such flood insurance was required by
federal regulation and such flood insurance has been made available) a flood
insurance policy meeting the requirements of the current guidelines of the
Federal Insurance Administration is in effect with a generally acceptable
insurance carrier rated A:VI or better in Best's in an amount representing
coverage equal to the lesser of (i) the minimum amount required, under the terms
of coverage, to compensate for any damage or loss on a replacement cost basis
(or the unpaid balance of the mortgage if replacement cost coverage is not
available for the type of building insured) and (ii) the maximum amount of
insurance which is available under the Flood Disaster Protection Act of 1973, as
amended. All individual insurance policies contain a standard mortgagee clause
naming the Company and its successors and assigns as mortgagee, and all premiums
thereon have been paid. The Mortgage obligates the Mortgagor thereunder to
maintain the hazard insurance policy at the Mortgagor's cost and expense, and on
the Mortgagor's failure to do so, authorizes the holder of the Mortgage to
obtain and maintain such insurance at such Mortgagor's cost and expense, and to
seek reimbursement therefor from the Mortgagor. Where required by state law or
regulation, the Mortgagor has been given an opportunity to choose the carrier of
the required hazard insurance, provided the policy is not a "master" or
"blanket" hazard insurance policy covering a condominium, or any hazard
insurance policy covering the common facilities of a planned unit development.
The hazard insurance policy is the valid and binding obligation of the insurer,
is in full force and effect, and will be in full force and effect and inure to
the benefit of the Purchaser upon the consummation of the transactions
contemplated by this Agreement. The Company has not engaged in, and has no
knowledge of the Mortgagor's having engaged in, any act or omission which would
impair the coverage of any such policy, the benefits of the endorsement provided
for herein, or the validity and binding effect of either including, without
limitation, no unlawful fee, commission, kickback or other unlawful compensation
or value of any kind has been or will be received, retained or realized by an
attorney, firm or other person or entity and no such unlawful items have been
received, retained or realized by the Company;
(g) Compliance with Applicable Laws. Any and all requirements of any
-------------------------------
federal, state or local law including, without limitation, usury, truth-in-
lending, real estate settlement procedures, consumer credit protection, equal
credit opportunity or disclosure laws applicable to the Mortgage Loan have been
complied with, the consummation of the transactions contemplated hereby will not
involve the violation of any such laws or regulations, and the Company shall
maintain in its possession, available for the Purchaser's inspection, and shall
deliver to the Purchaser upon demand, evidence of compliance with all such
requirements;
-12-
<PAGE>
(h) No Satisfaction of Mortgage. The Mortgage has not been satisfied,
---------------------------
cancelled, subordinated (other than as expressly set forth in paragraph (j) of
this Section 3.02) or rescinded, in whole or in part, and the Mortgaged Property
has not been released from the lien of the Mortgage, in whole or in part, nor
has any instrument been executed that would effect any such release,
cancellation, subordination (other than in connection with the first lien
referenced in paragraph (j) of this Section 3.02) or rescission. The Company
has not waived the performance by the Mortgagor of any action, if the
Mortgagor's failure to perform such action would cause the Mortgage Loan to be
in default, nor has the Company waived any default resulting from any acting or
inaction by the Mortgagor;
(i) Location and Type of Mortgaged Property. The Mortgaged Property
---------------------------------------
is located in the state identified in the Mortgage Loan Schedule and consists of
a parcel of real property with a detached single family residence erected
thereon, or a two- to four-family dwelling, or an individual condominium unit in
a low-rise condominium project, or an individual unit in a planned unit
development or a de minimis planned unit development, provided, however, that
any condominium project or planned unit development shall conform with the
applicable FNMA and FHLMC requirements regarding such dwellings, and no
residence or dwelling is a mobile home or a manufactured dwelling. No portion
of the Mortgaged Property is used for commercial purposes;
(j) Valid Second Lien. The Mortgage is a valid, subsisting,
-----------------
enforceable, and perfected second lien on the Mortgaged Property, including all
buildings on the Mortgaged Property and all installations and mechanical,
electrical, plumbing, heating and air conditioning systems located in or annexed
to such buildings, and all additions, alterations and replacements made at any
time with respect to the foregoing. The lien of the Mortgage is subject only
to:
(1) the lien of current real property taxes and assessments not
yet due and payable;
(2) covenants, conditions and restrictions, rights of way,
easements and other matters of the public record as of the date of
recording acceptable to mortgage lending institutions generally and
specifically referred to in the lender's title insurance policy delivered
to the originator of the Mortgage Loan and (i) referred to or to otherwise
considered in the appraisal made for the originator of the Mortgage Loan or
(ii) which do not adversely affect the appraised value of the Mortgaged
Property set forth in such appraisal;
(3) other matters to which like properties are commonly subject
which do not materially interfere with the benefits of the security
intended to be provided by the Mortgage or the use, enjoyment, value or
marketability of the related Mortgaged Property; and
(4) a First Lien on the Mortgaged Property.
-13-
<PAGE>
Any security agreement, chattel mortgage or equivalent document
related to and delivered in connection with the Mortgage Loan establishes and
creates a valid, subsisting and enforceable second lien and second priority
security interest on the property described therein and the Company has full
right to sell and assign the same to the Purchaser. The Mortgaged Property was
not, as of the date of origination of the Mortgage Loan, subject to a mortgage,
deed of trust, deed to secure debt or other security instrument creating a lien
subordinate to the lien of the Mortgage;
(k) Validity of Mortgage Documents. The Mortgage Note, the Mortgage
------------------------------
and any other agreement executed and delivered by a Mortgagor in connection with
a Mortgage Loan are genuine, and each is the legal, valid and binding obligation
of the maker thereof enforceable in accordance with its terms. All parties to
the Mortgage Note, the Mortgage and any other related agreement had legal
capacity to enter into the Mortgage Loan and to execute and deliver the Mortgage
Note, the Mortgage and any such agreement, and the Mortgage Note, the Mortgage,
and any other such related agreement have been duly and properly executed by
other such related parties;
(l) Full Disbursement of Proceeds. The proceeds of the Mortgage Loan
-----------------------------
have been fully disbursed and there is no requirement for future advances
thereunder, and any and all requirements as to completion of any on-site or off-
site improvement and as to disbursements of any escrow funds therefor have been
complied with. All costs, fees and expenses incurred in making or closing the
Mortgage Loan and the recording of the Mortgage were paid, and the Mortgagor is
not entitled to any refund of any amounts paid or due under the Mortgage Note or
Mortgage;
(m) Ownership. The Company is the sole owner of record and holder of
---------
the Mortgage Loan. The Mortgage Loan is not assigned or pledged, and the
Company has good indefeasible and marketable title thereto, and has full right
to transfer and sell the Mortgage Loan therein to the Purchaser free and clear
of any encumbrance, equity, participation interest, lien, pledge, charge, claim
or security interest, and has full right and authority subject to no interest or
participation of, or agreement with, any other party, to sell and assign each
Mortgage Loan pursuant to this Agreement and following the sale of each Mortgage
Loan, the Purchaser will own such Mortgage Loan free and clear of any
encumbrance, equity, participation interest, lien, pledge, charge, claim or
security interest. The Company intends to relinquish all rights to possess,
control and monitor the Mortgage Loan. After the related Closing Date, the
Company will have no right to modify or alter the terms of the sale of the
Mortgage Loan and the Company will have no obligation or right to repurchase the
Mortgage Loan or substitute another Mortgage Loan, except as provided in this
Agreement;
(n) Doing Business. All parties which have had any interest in the
--------------
Mortgage Loan, whether as mortgagee, assignee, pledgee or otherwise, are (or,
during the period in which they held and disposed of such interest, were) (1) in
compliance with any and all applicable licensing requirements of the laws of the
state wherein the Mortgaged Property is located, and (2) organized under the
laws of such state, or (3) qualified to do business in
-14-
<PAGE>
such state, or (4) a federal savings and loan association, savings bank or a
national bank having its principal office in such state, or (5) not doing
business in such state;
(o) LTV. The LTV and CLTV are as identified in the applicable
---
Assignment and Conveyance.
(p) Title Insurance. The Mortgage Loan is covered by a limited
---------------
liability lender's title insurance policy or other generally acceptable form of
policy of insurance acceptable to lenders in the industry who make second lien
mortgage loans that are similar to the Mortgage Loans, issued by a title insurer
acceptable to FNMA or FHLMC and qualified to do business in the jurisdiction
where the Mortgaged Property is located, insuring the Company, its successors
and assigns, as to the second priority lien of the Mortgage in the original
principal amount of the Mortgage Loan, subject only to the exceptions contained
in clauses (1), (2), (3) and (4) of paragraph (j) of this Section 3.02. The
Company is the sole insured of such lender's title insurance policy, and such
lender's title insurance policy is valid and remains in full force and effect
and will be in force and effect upon the consummation of the transactions
contemplated by this Agreement. No claims have been made under such lender's
title insurance policy, and no prior holder of the Mortgage, including the
Company, has done, by act or omission, anything which would impair the coverage
of such lender's title insurance policy, including without limitations, no
unlawful fee, commission, kickback or other unlawful compensation or value of
any kind has been or will be received, retained or realized by any attorney,
firm or other person or entity, and no such unlawful items have been received,
retained or realized by the Company;
(q) No Defaults. There is no default, breach, violation or event of
-----------
acceleration existing under the Mortgage or the Mortgage Note and no event
which, with the passage of time or with notice and the expiration of any grace
or cure period, would constitute a default, breach, violation or event of
acceleration, and neither the Company nor its predecessors have waived any
default, breach, violation or event of acceleration. To the best of the
Company's knowledge the First Lien is in full force and effect. There is no
default, breach, violation or event of acceleration existing under such First
Lien mortgage or the related mortgage note, and no event which, with the passage
of time or with notice and the expiration of any grace or cure period, would
constitute a default, breach, violation or event of acceleration thereunder.
Either (i) the First Lien mortgage contains a provision which allows or (ii)
applicable law requires, the mortgagee under the second lien Mortgage Loan to
receive notice of, and affords such mortgagee an opportunity to cure any default
under the First Lien mortgage;
(r) No Mechanics' Liens. There are no mechanics' or similar liens or
-------------------
claims which have been filed for work, labor or material (and no rights are
outstanding that under the law could give rise to such liens) affecting the
related Mortgaged Property which are or may be liens prior to, or equal or
coordinate with, the lien of the related Mortgage;
(s) Location of Improvements; No Encroachments. All improvements
------------------------------------------
which were considered in determining the Appraised Value of the Mortgaged
Property lay
-15-
<PAGE>
wholly within the boundaries and building restriction lines of the Mortgaged
Property and no improvements on adjoining properties encroach upon the Mortgaged
Property. No improvement located on or being part of the Mortgaged Property is
in violation of any applicable zoning law or regulation;
(t) Origination: Payment Terms. At the time the Mortgage Loan was
---------------------------
originated, the originator was a mortgagee approved by the Secretary of Housing
and Urban Development pursuant to Section 203 and 211 of the National Housing
Act or a savings and loan association, a savings bank, a commercial bank credit
union, insurance company or similar banking institution which is supervised and
examined by a federal or state authority. Principal payments on the Mortgage
Loan commenced no more than sixty days after funds were disbursed in connection
with the Mortgage Loan. The documents, instruments and agreements submitted for
loan underwriting were not falsified and contain no untrue statement of material
fact or omit to state a material fact required to be stated therein or necessary
to make the information and statements therein not misleading. The Mortgage
Note has the terms identified in the applicable Assignment and Conveyance;
(u) Customary Provisions. The Mortgage contains customary and
--------------------
enforceable provisions such as to render the rights and remedies of the holder
thereof adequate for the realization against the Mortgaged Property of the
benefits of the security provided thereby, including, (i) in the case of a
Mortgage designated as a deed of trust, by trustee's sale, and (ii) otherwise by
judicial foreclosure. Upon default by a Mortgagor on a Mortgage Loan and
foreclosure on, or trustee's sale of, the Mortgaged Property pursuant to the
proper procedures, the holder of the Mortgage Loan will be able to deliver good
and marketable title to the Mortgaged Property. There is no homestead or other
exemption available to a Mortgagor which would interfere with the right to sell
the Mortgaged Property at a trustee's sale or the right to foreclose the
Mortgage;
(v) Conformance with Underwriting Guidelines. The Mortgage Loan was
----------------------------------------
underwritten in accordance with the Company's Underwriting Guidelines. The
Mortgage Note and Mortgage are on forms acceptable to FHLMC or FNMA;
(w) Occupancy of the Mortgaged Property. As of the related Closing
-----------------------------------
Date the Mortgaged Property is lawfully occupied under applicable law. All
inspections, licenses and certificates required to be made or issued with
respect to all occupied portions of the Mortgaged Property and, with respect to
the use and occupancy of the same, including but not limited to certificates of
occupancy and fire underwriting certificates, have been made or obtained from
the appropriate authorities. The Mortgagor represented at the time of
origination of the Mortgage Loan that the Mortgagor would occupy the Mortgaged
Property as the Mortgagor's primary residence;
(x) No Additional Collateral. The Mortgage Note is not and has not
------------------------
been secured by any collateral except the lien of the corresponding Mortgage and
the security interest of any applicable security agreement or chattel mortgage
referred to in (j) above;
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<PAGE>
(y) Deeds of Trust. In the event the Mortgage constitutes a deed of
--------------
trust, a trustee, duly qualified under applicable law to serve as such, has been
properly designated and currently so serves and is named in the Mortgage, and no
fees or expenses are or will become payable by the Purchasers to the trustee
under the deed of trust, except in connection with a trustee's sale after
default by the Mortgagor;
(z) Acceptable Investment. No circumstances or conditions exist with
---------------------
respect to the Mortgage, the Mortgaged Property, the Mortgagor or the
Mortgagor's credit standing that can reasonably be expected to cause private
institutional investors which invest in mortgage loans similar to the Mortgage
Loans to regard the Mortgage Loan as an unacceptable investment, cause the
Mortgage Loan to become delinquent, or adversely affect the value or
marketability of the Mortgage Loan;
(aa) Delivery of Mortgage Documents. The Mortgage Note, the Mortgage,
------------------------------
the Assignment of Mortgage and any other documents required to be delivered for
the Mortgage Loan by the Company under the Custodial Agreement have been
delivered to the Custodian. The Company is in possession of a complete, true
and accurate Mortgage File in compliance with Exhibit B, except for such
---------
documents the originals of which have been delivered to the Custodian;
(bb) Condominiums/Planned Unit Developments. If the Mortgaged
--------------------------------------
Property is a condominium unit or a planned unit development (other than a de
minimus planned unit development) such condominium or planned unit development
project meets the eligibility requirements of FNMA or is located in a
condominium or planned unit development project which has received project
approval from FNMA and the representations and warranties required by FNMA and
the Company's Underwriting Guidelines with respect to such condominium or
planned unit development have been made and remain true and correct in all
respects;
(cc) Assignment of Mortgage. The Assignment of Mortgage is in
----------------------
recordable form and is acceptable for recording under the laws of the
jurisdiction in which the Mortgaged Property is located;
(dd) Due on Sale. The Mortgage contains an enforceable provision for
-----------
the acceleration of the payment of the unpaid principal balance of the Mortgage
Loan in the event that the Mortgaged Property is sold or transferred without the
prior written consent of the mortgagee thereunder;
(ee) No Buydown Provisions; No Graduated Payments or Contingent
----------------------------------------------------------
Interests. The Mortgage Loan does not contain provisions pursuant to which
- ---------
Monthly Payments are paid or partially paid with funds deposited in any separate
account established by the Company, the Mortgagor or anyone on behalf of the
Mortgagor, or paid by any source other than the Mortgagor nor does it contain
any other similar provisions currently in effect which may constitute a
"buydown" provision. The Mortgage Loan is not a graduated payment
-17-
<PAGE>
mortgage loan and the Mortgage Loan does not have a shared appreciation or other
contingent interest feature;
(ff) Consolidation of Future Advances. Any future advances made prior
--------------------------------
to the related Cut-off Date have been consolidated with the outstanding
principal amount secured by the Mortgage, and the secured principal amount, as
consolidated, bears a single interest rate and single repayment term. The lien
of the Mortgage securing the consolidated principal amount is expressly insured
as having second lien priority by a title insurance policy, an endorsement to
the policy insuring the mortgagee's consolidated interest or by other title
evidence acceptable to FNMA and FHLMC. The consolidated principal amount does
not exceed the original principal amount of the Mortgage Loan;
(gg) Mortgaged Property Undamaged; Condemnation. The Mortgaged
------------------------------------------
Property is undamaged by waste, fire, earthquake or earth movement, windstorm,
flood, tornado or other casualty so as to affect adversely the value of the
Mortgaged Property as security for the Mortgage Loan or the use for which the
premises were intended and each Mortgaged Property is in good repair. There
have not been any condemnation proceedings with respect to the Mortgaged
Property and the Company has no knowledge of any such proceedings in the future;
(hh) Collection Practices; Escrow Deposits. The origination,
-------------------------------------
servicing and collection practices used with respect to the Mortgage Loan have
been in all respects in compliance with Accepted Servicing Practices,
applicable laws and regulations, and have been in all respects legal and proper.
With respect to escrow deposits and Escrow Payments, to the extent such Escrow
Payments are not collected by the mortgagee or its designee under the First
Lien, all such payments are in the possession of, or under control of, the
Company and there exist no deficiencies in connection therewith for which
customary arrangements for repayment thereof have not been made. All Escrow
Payments have been collected in full compliance with state and federal law. An
escrow of funds is not prohibited by applicable law and, to the extent such
Escrow Payments are not collected by the mortgagee or its designee under the
First Lien, has been established in an amount sufficient to pay for every item
that remains unpaid and has been assessed but is not yet due and payable. No
escrow deposits or Escrow Payments or other charges or payments due the Company
have been capitalized under the Mortgage or the Mortgage Note. Any interest
required to be paid pursuant to state and local law has been properly paid and
credited;
(ii) Appraisal. The Mortgage File contains an appraisal of the
---------
related Mortgaged Property signed prior to the approval of the Mortgage Loan
application by a qualified appraiser, duly appointed by the Company, who had no
interest, direct or indirect in the Mortgaged Property or in any loan made on
the security thereof, and whose compensation is not affected by the approval or
disapproval of the Mortgage Loan;
(jj) Soldiers' and Sailors' Relief Act. The Mortgagor has not
---------------------------------
notified the Company, and the Company has no knowledge of any relief requested
or allowed to the Mortgagor under the Soldiers' and Sailors' Civil Relief Act of
1940;
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<PAGE>
(kk) Environmental Matters. To the best of the Company's knowledge,
---------------------
the Mortgaged Property is free from any and all toxic or hazardous substances
and there exists no violation of any local, state or federal environmental law,
rule or regulation;
(ll) Construction or Rehabilitation of Mortgaged Property. No
----------------------------------------------------
Mortgage Loan was made in connection with the construction or rehabilitation of
a Mortgaged Property or facilitating the trade-in or exchange of a Mortgaged
Property;
(mm) Ground Leases. Except for a Mortgage Loan secured by Mortgaged
-------------
Property located in the State of Hawaii, no Mortgage Loan is secured by a
Mortgage on a leasehold estate. With respect to Mortgage Loans in the state of
Hawaii that are secured by a leasehold estate, (i) the lease is valid, in full
force and effect, and conforms to all of FNMA's requirements for leasehold
estates; (ii) all rents and other payments due under the lease have been paid;
(iii) the lessee is not in default under any provision of the lease; (iv) the
term of the lease exceeds the maturity date of the related Mortgage Loan by at
least ten years; and (v) the mortgagee under the Mortgage Loan is given notice
and an opportunity to cure any defaults under the lease;
(nn) No Defense to Insurance Coverage. No action has been taken or
--------------------------------
failed to be taken, no event has occurred and no state of facts exists or has
existed on or prior to the related Closing Date (whether or not known to the
Company on or prior to such date) which has resulted or will result in an
exclusion from, denial of, or defense to coverage under any applicable pool
policy, special hazard insurance policy, or bankruptcy bond (including, without
limitation, any exclusions, denials or defenses which would limit or reduce the
availability of the timely payment of the full amount of the loss otherwise due
thereunder to the insured), whether arising out of actions, representations,
errors, omissions, negligence, or fraud of the Company, the related Mortgagor or
any party involved in the application for such insurance or coverage, including
the appraisal, plans and specifications and other exhibits or documents
submitted therewith to the insurer or under any such insurance policy, or for
any other reason under such coverage, but not including the failure of the
insurer to pay by reason of the insurer's breach of the insurance policy or the
insurer's financial inability to pay. In connection with the placement of any
insurance or coverage, no commission, fee or other compensation has been or will
be received by the Company or by any officer, director, or employee of the
Company or any designee of the Company or any corporation in which the Company
or any officer, director or employee had a financial interest at the time of
placement of such insurance;
(oo) Value of Mortgaged Property. The Company has no knowledge of any
---------------------------
circumstances existing that could reasonably be expected to adversely affect the
value or the marketability of any Mortgaged Property or Mortgage Loan or to
cause the Mortgage Loans to prepay during any period materially faster or slower
than the Mortgage Loans originated by the Company generally;
(pp) Section 32 Mortgages. The Company has provided the related
--------------------
Mortgagor with all disclosure materials required by Section 226.32 of the
Federal Reserve
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<PAGE>
Board Regulation Z with respect to any Mortgage Loans subject to such Section of
the Federal Reserve Board Regulation Z; and
(qq) Transfer of Servicing. The Company has taken all actions, and
---------------------
has caused the Servicer to take all actions, required by applicable law and in
accordance with Accepted Servicing Practices in order to transfer the servicing
of the Mortgage Loans to the Servicer, including, without limitation, notifying
the related Mortgagors that the servicing of the Mortgage Loans has been
transferred to the Servicer in accordance with the Real Estate Settlement
Procedures Act and the Cranston Gonzales National Affordable Housing Act of 1990
(to the extent applicable).
Section 3.03 REMEDIES FOR BREACH OF REPRESENTATIONS AND WARRANTIES.
-----------------------------------------------------
It is understood and agreed that the representations and warranties
set forth in Sections 3.01 and 3.02 shall survive the sale of the Mortgage Loans
to the Purchaser and the delivery of the Mortgage Loan Documents to the
Custodian and shall inure to the benefit of the Purchaser, notwithstanding any
restrictive or qualified endorsement on any Mortgage Note or Assignment of
Mortgage or the examination or failure to examine any Mortgage File. Upon
discovery by either the Company or the Purchaser of a breach of any of the
foregoing representations and warranties which materially and adversely affects
the value of the Mortgage Loans or the interest of the Purchaser (or which
materially and adversely affects the interests of Purchaser in the related
Mortgage Loan in the case of a representation and warranty relating to a
particular Mortgage Loan), the party discovering such breach shall give prompt
written notice to the other.
Within 60 days of the earlier of either discovery by or notice to the
Company of any breach of a representation or warranty which materially and
adversely affects the value of the Mortgage Loans, the Company shall use its
best efforts promptly to cure such breach in all material respects and, if such
breach cannot be cured, the Company shall, at the Purchaser's option and subject
to Section 3.04, repurchase such Mortgage Loan at the Repurchase Price. In the
event that a breach shall involve any representation or warranty set forth in
Section 3.01, and such breach cannot be cured within 60 days of the earlier of
either discovery by or notice to the Company of such breach, all of the Mortgage
Loans shall, at the Purchaser's option and subject to Section 3.04, be
repurchased by the Company at the Repurchase Price. Any repurchase of a Mortgage
Loan or Loans pursuant to the foregoing provisions of this Section 3.03 shall be
accomplished by deposit in the Custodial Account of the amount of the Repurchase
Price for distribution to Purchaser on the next scheduled Remittance Date, after
deducting therefrom any amount received in respect of such repurchased Mortgage
Loan or Loans and being held in the Custodial Account for future distribution.
At the time of repurchase, the Purchaser and the Company shall arrange
for the reassignment of the Deleted Mortgage Loan to the Company and the
delivery to the Company of any documents held by the Custodian relating to the
Deleted Mortgage Loan. In the event of a repurchase, the Company shall,
simultaneously with such reassignment, give written
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<PAGE>
notice to the Purchaser that such repurchase has taken place, amend the Mortgage
Loan Schedule to reflect the withdrawal of the Deleted Mortgage Loan from this
Agreement.
In addition to such repurchase obligation, the Company shall indemnify
the Purchaser and hold it harmless against any losses, damages, penalties,
fines, forfeitures, reasonable and necessary legal fees and related costs,
judgments, and other costs and expenses resulting from any claim, demand,
defense or assertion based on or grounded upon, or resulting from, a breach of
the Company representations and warranties contained in this Agreement. It is
understood and agreed that the obligations of the Company set forth in this
Section 3.03 to cure or repurchase a defective Mortgage Loan and to indemnify
the Purchaser as provided in this Section 3.03 constitute the sole remedies of
the Purchaser respecting a breach of the foregoing representations and
warranties.
Any cause of action against the Company relating to or arising out of
the breach of any representations and warranties made in Sections 3.01 and 3.02
shall accrue as to any Mortgage Loan upon (i) discovery of such breach by the
Purchaser or notice thereof by the Company to the Purchaser, (ii) failures by
the Company to cure such breach or repurchase such Mortgage Loan as specified
above, and (iii) demand upon the Company by the Purchaser for compliance with
this Agreement.
Section 3.04 RESTRICTIONS APPLICABLE IN THE EVENT THAT A MORTGAGE LOAN
---------------------------------------------------------
IS ACQUIRED BY A REMIC.
----------------------
In the event that any Mortgage Loan is held by a REMIC,
notwithstanding any contrary provision of this Agreement, with respect to any
Mortgage Loan which is not in default or as to which no default is imminent, no
repurchase pursuant to Section 3.03 shall be made unless the Company has
obtained an Opinion of Counsel to the effect that such repurchase will not (i)
result in the imposition of taxes on "prohibited transactions" of such REMIC (as
defined in Section 860F of the Code) or otherwise subject the REMIC to tax, or
(ii) cause the REMIC to fail to qualify as a REMIC at any time.
Section 3.05 FIRST TWO MONTHLY PAYMENTS BY MORTGAGOR.
----------------------------------------
With respect to any Mortgage Loan, if the related Mortgagor is thirty
(30) days or more delinquent with respect to the Mortgage Loan's first or second
Monthly Payment after origination, the Company shall, upon receipt of notice
from the Purchaser, promptly repurchase such Mortgage Loan from the Purchaser at
the Repurchase Price in accordance with Section 3.03 hereof.
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<PAGE>
ARTICLE IV
ADMINISTRATION AND SERVICING OF MORTGAGE LOANS
Section 4.01 SERVICING OF THE MORTGAGE LOANS.
-------------------------------
The Mortgage Loans will be serviced by the Servicer in accordance with
the Servicing Agreement.
ARTICLE V
THE COMPANY
Section 5.01 INDEMNIFICATION; THIRD PARTY CLAIMS.
-----------------------------------
The Company shall indemnify the Purchaser and hold it harmless against
any and all claims, losses, damages, penalties, fines, forfeitures, reasonable
and necessary legal fees and related costs, judgments, and any other costs, fees
and expenses that the Purchaser may sustain in any way related to the failure of
the Company to perform its duties in strict compliance with the terms of this
Agreement. The Company immediately shall notify the Purchaser if a claim is
made by a third party with respect to this Agreement or the Mortgage Loans,
assume (with the prior written consent of the Purchaser) the defense of any such
claim and pay all expenses in connection therewith, including counsel fees, and
promptly pay, discharge and satisfy any judgment or decree which may be entered
against it or the Purchaser in respect of such claim. The Company shall follow
any written instructions received from the Purchaser in connection with such
claim. The Purchaser promptly shall reimburse the Company for all amounts
advanced by it pursuant to the preceding sentence except when the claim is in
any way related to the Company's indemnification pursuant to Section 3.03.
Section 5.02 RIGHT TO EXAMINE COMPANY RECORDS.
--------------------------------
The Purchaser shall have the right to examine and audit any and all of
the books, records, or other information of the Company, whether held by the
Company or by another on its behalf, with respect to or concerning this
Agreement or the Mortgage Loans, during business hours or at such other times as
may be reasonable under applicable circumstances, upon reasonable advance
notice.
Section 5.03 FINANCIAL STATEMENTS.
--------------------
In connection with marketing the Mortgage Loans, the Purchaser may
make available to a prospective Purchaser an audited Consolidated Statement of
Operations of the Company for the most recently completed five fiscal years for
which such a statement is available, as well as an audited Consolidated
Statement of Condition at the end of the last two fiscal years covered by such
Consolidated Statement of Operations. The Company also shall
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<PAGE>
make available any comparable audited interim statements to the extent any such
statements have been prepared by or on behalf of the Company (and are available
upon request to members or stockholders of the Company or to the public at
large). If it has not already done so, the Company shall furnish promptly to the
Purchaser copies of the statement specified above. The Company also shall make
available to Purchaser or prospective Purchaser a knowledgeable financial or
accounting officer for the purpose of answering questions respecting recent
developments affecting the Company or the financial statements of the Company.
Section 5.04 LIMITATION ON RESIGNATION AND ASSIGNMENT BY COMPANY.
---------------------------------------------------
The Company shall neither assign this Agreement or delegate its rights
or duties hereunder or any portion hereof or sell or otherwise dispose of all or
substantially all of its property or assets (other than to a successor of the
Company which shall assume all of the rights, obligations, assets and
liabilities of the Company in connection with a public offering of securities
backed by the Mortgage Loans) without the prior written consent of the
Purchaser, which consent shall be granted or withheld in the sole discretion of
the Purchaser.
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<PAGE>
ARTICLE VI
MISCELLANEOUS PROVISIONS
Section 6.01 AMENDMENT.
---------
This Agreement may be amended from time to time by the Company and by
written agreement signed by the Company and the Purchaser.
SECTION 6.02 GOVERNING LAW.
-------------
THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES
HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.
Section 6.03 NOTICES.
-------
All demands, notices and communications hereunder shall be in writing
and shall be deemed to have been duly given if personally delivered at or mailed
by registered mail, postage prepaid, addressed as follows:
(i) if to the Company:
T.A.R. Preferred Mortgage Corporation
19782 MacArthur Boulevard
Suite 250
Irvine, California 92715
Attention: Todd A. Rodriguez
or such other address as may hereafter be furnished to the Purchaser in writing
by the Company;
(ii) if to Purchaser:
CS First Boston Mortgage Capital Corp.
Park Avenue Plaza
55 East 52nd Street
New York, New York 10055
Attention: Heidi Davis
Section 6.04 SEVERABILITY OF PROVISIONS.
--------------------------
Any part, provision, representation or warranty of this Agreement
which is prohibited or which is held to be void or unenforceable shall be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof. Any part, provision,
representation or warranty of this Agreement which is prohibited or
-24-
<PAGE>
unenforceable or is held to be void or unenforceable in any jurisdiction shall
be ineffective, as to such jurisdiction, to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction as to any Mortgage Loan
shall not invalidate or render unenforceable such provision in any other
jurisdiction. To the extent permitted by applicable law, the parties hereto
waive any provision of law which prohibits or renders void or unenforceable any
provision hereof. If the invalidity of any part, provision, representation or
warranty of this Agreement shall deprive any party of the economic benefit
intended to be conferred by this Agreement, the parties shall negotiate, in
good-faith, to develop a structure the economic effect of which is nearly as
possible the same as the economic effect of this Agreement without regard to
such invalidity.
Section 6.05 RELATIONSHIP OF PARTIES.
-----------------------
Nothing herein contained shall be deemed or construed to create a
partnership or joint venture between the parties hereto.
Section 6.06 EXECUTION; SUCCESSORS AND ASSIGNS.
---------------------------------
This Agreement may be executed in one or more counterparts and by the
different parties hereto on separate counterparts, each of which, when so
executed, shall be deemed to be an original; such counterparts, together, shall
constitute one and the same agreement. Subject to Section 5.04, this Agreement
shall inure to the benefit of and be binding upon the Company and the Purchaser
and their respective successors and assigns.
Section 6.07 RECORDATION OF ASSIGNMENTS OF MORTGAGE.
--------------------------------------
To the extent permitted by applicable law, each of the Assignments of
Mortgage is subject to recordation in all appropriate public offices for real
property records in all the counties or other comparable jurisdictions in which
any or all of the Mortgaged Properties are situated, and in any other
appropriate public recording office or elsewhere, such recordation to be
effected at the Purchaser's expense in the event recordation is either necessary
under applicable law or requested by the Purchaser at its sole option.
Section 6.08 ASSIGNMENT BY PURCHASER.
-----------------------
The Purchaser shall have the right, without the consent of the Company
but subject to the limit set forth in Section 2.02 hereof, to assign, in whole
or in part, its interest under this Agreement with respect to some or all of the
Mortgage Loans, and designate any person to exercise any rights of the Purchaser
hereunder, by executing an Assignment and Assumption Agreement substantially in
the form of Exhibit D hereto. Upon such assignment of rights and assumption of
---------
obligations, the assignee or designee shall accede to the rights and obligations
hereunder of the Purchaser with respect to such Mortgage Loans and the Purchaser
as assignor shall be released from all obligations hereunder with respect to
such Mortgage
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<PAGE>
Loans from and after the date of such assignment and assumption. All references
to the Purchaser in this Agreement shall be deemed to include its assignee or
designee.
Section 6.09 COUNTERPARTS.
------------
This Agreement may be executed simultaneously in any number of
counterparts. Each counterpart shall be deemed to be an original, and all such
counterparts shall constitute one and the same instrument.
Section 6.10 WAIVERS.
-------
No term or provision of this Agreement may be waived or modified
unless such waiver or modification is in writing and signed by the party against
whom such waiver or modification is sought to be enforced.
Section 6.11 EXHIBITS.
--------
The exhibits to this Agreement are hereby incorporated and made a part
hereof and are an integral part of this Agreement.
Section 6.12 GENERAL INTERPRETIVE PRINCIPLES.
-------------------------------
For purposes of this Agreement, except as otherwise expressly provided
or unless the context otherwise requires:
(a) the terms defined in this Agreement have the meanings assigned to
them in this Agreement and include the plural as well as the singular, and the
use of any gender herein shall be deemed to include the other gender;
(b) accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with generally accepted accounting principles;
(c) references herein to "Articles," "Sections," "Subsections,"
"Paragraphs," and other Subdivisions without reference to a document are to
designated Articles, Sections, Subsections, Paragraphs and other subdivisions of
this Agreement;
(d) reference to a Subsection without further reference to a Section
is a reference to such Subsection as contained in the same Section in which the
reference appears, and this rule shall also apply to Paragraphs and other
subdivisions;
(e) the words "herein," "hereof," "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
provision; and
(f) the term "include" or "including" shall mean without limitation by
reason of enumeration.
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<PAGE>
Section 6.13 REPRODUCTION OF DOCUMENTS.
-------------------------
This Agreement and all documents relating thereto, including, without
limitation, (a) consents, waivers and modifications which may hereafter be
executed, (b) documents received by any party at the closing, and (c) financial
statements, certificates and other information previously or hereafter
furnished, may be reproduced by any photographic, photostatic, microfilm, micro-
card, miniature photographic or other similar process. The parties agree that
any such reproduction shall be admissible in evidence as the original itself in
any judicial or administrative proceeding, whether or not the original is in
existence and whether or not such reproduction was made by a party in the
regular course of business, and that any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible in evidence.
Section 6.14 FURTHER AGREEMENTS.
------------------
The Company and the Purchaser each agree to execute and deliver to the
other such reasonable and appropriate additional documents, instruments or
agreements as may be necessary or appropriate to effectuate the purposes of this
Agreement.
Section 6.15 NO SOLICITATION.
---------------
From and after each related Closing Date, the Company hereby agrees
that it will not take any action or permit or cause any action to be taken by
any of its agents or affiliates, or by any independent contractors on the
Company's behalf, to personally, by telephone or mail, solicit the borrower or
obligor under any Mortgage Loan for any purpose whatsoever, including to
refinance a Mortgage Loan, in whole or in part, without the prior written
consent of the Purchaser. It is understood and agreed that all rights and
benefits relating to the solicitation of any Mortgagors and the attendant
rights, title and interest in and to the list of such Mortgagors and data
relating to their Mortgages (including insurance renewal dates) shall be
transferred to the Purchaser pursuant hereto on the related Closing Date and the
Company shall take no action to undermine these rights and benefits.
Notwithstanding the foregoing, it is understood and agreed that promotions
undertaken by the Company or any affiliate of the Company which are directed to
the general public at large, including, without limitation, mass mailing based
on commercially acquired mailing lists, newspaper, radio and television
advertisements shall not constitute solicitation under this Section 6.15.
Section 6.16 GRANT OF SECURITY INTEREST.
--------------------------
The Company and the Purchaser intend that the transactions hereunder
be sales to the Company of the Mortgage Loans and not loans from the Purchaser
to the Company secured by the Mortgage Loans. However, in order to preserve the
Purchaser's rights under this Agreement in the event that a court or other forum
recharacterizes the transactions hereunder as loans and as security for the
performance by the Company of all of the Company's obligations to the Purchaser
under this Agreement and the transactions entered into
-27-
<PAGE>
pursuant to this Agreement, the Company grants to the Purchaser a first priority
security interest in all of the Mortgage Loans, this Agreement and any other
contract rights, general intangibles and other assets relating to the Mortgage
Loans or any interest in the Mortgage Loans as of each applicable Closing Date,
with respect to all transactions hereunder and all proceeds thereof.
[NO FURTHER TEXT ON THIS PAGE]
-28-
<PAGE>
IN WITNESS WHEREOF, the Company and the Purchaser have caused their
names to be signed hereto by their respective officers thereunto duly authorized
as of the day and year first above written.
CS FIRST BOSTON MORTGAGE CAPITAL CORP.
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
T.A.R. PREFERRED MORTGAGE CORPORATION
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On the __ day of ________, 1996 before me, a Notary Public in and for
said State, personally appeared ________, known to me to be Vice President of CS
First Boston Mortgage Capital Corp., the corporation that executed the within
instrument and also known to me to be the person who executed it on behalf of
said corporation, and acknowledged to me that such corporation executed the
within instrument.
IN WITNESS WHEREOF, I have hereunto set my hand affixed my office seal
the day and year in this certificate first above written.
-------------------------------------------------
Notary Public
My Commission expires ___________
<PAGE>
STATE OF )
) ss.:
COUNTY OF )
On the __ day of _______, 1996 before me, a Notary Public in and for
said State, personally appeared __________, known to me to be ______________ of
__________________, the corporation that executed the within instrument and also
known to me to be the person who executed it on behalf of said corporation, and
acknowledged to me that such corporation executed the within instrument.
IN WITNESS WHEREOF, I have hereunto set my hand affixed my office seal
the day and year in this certificate first above written.
-------------------------------------------------
Notary Public
My Commission expires ___________
<PAGE>
EXHIBIT A
---------
Mortgage Loan Schedule
----------------------
<PAGE>
EXHIBIT B
---------
CONTENTS OF EACH MORTGAGE FILE
------------------------------
With respect to each Mortgage Loan, the Mortgage File shall include
each of the following items, which shall be available for inspection by the
Purchaser and any prospective Purchaser, and which shall be delivered to the
Custodian pursuant to Section 2.01 and 2.03 of the Seller's Warranties Agreement
to which this Exhibit is attached (the "Agreement"):
---------
1. The original Mortgage Note bearing all intervening endorsements,
endorsed "Pay to the order of _________ without recourse" and signed
in the name of the Company by an authorized officer (in the event that
the Mortgage Loan was acquired by the Company in a merger, the
signature must be in the following form: "[Company], successor by
merger to [name of predecessor]"; and in the event that the Mortgage
Loan was acquired or originated by the Company while doing business
under another name, the signature must be in the following form:
"[Company], formerly known as [previous name]").
2. The original of any guarantee executed in connection with the Mortgage
Note (if any).
3. The original Mortgage, with evidence of recording thereon. If in
connection with any Mortgage Loan, the Company cannot deliver or cause
to be delivered the original Mortgage with evidence of recording
thereon on or prior to the related Closing Date because of a delay
caused by the public recording office where such Mortgage has been
delivered for recordation or because such Mortgage has been lost or
because such public recording office retains the original recorded
Mortgage, the Company shall deliver or cause to be delivered to the
Custodian, a photocopy of such Mortgage, together with (i) in the case
of a delay caused by the public recording office, an Officer's
Certificate of the Company stating that such Mortgage has been
dispatched to the appropriate public recording office for recordation
and that the original recorded Mortgage or a copy of such Mortgage
certified by such public recording office to be a true and complete
copy of the original recorded Mortgage will be promptly delivered to
the Custodian upon receipt thereof by the Company; or (ii) in the case
of a Mortgage where a public recording office retains the original
recorded Mortgage or in the case where a Mortgage is lost after
recordation in a public recording office, a copy of such Mortgage
certified by such public recording office or by the title insurance
company that issued the title policy to be a true and complete copy of
the original recorded Mortgage.
4. The originals of all assumption, modification, consolidation or
extension agreements, with evidence of recording thereon.
<PAGE>
5. The original Assignment of Mortgage for each Mortgage Loan, in form
and substance acceptable for recording in blank. If the Mortgage Loan
was acquired by the Company in a merger, the Assignment of Mortgage
must be made by "[Company], successor by merger to [name of
predecessor]." If the Mortgage Loan was acquired or originated by the
Company while doing business under another name, the Assignment of
Mortgage must be by "[Company], formerly known as [previous name]."
6. Originals of all intervening assignments of the Mortgage with evidence
of recording thereon, or if any such intervening assignment has not
been returned from the applicable recording office or has been lost or
if such public recording office retains the original recorded
assignments of mortgage, the Company shall deliver or cause to be
delivered to the Custodian, a photocopy of such intervening
assignment, together with (i) in the case of a delay caused by the
public recording office, an Officer's Certificate of the Company
stating that such intervening assignment of mortgage has been
dispatched to the appropriate public recording office for recordation
and that such original recorded intervening assignment of mortgage or
a copy of such intervening assignment of mortgage certified by the
appropriate public recording office or by the title insurance company
that issued the title policy to be a true and complete copy of the
original recorded intervening assignment of mortgage will be promptly
delivered to the Custodian upon receipt thereof by the Company; or
(ii) in the case of an intervening assignment where a public recording
office retains the original recorded intervening assignment or in the
case where an intervening assignment is lost after recordation in a
public recording office, a copy of such intervening assignment
certified by such public recording office to be a true and complete
copy of the original recorded intervening assignment.
7. The original limited liability lender's title insurance policy.
8. Any security agreement, chattel mortgage or equivalent executed in
connection with the Mortgage.
9. The original hazard insurance policy and, if required by law, flood
insurance policy, in accordance with the Agreement.
10. Residential loan application.
11. Mortgage Loan closing statement.
12. Verification of employment and income.
13. Credit report on the Mortgagor.
14. Drive-by.
EXHIBIT B - PAGE 2
<PAGE>
15. Photograph of the Mortgaged Property.
16. Copy of each instrument necessary to complete identification of any
exception set forth in the exception schedule in the title policy,
i.e., map or plat, restrictions, easements, sewer agreements, home
association declarations, etc.
17. All required disclosure statements.
18. If available, termite report, structural engineer's report, water
potability and septic certification.
19. Tax receipts, insurance premium receipts, ledger sheets, payment
history from date of origination, insurance claim files,
correspondence, current and historical computerized data files, and
all other processing, underwriting and closing papers and records
which are customarily contained in a mortgage loan file and which are
required to document the Mortgage Loan or to service the Mortgage
Loan.
20. Copies of all mortgage loan documents for the First Lien mortgage
loan.
In the event an Officer's Certificate of the Company is delivered to
the Custodian because of a delay caused by the public recording office in
returning any recorded document, the Company shall deliver to the Custodian,
within 60 days of the related Closing Date, an Officer's Certificate which shall
(i) identify the recorded document, (ii) state that the recorded document has
not been delivered to the Custodian due solely to a delay caused by the public
recording office, (iii) state the amount of time generally required by the
applicable recording office to record and return a document submitted for
recordation, and (iv) specify the date the applicable recorded document will be
delivered to the Custodian. The Company shall be required to deliver to the
Custodian the applicable recorded document by the date specified in (iv) above.
An extension of the date specified in (iv) above may be requested from the
Purchaser, which consent shall not be unreasonably withheld.
EXHIBIT B - PAGE 3
<PAGE>
EXHIBIT C
---------
FORM OF CUSTODIAL AGREEMENT
---------------------------
<PAGE>
EXHIBIT D
---------
FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT
-------------------------------------------
_________________, 199_
ASSIGNMENT AND ASSUMPTION AGREEMENT, dated ____________, between
__________ ________________________________________, a ___________________
corporation having an office at ________________________ ("Assignor") and
--------
_________________________________, a __________________ corporation having an
office at __________________ ("Assignee"):
--------
For and in consideration of the sum of TEN DOLLARS ($10.00) and other
valuable consideration the receipt and sufficiency of which hereby are
acknowledged, and of the mutual covenants herein contained, the parties hereto
hereby agree as follows:
1. The Assignor hereby grants, transfers and assigns to Assignee all
of the right, title and interest of Assignor, as purchaser, in, to and under
that certain Seller's Warranties Agreement, Conventional Residential Fixed Rate
Mortgage Loans (the "Seller's Warranties Agreement"), dated as of August 1,
-----------------------------
1996, by and between CS First Boston Mortgage Capital Corp. (the "Purchaser"),
---------
and T.A.R. Preferred Mortgage Corporation (the "Company"), and the Mortgage
-------
Loans delivered thereunder by the Company to the Assignor, and that certain
Custodial Agreement (the "Custodial Agreement"), dated as of August 1, 1996, by
-------------------
and among the Company, the Purchaser, Advanta Mortgage Corp. USA (the
"Servicer") and Bankers Trust Company of California, N.A. (the "Custodian").
-------- ---------
2. The Assignor warrants and represents to, and covenants with, the
Assignee that:
a. The Assignor is the lawful owner of the Mortgage Loans with the
full right to transfer the Mortgage Loans free from any and all claims and
encumbrances whatsoever;
b. The Assignor has not received notice of, and has no knowledge of,
any offsets, counterclaims or other defenses available to the Company with
respect to the Seller's Warranties Agreement or the Mortgage Loans;
c. The Assignor has not waived or agreed to any waiver under, or
agreed to any amendment or other modification of, the Seller's Warranties
Agreement, the Custodial Agreement or the Mortgage Loans, including without
limitation the transfer of the servicing obligations under the Seller's
Warranties Agreement. The Assignor has no knowledge of, and has not received
notice of, any waivers under or amendments or other modifications of, or
assignments of rights or obligations under, the Seller's Warranties Agreement or
the Mortgage Loans; and
<PAGE>
d. Neither the Assignor nor anyone acting on its behalf has offered,
transferred, pledged, sold or otherwise disposed of the Mortgage Loans, any
interest in the Mortgage Loans or any other similar security to, or solicited
any offer to buy or accept a transfer, pledge or other disposition of the
Mortgage Loans, any interest in the Mortgage Loans or any other similar security
from, or otherwise approached or negotiated with respect to the Mortgage Loans,
any interest in the Mortgage Loans or any other similar security with, any
person in any manner, or made any general solicitation by means of general
advertising or in any other manner, or taken any other action which would
constitute a distribution of the Mortgage Loans under the Securities Act of 1933
(the "33 Act") or which would render the disposition of the Mortgage Loans a
------
violation of Section 5 of the 33 Act or require registration pursuant thereto.
3. The Assignee warrants and represents to, and covenants with, the
Assignor and the Company pursuant to Section 6.08 of the Seller's Warranties
Agreement that:
a. The Assignee agrees to be bound, as Purchaser, by all of the
terms, covenants and conditions of the Seller's Warranties Agreement, the
Mortgage Loans and the Custodial Agreement, and from and after the date hereof,
the Assignee assumes for the benefit of each of the Company and the Assignor all
of the Assignor's obligations as Purchaser thereunder;
b. The Assignee understands that the Mortgage Loans have not been
registered under the 33 Act or the securities laws of any state;
c. The purchase price being paid by the Assignee for the Mortgage
Loans are in excess of $250,000 and will be paid by cash remittance of the full
purchase price within 60 days of the sale;
d. The Assignee is acquiring the Mortgage Loans for investment for
its own account only and not for any other person. In this connection, neither
the Assignee nor any Person authorized to act therefor has offered the Mortgage
Loans by means of any general advertising or general solicitation within the
meaning of Rule 502(c) of U.S. Securities and Exchange Commission Regulation D,
promulgated under the 1933 Act;
e. The Assignee considers itself a substantial, sophisticated
institutional investor having such knowledge and experience in financial and
business matters that it is capable of evaluating the merits and risks of
investment in the Mortgage Loans;
f. The Assignee has been furnished with all information regarding the
Mortgage Loans that it has requested from the Assignor or the Company;
g. Neither the Assignee nor anyone acting on its behalf has offered,
transferred, pledged, sold or otherwise disposed of the Mortgage Loans, any
interest in the Mortgage Loans or any other similar security to, or solicited
any offer to buy or accept a
2
<PAGE>
transfer, pledge or other disposition of the Mortgage Loans, any interest in the
Mortgage Loans or any other similar security from, or otherwise approached or
negotiated with respect to the Mortgage Loans, any interest in the Mortgage
Loans or any other similar security with, any person in any manner which would
constitute a distribution of the Mortgage Loans under the 33 Act or which would
render the disposition of the Mortgage Loans a violation of Section 5 of the 33
Act or require registration pursuant thereto, nor will it act, nor has it
authorized or will it authorize any person to act, in such manner with respect
to the Mortgage Loans; and
h. Either: (1) the Assignee is not an employee benefit plan ("Plan")
----
within the meaning of section 3(3) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA") or a plan (also "Plan") within the meaning of
----- ----
section 4975(e)(1) of the Internal Revenue Code of 1986 ("Code"), and the
----
Assignee is not directly or indirectly purchasing the Mortgage Loans on behalf
of, investment manager of, as named fiduciary of, as Trustee of, or with assets
of, a Plan; or (2) the Assignee's purchase of the Mortgage Loans will not result
in a prohibited transaction under section 406 of ERISA or section 4975 of the
Code.
4. The Assignor hereby delivers to the Assignee the notice required
pursuant to Section 226.32 of the Federal Reserve Board Regulation Z with
respect to the Mortgage Loans sold pursuant hereto: "Notice: This is a mortgage
subject to special rules under the federal Truth in Lending Act, Purchasers or
assignees of this mortgage could be liable for all claims and defenses with
respect to the mortgage that the borrower could assert against the creditor."
5. The Assignee's address for purposes of all notices and
correspondence related to the Mortgage Loans and the Seller's Warranties
Agreement is:
------------------------------------
------------------------------------
------------------------------------
Attention:
--------------------------
The Assignee's wire transfer instructions for purposes of all
remittances and payments related to the Mortgage Loans and the Seller's
Warranties Agreement are:
------------------------------------
------------------------------------
------------------------------------
Attention:
--------------------------
6. The delivery of this Assignment and Assumption Agreement by the
Assignee to the Company shall constitute notice of the transfer of the
Assignor's rights and
3
<PAGE>
obligations with respect to the Mortgage Loans assigned and conveyed hereby,
under the Seller's Warranties Agreement.
7. THIS ASSIGNMENT AND ASSUMPTION AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK AND THE OBLIGATIONS, RIGHTS
AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH
SUCH LAWS.
8. This Assignment and Assumption Agreement shall inure to the
benefit of the successors and permitted assigns of the parties hereto. This
Assignment and Assumption Agreement may not be assigned by the Assignee without
the express written consent of the Assignor in its sole discretion.
9. No term or provision of this Assignment and Assumption Agreement
may be waived or modified unless such waiver or modification is in writing and
signed by the party against whom such waiver or modification is sought to be
enforced.
10. For the purpose of facilitating the execution of this Assignment
and Assumption Agreement as herein provided and for other purposes, this
Assignment and Assumption Agreement may be executed simultaneously in any number
of counterparts, each of which counterparts shall be deemed to be an original,
and such counterparts shall constitute and be one and the same instrument.
4
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Assignment and
Assumption Agreement to be executed by their duly authorized officers as of the
date first above written.
- --------------------------------- ----------------------------------
Assignor Assignee
By: By:
-------------------------------- ----------------------------------
Its: Its:
------------------------------- ---------------------------------
Taxpayer Taxpayer
Identification No. Identification No.
------------------ -------------------
5
<PAGE>
EXHIBIT E
---------
FORM OF ASSIGNMENT AND CONVEYANCE
---------------------------------
On this ____ day of _________, 1996, T.A.R. Preferred Mortgage
Corporation ("T.A.R.") as the Company under that certain Seller's Warranties
Agreement, dated as of August 1, 1996 (the "Agreement") does hereby sell,
transfer, assign, set over and convey to CS First Boston Mortgage Capital Corp.
as Purchaser under the Agreement, without recourse, but subject to the terms of
the Agreement, all rights, title and interest of T.A.R. in and to the Mortgage
Loans listed on the Mortgage Loan Schedule attached hereto as Exhibit A,
together with the Mortgage Files and all rights and obligations arising under
the documents contained therein. Pursuant to Section 2.03 of the Agreement,
T.A.R. has delivered to the Custodian the documents for each Mortgage Loan to be
purchased as set forth in the Custodial Agreement. The ownership of each
Mortgage Note, Mortgage, and the contents of the Mortgage File is vested in CS
First Boston Mortgage Capital Corp. and the ownership of all records and
documents with respect to the related Mortgage Loan prepared by or which come
into the possession of T.A.R. shall immediately vest in CS First Boston Mortgage
Capital Corp. and shall be retained and maintained, in trust, by T.A.R. at the
will of CS First Boston Mortgage Capital Corp. in such custodial capacity only.
The Mortgage Loans listed on Exhibit A have the characteristics set
forth on Exhibit B hereto as of the applicable Closing Date.
Capitalized terms used herein and not otherwise defined shall have the
meanings set forth in the Agreement.
T.A.R. PREFERRED MORTGAGE CORPORATION
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
<PAGE>
EXHIBIT 10.16
===============================================================================
CS FIRST BOSTON MORTGAGE CAPITAL CORP.
Purchaser
and
T.A.R. PREFERRED MORTGAGE CORPORATION
Company
and
BANKERS TRUST COMPANY OF CALIFORNIA, N.A.
Custodian
and
ADVANTA MORTGAGE CORP. USA
Servicer
____________________________
CUSTODIAL AGREEMENT
As of August 1, 1996
____________________________
Conventional Fixed Rate Residential Second Lien Mortgage Loans
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 1. Definitions................................. 1
Section 2. Delivery of Custodial Files................. 3
Section 3. Trust Receipt of the Custodian.............. 5
Section 4. Obligations of the Custodian................ 5
Section 5. Final Certification......................... 6
Section 6. Future Defects.............................. 6
Section 7. Release for Servicing....................... 6
Section 8. Limitation on Release....................... 7
Section 9. Release for Payment......................... 7
Section 10. Fees of Custodian........................... 7
Section 11. Removal of Custodian........................ 7
Section 12. Transfer of Custodial Files Upon Termination 8
Section 13. Examination of Custodial Files.............. 9
Section 14. Insurance of Custodian...................... 9
Section 15. Counterparts................................ 9
Section 16. Periodic Statements......................... 9
Section 17. Governing Law............................... 9
Section 18. Copies of Mortgage Documents................ 10
Section 19. No Adverse Interest of Custodian............ 10
Section 20. Termination of Custodian.................... 10
Section 21. Term of Agreement........................... 10
Section 22. Notices..................................... 10
<PAGE>
</TABLE>
<TABLE>
<S> <C> <C>
Section 23. Successors and Assigns...................... 11
Section 24. Indemnification of Custodian................ 11
Section 25. Indemnification of Purchaser................ 11
Section 26. Reliance of Custodian....................... 12
Section 27. Transmission of Custodial Files............. 12
Section 28. Authorized Representatives.................. 13
Section 29. Reproduction of Documents................... 13
Section 30. Amendment................................... 13
Section 31. Reserve Fund................................ 14
</TABLE>
EXHIBITS
--------
EXHIBIT 1 FORM OF TRUST RECEIPT
EXHIBIT 2 FORM OF FINAL CERTIFICATION
EXHIBIT 3 FORM OF REQUEST FOR RELEASE OF
DOCUMENTS AND RECEIPT
EXHIBIT 4 AUTHORIZED REPRESENTATIVES OF COMPANY
EXHIBIT 5 AUTHORIZED REPRESENTATIVES OF PURCHASER
EXHIBIT 6 AUTHORIZED REPRESENTATIVES OF CUSTODIAN
EXHIBIT 7 FORM OF NOTICE OF SALE
EXHIBIT 8 FORM OF OPINION OF COUNSEL OF THE CUSTODIAN
EXHIBIT 9 MORTGAGE LOAN SCHEDULE
EXHIBIT 10 FORM OF LOST NOTE AFFIDAVIT
EXHIBIT 11 AUTHORIZED REPRESENTATIVES OF SERVICER
EXHIBIT 12 CONFIRMATION OF RECEIPT OF RESERVE FUNDS
<PAGE>
THIS CUSTODIAL AGREEMENT, dated as of August 1, 1996, by and among CS
First Boston Mortgage Capital Corp., having an address at Park Avenue Plaza, 55
East 52nd Street, New York, New York 10055 (the "Purchaser"), T.A.R. Preferred
---------
Mortgage Corporation, having an address at 19782 MacArthur Boulevard, Suite 250,
Irvine, California 92715 (the "Company"), Advanta Mortgage Corp. USA having an
-------
address at 16875 West Bernardo Drive, San Diego, California 92127 (the
"Servicer") and Bankers Trust Company of California, N.A., having an address at
--------
3 Park Plaza, 16th Floor, Irvine, California 92714 (the "Custodian");
---------
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, the Purchaser has agreed to purchase, from time to time, from
the Company and the Company has heretofore agreed to sell, from time to time, to
the Purchaser certain mortgage loans (each a "Mortgage Loan") on a servicing
released basis pursuant to a Mortgage Loan Purchase Agreement, by and between
the Purchaser and the Company (the "Purchase Agreement"), a Seller's Warranties
Agreement, by and between the Purchaser and Company, and a Loan Servicing
Agreement, by and among the Purchaser, the Company and the Servicer (the
"Servicing Agreement"), each dated as of the date hereof;
WHEREAS, as determined by the Purchaser, the Company, the Purchaser or
one or more designees of the Purchaser will retain record title to the Mortgage
Loans; and
WHEREAS, the Custodian is a national banking association chartered
under the laws of the United States of America and regulated by the Comptroller
of the Currency and is otherwise authorized to act as Custodian pursuant to this
Agreement. The Purchaser desires to have the Custodian take possession of the
Mortgages and Mortgage Notes, along with certain other documents specified
herein, as the Custodian of the Purchaser and any future purchaser, in
accordance with the terms and conditions hereof.
NOW THEREFORE, in consideration of the mutual undertakings herein
expressed, the parties hereto hereby agree as follows:
Section 1. Definitions.
-----------
Capitalized terms used but not defined herein shall have the meanings
assigned to them in the Servicing Agreement.
Agreement: This Custodial Agreement and all amendments and
---------
attachments hereto and supplements hereof.
Assignment of Mortgage: An assignment of the Mortgage, notice of
----------------------
transfer or equivalent instrument in recordable form, sufficient under the laws
of the jurisdiction wherein the related Mortgaged Property is located to reflect
the sale of the Mortgage to the Purchaser.
<PAGE>
Closing Date: The dates or dates on which the Purchaser, from time to
------------
time, shall purchase and the Company, from time to time, shall sell the Mortgage
Loans listed on the related Mortgage Schedule with respect to the related
Closing Date. The Closing Date for such Mortgage Loans shall be as respectively
set forth on the Mortgage Loan Schedule or such other date or dates as are
mutually agreed upon by the parties.
Company: T.A.R. Preferred Mortgage Corporation, or its successor in
-------
interest or assigns.
Confirmation of Receipt of Reserve Funds: The confirmation of receipt
----------------------------------------
of the Reserve Fund amount delivered by the Custodian to the Purchaser, in the
form of Exhibit 12 hereto.
Custodian: Bankers Trust Company of California, N.A., or its
---------
successor in interest or assigns, or any successor to the Custodian under this
Agreement as herein provided.
Custodial File: As to each Mortgage Loan, any mortgage loan documents
--------------
which are delivered to the Custodian or which at any time come into the
possession of the Custodian.
Final Certification: A final certification as to each Mortgage Loan,
-------------------
which Final Certification is delivered to the Purchaser by the Custodian in the
form annexed hereto as Exhibit 2.
---------
Mortgage: The mortgage, deed of trust or other instrument securing a
--------
Mortgage Note, which creates a second lien on an unsubordinated estate in fee
simple in real property securing the Mortgage Note.
Mortgage Loan Schedule: A schedule of Mortgage Loans annexed hereto as
----------------------
Exhibit A, such schedule setting forth the following information with respect to
- ---------
each Mortgage Loan: (1) the Company's Mortgage Loan identifying number; (2) the
Mortgagor's name; (3) the street address of the Mortgaged Property including the
state and the zip code; (4) a code indicating whether the Mortgaged Property is
owner occupied; (5) the number and type of residential units constituting the
Mortgaged Property; (6) the original months to maturity or the remaining months
to maturity from the Cut-off Date, in any case based on the original
amortization schedule, and if different, the maturity expressed in the same
manner but based on the actual amortization schedule; (7) the Loan-to-Value
Ratio at origination; (8) the Mortgage Interest Rate as of the Cut-off Date; (9)
the Due Date for the first payment on the Mortgage Loan; (10) the stated
maturity date; (11) the amount of the Monthly Payment as of the date of
origination; (12) the last Due Date for which a Monthly Payment was actually
applied to the outstanding principal balance; (13) the original principal amount
of the Mortgage Loan; (14) the principal balance of the Mortgage Loan as of the
close of business on the Cut-off Date, after deduction of payments of principal
due on or before the Cut-off Date, whether or not collected; (15) the Mortgage
Interest Rate minus the Servicing Fee as of the Cut-off Date; (16) a code
indicating the purpose of the Mortgage Loan; (17) the Mortgagor's
-2-
<PAGE>
debt to income ratio; (18) the Mortgagor's credit score; and (19) the
outstanding principal balance of the First Lien. With respect to the Mortgage
Loans in the aggregate, the Mortgage Loan Schedule shall set forth the following
information, as of the Cut-off Date: (1) the number of Mortgage Loans; (2) the
current aggregate outstanding principal balance of the Mortgage Loans; (3) the
weighted average Mortgage Interest Rate of the Mortgage Loans; and (4) the
weighted average maturity of the Mortgage Loans.
Mortgage Note: The note or other evidence of the indebtedness of a
-------------
Mortgagor secured by a Mortgage.
Mortgaged Property: The real property securing repayment of the debt
------------------
evidenced by a Mortgage Note.
Opinion of Counsel: An opinion of counsel to the Custodian, in the
------------------
form of Exhibit 8 hereto, to be delivered to the Purchaser upon execution of
---------
this Agreement.
Person: Any individual, corporation, partnership, joint venture,
------
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof.
Purchaser: CS First Boston Mortgage Capital Corp., or its successor
---------
in interest or assigns, or any successor to the Purchaser under the Servicing
Agreement as therein provided.
Qualified Insurer: An insurance company duly qualified as such under
-----------------
the laws of the states in which the Mortgaged Properties are located, duly
authorized and licensed in such states to transact the applicable insurance
business and to write the insurance provided, approved as an insurer by FNMA or
FHLMC, and whose claims-paying ability is rated in one of the two highest rating
categories by a Rating Agency with respect to primary mortgage insurance and in
one of the two highest rating categories by A.M. Best Co., Inc. with respect to
hazard and flood insurance.
Servicer: Advanta Mortgage Corp. USA, any affiliate, or its successor
--------
in interest or assigns.
Trust Receipt: A trust receipt as to each delivery of Mortgage Loans,
-------------
which Trust Receipt is delivered to the Purchaser by the Custodian in the form
annexed hereto as Exhibit 1.
---------
Section 2. Delivery of Custodial Files.
---------------------------
The Company shall cause to be delivered and released to the Custodian
at least two (2) Business Days prior to each Closing Date the following original
documents pertaining to each of the related Mortgage Loans identified in the
related Mortgage Loan Schedule annexed hereto as Exhibit 9 as amended on each
---------
Closing Date (such information shall also be delivered to the Custodian on
computer readable magnetic tape or disk):
-3-
<PAGE>
(a) The original Mortgage Note bearing all intervening endorsements,
endorsed "Pay to the order of _________ without recourse" and signed in the name
of the Company by an authorized officer (in the event that the Mortgage Loan was
acquired by the Company in a merger, the signature must be in the following
form: "[Company], successor by merger to [name of predecessor]"; and in the
event that the Mortgage Loan was acquired or originated by the Company while
doing business under another name, the signature must be in the following form:
"[Company], formerly known as [previous name]");
(b) The original of any guarantee executed in connection with the
Mortgage Note (if any);
(c) The original Mortgage, with evidence of recording thereon. If in
connection with any Mortgage Loan, the Company cannot deliver or cause to be
delivered the original Mortgage with evidence of recording thereon on or prior
to the related Closing Date because of a delay caused by the public recording
office where such Mortgage has been delivered for recordation or because such
Mortgage has been lost or because such public recording office retains the
original recorded Mortgage, the Company shall deliver or cause to be delivered
to the Custodian, a photocopy of such Mortgage, together with (i) in the case of
a delay caused by the public recording office, an Officer's Certificate of the
Company stating that such Mortgage has been dispatched to the appropriate public
recording office for recordation and that the original recorded Mortgage or a
copy of such Mortgage certified by such public recording office to be a true and
complete copy of the original recorded Mortgage will be promptly delivered to
the Custodian upon receipt thereof by the Company; or (ii) in the case of a
Mortgage where a public recording office retains the original recorded Mortgage
or in the case where a Mortgage is lost after recordation in a public recording
office, a copy of such Mortgage certified by such public recording office or by
the title insurance company that issued the title policy to be a true and
complete copy of the original recorded Mortgage;
(d) The originals of all assumption, modification, consolidation or
extension agreements, with evidence of recording thereon;
(e) The original Assignment of Mortgage for each Mortgage Loan, in
form and substance acceptable for recording in blank. If the Mortgage Loan was
acquired by the Company in a merger, the Assignment of Mortgage must be made by
"[Company], successor by merger to [name of predecessor]." If the Mortgage Loan
was acquired or originated by the Company while doing business under another
name, the Assignment of Mortgage must be by "[Company], formerly known as
[previous name];"
(f) Originals of all intervening assignments of the Mortgage with
evidence of recording thereon, or if any such intervening assignment has not
been returned from the applicable recording office or has been lost or if such
public recording office retains the original recorded assignments of mortgage,
the Company shall deliver or cause to be delivered to the Custodian, a photocopy
of such intervening assignment, together with (i) in the case of a delay caused
by the public recording office, an Officer's Certificate of the Company stating
that such intervening assignment of mortgage has been dispatched to the
appropriate public
-4-
<PAGE>
recording office for recordation and that such original recorded intervening
assignment of mortgage or a copy of such intervening assignment of mortgage
certified by the appropriate public recording office or by the title insurance
company that issued the title policy to be a true and complete copy of the
original recorded intervening assignment of mortgage will be promptly delivered
to the Custodian upon receipt thereof by the Company; or (ii) in the case of an
intervening assignment where a public recording office retains the original
recorded intervening assignment or in the case where an intervening assignment
is lost after recordation in a public recording office, a copy of such
intervening assignment certified by such public recording office to be a true
and complete copy of the original recorded intervening assignment;
(g) The original limited liability lender's title insurance policy;
(h) Any security agreement, chattel mortgage or equivalent executed in
connection with the Mortgage; and
(i) Copies of all mortgage loan documents for the First Lien mortgage
loan.
From time to time, the Company shall forward to the Custodian
additional original documents, additional documents evidencing an assumption,
modification, consolidation or extension of a Mortgage Loan approved by the
Company, in accordance with the terms of the Servicing Agreement. All such
mortgage documents held by the Custodian as to each Mortgage Loan shall
constitute the "Custodial File".
--------------
The Company shall promptly, upon request or direction by Purchaser,
submit for recording, in the appropriate public office for real property
records, each assignment referred to in Section 2(e) and (f) above.
Section 3. Trust Receipt of the Custodian; Confirmation of Receipt of
----------------------------------------------------------
Reserve Fund.
------------
On the related Closing Date, the Custodian shall deliver to the
Purchaser a Trust Receipt certifying receipt of a Mortgage Note and Assignment
of Mortgage for each Mortgage Loan on the related Mortgage Loan Schedule. The
Custodian makes no representations as to and shall not be responsible to verify
(i) the validity, legality, enforceability, sufficiency, due authorization,
recordability or genuineness of any Mortgage Note or Assignment of Mortgage or
any of the Mortgage Loans identified on the Mortgage Loan Schedule, (ii) the
collectability, insurability, effectiveness or suitability of any such Mortgage
Loan or (iii) the accuracy of the aggregate outstanding principal balance of the
Mortgage Loans which will be provided by the Purchaser.
On the Business Day following the related Closing Date, the Custodian
shall deliver to the Purchaser a Confirmation of Receipt of Reserve Funds
-5-
<PAGE>
Section 4. Obligations of the Custodian.
----------------------------
With respect to the Mortgage Note, the Mortgage and the Assignment of
Mortgage and other documents constituting each Custodial File which is delivered
to the Custodian or which come into the possession of the Custodian, the
Custodian is the Custodian for the Purchaser exclusively. The Custodian shall
hold all mortgage documents received by it constituting the Custodial File for
the exclusive use and benefit of the Purchaser, and shall make disposition
thereof only in accordance with the Agreement and the instructions furnished by
the Purchaser. The Custodian shall segregate and maintain continuous custody of
all mortgage documents constituting each Custodial File in secure and fireproof
facilities in accordance with customary standards for such custody.
Section 5. Final Certification.
-------------------
Within 30 days after each Closing Date, the Custodian shall ascertain
that all documents referred to in paragraphs (a), (c), (e), (f) and (g) of
Section 2, and to the extent provided in the Custodial Files (b), (d), and (h)
of Section 2 are in its possession, and shall deliver to the Purchaser a Final
Certification to the effect that, as to each Mortgage Loan listed in the
Mortgage Loan Schedule (other than any Mortgage Loan paid in full or any
Mortgage Loan specifically identified in such exception report as not covered by
such certification): (i) all documents referred to in paragraphs (a), (c), (e),
(f) and (g) of Section 2, and to the extent provided in the Custodial Files (b),
(d), and (h) of Section 2 are in its possession; (ii) such documents have been
reviewed by it and appear regular on their face and relate to such Mortgage
Loan; (iii) based on its examination and only as to the foregoing documents, the
information set forth in items (1), (2), (3), (10), (11), and (13) of the
definition of Mortgage Loan Schedule respecting such Mortgage Loan is correct;
and (iv) each Mortgage Note has been endorsed as provided in Section 2 of this
Agreement. The Custodian makes no representations as to and shall not be
responsible to verify (i) the validity, legality, enforceability, sufficiency,
due authorization, recordability, or genuineness of any document in any
Custodial File or any of the Mortgage Loans identified on the Mortgage Loan
Schedule or (ii) the collectability, insurability, effectiveness or suitability
of any such Mortgage Loan or (iii) whether a binder or title insurance policy is
required to be delivered pursuant to Section 2(g).
Section 6. Future Defects.
--------------
During the term of this Agreement, if the Custodian discovers any
defect with respect to the Custodial File, the Custodian shall give written
specification of such defect to the Company, the Servicer and the Purchaser.
Section 7. Release for Servicing.
---------------------
From time to time and as appropriate for the foreclosure or servicing
of any of the Mortgage Loans, the Custodian shall, upon written receipt from the
Servicer of a request for release of documents and receipt in the form annexed
hereto as Exhibit 3, release to the Servicer the related Custodial File or the
---------
documents set forth in such request and receipt. All
-6-
<PAGE>
documents so released to the Servicer shall be held by the Servicer in trust for
the benefit of the Purchaser in accordance with the terms of the Servicing
Agreement. The Servicer shall return to the Custodian the Custodial File or
other such documents when the Servicer's need therefor in connection with such
foreclosure or servicing no longer exists, unless the Mortgage Loan shall be
liquidated in which case, upon receipt of an additional request for release of
documents and receipt certifying such liquidation from the Servicer to the
Custodian in the form annexed hereto as Exhibit 3, a copy of the Servicer's
---------
request and receipt submitted pursuant to the first sentence of this Section 7
shall be released by the Custodian to the Servicer.
Section 8. Limitation on Release.
---------------------
The foregoing provision respecting release to the Servicer of the
Custodial Files and documents by the Custodian upon request by the Servicer
shall be operative only to the extent that at any time the Servicer shall not
request and the Custodian shall not release to the Servicer Custodial Files or
documents (including those requested) pertaining to more than 15 Mortgage Loans
at the time being serviced by the Servicer under the Servicing Agreement. Any
additional Custodial Files or documents requested to be released by the Servicer
may be released only upon written authorization of the Purchaser. The
limitations of this paragraph shall not apply to the release of Custodial Files
to the Servicer under Section 9 below.
Section 9. Release for Payment.
-------------------
Upon the repurchase or rejection of any Mortgage Loan pursuant to the
Seller's Warranties Agreement, or upon the payment in full of any Mortgage Loan,
and upon receipt by the Custodian of the Servicer's request for release of
documents and receipt in the form annexed hereto as Exhibit 3 (which
---------
certification shall include a statement to the effect that all amounts received
in connection with such payment or repurchase have been credited to the
Custodial Account if provided in the Servicing Agreement), the Custodian shall
promptly release the related Custodial File to the Servicer.
Section 10. Fees of Custodian.
-----------------
The Custodian shall charge such fees for its services under this
Agreement as are set forth in a separate agreement between the Custodian and the
Company, the payment of which fees, together with the Custodian's expenses in
connection herewith, shall be solely the obligation of the Company.
Section 11. Removal of Custodian.
--------------------
The Purchaser, with or without cause, may (i) require the Custodian to
complete the endorsements on the Mortgage Notes and to complete the Assignments
of Mortgage, and/or (ii) upon at least 30 days' notice remove and discharge the
Custodian from the performance of its duties under this Agreement by written
notice from the Purchaser to the Custodian, with a copy to the Company and the
Servicer. Having given notice of such removal, the Purchaser promptly shall
appoint a successor Custodian to act on behalf of the
-7-
<PAGE>
Purchaser by written instrument, one original counterpart of which instrument
shall be delivered to the Purchaser, with a copy to the Company and the Servicer
and an original to the successor Custodian. In the event of any such removal,
the Purchaser shall deliver all Trust Receipts and Final Certifications to the
Custodian which were not previously delivered to the Custodian, and the
Custodian shall promptly transfer to the successor Custodian, as directed by the
Purchaser, all Custodial Files being administered under this Agreement, and the
Purchaser shall prepare or cause to be prepared, at the expense of the
Purchaser, the necessary assignment documents and the Custodian shall complete
and execute such assignments and endorse the Mortgage Notes to the successor
Custodian if the endorsements on the Mortgage Notes and the Assignments of
Mortgages have been completed in the name of the Custodian as directed by the
Purchaser. In the event that the Purchaser terminates the Custodian without
cause, then the Purchaser shall bear the out-of-pocket costs incurred as a
result of the transfer and delivery of the Custodial Files to a successor
custodian. In all other instances, the Company shall bear such costs.
Section 12. Transfer of Custodial Files Upon Termination.
--------------------------------------------
Upon receipt by the Custodian of written notice from the Purchaser, at
the cost and expense of the Purchaser, the Custodian shall release to such
persons as the Purchaser shall designate the Custodial Files relating to such
Mortgage Loans as the Purchaser shall request, and shall assign the Mortgages
and endorse the Mortgage Notes as the Purchaser shall request.
In the event the Purchaser sells all or a portion of the Mortgage
Loans to a purchaser (the "Transferee"), the Purchaser shall give the Custodian
----------
one (1) Business Day notice prior to the sale of any or all of the Mortgage
Loans (the "Sold Mortgage Loans"). Such notice of sale (the "Notice of Sale")
------------------- --------------
shall be in the form attached hereto as Exhibit 7 and a Mortgage Loan Schedule
---------
with respect to the Mortgage Loans being sold shall also be delivered to the
Custodian on a computer readable magnetic disk. If requested by the Purchaser,
and upon receipt of the original or a facsimile copy of the Trust Receipt and a
Final Certification (if a Final Certification has previously been issued) which
has been clearly marked "CANCELLED" and signed by an authorized officer of the
Purchaser (and in the case of a facsimile, the original cancelled Trust Receipt
and a Final Certification (if a Final Certification has previously been issued
shall be sent to the Custodian via overnight delivery), the Custodian shall
deliver to the Purchaser a certification in the form of the Trust Receipt and a
certification in the form of a Final Certification (if a Final Certification has
previously been issued) with respect to the remaining Mortgage Loans governed
hereunder.
The Custodian shall hold the related Mortgage Loan Documents of the
Sold Mortgage Loans, for the benefit of the Transferee until the Purchaser or
the Transferee gives the Custodian written instructions for the delivery (at the
cost and expense of such Transferee) of the related Mortgage Loan Documents to
the Transferee or a designee of the Transferee. If requested by the Purchaser,
with respect to the Sold Mortgage Loans, the Custodian shall deliver to the
Transferee an original copy of a Trust Receipt and if a Final Certification has
been issued with respect to the Sold Mortgage Loans, a Final Certification for
the benefit of
-8-
<PAGE>
the Transferee for the period of time the Custodian holds the Sold Mortgage
Loans for the Transferee. Simultaneously with the delivery of the related
Mortgage Loan Documents to the Transferee or a designee of the Transferee, the
Trust Receipt and Final Certification, if any, issued to the Transferee shall be
deemed canceled and the Sold Mortgage Loans and related Mortgage Loan Documents
will no longer be subject to this Agreement. Such cancelled Trust Receipt and
Final Certification, if any, issued to such Transferee shall be returned to the
Custodian for proper disposition.
Section 13. Examination of Custodial Files.
------------------------------
Upon reasonable prior notice to the Custodian but not less than two
(2) Business Days' notice, the Purchaser and its agents, accountants, attorneys
and auditors will be permitted during normal business hours to examine the
Custodial Files, documents, records and other papers in the possession of or
under the control of the Custodian relating to any or all of the Mortgage Loans.
Section 14. Insurance of Custodian.
----------------------
At its own expense, the Custodian shall maintain at all times during
the existence of this Agreement and keep in full force and effect fidelity
insurance, theft of documents insurance, forgery insurance and errors and
omissions insurance. All such insurance shall be in amounts, with standard
coverage and subject to deductibles, all as is customary for insurance typically
maintained by banks which act as Custodian. The minimum coverage under any such
bond and insurance policies shall be at least equal to the corresponding amounts
required by FNMA in the FNMA Mortgage-Backed Securities Selling and Servicing
Guide or by FHLMC in the FHLMC Seller's & Servicer's Guide, and as required by
FHA Regulations or VA Regulations. A certificate of the respective insurer as
to each such policy, shall be furnished to the Purchaser, upon request,
containing the statement of the insurer evidencing that such insurance is in
full force and effect.
Section 15. Counterparts.
------------
For the purpose of facilitating the execution of this Agreement as
herein provided and for other purposes, this Agreement may be executed
simultaneously in any number of counterparts, each of which counterparts shall
be deemed to be an original, and such counterparts shall constitute and be one
and the same instrument.
Section 16. Periodic Statements.
-------------------
Upon the request of the Purchaser, the Custodian shall provide to the
Purchaser a list of all the Mortgage Loans for which the Custodian holds a
Custodial File pursuant to this Agreement. Such list may be in the form of a
copy of the Mortgage Loan Schedule with manual deletions to specifically denote
any Mortgage Loans paid off or repurchased since the date of this Agreement.
-9-
<PAGE>
SECTION 17. GOVERNING LAW.
-------------
THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF CALIFORNIA AND THE OBLIGATIONS, RIGHTS, AND REMEDIES OF THE PARTIES
HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.
Section 18. Copies of Mortgage Documents.
----------------------------
Upon the request of the Purchaser and at the cost and expense of the
Purchaser, the Custodian shall provide the Purchaser with copies of the Mortgage
Notes, Mortgages, Assignments of Mortgage and other documents relating to one or
more of the Mortgage Loans.
Section 19. No Adverse Interest of Custodian.
--------------------------------
By execution of this Agreement, the Custodian represents and warrants
that it currently holds, and during the existence of this Agreement shall hold,
no adverse interest, by way of security or otherwise, in any Mortgage Loan, and
hereby waives and releases any such interest which it may have in any Mortgage
Loan as of the date hereof.
Section 20. Termination of Custodian.
------------------------
The Custodian may terminate its obligations under this Agreement upon
at least 45 days' notice to the Company, the Servicer and the Purchaser. In the
event of such termination, the Purchaser shall appoint a successor Custodian
which successor Custodian shall deliver all previously issued Trust Receipts and
Final Certifications to the predecessor Custodian which were not previously
delivered to the predecessor Custodian. The payment of such successor
Custodian's fees and expenses shall be solely the responsibility of the Company.
Upon such appointment, the Custodian shall promptly transfer to the successor
Custodian, as directed, all Custodial Files being administered under this
Agreement, and shall assign the Mortgages and endorse the Mortgage Notes to the
successor Custodian, if the endorsements on the Mortgage Notes and the
Assignments of Mortgage have been completed in the name of the Custodian, or as
otherwise directed by the Purchaser.
Section 21. Term of Agreement.
-----------------
Unless terminated pursuant to Section 11 or Section 20 hereof, this
Agreement shall terminate upon the final payment or other liquidation (or
advance with respect thereto) of the last Mortgage Loan or the disposition of
all property acquired upon foreclosure or deed in lieu of foreclosure of any
Mortgage Loan, and the final remittance of all funds due the Purchaser under the
Servicing Agreement. In such event all documents remaining in the Custodial
Files shall be released in accordance with the written instructions of the
Purchaser upon delivery by the Purchaser of the related Trust Receipts and Final
Certifications which were not previously delivered to the Custodian.
-10-
<PAGE>
Section 22. Notices.
-------
All demands, notices and communications hereunder shall be in writing
and shall be deemed to have been duly given if mailed, by registered or
certified mail, return receipt requested, or, if by other means, when received
by the recipient party at the address shown on the first page hereof, or at such
other addresses as may hereafter be furnished to the other parties by like
notice. Any such demand, notice or communication hereunder shall be deemed to
have been received on the date delivered to or received at the premises of the
addressee (as evidenced, in the case of registered or certified mail, by the
date noted on the return receipt). The Custodian's corporate trust office is
located at the following address: 3 Park Plaza, 16th Floor, Irvine, California
92714, and the Custodian shall notify the Purchaser, the Company and the
Servicer if such address should change.
Section 23. Successors and Assigns.
----------------------
This Agreement shall inure to the benefit of the successors and
assigns of the parties hereto.
Section 24. Indemnification of Custodian.
----------------------------
Neither the Custodian nor any of its directors, officers, agents or
employees, shall be liable for any action taken or omitted to be taken by it or
them hereunder or in connection herewith in good faith and believed by it or
them to be within the purview of this Custodial Agreement, except for its or
their own negligence, lack of good faith or willful misconduct. In no event
shall the Custodian or its directors, officers, agents and employees be held
liable for any special, indirect or consequential damages resulting from any
action taken or omitted to be taken by it or them hereunder or in connection
herewith even if advised of the possibility of such damages.
The Company agrees to indemnify and hold the Custodian and its
directors, officers, agents and employees harmless against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind or nature whatsoever, including
reasonable attorney's fees, that may be imposed on, incurred by, or asserted
against it in any way relating to or arising out of this Custodial Agreement or
any action taken or not taken by it or them hereunder unless such liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements were imposed on, incurred by or asserted against the
Custodian (a) because of the breach by the Custodian of its obligations
hereunder, which breach was caused by negligence, lack of good faith or willful
misconduct on the part of the Custodian or any of its directors, officers,
agents or employees or (b) pursuant to the Custodian's indemnification
obligation under Section 25 hereof. The foregoing indemnification shall survive
any termination or assignment of this Custodial Agreement and the resignation or
removal of the Custodian.
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<PAGE>
Section 25. Indemnification of the Purchaser.
--------------------------------
In the event that the Custodian fails to produce a Mortgage Note,
Assignment of Mortgage or any other document related to a Mortgage Loan that was
in its possession pursuant to Section 2 within two (2) Business Days after
required or requested by the Purchaser (a "Custodial Delivery Failure"), and
provided, that (i) Custodian previously delivered to the Purchaser a Trust
Receipt with respect to such document; (ii) such document is not outstanding
pursuant to a request for release of documents and receipt in the form annexed
hereto as Exhibit 3; and (iii) such document was assigned or sold to the
---------
Purchaser, then the Custodian shall (a) with respect to any missing Mortgage
Note, promptly deliver to such Purchaser upon request, a Lost Note Affidavit in
the form of Exhibit 10 annexed hereto and (b) with respect to any missing
----------
document related to such Mortgage Loan including but not limited to, a missing
Mortgage Note, (1) indemnify the Purchaser in accordance with the succeeding
paragraph of this Section 25 and, (2) at the Purchaser's option, at any time the
long term obligations of the Custodian are rated below the second highest rating
category of Moody's Investors Service or Standard and Poor's Ratings Group,
obtain and maintain an insurance bond in the name of the Purchaser, and its
successors in interest and assigns, insuring against any losses associated with
the loss of such document, in an amount equal to the then outstanding principal
balance of the Mortgage Loan or such lesser amount requested by the Purchaser in
the Purchaser's sole discretion.
The Custodian agrees to indemnify and hold the Purchaser and its
designee harmless against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any
kind or nature whatsoever, including reasonable attorney's fees, that may be
imposed on, incurred by, or asserted against it or them in any way relating to
or arising out of such Custodial Delivery Failure. The foregoing
indemnification shall survive any termination or assignment of the Custodial
Agreement and the resignation or removal of the Custodian.
Section 26. Reliance of Custodian.
---------------------
In the absence of bad faith on the part of the Custodian, the
Custodian may conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon any request, instructions,
certificate, opinion or other document furnished to the Custodian, reasonably
believed by the Custodian to be genuine and to have been signed or presented by
the proper party or parties and conforming to the requirements of this Custodial
Agreement; but in the case of any loan document or other request, instruction,
document or certificate which by any provision hereof is specifically required
to be furnished to the Custodian, the Custodian shall be under a duty to examine
the same in accordance with the requirements of this Custodial Agreement.
Section 27. Transmission of Custodial Files.
-------------------------------
Written instructions as to the method of shipment and shipper(s) the
Custodian is directed to utilize in connection with transmission of mortgage
files and loan documents in the performance of the Custodian's duties hereunder
shall be delivered by the Servicer to the
-12-
<PAGE>
Custodian prior to any shipment of any mortgage files and loan document
hereunder. The Servicer will arrange for the provision of such services at its
sole cost and expense (or, at the Custodian's option, reimburse the Custodian
for all costs and expenses incurred by the Custodian consistent with such
instructions) and will maintain such insurance against loss or damage to
mortgage files and loan documents as the Servicer deems appropriate. Without
limiting the generality of the provisions of Section 24 above, it is expressly
agreed that in no event shall the Custodian have any liability for any losses or
damages to any person, including without limitation, the Servicer, arising out
of actions of the Custodian consistent with instructions of the Servicer.
Section 28. Authorized Representatives.
--------------------------
Each individual designated as an authorized representative of the
Company, the Custodian, the Purchaser and the Servicer, respectively (an
"Authorized Representative"), is authorized to give and receive notices,
- --------------------------
requests and instructions and to deliver certificates and documents in
connection with this Custodial Agreement on behalf of the Company, the
Custodian, the Purchaser or the Servicer, as the case may be, and the specimen
signature for each such Authorized Representative of the Company, each such
Authorized Representative of the Custodian, each such Authorized Representative
of the Purchaser, and each such Authorized Representative of the Servicer
initially, authorized hereunder, is set forth on Exhibits 4, 5, 6 and 11 hereof,
---------- -- -
respectively. From time to time, the Company, the Custodian, the Purchaser and
the Servicer may, by delivering to the others a revised exhibit, change the
information previously given pursuant to this Section 28, but each of the
parties hereto shall be entitled to rely conclusively on the then current
exhibit until receipt of a superseding exhibit.
Section 29. Reproduction of Documents.
-------------------------
This Custodial Agreement and all documents relating thereto except
with respect to the Custodial File, including, without limitation, (a) consents,
waivers and modifications which may hereafter be executed, and (b) certificates
and other information previously or hereafter furnished, may be reproduced by
any photographic, photostatic, microfilm, microcard, miniature photographic or
other similar process. The parties agree that any such reproduction shall be
admissible in evidence as the original itself in any judicial or administrative
proceeding, whether or not the original is in existence and whether or not such
reproduction was made by a party in the regular course of business, and that any
enlargement, facsimile or further reproduction of such reproduction shall
likewise be admissible in evidence.
Section 30. Amendment.
----------
This Custodial Agreement may be amended from time to time by written
agreement signed by the Company, the Purchaser, the Servicer and the Custodian.
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<PAGE>
Section 31. Reserve Fund.
------------
On each Closing Date, the Company shall deposit with the Custodian in
immediately available funds to an account maintained with the Custodian for the
benefit of and in the name of the Purchaser (the "Reserve Fund"), an amount
------------
equal to 50 basis points (0.50%) multiplied by the aggregate outstanding
principal balance of the Mortgage Loans being purchased by the Company on the
related Closing Date (such amount, the "Reserve Amount"). The Purchaser shall
--------------
own the Reserve Amount in its entirety and shall be entitled, in its sole
discretion, to withdraw all or a portion of the Reserve Amount from the Reserve
Fund at any time for any reason including, without limitation, in order to
reimburse itself for any actual losses incurred by it with respect to the
Mortgage Loans (other than for a breach of a representation and warranty set
forth in the Seller's Warranties Agreement, for which the Purchaser's sole
recourse shall be a repurchase of the related Mortgage Loan and indemnification,
as provided in Section 3.03 of the Seller's Warranties Agreement or losses
resulting from the Purchaser's breach of the Purchase Agreement or any other
agreement between the Purchaser and the Company), or as credit enhancement in
connection with any securitization or resale of all or a portion of the Mortgage
Loans (such amount allocated to credit enhancement being limited to 50 basis
points (0.50%) multiplied by the aggregate outstanding principal balance of the
Mortgage Loans being securitized or resold), notwithstanding the termination of
the Seller's Warranties Agreement in connection with such securitization. The
Purchaser shall have the exclusive right to withdraw funds from the Reserve Fund
and the Reserve Fund shall be a "no access" account to the Company.
notwithstanding anything to the contrary set forth herein, in the event the
company is required to repurchase a mortgage loan from the purchaser pursuant to
section 6(c) of the purchase agreement, at the company's option either that
portion of the reserve amount which relates to the repurchased mortgage loan
shall be remitted by the purchaser to the company within three (3) business days
following the repurchase of the mortgage loan by the company or such amount
shall be offset against the repurchase price and the purchaser shall have the
right to withdraw the same from the reserve fund. Upon the termination of the
Seller's Warranties Agreement, all funds remaining in the Reserve Fund shall be
the sole and exclusive property of the Purchaser, provided, however, that upon
the payment in full or liquidation of all of the Mortgage Loans, all funds
remaining in the Reserve Fund shall be remitted by the Purchaser to the Company
within three (3) Business Days following receipt by the Purchaser of evidence
from the Company that a payment in full or liquidation has occurred with respect
to all of the Mortgage Loans. The Custodian shall invest any funds deposited in
the Reserve Fund in investments as directed by the Purchaser to the Custodian in
writing. All interest earned on funds deposited in the Reserve Fund shall
remain in the Reserve Fund and shall be part of the Reserve Amount. The
Purchaser and the Company hereby notify the Custodian of the Purchaser's
security interest in the Reserve Fund and in account #21070 maintained with the
Custodian.
-14-
<PAGE>
IN WITNESS WHEREOF, the Company, the Purchaser, the Custodian and the Servicer
have caused their names to be duly signed hereto by their respective officers
thereunto duly authorized, all as of the date first above written.
CS FIRST BOSTON MORTGAGE CAPITAL CORP.
Purchaser
By: _______________________________
Name: _______________________________
Title: _______________________________
T.A.R. PREFERRED MORTGAGE CORPORATION
Company
By: ___________________________________
Name: ___________________________________
Title: ___________________________________
BANKERS TRUST COMPANY OF CALIFORNIA, N.A.
Custodian
By: ___________________________________
Name: ___________________________________
Title: ___________________________________
ADVANTA MORTGAGE CORP. USA
Servicer
By: ____________________________________
Name: ____________________________________
Title: ____________________________________
-15-
<PAGE>
EXHIBIT 1
---------
FORM OF TRUST RECEIPT
__________________, 1996
[To be addressed to the Purchaser]
Original Principal Balance:
Aggregate Outstanding Principal Balance of the Mortgage Loans:
Loan Count:
Re: The Custodial Agreement, dated as of August 1, 1996, among CS First
Boston Mortgage Capital Corp. as the Purchaser, T.A.R. Preferred
Mortgage Corporation, as the Company and Advanta Mortgage Corp. USA,
as the Servicer and Bankers Trust Company of California, N.A. as the
Custodian.
Ladies and Gentlemen:
In accordance with the provisions of Section 3 of the above-referenced
Custodial Agreement, the undersigned, as the Custodian, hereby certifies that it
has received with respect to each Mortgage Loan identified on the Mortgage Loan
Schedule, a Mortgage Note and an Assignment of Mortgage as described in Section
2 of the above-referenced Custodial Agreement.
The Custodian makes no representations as to and shall not be
responsible to verify: (i) the validity, legality, enforceability, sufficiency,
due authorization, recordability or genuineness of any of the Mortgage Loans
identified on the Mortgage Loan Schedule, (ii) the collectability, insurability,
effectiveness or suitability of any such Mortgage Loan, or (iii) the accuracy of
the aggregate outstanding principal balance of the Mortgage Loans which has been
provided by CS First Boston Mortgage Capital Corp.
BANKERS TRUST COMPANY OF CALIFORNIA, N.A.
By: __________________________________
Name: __________________________________
Title: __________________________________
<PAGE>
EXHIBIT 2
---------
FORM OF FINAL CERTIFICATION
______________________
[No later than 30 days after the Closing Date]
[To be addressed to the Purchaser of record]
Re: The Custodial Agreement, dated as of August 1, 1996, among CS First
Boston Mortgage Capital Corp. as the Purchaser, T.A.R. Preferred
Mortgage Corporation, as the Company, Advanta Mortgage Corp. USA, as
the Servicer and Bankers Trust Company of California, N.A., as the
Custodian.
Ladies and Gentlemen:
In accordance with the provisions of Section 5 of the above-referenced
Custodial Agreement, the undersigned, as the Custodian, hereby certifies that as
to each Mortgage Loan listed in the Mortgage Loan Schedule (other than any
Mortgage Loan paid in full or any Mortgage Loan listed on the attachment hereto)
it has reviewed the Custodial Files and has determined that (i) all documents
required to be delivered to it pursuant to paragraphs (a), (c), (e), (f) and (g)
of Section 2 of the Custodial Agreement, and to the extent provided in the
Custodial Files (b), (d), and (h) of Section 2 of the Custodial Agreement are in
its possession; (ii) such documents have been reviewed by it and appear regular
on their face and related to such Mortgage Loan; (iii) based on its examination
and only as to the foregoing documents, the information set forth in items (1),
(2), (3), (10), (11), and (13) of the Mortgage Loan Schedule respecting such
Mortgage Loan is correct; and (iv) each Mortgage Note has been endorsed as
provided in Section 2 of the Custodial Agreement.
The Custodian makes no representations as to and shall not be
responsible to verify the: (i) the validity, legality, enforceability,
sufficiency, due authorization, recordability or genuineness of any of the
documents contained in any Custodial File or any of the Mortgage Loans
identified on the Mortgage Loan Schedule, or (ii) the collectability,
insurability, effectiveness or suitability of any such Mortgage Loan or (iii)
whether a binder or title insurance policy is required to be delivered pursuant
to Section 2(g).
BANKERS TRUST COMPANY OF
CALIFORNIA, N.A.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
<PAGE>
EXHIBIT 3
---------
FORM OF REQUEST FOR RELEASE OF DOCUMENTS AND RECEIPT
To: [Address]
Re: The Custodial Agreement, dated as of August 1, 1996, among CS First
Boston Mortgage Capital Corp. as the Purchaser, T.A.R. Preferred
Mortgage Corporation, as the Company, Advanta Mortgage Corp. USA, as
the Servicer and Bankers Trust Company of California, N.A. as the
Custodian.
In connection with the administration of the Mortgage Loans held by
you as the Custodian on behalf of the Purchaser, we request the release, and
acknowledge receipt, of the (Custodial File/[specify documents]) for the
Mortgage Loan described below, for the reason indicated. The Custodial
File/documents should be sent to:
[Name]
[Company]
[Address]
[Phone]
Mortgagor's Name, Address & Zip Code:
- ------------------------------------
Mortgage Loan Number:
- --------------------
Reason for Requesting Documents (check one)
- -------------------------------
__1. Mortgage Loan Paid in Full. (The Servicer hereby certifies that all
amounts received in connection therewith have been credited to the
Purchaser.)
__2. Mortgage Loan Repurchase Pursuant to the Servicing Agreement. (The
Servicer hereby certifies that the repurchase price has been credited
to the Purchaser.)
__3. Mortgage Loan Liquidated By _____________ (The Servicer hereby
certifies that all proceeds of foreclosure, insurance, condemnation or
other liquidation have been finally received and credited to the
Purchaser.)
__4. Mortgage Loan in Foreclosure.
__5. Other (explain) ____________________________
<PAGE>
If box 1, 2 or 3 above is checked, and if all or part of the Custodial
File was previously released to us, please release to us our previous request
and receipt on file with you, as well as any additional documents in your
possession relating to the specified Mortgage Loan.
If box 4 or 5 above is checked, upon our return of all of the above
documents to you as the Custodian, please acknowledge your receipt by signing in
the space indicated below, and returning this form.
ADVANTA MORTGAGE CORP. USA
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
Date:
------------------------------------
Acknowledgment of Documents returned to the Custodian:
BANKERS TRUST COMPANY OF CALIFORNIA, N.A.
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
Date:
------------------------------------
<PAGE>
EXHIBIT 4
---------
AUTHORIZED REPRESENTATIVES OF COMPANY
NAME SPECIMEN SIGNATURE
- ---- ------------------
___________________ ___________________________
___________________ ___________________________
___________________ ___________________________
___________________ ___________________________
___________________ ___________________________
<PAGE>
EXHIBIT 5
---------
AUTHORIZED REPRESENTATIVES OF PURCHASER
NAME SPECIMEN SIGNATURE
- ---- ------------------
_______________________ _____________________________
_______________________ _____________________________
_______________________ _____________________________
_______________________ _____________________________
_______________________ _____________________________
<PAGE>
EXHIBIT 6
---------
AUTHORIZED REPRESENTATIVES OF CUSTODIAN
NAME SPECIMEN SIGNATURE
- ---- ------------------
________________________ ________________________________
________________________ ________________________________
________________________ ________________________________
________________________ ________________________________
________________________ ________________________________
<PAGE>
EXHIBIT 7
---------
FORM OF NOTICE OF SALE
----------------------
Date: [to be sent at least one day prior to sale]
To: Bankers Trust Company of California, N.A.
From: CS First Boston Mortgage Capital Corp.
(or its Successor or Assignee)
Re: The Custodial Agreement, dated as of August 1, 1996, among CS First
Boston Mortgage Capital Corp. as the Purchaser, T.A.R. Preferred Mortgage
Corporation as the Company, Advanta Mortgage Corp. USA, as the Servicer and
Bankers Trust Company of California, N.A as the Custodian.
Ladies and Gentlemen:
You are hereby notified that as of [date of sale to be inserted] (the
"Transfer Date"), the undersigned has transferred and assigned to [name of
subsequent purchaser to be inserted], having an address at
___________________________________, the right (including the power to convey
title thereto), title and interest in and to the Mortgage Loans identified in
the Mortgage Loan Schedule attached hereto as Schedule A and you are hereby
instructed to [if the Custodial Agreement is to be assigned insert: hold such
Mortgage Loans pursuant to the terms of the Custodial Agreement, dated as of
August 1, 1996, among CS First Boston Mortgage Capital Corp. as the Purchaser,
T.A.R. Preferred Mortgage Corporation, as the Company, Advanta Mortgage Corp.
USA, as the Servicer and Bankers Trust Company of California, N.A as the
Custodian., for the sole and exclusive benefit of [name of subsequent purchaser
to be inserted] subject to the terms hereof, by which [name of subsequent
purchaser to be inserted] agrees to be bound] [if the related Custodial Files
are to be released insert: release the Custodial Files with respect to such
Mortgage Loans to [the subsequent purchaser] upon the direction of [the
Purchaser] on the Transfer Date].
This notification may be revoked by [Purchaser] by written notice to
the Custodian at any time prior to the transfer of ownership of the referenced
Mortgage Loans to [name of subsequent purchaser].
<PAGE>
CS FIRST BOSTON MORTGAGE CAPITAL CORP.
(or its Successor or Assignee)
By: ________________________________
Name: [to be signed by an authorized
representative]
Title: _______________________________
Acknowledged & Agreed:
[Subsequent Purchaser]
By: _______________________
Name:
Title:
<PAGE>
EXHIBIT 8
---------
FORM OF OPINION OF COUNSEL OF THE CUSTODIAN
(Date)
CS First Boston Mortgage Capital Corp.
Park Avenue Plaza
55 East 52nd Street
New York, New York 10055
Ladies and Gentlemen:
[We] [I] have acted as counsel to Bankers Trust Company of California,
N.A. (the "Custodian"), in connection with the execution and delivery of the
---------
Custodial Agreement, dated as of August 1, 1996 (the "Agreement"), among T.A.R.
---------
Preferred Mortgage Corporation (the "Seller"), Advanta Mortgage Corp. USA, you,
------
and the Custodian with respect to the Mortgage Loans delivered by the Seller as
to which the Custodian named herein is to act as custodian.
[We] [I] have reviewed the Agreement and such other matters as we have
deemed appropriate in order to deliver the opinions contained herein.
Based upon the foregoing, it is [our] [my] opinion that:
1. The Custodian is a [federally] [state] chartered commercial bank
duly organized, validly existing and in good standing under the laws of the
[United States] [the State of ______] with full right, power and authority to
enter into, execute and deliver the Agreement.
2. The Agreement has been duly authorized, executed and delivered by
the Custodian and constitutes the legal, valid and binding agreement of and
enforceable against the Custodian in accordance with its terms, subject to
bankruptcy laws and other similar laws of general application affecting rights
of creditors and subject to the application of the rules of equity, including
those respecting the availability of specific performance, none of which will
materially interfere with the realization of the benefits provided under the
Agreement.
<PAGE>
This opinion is given to you for your sole benefit, and no other
person or entity is entitled to rely hereon except that the purchasers to which
you initially and directly resell the Mortgage Loans may rely on this opinion as
if it were addressed to them as of its date.
Very truly yours,
<PAGE>
EXHIBIT 9
---------
MORTGAGE LOAN SCHEDULE
<PAGE>
EXHIBIT 10
----------
FORM OF LOST NOTE AFFIDAVIT
STATE OF CALIFORNIA
) SS:
COUNTY OF ORANGE
__________________________ being first duly sworn, deposes and says:
1. That he is an __________________ of Bankers Trust Company of
California, N.A. ("Bankers Trust"), which was the custodian of the mortgage loan
documents for mortgage loan number _______________ as provided by
2. That the original of the related note (the "Note") appears to have
been lost, mislaid or misfiled by Bankers Trust;
3. That the records of Bankers Trust do not show that such Note was
ever released, paid off, satisfied, assigned, transferred, pledged or
hypothecated and that such note has been either lost, mislaid, or misfiled by
Bankers Trust;
4. That Bankers Trust is aware that ____________________, to which
the above mentioned mortgage loan is to be assigned, relies upon the statements
made herein as to such Note having been lost, mislaid or misfiled by Bankers
Trust and never having been released, paid off, satisfied, assigned,
transferred, pledged or hypothecated;
5. In the event that Bankers Trust should ever locate said mortgage
Note, Bankers Trust agrees to provide said Note to ___________________ and
_______________ agrees to return this Lost Note to Bankers Trust;
6. Attached hereto is a true and correct copy of (i) the Note,
endorsed in blank by the Mortgagee, and (ii) the Mortgage or Deed of Trust
[strike one] which secures the Note, which Mortgage or Deed of Trust is recorded
at ___________________
7. Bankers Trust shall (a) shall indemnify and hold harmless
[INVESTOR], its successors, and assigns, against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements of any kind or nature whatsoever, including reasonable
attorney's fees, that may be imposed on, incurred by, or asserted against it or
them in any way relating to or arising out of unavailability of any Notes.
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this instrument on
behalf of Bankers Trust Company of California, N.A., this _____ day of
____________, 19__.
BANKERS TRUST COMPANY
OF CALIFORNIA, N.A.
By: _____________________
Name: _____________________
STATE OF CALIFORNIA
County of Orange
On this _________ day of _______________________, 199_,
_____________________ personally came before me And is known to me to be the
individual described in, and who executed, the foregoing instrument, and he/she
acknowledged to me that he/she executed the same.
_____________________________________ Notary Public, State of California
(No.__________)
Qualified in ___________ County
Term expires ____________ 19 __
Notary Seal
<PAGE>
EXHIBIT 11
----------
AUTHORIZED REPRESENTATIVES OF THE SERVICER
NAME SPECIMEN SIGNATURE
- ---- ------------------
___________________ ________________________________
___________________ ________________________________
___________________ ________________________________
___________________ ________________________________
___________________ ________________________________
<PAGE>
EXHIBIT 12
----------
CONFIRMATION OF RECEIPT OF RESERVE FUNDS
To:___________________
Re: The Custodial Agreement, dated as of August 1, 1996, among CS First
Boston Mortgage Capital Corp. as the Purchaser, T.A.R. Preferred
Mortgage Corporation, as the Company, Advanta Mortgage Corp. USA, as
the Servicer and Bankers Trust Company of California, N.A. as the
Custodian.
In connection with the above-referenced Custodial Agreement, Custodian
hereby confirms that with respect to the Closing Date of _________, the
Custodian has received an amount equal to $______________, and has deposited
same in the Reserve Fund.
BANKERS TRUST COMPANY OF CALIFORNIA, N.A.
By: ____________________________
Name: ____________________________
Title: ____________________________
Date: ____________________________
<PAGE>
EXHIBIT 10.17
AMENDMENT TO
MORTGAGE LOAN PURCHASE AGREEMENT
Amendment No. 1, dated as of May 8, 1997 (this "Amendment"), between
----------
Credit Suisse First Boston Mortgage Capital LLC (formerly known as CS First
Boston Mortgage Capital Corp.) (the "Purchaser") and Preferred Credit
---------
Corporation (formerly known as T.A.R. Preferred Mortgage Corporation) (the
"Seller").
- -------
RECITALS
--------
The Purchaser and the Seller are parties to that certain Mortgage Loan
Purchase Agreement, dated August 1, 1996 (the "Existing Purchase Agreement"; as
---------------------------
amended by this Amendment, the "Purchase Agreement"). Capitalized terms used
------------------
but not otherwise defined herein shall have the meanings given to them in the
Existing Purchase Agreement.
The Purchaser and the Seller hereby agree, in consideration of the
mutual promises and mutual obligations set forth herein, that the Existing
Purchase Agreement is hereby amended as follows:
SECTION ONE. Section 27 of the Existing Purchase Agreement shall be
deleted and replaced by the following:
"SECTION 27, Purchase Option. The Purchaser and the Seller agree
---------------
that, for a period beginning on May 8, 1997 or such other date as mutually
agreed upon by the Purchaser and the Seller, (the "First Closing Date") pursuant
------------------
to that certain Purchase Price and Terms Letter, dated May 7, 1997 between the
Seller and the
1
<PAGE>
Purchaser (the May Commitment Letter") and ending December 31, 1998 (the "Option
----------------------- ------
Period"), the Purchaser shall have the right to purchase any mortgage loans
- ------
originated by the Seller until the Purchaser purchases mortgage loans in an
amount not to exceed the sum of the aggregate "Minimum Delivery Amount" as set
forth in the Schedule in Section (1) of the May Commitment Letter (such amount,
the "Option Amount"), which meet the Underwriting Guidelines (as defined below)
-------------
or any underwriting guidelines substantially similar to the Underwriting
Guidelines during such Option Period (the "Additional Mortgage Loans"), on the
-------------------------
terms and conditions set forth below. The Purchaser's sole remedy for the
Seller's failure to deliver mortgage loans as required in this paragraph shall
be as expressly set forth in the fourth paragraph of this Section 27.
The purchase price to be paid for the Additional Mortgage Loans
purchased on the First Closing Date shall be the "Purchase Price" as defined in
the May Commitment Letter. On each additional Closing Date following the First
Closing Date, for the purchase and sale of additional Mortgage Loans, the
weighted average gross coupon for the Additional Mortgage Loans being sold on
such Closing Date shall be approximately equal to (which shall mean for purposes
of this Section 27, plus or minus 10 basis points) the offer side yield for the
"on the run" five year U.S. Treasury Note as quoted on Page 500 of Telerate plus
700 basis points. Subject to the following sentences, the purchase price for
any Additional Mortgage Loans (other than the Additional Mortgage Loans
purchased on the First Closing Date) purchased by the Purchaser (the "Additional
----------
2
<PAGE>
Mortgage Loan Purchase Price") shall be calculated such that the corporate bond
- ----------------------------
equivalent yield for the Additional Mortgage Loans, being sold on such Closing
Date, will be equivalent yield for the straight line interpolated offer side
yield of the "on the run" four year U.S. Treasury Note plus a spread of 475
basis points, calculated using a fifteen year stated maturity, a servicing fee
of 0.55 of 1%, a 48 day delay and a prepayment speed of 20 CPR; provided,
however, in no event shall the percentage of par used to calculate the
Additional Mortgage Loan Purchase Price be greater than the percentage of par
used to calculate the Purchase Price in the May Commitment Letter.
Each Additional Mortgage Loan shall conform to the underwriting
guidelines effective as of August 21, 1996 (the "Underwriting Guidelines") or
-----------------------
other underwriting guidelines substantially similar to the Underwriting
Guidelines. In the event that any Additional Mortgage Loan purchased and sold
hereunder fails to conform to the Underwriting Guidelines or other underwriting
guidelines substantially similar to the Underwriting Guidelines, the Purchaser
shall have the right, to be exercised in its sole discretion, to reprice such
Additional Mortgage Loan.
In the event the Seller fails to deliver to the Purchaser by September
15, 1998 Additional Mortgage Loans with an aggregate outstanding principal
balance at least equal to $750,000,000, the Seller shall pay to the Purchaser a
pair-off fee (the "Pair-off Fee") equal to 100 basis points (1.00%) multiplied
------------
by the difference between (a) $750,000,000 and (b) the actual aggregate
3
<PAGE>
outstanding principal balance of Additional Mortgage Loans delivered to the
Purchaser by the Seller (the "Shortfall Amount") as of September 15, 1998. In
----------------
the event that as of December 31, 1998, the Seller fails to deliver to the
Purchaser Additional Mortgage Loans with an aggregate outstanding principal
balance at least equal to $750,000,000, the Seller shall pay to the Purchaser an
additional pair-off fee (the "Additional Pair-off Fee") equal to 200 basis
-----------------------
points (2.00%) multiplied by the Shortfall Amount as of December 31, 1998. Such
Additional Pair-off Fee, if any, shall be due and payable on December 31, 19989.
The Purchaser shall have the right, in its sole discretion, to set-off all or
any portion of the Pair-off Fee or the Additional Pair-off Fee, if any, against
any amounts owed to the Seller by the Purchaser.
Any Additional Mortgage Loans purchased by the Purchaser shall be
purchased pursuant and subject to this Agreement and the Seller's Warranties
Agreement, unless otherwise mutually agreed by the parties hereto.
Notwithstanding and in addition to the foregoing, in the event that the
Purchaser declines to purchase any Additional Mortgage Loans during the Option
Period that conform to the provisions set forth herein (the "Rejected Conforming
-------------------
Mortgage Loans"), the applicable Shortfall Amount shall be reduced by the
- --------------
aggregate outstanding principal balance of such Rejected Conforming Mortgage
Loans to calculate the Pair-off Fee or the Additional Pair-off Fee.
Notwithstanding and in addition to the foregoing, in the event (a) the
Purchaser declines to purchase any of the Additional
4
<PAGE>
Mortgage Loans as described in this Section or (b) the Purchaser causes the
SEller to repurchase any of the Mortgage Loan pursuant to Section 6(c) hereof
(the "Repurchased Mortgage Loans") and the Seller subsequently securitizes the
--------------------------
Repurchased Mortgage Loans, the Purchaser shall have the exclusive right, to be
exercised at its sole option, to act as exclusive underwriter and/or placement
agent on an offering by the Seller of securities backed by any or all of the
Additional Mortgage Loans and/or the Repurchased Mortgage Loans (the
"Securitization"), at an underwriting fee which shall be equal to the
underwriting fee charged by the Purchaser, determined as of the closing date for
the related Securitization, as the Purchaser's fee for underwriting securities
collateralized by mortgage loans which were similar in size and product type as
the related Securitization. This Section shall survive each Closing Date and
shall be independently enforceable by the Purchaser."
SECTION TWO. Termination of Service. The Purchaser and the Seller
----------------------
agree that notwithstanding anything to the contrary contained in the Purchase
Agreement or the Seller's Warranties Agreement, in the event that the Purchaser
shall terminate the Servicer, in its sole discretion, with respect to servicing
any or all of the Additional Mortgage Loans purchased on the First Closing Date,
the Seller, upon receipt of an invoice for the fees associated with such
termination (the "Termination Fee") from the Purchaser, shall promptly pay the
---------------
Servicer all Termination Fees.
SECTION THREE. Survival of Terms Letter. The Purchaser and the
------------------------
Seller agree that notwithstanding anything to the contrary
5
<PAGE>
contained in the Purchase Agreement or the Seller's Warranties Agreement, the
last two sentences in the first paragraph of the May Commitment Letter referring
to the delivery by the Seller to the Purchaser of a stock warrant, shall survive
each Closing Date until such warrant is delivered in accordance with the terms
thereof.
SECTION FOUR. Seller Representations and Warranties. The Seller
-------------------------------------
hereby represents and warrants to the Purchaser that it is in compliance with
all the terms and provisions set forth in the Existing Purchase Agreement on its
part to be observed or performed, and that no default has occurred or is
continuing, and hereby confirms and reaffirms the representations and warranties
contained in Section 6 of the Existing Purchase Agreement.
SECTION FIVE. Counterparts. This Amendment may be executed by each
------------
of the parties hereto on any number of separate counterparts, each of which
shall be an original and all of which taken together shall constitute one and
the same instrument.
SECTION SIX. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
-------------
CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK WITHOUT REFERENCE
TO THE CHOICE OF LAW PROVISIONS THEREOF.
IN WITNESS WHEREOF, the parties have caused their names to be signed
hereto by their respective officers thereunto duly authorized as of the day and
year first above written.
CREDIT SUISSE FIRST BOSTON MORTGAGE
CAPITAL LLC
(Purchaser)
By:_________________________________
Name: ______________________________
Title:______________________________
6
<PAGE>
PREFERRED CREDIT CORPORATION
(Seller)
By:_________________________________
Name: ______________________________
Title:______________________________
7
<PAGE>
EXHIBIT 10.18
TERMINATION AGREEMENT
This Termination Agreement (the "Agreement") is effective as of the 6th
day of December, 1996 between Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), a corporation organized and existing under the laws of the
State of Delaware, Merrill Lynch Mortgage Capital Inc. ("MLMC"), a corporation
organized and existing under the laws of the State of Delaware, and Merrill
Lynch Credit Corporation ("MLCC"), a corporation organized and existing under
the laws of the State of Delaware (Merrill Lynch, MLMC, and MLCC are referred to
collectively at times as the "ML Entities"), on the one hand, and T.A.R.
Preferred Mortgage Corporation ("PMC"), a corporation organized and existing
under the laws of the State of California, Todd A. Rodriguez ("Rodriguez"), and
Walter Villaume ("Villaume"), on the other hand.
WHEREAS, Merrill Lynch and PMC entered into an agreement, dated February
16, 1996 (the "Engagement Agreement"); and
WHEREAS, a copy of the Engagement Agreement is annexed hereto as Exhibit A;
and
WHEREAS, PMC desires to terminate the Engagement Agreement; and
WHEREAS, Merrill Lynch and PMC are willing to terminate
<PAGE>
Engagement Agreement on the terms and conditions set forth in this Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the ML Entities, PMC, Rodriguez,
and Villaume agree as follows:
1. The Engagement Agreement, along with the Master Repurchase Agreement,
dated February 26, 1996, the Tri-Party Custody Agreement, dated February 26,
1996, and Amendment No. 1 to the Master Repurchase Agreement, dated May 31,
1996, are hereby terminated, except that PMC's and/or the ML Entities'
obligations as set forth in paragraphs 6, 12, 13, and 14 of the Engagement
Agreement shall survive termination thereof and shall remain in full force and
effect, and that such obligations of PMC and/or the ML Entities shall continue
to be binding on PMC's and/or the ML Entities' successors and assigns, as set
forth in paragraph 10 thereof.
2. Contemporaneous with the effective date of this Agreement, PMC has
issued to Merrill Lynch and MLMC warrants (collectively, the "Warrant"), in the
forms annexed hereto as Exhibit B, to purchase in the aggregate up to 2% of the
common stock of PMC on the terms and conditions set forth in the Warrant. PMC
hereby represents and covenants that it has taken all actions necessary to
<PAGE>
issue the Warrant, that the Warrant represents a legal, valid, and binding
obligation of PMC, and that the rights granted to Merrill Lynch and MLMC in the
Warrant do not conflict with or violate the rights of any other person or
entity. In the event that it is determined that the Warrant, for any reason, was
either not validly issued or is subject to a challenge to validity by any person
or entity, PMC agrees, upon request by Merrill Lynch or MLMC, to take all
actions necessary to make the Warrant a legal, valid, and binding obligation of
PMC or, in the alternative, to cancel the Warrant and issue to Merrill Lynch and
MLMC another warrant on substantially the same terms and conditions as the
Warrant.
3. Except as provided in paragraph 6a. below, in the event PMC or any of
its affiliates engages in any "Securitization" (as that term is defined in the
Engagement Agreement) for which the closing occurs after November 15, 1996 and
on or before June 30, 1997, and for which Merrill Lynch does not act as sole
placement agent (in the case of a "Private Placement", as that term is defined
in the Engagement Agreement), sole lead underwriter (in the case of a "Public
Securitization", as that term is defined in the Engagement Agreement), or sole
advisor (in the case of an "Indirect Placement", as that term is defined in the
Engagement Agreement), then, with respect to each such "Securitization":
a. PMC shall pay to Merrill Lynch the amount of
<PAGE>
$250,000 contemporaneously with the closing of such
Securitization by wire transfer in accordance with the
instructions set forth in Exhibit C hereto; and
b. In the event that Merrill Lynch acts as sole placement agent,
sole lead underwriter, or sole advisor in connection with any
such Securitization, then the fees to be paid to Merrill Lynch in
connection with such Securitization shall be in lieu of the
$250,000 payment referred to above.
4. Except as provided in paragraph 6a. below, in the event PMC or any of
its affiliates engages in any Securitization for which the closing occurs after
June 30, 1997, and for which Merrill Lynch does not act as sole placement agent
(in the case of a "Private Placement", as that term is defined in the Engagement
Agreement), sole lead underwriter (in the case of a "Public Securitization", as
that term is defined in the Engagement Agreement), or sole advisor (in the case
of an "Indirect Placement", as that term is defined in the Engagement
Agreement), then, with respect to each such "Securitization":
a. PMC shall pay to Merrill Lynch the amount of $500,000
contemporaneously with the closing of such
<PAGE>
Securitization by wire transfer in accordance with the
instructions set forth in Exhibit C hereto; and
b. In the event that Merrill Lynch acts as sole placement agent,
sole lead underwriter, or sole advisor in connection with any
such Securitization, then the fees to be paid to Merrill Lynch in
connection with such Securitization shall be in lieu of the
$500,000 payment referred to above.
5. PMC and Merrill Lynch acknowledge and agree that PMC shall have no
obligation to offer Merrill Lynch the opportunity to act as sole placement
agent, sole lead underwriter, or sole advisor in connection with any
Securitization, as contemplated by paragraphs 3 and 4 above, that PMC shall have
no obligation to undertake or engage in any Securitization at any time or from
time to time, and that no assurance can be given that PMC will engage in any
Securitization in the future (if at all). If and to the extent PMC determines to
engage in any Securitizations in the future (as to which no assurance can be
given), PMC shall give Merrill Lynch at least three business days' prior notice
of its intention to engage in any Securitization for which it will not offer
Merrill Lynch the opportunity to participate, as set forth in the previous
sentence, to the extent practicable under the circumstances. PMC and Merrill
Lynch further acknowledge and agree that, in the event PMC offers
<PAGE>
Merrill Lynch the opportunity to act as sole placement agent, sole lead
underwriter, or sole advisor in connection with any Securitization, Merrill
Lynch shall have no obligation to act in such capacity or otherwise participate
in such Securitization except on terms and conditions that Merrill Lynch, in its
sole discretion, deems acceptable. Any decision by Merrill Lynch to decline to
act as sole lead underwriter, sole placement agent, or sole advisor, or
otherwise participate, in connection with any Securitization shall not in any
way affect or impair its right to receive the payments set forth in paragraphs
3a., 4a., and 6a. above, or PMC's obligations under this Agreement with respect
to any other Securitizations.
6. a. At such time as the "Aggregate Amount of Payments" received by
Merrill Lynch equals or exceeds the amount of $4,750,000, PMC's obligation to
make payments pursuant to paragraphs 3a. and 4a. above shall terminate. For
purposes of this Agreement, the term "Aggregate Amount of Payments" shall be
defined as the sum of the following: (x) the Warrant Value (as defined below);
(y) the amount of any payments actually received by Merrill Lynch pursuant to
paragraphs 3a. and 4a. above; and (z) the amount of any fees actually received
by Merrill Lynch as a result of its acting as sole placement agent, sole lead
underwriter, or sole advisor with respect to any Securitization, as set forth in
paragraphs 3b. and 4b. above. Merrill Lynch and MLMC shall, in all
<PAGE>
instances, retain all rights with respect to the Warrant even if the "Aggregate
Amount of Payments" received by Merrill Lynch pursuant to subsections (y) and
(z) above equals or exceeds the amount of $4,750,000 (although PMC's payment
obligations under paragraphs 3a. and 4a. shall terminate). In no event shall
the foregoing in any way obligate PMC or any affiliate or associate thereof to
undertake or complete a Securitization at any time or from time to time.
b. For purposes of this Agreement:
(i) "Warrant Value" shall mean the difference between (x) the
exercise price actually paid or payable by Merrill Lynch and MLMC upon
exercise of the Warrant and (y) the "Fair Market Value" (as defined
below) of the Warrant or, if previously exercised, the shares received
upon exercise of the Warrant {the "Warrant Shares").
(ii) For purposes of this Agreement, "Fair Market Value" shall be
defined as follows:
(1) Except as provided below, until such time as PMC effects
a "Resale Registration" (as defined below, the Fair Market Value
of the Warrant or the Warrant Shares shall be zero.
<PAGE>
(2) At such time as PMC effects a Resale Registration, the
Fair Market Value of the Warrant or Warrant Shares shall be:
(I) if the common stock of PMC (the "Common Stock") is
listed on an exchange or exchanges, or admitted
for trading in a market system which provides last
sale data under Rule 11Aa3-1 of the General Rules
and Regulations of the Securities and Exchange
Commission (the "Commission") under the Securities
Exchange Act of 1934, as amended (a "Market
System"), the average reported sales price per
share over the ten day trading period ending on
the last business day before PMC effects such
Resale Registration (the "Trading Period") on the
principal exchange on which such Common Stock is
traded, or in such a Market System, as applicable,
multiplied by the number of shares represented by
the Warrant or the
<PAGE>
number of Warrant Shares, as the case may be; or
(II) if the Common Stock is not then traded on an
exchange or in such a Market System, the average
of the closing bid and asked prices per share for
the Common Stock in the over-the-counter market as
quoted on NASDAQ over the Trading Period,
multiplied by the number of shares represented by
the Warrant or the number of Warrant Shares, as
the case may be.
c. Notwithstanding the foregoing provisions of this paragraph 6.:
(i) If, prior to the time PMC effects a Resale Registration, Merrill
Lynch or MLMC sells the Warrant or the Warrant Shares to: (a) a person or
entity that is controlled by or under common control with Merrill Lynch or
MLMC (a "ML Controlled Person"), then the Fair Market Value of the Warrant
or Warrant Shares shall be zero; and (b) other than a ML Controlled Person,
then the Fair Market Value shall be the
<PAGE>
proceeds received from such person or entity less the sum of (x) the
aggregate exercise price under the Warrant for such Warrant Shares and (y)
the aggregate transaction costs of Merrill Lynch or MLMC, as the case may
be, related to the sale of the Warrant Shares; provided, however, that in
the event that less than all of the Warrant Shares are sold, then the Fair
Market Value of those Warrant Shares sold shall be the proceeds received
less the sum of (x) the aggregate exercise price under the Warrant for the
Warrant Shares that are sold and (y) the aggregate transaction costs of
Merrill Lynch or MLMC, as the case may be, related to the sale of the
Warrant Shares, and the Fair Market Value of the remaining Warrant Shares
held by Merrill Lynch, MLMC, or a ML Controlled Person shall be determined,
for purposes of this Agreement, in accordance with the remaining provisions
of this paragraph;
(ii) If, prior to the time PMC effects a Resale Registration, Merrill
Lynch, MLMC, or a ML Controlled Person sells any Warrant Shares (whether
pursuant to Rule 144 under the Securities Act of 1933 or otherwise), then
the Fair Market Value of the Warrant Shares sold shall be the proceeds
received by Merrill Lynch, MLMC, or such ML Controlled Person from such
sales less the sum of (x) the aggregate exercise price under the Warrant
for such Warrant Shares and (y) the aggregate transaction costs of Merrill
Lynch, MLMC, or such ML
<PAGE>
Controlled Person, as the case may be, related to the sale of the Warrant
Shares, and the Fair Market Value of the remaining Warrant Shares held by
Merrill Lynch, MLMC, or a ML Controlled Person shall be determined, for
purposes of this Agreement, in accordance with the applicable provisions of
this paragraph; and
(iii) In the event that PMC consummates an initial public offering of
its common stock (an "IPO", as defined below) and, in connection therewith,
causes all or part of the shares of common stock of PMC issuable upon
exercise of the Warrant to be registered under the Securities Act of 1933
to permit the sale thereof by Merrill Lynch or MLMC or their respective
successors and assigns, as the case may be, then the Fair Market Value of
the shares so registered shall be the proceeds received from the sale of
such shares by Merrill Lynch, MLMC or their respective successors and
assigns less the sum of (x) the aggregate exercise price under the Warrant
for such shares and (y) the aggregate transaction costs of Merrill Lynch,
MLMC, or their respective successors and assigns, as the case may be,
related to the sale of the Warrant Shares, and the Fair Market Value of the
remaining Warrant Shares shall be determined, for purposes of this
Agreement, in accordance with the applicable provisions of this paragraph.
<PAGE>
Nothing in the foregoing shall require or obligate PMC to register, or
assist in the sale of, the Warrant or any of the Warrant Shares, by Merrill
Lynch or MLMC other than as contemplated in the Warrant.
d. For purposes of this Agreement, PMC shall be deemed to have
effected a "Resale Registration" on the date upon which subsequent to PMC's
consummation of an IPO: (i) a registration statement filed by PMC with the
Commission that causes the shares of common stock of PMC issuable upon exercise
of the Warrant to be registered under the Securities Act of 1933 to permit the
sale thereof by Merrill Lynch or MLMC or their respective successors or assigns,
as the case may be, becomes effective; and (ii) Merrill Lynch, MLMC or their
respective successors or assigns receive copies of PMC's prospectus under such
registration statement in quantities reasonably requested by them in order to
effect any such sales.
e. For purposes of this Agreement, "IPO" shall mean the first
closing of the initial public offering of the common stock of PMC effected
pursuant to an effective registration statement filed by PMC with the Commission
under the Securities Act of 1933 (other than a registration statement relating
either to: (i) the sale of securities to officers, directors, employees, or
bona fide consultants of the Company, or any of its parents or subsidiaries,
pursuant to a stock option, stock purchase, or similar plan; or
<PAGE>
(ii) a reclassification, merger, or other transaction of the type referred to in
Rule 145(a) of the rules and regulations of the Commission under the Securities
Act of 1933).
7. PMC, and its sole shareholders, Rodriguez and Villaume, each represent
and warrant that they will not form any other corporation, partnership, or other
entity to succeed to or conduct the business presently being conducted by PMC,
or transfer to any other corporation, partnership, or other entity all or
substantially all of the assets of PMC, or take any other such acts that might
impair or encumber Merrill Lynch's rights under this Agreement, unless such
successor entity agrees to be bound by the terms hereof. Notwithstanding the
foregoing, PMC, Rodriguez, and Villaume may reorganize PMC as a corporation
under the laws of a state other than California (whether by merger into a newly
formed corporation or otherwise so long as the shareholders of the newly formed
corporation are identical to the shareholders of PMC immediately following such
transaction, and so long as such newly formed corporation remains bound by the
terms of this Agreement. In addition to any other rights and remedies Merrill
Lynch might have, Rodriguez and Villaume each agree to indemnify and hold
harmless Merrill Lynch from any "loss" it might incur in the event the
representations and warranties set forth in this paragraph are breached. For
purposes of this Agreement, the term "loss" is to include, but not be limited
to, the payments that would have been
<PAGE>
required to be paid by any other corporation, partnership, or entity, as
described in the first sentence of this paragraph, or any reorganized PMC or
newly formed corporation, as described in the second sentence of this paragraph,
pursuant to paragraphs 3a., 4a., and 6a. above with respect to any
Securitization done by such other corporation, partnership, or other entity that
would otherwise have been done by PMC, and costs and expenses (including legal
fees) incurred in prosecuting claims arising out of a breach of the
representations and warranties set forth herein. Nothing in this Agreement shall
in any way impair PMC from undertaking any transaction whatsoever including,
without limitation, the sale of all or a portion of the shares or assets of PMC
to any other person or entity, the consummation by PMC of an IPO, or the
acquisition of any other person or entity by PMC, so long as such transactions
do not impair Merrill Lynch's rights, or interfere with the intent of the
parties, under this Agreement.
8. In consideration of this Agreement, the ML Entities shall and do hereby
each forever release and discharge PMC, and its officers, directors,
shareholders, agents, contractors, attorneys, employees, partners, divisions,
predecessors, successors, assigns, licensees, and any party associated with any
Securitization (collectively, the "PMC Releasees"), of and from any and all
claims (including, but not limited to, claims for attorney's fees), of whatever
kind or nature, in contract or in tort, under the laws of
<PAGE>
any jurisdiction, whether known or unknown, suspected or unsuspected, that the
ML Entities, and their successors and assigns, shall, may, or can have against
the PMC Releasees, based on, arising out of, or in connection with: (i) the
Engagement Agreement; (ii) the Master Repurchase Agreement, dated February 26,
1996; (iii) the Tri-Party Custody Agreement, dated February 26, 1996; (iv)
Amendment No. 1 to the Master Repurchase Agreement, dated May 31, 1996; and (v)
any other agreements or understandings made or entered into by Merrill Lynch and
PMC in connection with the foregoing (the "Released Claims"); provided, however,
that PMC shall not be released from its obligations, as set forth in paragraph 1
above, under the Engagement Letter that survive termination thereof, and
Rodriguez and Villaume shall not be released from their obligations, as set
forth in paragraph 8 above, and PMC, Rodriguez, and Villaume shall not otherwise
be released from their obligations under this Agreement. On each day that any
payment is made by PMC under paragraphs 3a., 4a., or 6a. above, the ML Entities
shall be deemed to have released the PMC Releasees from any claims with respect
to such payment.
9. In consideration of this Agreement, PMC, Rodriguez, and Villaume
(collectively, the "PMC Releasors") shall and do hereby each forever release and
discharge the ML Entities, and their respective parents, subsidiaries, and
affiliates, and their respective officers, directors, shareholders, agents,
contractors,
<PAGE>
attorneys, employees, partners, divisions, predecessors, successors, assigns,
and licensees (collectively, the "ML Releasees"), of and from any and all claims
(including, but not limited to, claims for attorney's fees), of whatever kind or
nature, in contract or in tort, under the laws of any jurisdiction, whether
known or unknown, suspected or unsuspected, that the PMC Releasors, and their
successors or assigns, shall, may, or can have against the ML Releasees, based
on, arising out of, or in connection with: (i) the Engagement Agreement; (ii)
the Master Repurchase Agreement, dated February 26, 1996; (iii) the Tri-Party
Custody Agreement, dated February 26, 1996; (iv) Amendment No. 1 to the Master
Repurchase Agreement, dated May 31, 1996; and (v) any other agreements or
understandings made or entered into by Merrill Lynch and PMC in connection with
the foregoing; provided, however, that the ML Entities shall not be released
from their obligations under this Agreement.
10. Nothing contained herein shall be construed as an admission of any
kind by any party hereto or used in any proceeding as an admission by any party.
11. The parties acknowledge and agree that no press release, interview, or
other publicity shall be issued with respect to this Agreement or its contents
and that the terms of this Agreement shall be kept strictly confidential;
provided, however, that the parties shall have the right to disclose this
Agreement and the
<PAGE>
terms hereof to their respective accountants and outside auditors, to any person
or entity to the extent necessary to effect the terms of this Agreement
(including the Warrant), to any person providing financing to PMC, and as
required by law (including as required to any regulatory entities or to effect
an IPO by PMC).
12. This Agreement shall inure to the benefit of and shall be binding upon
the successors, assigns, representatives, and beneficiaries of the parties
hereto and upon any corporation or other entity into or with which any party
hereto may merge or consolidate. This Agreement embodies the entire
understanding of the parties, and supersedes all prior agreements, oral or
written, and may be amended or modified only by a written agreement executed by
each of the parties. Each provision of this Agreement shall be interpreted in
such manner as to be effective under applicable law. If any provision of this
Agreement shall be or become prohibited or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity
without invalidating the remainder of such provision or the remaining provisions
of this Agreement.
13. Each party represents that it is the sole owner of all right, title,
and interest with respect to the Released Claims, has not assigned, transferred,
or conveyed any Released Claims to any person or entity, and has all power and
authority necessary to make
<PAGE>
the agreements set forth herein and has taken all necessary corporate action to
authorize the execution and delivery of this Agreement and the performance of
its obligations hereunder. No consent of any other person including, without
limitation, stockholders or creditors of the parties, and no license, permit,
approval, or authorization of, exemption by, notice or report to, or
registration, filing, or declaration with, any governmental authority is
required by the parties in connection with the execution and delivery of this
Agreement or the performance of its obligations hereunder. This Agreement has
been, and each instrument or document required hereunder will be, executed and
delivered by a duly authorized officer of the parties hereto, and this Agreement
constitutes a legally valid and binding obligation of the parties enforceable
against the parties in accordance with its terms.
14. This Agreement shall be governed by the laws of the State of New York
without regard to its choice of law principles.
15. The parties each represent that they have had the opportunity to
consult with counsel of their choice regarding this Agreement and that, after
such consultation, they enter into this Agreement of their own free will.
16. The parties agree that any claim arising under or relating to this
Agreement or the Warrant shall be brought only in
<PAGE>
the Supreme Court of the State of New York, County of New York, or the United
States District Court for the Southern District of New York, and that, in
connection with any such claims, the parties waive their right to trial by jury
and any defense based on inconvenient forum. PMC, Rodriguez, and Villaume each
hereby consent to the jurisdiction of the Supreme Court of the State of New
York, County of New York, or the United States District Court for the Southern
District of New York, in connection with any action that might be brought under
or relating to this Agreement or the Warrant.
17. a. All notices to the ML Entities under this Agreement shall be made
by registered first class mail, return receipt requested, or by facsimile, to:
Mr. C.J. De Santis
Managing Director
Asset Backed Finance Group
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
World Financial Center
North Tower
New York, New York 10281-1310
Telephone: (212) 449-2139
Facsimile: (212) 449-9015.
b. All notices to PMC, Rodriguez, or Villaume under this Agreement
shall be made by registered first class mail, return receipt requested, or by
facsimile, to:
if to PMC, to:
T.A.R. Preferred Mortgage Corporation
19782 MacArthur Boulevard
Suite 260
<PAGE>
Irvine, California 92715
Attention: Walter Villaume or Todd Rodriguez
Telephone: (714) 474-0700
Facsimile: (714) 660-3872
if to Rodriguez, to:
T.A.R. Preferred Mortgage Corporation
19782 MacArthur Boulevard
Suite 260
Irvine, California 92715
Attention: Todd A. Rodriguez
Telephone: (714) 474-0700, ext. 101
Facsimile: (714) 660-3872
if to Villaume, to:
T.A.R. Preferred Mortgage Corporation
19782 MacArthur Boulevard
Suite 260
Irvine, California 92715
Attention: Walter Villaume
Telephone: (714) 474-0700, ext. 102
Facsimile: (714) 660-3872
18. Merrill Lynch and MLMC agree to execute a Stockholders Agreement
substantially in the form of Exhibit D hereto.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement on the day and year first written above.
T.A.R. Preferred Mortgage Corporation
By: _____________________________________
Todd A. Rodriguez
Its Chief Executive Officer
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
By: _____________________________________
Its: _______________________________
<PAGE>
Merrill Lynch Mortgage Capital Inc.
By: _____________________________________
Its: _______________________________
Todd A. Rodriguez
_________________________________________
Walter Villaume
_________________________________________
<PAGE>
EXHIBIT 10.19
STOCKHOLDERS' AGREEMENT
This STOCKHOLDERS' AGREEMENT (this "Agreement") is made and entered into,
as of December 6, 1996 by and among Walter Villaume ("Villaume"), Todd A.
Rodriguez ("Rodriguez" and, together with Villaume, the "Stockholders"), T.A.R.
Preferred Mortgage Corporation, a California corporation (the "Company") and
Merrill Lynch Mortgage Capital Inc., a Delaware corporation ("MLMCI"), and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, a Delaware corporation
("MLPF&S" and, together with MLMCI, the "Optionholders"), with reference to the
following:
WHEREAS, as of the date hereof, the Company has issued to the Optionholders
warrants (the "Warrants") to purchase in the aggregate up to two percent (2%) of
the fully-diluted shares of Common Stock, $0.1 par value (the "Common Stock"),
of the Company;
WHEREAS, the Stockholders own all of the issued and outstanding shares of
the Company;
WHEREAS, in connection with the issuance of the Warrants, the Company, the
Stockholders and the Optionholders desire to set forth the respective rights and
obligations of the parties in the event of a "Sale of the Business" (as defined
in Section 1 hereof) or other events resulting in a transfer of shares of Common
Stock of the Company.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants and conditions hereinafter set forth, the parties hereto agree as
follows:
Section 1. Definitions. For purposes of this Agreement, the following terms
-----------
shall have the following meanings:
"Affiliate" of any Person means (i) any Person that, directly or indirectly
through one or more intermediaries, controls or is controlled by or is under
common control with such Person; or (ii) any executive officer, director or
partner of such Person, and the term "control" shall include the possession,
direct or indirect, of the power to direct or cause the direction of the
management or policies of a Person, whether through ownership of voting
securities, by conduct or otherwise.
"Affiliated Purchaser" means any of the Company, an Affiliate of the
Company, any Person who acquires rights under a Plan, a Stockholder Affiliate or
a Stockholder Representative.
"Acquired Shares" means, on any particular date, the number of shares
issued by the Company to the Optionholders as a result of the Optionholders'
exercise of the Warrants, and any shares issued with respect thereto as a result
of a stock split, stock dividend, reorganization or similar corporate event.
<PAGE>
"Immediate Family" means any child, stepchild, grandchild, parent,
stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-
law, daughter-in-law, brother-in-law, sister-in-law or any adopted children of
either of the Stockholders.
"IPO" means the first closing of the initial public offering of the Common
Stock of the Company effected pursuant to an effective registration statement
filed by the Company with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933 (other than a registration
statement relating either (i) to the sale of securities to officers, directors,
employees or bona fide consultants of the Company, or any of its parents or
subsidiaries, pursuant to a Plan, or (ii) to a reclassification, merger, or
other transaction of the type referred to in Rule 145(a) of the rules and
regulations of the Commission under the Securities Act of 1933).
"Stockholder Affiliate" means (i) during the life of either Stockholder,
any entity in which the Stockholder owns 50% or more of the outstanding voting
securities, any member of Stockholder's Immediate Family or a trust established
for the benefit of his Immediate Family and (ii) following the death of the
Stockholder, any Person or group of Persons acting in concert, who beneficially
own or control more than 50 % of the outstanding shares of Common Stock of the
Company and which Person or Persons have not acquired such shares as a result of
a Sale of the Business.
"Stockholder Representative" means (i) in the event of the physical or
mental incapacity of the Stockholder, his duly appointed administrator,
representative or attorney-in-fact, or (ii) in the event of the death of the
Stockholder, any Person or group of Persons acting in concert, who beneficially
own or control more than 50% of the outstanding shares of Common Stock of the
Company and which Person or Persons have not acquired such shares as a result of
a Sale of the Business.
"or" includes "and/or."
"Person" means any individual, person, entity, company, corporation,
partnership, trust, joint venture or association.
"Plan" means and refers to any plan adopted by the Company providing for
the grant of option, stock purchase or other derivative rights to employees,
officers, directors, consultants and representatives of the Company.
"Sale of the Business" means any transaction or series of transactions
(whether structured as a stock sale, merger, consolidation, reorganization,
asset sale or otherwise) which results in the sale or transfer of all or
substantially all of the assets or greater than 50 % of the outstanding shares
of Common Stock of the Company to a Person who is not an Affiliated Purchaser.
"Transfer" has the meaning ascribed to such term in Section 3 hereof.
<PAGE>
Section 2. Term. This Agreement shall be effective as of the date first set
----
forth above and shall terminate on the earlier to occur of (i) December 6, 2011
and (ii) an IPO.
Section 3. Additional Restrictions on Transfer of Shares. During the term
---------------------------------------------
of this Section 3, the Optionholders shall not sell, assign, pledge,
hypothecate, or in any manner transfer the Warrants or any Acquired Shares, or
any right or interest in the Warrants or the Acquired Shares, with or without
consideration, to any Person (each such action is referred to herein as a
"Transfer") except as permitted by this Agreement. The Warrants and all stock
certificates representing the Acquired Shares shall bear the following legend:
THE WARRANT AND THE WARRANT SHARES REPRESENTED BY THIS CERTIFICATE ARE
SUBJECT TO TRANSFER RESTRICTIONS AND PURCHASE RIGHTS SET FORTH IN A
STOCKHOLDERS AGREEMENT DATED AS OF DECEMBER 6, 1996. A COPY OF SUCH
AGREEMENT IS MAINTAINED ON FILE IN THE PRINCIPAL OFFICE OF THE COMPANY
IN THE STATE OF CALIFORNIA.
Any Transfer of the Warrants or the Acquired Shares not made in accordance
with this Agreement shall be null and void, and the Company shall not cause or
permit the Transfer of the Warrants or any such Acquired Shares to be made on
this books unless the Transfer is permitted by this Agreement and has been made
in accordance with the terms hereof, and each transferee of the Warrants or any
such Acquired Shares has executed an agreement, in form and substance
satisfactory to the Stockholders, to be bound by and subject to the terms and
conditions of this Agreement.
Section 4. Right of First Refusal
----------------------
(a) If at any time either Optionholder wishes to effect a Transfer of any
or all of its Warrant or its Acquired Shares to any other Person (other than a
Transfer permitted under any of Sections 5 and 6 of this Agreement), such
Optionholder shall offer to sell (and sell if such offer is accepted) such
Warrant and/or such Acquired Shares, as applicable, to each of the Stockholders
and the Company in accordance with the procedures hereinafter described in this
Section 4 (the "First Offer Procedures").
(b) Each offer pursuant to this Section 4 shall initially be made by the
delivery to the Stockholders and the Company of a written notice (the "First
Offer Notice") which (i) shall make reference to this Section 4; (ii) shall name
the Person or Persons with whom the proposed transaction is to be effected; and
(iii) shall enclose a copy of the agreement or other writing under which the
proposed transaction is expected to occur or shall state the price, closing
date, and other significant terms and conditions (in reasonable detail) of the
proposed transaction (collectively, the "Offer Terms"). The First Offer Notice
shall serve as an offer to sell the portion of the Warrant and/or the number of
shares set forth in the First Offer Notice on the
<PAGE>
terms set forth herein, other than the price which, for purposes of the First
Offer Procedures, shall equal (the "Acceptance Price") the price set forth in
the First Offer Notice (or, if the consideration to be paid includes property
other than cash, the "price" set forth in the First Offer Notice shall be deemed
to be the fair market value of such property, as determined by the Board of
Directors of the Company in the exercise of its good faith discretion). The
offer, as set forth in the First Offer Notice, is hereinafter referred to as the
"First Offer." The First Offer shall be irrevocable for three business days
after delivery of the First Offer Notice (the "Offer Period"). The Stockholders
or the Company (or both) may accept, in whole or in part, the First Offer, but
only on the same terms as those stated in the First Offer Notice. Such
acceptance shall be made in the manner described in Section 4(c) hereof.
(c) If the Stockholders or the Company elect to purchase any of such
Warrant or such Acquired Shares, he or it shall, within the applicable Offer
Period, notify such Optionholder in writing of the acceptance of such offer and,
if either or both of the Stockholders elect to purchase any Acquired Shares, he
shall concurrently deliver a copy of his notice of acceptance to the Company.
The Company's and any Stockholder's election to purchase under this Section 4(c)
is an irrevocable commitment to purchase. If the total number of Acquired Shares
subscribed for by the Company and the Stockholder exceeds the number of Acquired
Shares offered in the First Offer Notice, unless the Company and the
Stockholders otherwise agree, the Stockholders' acceptance shall have priority
over the Company, and the number of Acquired Shares purchasable by the Company
shall be ratably reduced. The Company and the Stockholders, to the extent that
they elect to purchase any of the Acquired Shares offered are collectively
referred to below in this Section 4 as the "Section 4 Purchasers." Promptly
following receipt of the Stockholders' notice of acceptance, or concurrently
with its delivery of its notice of acceptance, whichever shall first occur, the
Company shall advise the applicable Optionholder in writing of the closing date
(the "Scheduled Closing Date") in respect of such sale (which shall not be more
than 30 days following delivery of the First Offer Notice to the Section 4
Purchasers). On the Scheduled Closing Date, the Acceptance Price in respect of
all Shares to be purchased by the Section 4 Purchasers shall be paid in full to
the applicable Optionholder by the respective Section 4 Purchasers, against
delivery of a certificate or certificates representing the portion of the
Warrant or the Shares purchased in proper form for Transfer. In connection with
such closing, such Optionholder shall warrant to the Section 4 Purchasers good
and marketable title to the purchased Warrant or Acquired Shares, free and clear
of all claims, liens, charges, encumbrances and security interests of any nature
whatsoever (other than the restrictions set forth in this Agreement).
(d) If the Section 4 Purchasers do not accept the First Offer prior to the
expiration of the Offer Period, the First Offer shall terminate, and the
applicable Optionholder shall be free to Transfer its Warrant or its Acquired
Shares described in the First Offer Notice in the manner and in the time period
disclosed in the First Offer and in accordance with the remaining terms of this
Agreement (including, without limitation, the requirements set forth in Section
3 that the certificates be legended and that the transferee execute such
documents as the Company may require). If the transaction has not been so
effected within 90 days following termination of the
<PAGE>
Offer Period, such Acquired Shares shall again be subject to all of the
provisions of this Agreement.
Section 5. Tag-Along Rights.
----------------
(a) If, within any 90 day period, the Stockholders or a Stockholder
Affiliate propose to effect one or a series of related Transfers (other than an
IPO) of any of the shares of Common Stock owned by him or it (the "Stockholder
Stock") to any Person which is not an Affiliated Purchaser such that,
immediately following such Transfers, the Stockholders and the Stockholder
Affiliates beneficially own or control, in the aggregate, less than 50% of all
issued and outstanding shares of Common Stock, then the Stockholders shall give
written notice (the "Tag-Along Notice") to the Optionholders at least 30 days
prior to the first scheduled closing of all such Transfers (or as soon as
practicable thereafter). The Tag-Along Notice shall describe in reasonable
detail each of the proposed Transfers including, without limitation, the name
of, and the number of shares of Common Stock of the Company proposed to be
purchased by, each transferee (the "Tag-Along Transferee"), the purchase price
of all shares of Common Stock of the Company proposed to be sold in each
Transfer, any other significant terms of such sales and the date such proposed
sales will be consummated.
(b) Each Optionholder shall have the right, exercisable upon irrevocable
written notice to the Stockholders within four business days after receipt of
the Tag-Along Notice, to participate in all, but not less than all, such sales
of Stockholder Stock on the same terms and conditions as set forth in the Tag-
Along Notice and to sell all or any portion of the number of Acquired Shares
(including Acquired Shares purchased upon exercise of its Warrant after the
receipt of the Tag-Along Notice) owned by such Optionholder as determined in
accordance with the calculation set forth below. Each Optionholder shall
indicate in the notice of election to the Stockholders the maximum number of
Acquired Shares such Optionholder desires to sell in each such sale. Each
Optionholder understands that such Optionholder shall be entitled to sell only a
"pro rata portion" of the Acquired Shares in each sale. For purposes of this
Section 5Co), "pro rata portion" shall mean the number of Acquired Shares
determined by multiplying (i) the total number of Acquired Shares owned by such
Optionholder by (ii) a fraction, the numerator of which is the number of shares
of Common Stock the Tag-Along Transferee proposes to purchase and the
denominator of which is the total number of issued and outstanding shares of
Common Stock of the Company owned by the proposed transferors (including such
Optionholder), in each case measured as of the date of the notice described in
the last sentence of this Section 5(b). In the event the total number of shares
to be purchased by any Tag-Along Transferee is reduced for any reason, the "pro
rata portion" of Acquired Shares to be sold by each Optionholder shall be
recalculated in accordance with the foregoing sentence. In the event the Tag-
Along Transferee increases the number of shares it is willing to purchase, if
either Optionholder has previously exercised its Tag-Along rights under this
Section 5 with respect to the Transfer to such Tag-Along Transferee, such
Optionholder shall also be permitted to sell an "excess pro rata portion" of
Acquired Shares. For purposes of this Agreement, "excess pro rata portion" shall
mean the number of Acquired Shares determined by multiplying (i) the total
number of Acquired Shares
<PAGE>
owned by such Optionholder by (ii) a fraction, the numerator of which is the
additional number of shares of Common Stock of the Company the Tag-Along
Transferee is willing to purchase and the denominator of which is the total
number of outstanding shares of Common Stock of the Company owned by the
proposed transferors (including such Optionholder). Not later than 3 days prior
to the date scheduled for such sale, the Company shall provide notice (the "Pro
Rata Notice") to the Optionholders of the "pro rata portion" and "excess pro
rata portion" of Acquired Shares to be sold by each such Optionholder in such
sale. For purposes of this Section 5, the "Acquired Shares" shall include all
shares purchased by an Optionholder before the date of the Pro Rata Notice.
(c) Each Optionholder shall effect its participation in the sale by
delivering to the Stockholders (or such other Person as may be designated by the
Stockholders) on the date scheduled for such sale, one or more certificates, in
proper form for Transfer, which represent the number of Acquired Shares which
such Optionholder is entitled to sell in accordance with this Section 5. Such
stock certificate or certificates that the applicable Optionholder delivers to
the Stockholders shall be delivered on such date to such transferee in
consummation of the sale of the Acquired Shares pursuant to the terms and
conditions specified in the Tag-Along Notice, and the Stockholders shall, or
shall cause the Tag-Along Transferee to, concurrently therewith remit to such
Optionholder that portion of the sale proceeds to which such Optionholder is
entitled by reason of its participation in such sale, based on the pro rata
portion of Acquired Shares delivered by such Optionholder to the Stockholders.
As a condition to an Optionholder's exercise of its Tag-Along Rights under this
Section 5, such Optionholder shall execute an agreement, in form and substance
acceptable to each Stockholder, to be bound by and subject to the same
representations, warranties, covenants and indemnities (solely in respect of the
Acquired Shares being transferred) of any agreements executed by the Company,
the Stockholders or any Stockholder Affiliates in connection with the sale of
the Stockholder Stock to the Tag-Along Transferee.
Section 6. Grant to the Stockholders of Voting Rights; Come Along Right.
------------------------------------------------------------
Each time the shareholders of the Company meet, or act by written consent in
lieu of meeting, for the purpose of approving a Sale of the Business or IPO,
each Optionholder agrees to vote all of its Acquired Shares as directed by the
Stockholders. In order to effect the foregoing covenant, each Optionholder
hereby grants to the Stockholders with respect to all of such Optionholder's
Acquired Shares an irrevocable proxy (which is deemed to be coupled with an
interest) for the term of this Agreement with respect to any shareholder vote or
action by written consent to effect the Sale of the Business or IPO.
In furtherance of each Optionholder's covenants set forth in this Section
6, each such Optionholder hereby agrees to cooperate fully with the Stockholders
and the Company in any transaction involving a Sale of the Company or an IPO, to
execute and deliver all documents and instruments as the Stockholders, the
Company and, in the case of a Sale of the Company, the purchaser or, in the case
of an IPO, the underwriter, reasonably request to effect such transactions;
provided, however, that in no event shall either Optionholder be required to
make
<PAGE>
any representations, warranties, covenants or indemnities other than in respect
of title to the Acquired Shares and provided, further, that in no event shall
either Optionholder be required to execute any agreements or instruments other
than with respect to such representations, warrants, covenants or indemnities in
respect of title to the Acquired Shares. In connection with a Sale of the
Business, the Stockholders may require each Optionholder to sell, or cause to be
sold, the same proportionate number of the shares of Common Stock owned by such
Optionholder as are proposed to be sold or Transferred by the Stockholders for
the same consideration per share (determined in each case on the basis of the
number of Acquired Shares owned by such Optionholder and the total number of
shares of Common Stock to be sold by all shareholders of the Company) and
otherwise on the same terms and conditions obtained by the Stockholders in the
Sale of the Company (other than (i) those terms and conditions which are offered
to the Stockholders due to their status as key employees and founders of the
Company such as employment agreements, and noncompetition and nonsolicitation
covenants, and (ii) agreements relating to the Stockholders' personal assets
(including those personal assets which have been leased to, or licensed for use
by, the Company); but including those terms and conditions which relate to their
shares of Common Stock of the Company, such as indemnification obligations in
respect of title to such Acquired Shares. On the closing date of the sale of an
Optionholder's Acquired Shares under this Section 6, the consideration due such
Optionholder shall be paid in full to such Optionholder against deliver of a
certificate or certificates, as the case may be, representing the shares of
Common Stock sold by such Optionholder in proper form for transfer; provided,
that if such Optionholder fails to deliver the certificate or certificates to
the Stockholders or the purchaser in the Sale of the Company in proper form for
transfer on the date scheduled for closing, the Stockholders may deposit or
cause to be deposited the consideration due such Optionholder with a third party
selected by the Stockholders with instructions to release such consideration
only upon such Optionholder's satisfaction of the conditions set forth in this
Section 6, and the Company shall record the transfer of the certificate or
certificates on the Company's stock transfer ledger and deem such certificate or
certificates cancelled.
Section 7. Benefits Only to Parties. Nothing expressed by or mentioned in
------------------------
this Agreement is intended or shall be construed to give any person or entity,
other than the parties hereto and their respective successors or permitted
assigns (including any transferees of the Warrants) any legal or equitable
right, remedy or claim under or in respect of this Agreement or any provision
herein contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of the parties
hereto and their respective successors and permitted assigns, and for the
benefit of no other Person.
Section 8. Agreement Controlling. In the event of any conflict or
---------------------
inconsistency between the terms of this Agreement and any other agreement or
understanding between the parties hereto with respect to the subject matter
hereof, the terms of this Agreement shall control, except as expressly set forth
herein. This Agreement contains the entire agreement between the parties hereto
with respect to the subject matter hereof and supersedes and terminates all
prior arrangements or understandings (whether written or oral) with respect
thereto.
<PAGE>
Section 9. Captions. The Article and Section captions used herein are for
--------
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
Section 10. Counterparts. For the convenience of the parties, any number of
------------
counterparts of this Agreement may be executed by the parties hereto and each
such counterpart shall be deemed to be an original instrument.
Section 11. Notices. All notices, consents, requests, instructions,
-------
approvals and other communications provided for herein and all legal process in
regard hereto shall be validly given, made or served, if in writing and
delivered by personal delivery, overnight courier, telecopier or registered or
certified mail, return receipt requested and postage prepaid addressed as
follows:
If to the Company, to:
T.A.R. Preferred Mortgage Corporation
19782 MacArthur Blvd.
Suite 250
Irvine, CA 92715
Attention: Walter Villaume
Tel.: (714) 474-0700
Fax: (714) 660-3872
if to MLMCI, to:
Merrill Lynch Mortgage Capital Inc.
World Financial Center
North Tower
New York, NY 10281
Attention: Mr. C.J. DeSantis
Fax: (212) 449-9015
if to MLPF&S, to:
Merrill Lynch, Pierce, Fenner & Smith Incorporated
World Financial Center
North Tower
New York, NY 10281
Attention: Mr. C.J. DeSantis
Fax: (212) 449-9015
<PAGE>
if to Rodriguez, to:
T.A.R. Preferred Mortgage Corporation
19782 MacArthur Blvd.
Suite 250
Irvine, CA 92715
Attention: Todd A. Rodriguez
Tel.: (714) 474-0700, ext. 101
Fax: (714) 660-3872
if to Villaume, to:
T.A.R. Preferred Mortgage Corporation
19782 MacArthur Blvd.
Suite 250
Irvine, CA 92715
Attention: Walter Villaume
Tel.: (714) 474-0700, ext. 102
Fax: (714) 660-3872
or to such other address as any such party hereto may, from time to time,
designate in writing to all other parties hereto, and any such communication
shall be deemed to be given, made or served as of the date so delivered or, in
the case of any communication delivered by mall, as of the date so received.
Section 12. Successors and Assigns. This Agreement shall be binding upon
----------------------
and inure to the benefit of the Company, MLMCI, MLPF&S the Stockholders and
their respective heirs, devisees, legal representatives, successors, permitted
assigns and other permitted transferees.
Section 13. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
-------------
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA,
WITHOUT REGARD TO SUCH STATE'S CHOICE OF LAW PROVISIONS.
Section 14. Amendments; Waivers. No provision of this Agreement may be
-------------------
amended, modified or waived without approval of all of the parties hereto.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date first written above.
Merrill Lynch Mortgage Capital Inc.,
a Delaware corporation
By:__________________________________
Its: Authorized Signatory
Merrill Lynch, Pierce, Fenner & Smith
Incorporated,
a Delaware corporation
By:__________________________________
Its: Authorized Signatory
T.A.R. Preferred Mortgage Corporation,
a California corporation
By:__________________________________
Its: Authorized Signatory
Rodriguez
______________________________________
Villaume
______________________________________
<PAGE>
EXHIBIT 10.20
Preferred Mortgage Corporation
OWNER
and
Advanta Mortgage Corp. USA
SERVICER
LOAN SERVICING AGREEMENT
Dated as of
March 8, 1996
Fixed and Adjustable Rate Non-Conforming Mortgage Loans
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE I DEFINITIONS.............................................................. 4
Section 1.1 Definition of Terms...................................................... 4
ARTICLE II DELIVERY OF MORTGAGE LOAN FILES SERVICING STANDARDS...................... 8
Section 2.1 Transfer of Mortgage Loan Files (Reserved for Future Use)................ 8
Section 2.2 Agreement to Service Mortgage Loans...................................... 8
Section 2.3 Sub-Servicers............................................................ 8
ARTICLE III REPRESENTATIONS AND WARRANTIES........................................... 9
Section 3.1 Representations and Warranties of the Servicer........................... 9
Section 3.2 Representations and Warranties of the Owner.............................. 10
ARTICLE IV ACCOUNTING AND REPORTING................................................. 11
Section 4.1 Collection of Mortgage Loan Payments..................................... 11
Section 4.2 Interest Calculations.................................................... 12
Section 4.3 Application of Mortgage Loan Payments.................................... 12
Section 4.4 Establishment of Collection Account; Deposits in Collection Account...... 12
Section 4.5 Withdrawals from the Collection Account.................................. 13
Section 4.6 Establishment of Escrow Account; Deposits in Escrow Account.............. 14
Section 4.7 Withdrawals From Escrow Account.......................................... 15
Section 4.8 Servicing Advances....................................................... 15
Section 4.9 Monthly Remittance Reports............................................... 15
Section 4.10 Servicing Compensation................................................... 16
ARTICLE V ADMINISTRATION AND SERVICING OF MORTGAGE LOANS........................... 16
Section 5.1 Enforcement of Due-On-Sale Clause; Assumption............................ 16
Section 5.2 Maintenance of Insurance................................................. 17
Section 5.3 Cancellation of Mortgage Insurance....................................... 18
Section 5.4 Reserved For Future Use.................................................. 18
Section 5.5 Liquidation of Defaulted Mortgage Loans.................................. 18
Section 5.6 Deed-in-Lieu of Foreclosure.............................................. 19
Section 5.7 Real Estate Owned........................................................ 19
ARTICLE VI MISCELLANEOUS PROVISIONS................................................. 20
Section 6.1 Owner to Cooperate....................................................... 20
Section 6.2 Assignment of Agreement.................................................. 20
Section 6.3 Access to Certain Documentation Regarding the Loans...................... 21
Section 6.4 Default By Servicer...................................................... 21
Section 6.5 Default by Owner......................................................... 22
Section 6.6 Reserved for Future Use.................................................. 22
Section 6.7 Indemnification by Owner................................................. 22
Section 6.8 Fidelity Bond and Errors Omissions....................................... 23
</TABLE>
2
<PAGE>
<TABLE>
<S> <C> <C>
Section 6.9 Indemnification by Servicer........................................ 24
Section 6.10 Amendment.......................................................... 24
Section 6.11 Governing Law...................................................... 24
Section 6.12 Notices............................................................ 24
Section 6.13 Severability of Provisions......................................... 24
Section 6.14 Document Deficiencies.............................................. 25
Section 6.15 Termination........................................................ 25
Section 6.16 Attorneys' Fees.................................................... 25
Section 6.17 No Solicitation.................................................... 25
Section 6.18 Counterparts....................................................... 26
</TABLE>
3
<PAGE>
This Servicing Agreement, dated as of March 8, 1996, is entered into by and
between Preferred Mortgage Corporation, as owner of the Mortgage Loans that are
referred to herein (the "Owner") and Advanta Mortgage Corp, USA, as Servicer
(together with its permitted successors and assigns, the "Servicer").
WHEREAS, the Owner is the owner of certain first and second lien, fixed and
adjustable rate, non-conforming residential mortgage loans; and
WHEREAS, the Owner desires to deliver to Servicer certain Mortgage Loans,
from time to time to be serviced by Servicer in accordance with the terms and
conditions of the Mortgage Loans and this Agreement; and
WHEREAS, it is the intent of the parties that certain Mortgage Loans,
described in Exhibit A attached hereto, are to be delivered for servicing
concurrent with this Agreement and thereafter Owner may deliver additional
Mortgage Loans for Servicing pursuant to the terms hereof, and
NOW, THEREFORE, in consideration of the foregoing and mutual agreements
contained herein, the parties hereby agree as follows:
ARTICLE I
DEFINITIONS
-----------
Section 1.1 Definition of Terms
-------------------
Whenever used herein, the following words and phrases, unless the context
otherwise requires, shall have the following meanings:
"Accepted Servicing practices": Procedures and practices (including collection
----------------------------
procedures) that the Servicer customarily employs and exercises in servicing and
administering mortgage loans for its own account.
"Additional Servicing Compensation": Incidental fees or charges provided for in
---------------------------------
the applicable Note and/or Mortgage that are customarily charged by the Servicer
in the ordinary course of performing it's obligations herein including but not
limited to late payment charges, prepayment charges/penalties, assumption
processing charges and assumption fees, modification charges, demand fees,
insufficient funds fees and reconveyance charges.
"Agreement": This Servicing Agreement, including all exhibits hereto, and all
---------
amendments hereof and supplements hereto.
"Borrower": The individual or individuals obligated to repay the Mortgage Loan.
--------
4
<PAGE>
"Business Day": Any day other than (i) a Saturday or Sunday, or (it) a day in
------------
which banking or savings and loan institutions in San Diego, California or
Wilmington, Delaware are authorized or obligated by law or executive order to be
closed.
"Collection Account": The trust account or accounts which are created and
------------------
maintained by Servicer specifically for the collection of principal and
interest, insurance Proceeds, Liquidation Proceeds and other amounts received
with respect to the Mortgage Loans.
"Errors and Omissions Policy": An insurance policy insuring against losses
---------------------------
caused by errors and omissions of the Servicer and its personnel, including, but
not limited to, losses caused by the failure to pay insurance premiums or taxes
to record or perfect liens, or to properly service Mortgage Loans in accordance
with this Agreement.
"Escrow Account": For each Mortgage Loan, an account maintained by the Servicer
--------------
specifically for the payment of real estate tax assessments and insurance
premiums against Mortgaged Property.
"Escrow Payments": All funds collected by the Servicer to cover expenses of the
---------------
Borrower required to be paid under the Mortgage Loan Documents, including Hazard
Insurance and Flood Insurance, tax assessments and Mortgage Insurance Premiums.
"Event Default": Any one of the conditions or circumstances enumerated in
-------------
Sections 6.4 and 6.5.
"Fidelity Bond": An insurance policy insuring against losses caused by negligent
-------------
or unlawful acts of the Servicer's personnel, "Flood Insurance Policy": An
insurance policy insuring against flood damage to a Mortgaged Premises, required
by loan originators for Mortgaged Premises located in "flood hazard" areas
identified by the Secretary of HUD or the Director of the Federal Emergency
Management Agency.
"Flood Zone Service Contract": A transferable contract maintained for the
---------------------------
Mortgaged Property with a nationally recognized flood zone service provider for
the purpose of obtaining the current flood zone status relating to such
Mortgaged Property.
"Hazard Insurance Policy": A fire and casualty extended coverage insurance
-----------------------
policy insuring against loss or damage from fire and other perils covered within
the scope of standard extended hazard coverage, together with all riders and
endorsements thereto.
"Insurance Policy" Any insurance policy for a Mortgage Loan referred to in this
----------------
Agreement, including Mortgage Insurance Policy, Hazard Insurance Policy, Flood
Insurance Policy, and Title Insurance Policy, including all riders and
endorsements thereto.
"Liquidation Proceeds": Cash received in connection with the liquidation of a
--------------------
defaulted Mortgage Loan, whether through the sale or assignment of the Mortgage
Loan, trustee's sale, foreclosure sale, sale of the Mortgaged Property or
otherwise.
5
<PAGE>
"Mortgage Insurance policy": Insurance which insures the holder of the Note
-------------------------
against covered losses in the event the Borrower defaults under the Note or the
Security Instrument, including all riders and endorsements thereto,
"Mortgage Insurer": A mortgage guaranty insurance company that has issued a
----------------
Mortgage Insurance Policy in respect of a Mortgage Loan.
"Mortgage Loan Documents": Any and all documents related to a Mortgage Loan,
-----------------------
including the Note, Security Instrument and insurance policies.
"Mortgage Loan Schedule": The schedule of Mortgage Loans in the form of Exhibit
----------------------
A, attached hereto, delivered to Servicer on each Transfer Date, such schedule
setting forth the information as to each Mortgage Loan in form and substance
agreed to by the Servicer and the Owner.
"Mortgage Loan": The individual mortgage loan which is the subject of this
-------------
Agreement delivered from time to time being identified by a Mortgage Loan
Schedule. To the extent applicable and as the context so permits; any and all
references to "Mortgage Loan" or "Mortgage Loans" herein shall be deemed to
include any Mortgage Loan that has become an REO Property.
"Mortgaged Property": The property securing a Note and subject to the lien of
------------------
the related Security Instrument, which property consists of a single parcel of
real property on which is located a one-to four-family detached residential
dwelling, condominium or attached townhouse or rowhouse.
"Nonrecoverable Advance": Any previously made or proposed servicing advance, in
----------------------
the Servicer's good faith determination, that will not or would not be
ultimately recoverable from the related insurance proceeds or Liquidation
Proceeds.
"Note": A manually executed written instrument evidencing the Borrower's
----
promise to repay a stated sum of money, plus interest, to the noteholder by a
specific date according to a schedule of principal and interest payments.
"Owner": Preferred Mortgage Corporation.
-----
"Permitted Investments": Any one or more of the investments detailed on Exhibit
---------------------
B attached hereto.
"Principal Prepayment": Any payment or other recovery of principal on a
--------------------
Mortgage Loan which is received in advance of its scheduled due date, net of any
prepayment penalty or premium thereon which is retained by the Servicer, and is
not accompanied by an amount of interest representing scheduled interest due on
any date or dates in any month or months subsequent to the month of prepayment.
"Remittance Date": The date each month on which Servicer distributes to the
---------------
Owner the Owner's portion of the collections on the Mortgage Loans. The
Remittance Date shall be the
6
<PAGE>
twenty-fifth (25th) day of each calendar month, or the next succeeding Business
Day if the twenty-fifth (25th) day of the month is not a Business Day.
"Remittance Reports": Those monthly reports specified in Section 4.9.
------------------
"REO Property" Mortgaged Premises the title to which is acquired on behalf of
------------
the Owner through foreclosure or deed-in-lieu of foreclosure.
"Security Instrument": A written instrument creating a valid lien on the
-------------------
Mortgaged Premises. A Security Instrument may be in the form of a mortgage, deed
of trust, deed to secure debt or Security deed, including any riders and addenda
thereto.
"Servicer": Advanta Mortgage Corp. USA, or its successor in interest to the
--------
Servicer under this Agreement.
"Servicing Advance": All customary, reasonable and necessary "out of pocket"
-----------------
costs and expenses incurred in the performance by the Servicer of its servicing
obligations and not part of the Servicer's general and administrative expenses,
including but not limited to, the cost of (a) the preservation, restoration and
protection of the Mortgaged Property, (b) any enforcement or judicial
proceedings, including foreclosures, relating to Mortgage Loans or Mortgaged
Properties (c) the management and liquidation of the Mortgaged Property if the
Mortgaged Property is acquired in satisfaction of the Mortgage, and (d) the
maintenance of hazard insurance, payment of property taxes (including tax
penalties) or mortgage insurance premiums.
"Servicing Fee": For each Mortgage Loan, the compensation due the Servicer each
-------------
month.
"Servicing File": With respect to each Mortgage Loan documents delivered to the
--------------
Servicer, including photocopies of the Note and Security Instrument and any
other documents necessary for the Servicer to service the Mortgage Loans in
accordance with the terms of this Agreement.
"Tax Service Contract": A transferable contract maintained for the Mortgaged
--------------------
Property with a tax servicer provider for the purpose of obtaining current
information from local taxing authorities relating to such Mortgaged Property.
"Title Insurance Policy": An American Land Title Association (ALTA) mortgage
----------------------
loan title policy form 1970, or other form of lender's title insurance policy,
insuring the lien priority of the Security Instrument on the Mortgaged Premises.
"Transfer Date": For each Mortgage Loan, the date on which such Mortgage Loan
-------------
is delivered to Servicer for servicing hereunder.
7
<PAGE>
ARTICLE II
DELIVERY OF MORTGAGE LOAN FILES SERVICING STANDARDS
---------------------------------------------------
Section 2.1 Transfer of Mortgage Loan Files (Reserved for Future Use)
---------------------------------------------------------
Section 2.2 Agreement to Service Mortgage Loans
-----------------------------------
(a) Servicer agrees to service and administer the Mortgage Loans on the
Owner's behalf, in accordance with the terms of this Agreement, the Mortgage
Loans and Accepted Servicing Practices, giving due consideration to customary
and usual standards of practice of prudent institutional residential mortgage
loan servicers of comparable Mortgage Loans and with a view to the maximization
of timely recovery of principal and interest on the Mortgage Loans, but without
regard to: (i) any relationship that Servicer or any of its affiliates may have
with any Borrower or affiliate or manager thereof, (ii) Servicer's obligations
to make advances or to incur servicing expenses with respect to the Mortgage
Loans, or (iii) Servicer's right to receive compensation for its services
hereunder.
(b) Subject to the provisions of Section 2.2(a), above. Servicer shall
have full power and authority to do or cause to be done any and all things in
connection with such servicing and administration which Servicer may deem
necessary or desirable. In accordance with this Agreement, the Owner will
provide Servicer upon request with any powers of attorney necessary to undertake
the duties of Servicer. Servicer agrees to use its best efforts to service and
administer the Mortgage Loans in accordance with applicable state and federal
law.
(c) Without limiting the generality of the foregoing, the Servicer shall
and is hereby authorized and empowered by the Owner to: (i) execute and deliver,
on behalf of the Owner, any and all instruments of satisfaction or cancellation,
or of partial or full release or discharge, with respect to the Mortgage Loans
and with respect to the related Mortgaged Property, (ii) consent to any
modification of the terms of the Note if the effect of any such modification
will not materially or adversely affect the security afforded by the related
Mortgaged Property, (iii) institute foreclosure proceedings or obtain a deed-in-
lieu of foreclosure on behalf of the Owner, and (iv) take title in the name of
the Owner to any Mortgaged Property upon such foreclosure or delivery of deed in
lieu of foreclosure.
Section 2.3 Sub-Servicers
-------------
The Servicer may, with prior written approval from Preferred Mortgage
Corporation, perform its servicing responsibilities through agents or
independent contractors acting as sub-servicers, but shall not thereby be
released from any of its responsibilities hereunder, and the Servicer shall
diligently pursue all of its rights against such sub-servicer. Notwithstanding
any agreement with a sub-servicer, any of the provisions of this Agreement
relating to agreements or arrangements between the Servicer and a sub-servicer
or reference to actions taken through a sub-servicer or otherwise, the Servicer
shall remain obligated and liable to the Owner For the servicing and
administering of the Mortgage Loans in accordance with the provisions of this
agreement without diminution of such obligation or liability by virtue of such
Sub-Servicing
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Agreements or arrangements or by virtue of indemnification from the sub-servicer
for any acts and omissions and to the same extent and under the same terms and
conditions as if the Servicer alone were servicing and administering the
Mortgage Loans and any other transactions or services relating to the Mortgage
Loans involving the sub-servicer shall be deemed to be between the sub-servicer
and the Servicer alone and the Owner shall have no obligations, duties or
liabilities with respect to the sub-servicer including no obligation, duty or
liability of the Owner to pay sub-servicer's fees and expenses. For purposes of
this Agreement, the Servicer shall be deemed to have received payments on
Mortgage Loans when the sub-servicer has received such payments. The Servicer
shall pay all fees and expenses of the sub-servicer from its own funds, the
Servicing Fee or other amounts permitted to be retained by or reimbursed to the
Servicer hereunder.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
------------------------------
Section 3.1 Representations and Warranties of the Servicer
----------------------------------------------
Servicer represents and warrants to, and covenants with, the Owner that:
(a) Servicer is, and throughout the term of this Agreement will remain (i)
a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and (ii) duly qualified and in good standing to
transact any and all of its business, including the duties under this Agreement;
(b) The execution, delivery and performance of this Agreement have been
duly authorized by all necessary corporate action and the execution and delivery
of this Agreement by Servicer in the manner contemplated and the performance of
and compliance with the terms will not violate, contravene or create a default
under any applicable federal, state or local laws, licenses or permits;
(c) The execution and delivery of this Agreement by Servicer and the
performance of and compliance with its obligations and covenants do not require
the consent or approval of any governmental authority or, if such consent or
approval is required, it has been or will be obtained prior to such becoming
required;
(d) Assuming the due authorization and valid execution and delivery of this
Agreement by Owner, this Agreement, when executed and delivered by Servicer,
will constitute a valid, legal and binding obligation of Servicer, enforceable
against Servicer in accordance with its terms, except as the enforcement thereof
may be limited by applicable debtor relief laws and except as certain equitable
remedies may not be available regardless of whether enforcement is sought in
equity or law; and
(e) There is no litigation pending or, to Servicer's knowledge threatened,
which, if determined adversely to Servicer, would adversely affect the
execution, delivery or enforceability of this Agreement or Servicer's ability to
perform its obligations hereunder.
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Section 3.2 Representations and Warranties of the Owner
-------------------------------------------
As of the date of this Agreement and each Transfer Date. Owner represents
and warrants to, and covenants with, the Servicer that:
(a) The Owner owns, without limitation, (i) all right, title and interest
in the Mortgage Loans (including, without limitation, the security interest
created thereby), (ii) all the fights as a lender under any Insurance Policy
relating to a Mortgaged Property securing a Mortgage Loan for the benefit of the
owner of such Mortgage Loan, and (iii) all proceeds derived from any of the
foregoing;
(b) Owner is, and throughout the term of this Agreement will remain (1) a
corporation duly organized, validly existing and in good standing under the laws
of the state of its incorporations and (ii) duly qualified and in good standing
to transact any and all of its business;
(c) The execution, delivery and performance of this Agreement have been
duty authorized by all necessary corporate action and the execution and delivery
of this Agreement by Owner in the manner contemplated and the performance of and
compliance with the terms hereof by it will not violate, contravene or create a
default under any charter document or bylaw of the Owner or any contract,
agreement, or instrument to which the Owner is a party or by which Owner or any
of its property is bound;
(d) The execution and delivery of this Agreement by Owner and the
performance of and compliance with its obligations and covenants do not require
the consent or approval of any governmental authority or, if such consent or
approval is required, it has been or will be obtained prior to such becoming
required;
(e) Assuming the due authorization and valid execution and delivery of this
Agreement by Servicer, this Agreement, when executed and delivered by Owner,
will constitute a valid, legal and binding obligation of Owner, enforceable
against Owner in accordance with its terms, except as the enforcement may be
limited by applicable debtor relief laws and except as certain equitable
remedies may not be available regardless of whether enforcement is sought in
equity or law;
(f) There is no litigation pending or, to Owner's knowledge, threatened,
which, if determined adversely by Owner, would adversely affect the execution,
delivery or enforceability of this Agreement or Owner's ability to perform its
obligations;
(g) Owner holds legal right, title and interest to the Mortgage Loans and
no other party has the right to collect payments with respect thereto and the
Owner has the full power and authority to assign the servicing functions to
Servicer;
(h) All information provided to Servicer by Owners, including any copies of
Mortgage Loan Documents, information relating to the origination of such
Mortgage Loan, the prior servicing experience and any and all of the Mortgage
Loan balances and identification of
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any litigation affecting a contract or the servicing thereof is true, correct
and complete in all material respects;
(i) The information set forth in each Mortgage Loan Schedule is true and
correct in all material respects as of each Transfer Date;
(j) Each Security Instrument is a valid lien on the related Mortgaged
Property;
(k) To the Owner's best knowledge, no Mortgage Loan is subject to any
offset, defense or counterclaim;
(l) To the Owner's best knowledge, the physical property subject to each
Security instrument is free of material damage;
(m) Each Mortgage Loan at the time it was made complied in all material
respects with applicable state and federal laws and regulations, including,
without limitation, usury, equal credit opportunity and disclosure laws and
regulations;
(n) The Owner has not received a written notice of default of any senior
mortgage loan related to a Mortgage Loan which has not been cured by a party
other than such Owner;
(o) To the Owner's best knowledge, no Mortgage Loan is subject to (i) any
mechanics lien or claim for work, labor or material of which the Owner has
received written notice and that is or may be a lien prior to, or equal or
coordinate with, the lien of the related Security Instrument, (it) any
delinquent tax or assessment lien against the related Mortgage Loan;
(p) A lender's title insurance policy or binder, or title report in case of
sound mortgage loans or other assurance of title customary in the relevant
jurisdiction, is in full force and effect with respect to each Mortgage Loan;
(q) Each Mortgage Loan is covered by appropriate Hazard Insurance,
ARTICLE IV
ACCOUNTING AND REPORTING
------------------------
Section 4.1 Collection of Mortgage Loan Payments
------------------------------------
(a) Continuously from the date hereof until the principal and interest on
the Mortgage Loans is paid in full, Servicer agrees to proceed diligently to
collect all payments called for under the terms and provisions of the Mortgage
Loans, and shall follow such collection procedures with respect to mortgage
loans comparable to the Mortgage Loans held in its own portfolio, to the extent
such procedures are consistent with this Agreement and the terms of any
Insurance Policy and in accordance with Accepted Servicing Practices.
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(b) The Servicer may in its sole discretion (i) waive late payment charges,
assumption fees, charges for checks returned insufficient funds or other fees
which may be collected in the ordinary course of servicing the Mortgage Loans,
(ii) if a Borrower is in default (as defined in the Mortgage Loan), arrange with
the Borrower a schedule for the payment of delinquent payments due on the
related Mortgage Loan.
Section 4.2 Interest Calculations
---------------------
Monthly interest calculations for periods of a full month must be based on
a 30-day month and 360-day year, if permitted by the Note or by the law.
Interest calculations for periods of less than a full month (such as for a
Liquidation) must be calculated on the basis of actual days elapsed in a month
and a 365-day year unless otherwise provided by applicable federal or state law.
Section 4.3 Application of Mortgage Loan Payments
-------------------------------------
A payment from the Borrower will normally consist of interest, principal,
deposits for insurance and taxes and late charges, if applicable. Payments
received from Borrowers shall be applied in the following order unless otherwise
required by, the Mortgage Loan Documents, applicable state and federal
requirements or by a Mortgage Insurer:
(a) Deposits for taxes and insurance; and
(b) Required monthly interest; and
(c) Required monthly principal; and
(d) All other fees or penalties.
Section 4.4 Establishment of Collection Account; Deposits in Collection Account
-------------------------------------------------------------------
(a) The Servicer shall establish and maintain a Collection Account, (the
"Collection Account"), in the form of a time deposit or demand account, which
may be interest bearing, titled "Advanta Mortgage Corp. USA" in trust for the
Owner. Such Collection Account shall be established with a commercial bank, a
savings bank or a savings and loan association by the Servicer.
(b) The Servicer shall deposit in the Collection Account within two (2)
Business Days of receipt, and retain therein the following payments and
collections received or made with respect to the Mortgage Loans:
(i) all principal collections, including Principal Prepayments;
(ii) all interest collections;
(iii) all Liquidation Proceeds net of expenses;
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(iv) all proceeds received by the Servicer under any Insurance Policy,
other than proceeds to be held in the Escrow Account and applied to the
restoration or repair of the Mortgaged Property or released to the Borrower in
accordance with Accepted Servicing Procedures; and
(v) all awards or settlements in respect of condemnation proceedings
or eminent domain affecting any Mortgaged Property which are not released to the
Borrower in accordance with Accepted Servicing Practices.
(c) The Servicer may invest all or a portion of the funds in the Collection
Account in Permitted Investments in the name of the Servicer. The Servicer
shall receive as Additional Servicing Compensation all income and gain realized
from any such Permitted Investment. If any principal losses are incurred in
respect of any Permitted Investments, Servicer shall reimburse and restore to
the Collection Account the amount of any such principal losses out of Servicer's
own funds immediately as realized Notwithstanding the foregoing, Servicer's
right to invest funds in the Collection Account shall in no way limit the rights
of Servicer to be compensated for its services as provided in this Agreement.
(d) The requirements in this Section 4.4 for deposit in the Collection
Account shall be exclusive, it being understood and agreed that, without
limiting the generality of the foregoing, payments in the nature of late payment
charges, assumption processing charges, modification charges, demand fees,
insufficient funds fees and reconveyance fees need not be deposited by the
Servicer in the Collection Account.
Section 4.5 Withdrawals from the Collection Account
---------------------------------------
The Servicer shall, from time to time, withdraw funds from the Collection
Account for the following purposes:
(a) to reimburse itself for unreimbursed Servicing Advances, and for
accrued and unpaid Servicing Fees, the Servicer's right to reimburse itself
pursuant to this subclause (a) with respect to any Mortgage Loan being limited
to related Liquidation Proceeds, condemnation proceeds, REO Disposition
Proceeds, amounts representing proceeds of any Insurance Policy related to a
Mortgage Loan and such other amounts as may be collected by the Servicer from
the Borrower or otherwise relating to the Mortgage Loan, it being understood
that, in the case of any such reimbursement, the Servicer's right thereto shall
be prior to the rights of Owner;
(b) to reimburse itself for expenses incurred by and reimbursable to it
pursuant to Sections 4.10 and 6.7;
(c) to pay to itself any interest earned on funds deposited in the
Collection Account;
(d) to withdraw any amounts inadvertently deposited in the Collection
Account or not required to be deposited therein;
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(e) to make payments to the Owner in the amounts and in the manner provided
herein; and
(f) to clear and terminate the Collection Account upon the termination of
this Agreement.
If after receipt and application of Liquidation Proceeds in accordance with
the foregoing, the Servicer has sustained an unrecovered loss in connection with
a Servicing Advance, the amount of unrecovered loss shall be reimbursed to the
Servicer, first, from amounts in the Collation Account, or if such funds are
insufficient, by payment to the Servicer by the Owner within ten (10) Business
Days of the receipt of notice by such Owner of such amount.
The Servicer shall distribute that portion of collections on the Mortgage
Loans due to the Owner in the amounts and in the manner provided herein on each
Remittance Date.
Section 4.6 Establishment of Escrow Account; Deposits in Escrow Account
-----------------------------------------------------------
(a) The Servicer shall establish and maintain an Escrow Account, in the
form of a time deposit or demand account, which may be interest bearing, titled,
with respect to Escrow Payments actually held by the Servicer, "Advanta Mortgage
Corp. USA in trust for Borrower's Escrow Payments". Such Escrow Account shall
be established with a commercial bank, a savings bank or a savings and loan
association. The Escrow Account shall be drawable upon by the Servicer as
provided herein.
(b) The Servicer shall deposit in the Escrow Account within two (2)
Business Days of receipt or earlier if so required by law and retain therein:
(i) all Escrow Payments collected on account of the Mortgage Loans, for the
purpose of offering timely payment of any such items as required under the terms
of this Agreement, and (ii) all amounts representing proceeds of any Insurance
Policy which are to be applied to the restoration or repair of any Mortgaged
Property. To the extent required by law, the Servicer shall pay interest on
escrowed funds to the Borrower notwithstanding that the Escrow Account may not
bear interest.
(c) The Servicer may invest the funds in an Escrow Account in Permitted
Investments which shall be in the name of the Servicer in the trust capacity in
which the related Escrow Account is held or its nominee. The Servicer shall
receive as Additional Servicing Compensation an amount equal to all income and
gain realized from any such Permitted Investment, but only to the extent such
gain to Servicer is (i) not prohibited by applicable law and (ii) in excess of
amounts necessary to make any interest payments required by the Mortgage Loan
Documents or applicable law to be made to the applicable Borrower. If any
losses are incurred in respect of any Permitted Investments, Servicer shall
immediately reimburse and restore to the applicable Escrow Account the amount of
any such losses out of Servicer's own funds as realized. Notwithstanding the
foregoing, Servicer's right to invest funds in the Collection Account shall in
no way limit the fights of Servicer to be compensated for its services as
provided in this Agreement.
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Section 4.7 Withdrawals From Escrow Account
-------------------------------
Withdrawals from the Escrow Account shall be made by the Servicer, only
(a) to effect timely payment of taxes, mortgage insurance premiums, flood,
fire and hazard insurance premiums or other items constituting Escrow Payments
for the related Mortgage Loan;
(b) to reimburse the Services for any Servicing Advance made by the
Servicer to effect the payment of taxes or insurance required under the terms of
the related Mortgage Loan, but only from amounts received on the related
Mortgage Loan which represent late payments or collections of Escrow Payments
thereunder;
(c) to refund to any Borrower any funds found to be in excess of the
amounts required under the terms of the related Mortgage Loan;
(d) for application to restoration or repair of the Mortgaged Property;
(e) to pay to the Borrower, to the extent required by law, any interest
paid on the funds deposited in the Escrow Account;
(f) to pay to itself any interest earned on funds deposited in the Escrow
Account;
(g) to remove any deposits made in error; or
(h) to clear and terminate the Escrow Account upon termination of this
Agreement.
Section 4.8 Servicing Advances
------------------
As required, Servicer agrees to make Servicing Advances for the
preservation of any Mortgaged Property, including the payment of accrued and
unpaid taxes, forced placed hazard insurance, repayment of senior liens. It is
understood that Servicer's obligation to make such Servicing Advances shall
continue until (i) the payment in full of the Mortgage Loan or (ii) the date on
which the Mortgaged Property is liquidated; provided, however, Servicer shall
have no obligation to make Servicing Advances if, in the sole determination of
Servicer, such Servicing Advance would constitute a Nonrecoverable Advance.
Section 4.9 Monthly Remittance Reports
--------------------------
(a) The Servicer shall service the Mortgage Loans on an actual/actual
remittance basis with the accounting cutoff with respect to each Remittance Date
of the last day of the month immediately preceding such Remittance Date.
(b) Not later than the fifteenth (15th) day of each calendar month, or the
succeeding business day should the fifteenth not be a business day, the Servicer
shall prepare and deliver the following reports with respect to activity for the
most recently ended prior calendar month:
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(i) a trial balance report including all Mortgage Loans;
(ii) a monthly remittance report, including an itemization of any fee
withholdings and/or recoveries of servicing advances from the related
remittance:
(iii) a report setting forth any Mortgage Loans added or deleted;
(iv) a report setting forth curtailment or prepayments; and
(v) reports setting forth delinquency detail (including bankruptcy,
foreclosure and REO status).
Section 4.10 Servicing Compensation
----------------------
(a) As compensation for its activities hereunder, the Servicer shall be
entitled to retain as to each Mortgage Loan, a Servicing Fee of .55% (55 basis
points) per annum which shall be retained by Servicer from the interest portion
of the Mortgage Loan payments as received from a Borrower and from Liquidation
Proceeds, as applicable.
(b) Servicer shall be entitled to retain the Additional Servicing
Compensation.
(c) In addition, Owner shall pay Servicer a set-up fee of $15.00 per
Mortgage Loan for each Mortgage Loan transferred to Servicer and serviced
hereunder. Additionally, not later than the twenty-fifth (25th) day of each
calendar month or the succeeding business day should the twenty-fifth not be a
business day, the Servicer shall deliver a bank statement reconciliation of the
Collection Account for the related remittance period.
ARTICLE V
ADMINISTRATION AND SERVICING OF MORTGAGE LOANS
----------------------------------------------
Section 5.1 Enforcement of Due-On-Sale Clause; Assumption
---------------------------------------------
The Servicer is required to enforce any due-on-sale clause in the Note or
Security Instrument to the extent permitted by applicable law upon the transfer
of title to the Mortgaged Property unless (i) the Mortgage Loan Documents,
including riders or addenda permit such a transfer, or (ii) enforcement of the
due-on-sale clause will jeopardize the Mortgage Insurance coverage, if any, on
such Mortgage Loan, In all circumstances of unapproved transfer initiated by the
Borrower, the Servicer is required to promptly notify the Mortgage Insurer of
such transfer and obtain written approval from the Mortgage Insurer (if required
under the applicable Mortgage Insurance Policy) before initiating enforcement
proceedings.
Notwithstanding the preceding paragraph, Owner authorizes Servicer, to
waive, in the sole discretion of Servicer, the enforcement of a due-on-sale
clause on any Mortgage Loan and permit the assumption of such Mortgage Loan,
subject to the following conditions:
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(a) No material term of the Note, including, but not limited to, the rate
of interest on the Note and the remaining term to maturity, may be changed in
connection with such assumption, provided however, such limitation shall not
apply to interest rate, payment or amortization chances otherwise provided for
under the terms of the Note, such as in the case of an adjustable rate mortgage;
(b) The Servicer has performed a credit review of the new borrower and
determined that the new borrower is a prudent credit risk in the sole opinion of
the Servicer. Owner hereby authorizes, Servicer to apply more liberal credit
standards and underwriting in connection with a request for an assumption of a
Mortgage Loan than Servicer would apply for comparable new loans which
Servicer's is then originating for its own account, if Servicer in its sole
discretion, reasonably believes there is a risk of foreclosure on the Mortgage
Loan in the event the assumption is denied;
(c) The Mortgage Insurer has approved in writing the assumption of the
Mortgage Loan by the new borrower and such Mortgage Loan will continue to be
insured by such Mortgage Insurer;
(d) The new borrower executes documents assuming all the obligations of the
Borrower under the Mortgage Loan Documents;
(e) The Mortgage Loan will continue to be secured, and insured with a Title
Insurance Policy, if any, by a valid security interest upon the Mortgaged
Property of the same lien priority as existed immediately prior to such
assumption; provided however, if Servicer has not been delivered a Title
Insurance Policy on the Transfer Date for any such Mortgage Loan, Servicer shall
have no obligation to inquire into or obtain any title insurance in connection
with any assumption of such a Mortgage Loan; and
(f) The Servicer has determined that the estimated net realizable value of
the Mortgaged Property, in the sole judgment of the Servicer is less than the
then unpaid principal balance of the related Note, plus accrued interest to the
estimated date of the closing of the sale of Mortgaged Property to the new
borrower.
(g) The Servicer shall provide the Owner the original assumption agreement
following execution thereof.
Subject to the terms of the Note and Security Instrument, and applicable
law or regulation, the Servicer may charge a reasonable and customary assumption
fee, and the Servicer may retain such fee as Additional Servicing Compensation.
Section 5.2 Maintenance of Insurance
------------------------
(a) The Servicer shall cause to be maintained with respect to each Mortgage
Loan a Hazard Insurance Policy with a generally acceptable carrier that provides
for fire and extended coverage, and for a recovery of any insurance proceeds
relating to such Mortgage Loan by the Servicer on behalf of the Owner.
17
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(b) If the Mortgage Loan relates to a Mortgaged Property identified at
origination in the Federal Register by the Federal Emergency Management Agency
as having a special flood hazard, the Servicer will cause to be maintained with
respect thereto a Flood Insurance Policy with a generally acceptable carrier
which provides for a recovery of any insurance proceeds relating to such
Mortgage Loan by the Servicer on behalf of the Owner.
(c) With respect to each Mortgage Loan that provides for the collection of
escrow funds for the payment of fire and hazard insurance or flood insurance,
the Servicer shall effect the payment thereof prior to the applicable policy
termination date employing for such purpose deposits in the Escrow Account which
shall have been estimated and accumulated by the Servicer in the amounts
sufficient for such purposes. To the extent a Mortgage Loan does not provide
for escrow payments and the Borrower fails to maintain any required insurance
coverage, the Servicer shall by a Servicing Advance make the payment required to
effect the applicable in-force policy for the related Mortgaged Property.
(d) Notwithstanding the proceeding paragraphs, the Servicer at its option
may obtain and maintain, with respect to all or any portion of the Mortgage
Loans a blanket insurance policy with emended coverage insuring against fire,
hazard and flood, as applicable. The Servicer shall be deemed conclusively to
have satisfied its obligations with respect to Hazard Insurance and Flood
Insurance coverage under this Section if such blanket policy names the Servicer
as "Loss Payee" and provides coverage in an amount equal to the aggregate unpaid
principal balance of the Mortgage Loans without co-insurance,
Section 5.3 Cancellation of Mortgage Insurance
----------------------------------
If a Borrower requests cancellation of the Mortgage Insurance Policy, the
Servicer shall ensure that the FNMA guidelines governing cancellation are
followed in connection with any cancellation.
Section 5.4 Reserved For Future Use
-----------------------
Section 5.5 Liquidation of Defaulted Mortgage Loans
---------------------------------------
(a) The Servicer, on behalf of the Owner, shall foreclose upon or otherwise
take title, in the name of Owner, to Mortgaged Property (such as by a deed in
lieu of foreclosure) for any Mortgage Loan which is in default and as to which
no satisfactory arrangements, in the sole reasonable opinion of Servicer, can be
made for collection of delinquent payments. In connection with such foreclosure
or other transfer of title, the Servicer shall exercise the rights and powers
vested in it hereunder, and use the same degree of care and skill in such
exercise or use, as prudent servicers would exercise or use under similar
circumstances in the conduct of their own affairs, including, but not limited
to, making Servicing Advances for the payment of taxes, amounts due with respect
to senior liens, and insurance premiums.
(b) In determining whether or not to foreclose upon or otherwise comparably
transfer title to such Mortgaged Property, the Servicer shall take into account
the existence of any condition upon or impacting the Mortgaged Property in the
nature of hazardous substances,
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hazardous wastes, infectious waste, toxic substance, solid wastes and so forth,
as such terms now or in the future are defined or listed in, or otherwise
classified pursuant to, or regulated by, any applicable Environmental Laws,
including but not limited to all present and future federal, state or local
laws, ordinances, rules, regulations, decisions and other requirements of
governmental authorities relating to the environment or to any Hazardous
Substance.
Section 5.6 Deed-in-Lieu of Foreclosure
---------------------------
If the Owner and, if applicable, the Mortgage Insurer have approved the
liquidation of a Mortgage Loan by accepting a deed-in-lieu of foreclosure, the
Servicer may accept such deed provided that:
(a) Marketable title, as evidenced by a Title Insurance Policy, can be
conveyed to and acquired by the Owner or its designee;
(b) The transaction complies with all requirements of each Mortgage
Insurer, if any, and does not and will not violate or contravene any restriction
or prohibition of any Mortgage Insurance Policy, if any, or otherwise result in
any loss of or reduction in the coverage of benefits under such policies;
(c) No cash consideration is paid to the Borrower;
(d) The Mortgaged Properties are vacant at the time of the Borrower's
conveyance thereof, unless occupancy has been approved by each Mortgage Insurer,
if any; and
(e) The Servicer has obtained from the Borrower a written acknowledgment
that the deed is being accepted as an accommodation to the Borrower and on the
condition that the Mortgaged Properties will be transferred to the Owner that
owns such Mortgage Loan free and clear of all claims, liens, encumbrances,
attachments, reservations or restrictions except for those to which the
Mortgaged Properties were subject at the time the Mortgaged Properties became
subject to the lien of the Security Instrument.
Upon acquisition of the Mortgaged Properties, the Servicer shall promptly
advise the Owner and each Mortgage Insurer by letter, indicating the details of
the transaction and reasons for the conveyance and providing such other
information as is required by each Mortgage Insurer. Title shall be conveyed
directly from the Borrower to the Owner, or to such other Person designated by
the Owner.
Section 5.7 Real Estate Owned
-----------------
Title, Management and Disposition of REO Property. In the event that title
-------------------------------------------------
to the Mortgaged Property is acquired in foreclosure or by deed in lieu of
foreclosure, the deed or certificate of sale shall be taken in the name of the
Owner. The Owner agrees to cooperate with Servicer and take such actions as
shall be necessary for the Servicer to take title to the Mortgaged Property in
the name of the Owner.
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Notwithstanding the generality of the foregoing provisions, the Servicer
shall manage, conserve, protect and operate each REO Property for the Owners
solely for the purpose of its prompt disposition and sale. Pursuant to its
efforts to sell such REO Property, the Servicer shall either itself or through
an agent selected by the Servicer protect and conserve such REO Property in the
same manner and to such extent as is customary in the locality where such REO
Property is located and may, but shall not be obligated to, incident to its
conservation and protection of the interests of the Owners, rent the same, or
any part thereof as the Servicer deems to be in the best interests of the Owners
for the period prior to the sale of such REO Property. The Servicer shall
attempt to sell the same on such terms and conditions as the Servicer deems to
be in the best interest of the Owner.
The Servicer shall cause to be deposited within two (2) Business Days of
receipt in the Collection Account all revenues received with respect to the
conservation and disposition of each REO Property and shall be permitted to
retain from such revenues funds necessary for the proper operation, management
and maintenance of the REO Property, including reimbursement for its Servicing
Advances and fees of any managing agent acting on behalf of the Servicer.
Possession of Mortgage Files by Servicer. From time to time in connection
----------------------------------------
with the servicing of the Mortgage Loans hereunder, the Servicer may take
possession of all or a portion of the documents relating to the Mortgage Loans
as may be held by the Owner or the Custodian. Such documents shall be held in
trust by the Servicer for the benefit of the Owner as the owner thereof and the
Servicer's possession of such document or documents is at the will of the Owner
for the sole purpose of servicing the related Mortgage Loan, and such retention
and possession by the Servicer is in a custodial capacity only.
ARTICLE VI
MISCELLANEOUS PROVISIONS
------------------------
Section 6.1 Owner to Cooperate
------------------
From time to time and as appropriate in the servicing of any Mortgage Loan,
including without limitation, the payment in full of any Mortgage Loan,
notification that payment in full will be escrowed, foreclosure or other
comparable conversion of a Mortgage or collection under any applicable Insurance
Policy, the Owner, upon request of the Servicer shall release or cause the
release and delivery of the related Mortgage Loan Documents to the Servicer.
Section 6.2 Assignment of Agreement
-----------------------
Servicer agrees not to sell, transfer, pledge or otherwise dispose of its
right to receive all or any portion of the Servicing Fees, and any such
attempted sale, transfer, pledge or disposition shall be void, unless such
transfer is made to a successor servicer with the prior written consent of the
Owner.
20
<PAGE>
Section 6.3 Access to Certain Documentation Regarding the Loans
---------------------------------------------------
Upon reasonable advance notice, Servicer shall provide reasonable access
during normal business hours at its offices to the Owner, or any agents or
representatives thereof, to any reports and to information and documentation
regarding the Mortgage Loans.
Section 6.4 Default By Servicer
-------------------
Owner may terminate this Agreement upon the happening of any one or more of
the following events:
(a) Falsity in any material respect of any representation of warranty of
Servicer contained in this Agreement and failure of Servicer to cure the
condition or event causing any such representation or warranty to be false
within sixty (60) clays after the Servicer's receipt of written notice from
Owner specifying such falsity and requesting that it be cured or corrected;
(b) Failure of Servicer to duly observe or perform in any material respect
any other covenant, condition, or agreement in this Agreement for a period of
sixty (60) days after receipt of written notice by Servicer from Owner,
specifying such failure and requesting that it be remedied; provided, however,
if the failure stated in the notice cannot be corrected within the applicable
period, Owner and Servicer shall mutually agree to a reasonable extension of
time if corrective action is instituted by Servicer within the applicable period
and is diligently pursued until corrected;
(c) Decree or order of a court, agency or supervisory authority having
jurisdiction in the premises appointing a trustee, conservator, receiver or
liquidator in any insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceeding affecting Servicer or any of its properties
utilized in connection with the performance of servicing, or for resolving the
liquidation of the affairs of Servicer, if such decree or order shall have
remained in force undischarged or unstayed for a period of ninety (90) days;
(d) Commencement by Servicer as debtor of any case or proceeding under any
bankruptcy, insolvency, reorganization, liquidation, dissolution or similar law;
(e) Consent by Servicer to the appointment of a trustee, conservator,
receiver or liquidator in any insolvent, readjustment of debt, marshaling of
assets and liabilities, or similar proceeding affecting Servicer or
substantially all of its properties; or
(f) Admission in writing by Servicer of its inability to pay debts
generally as they mature, or the making of an assignment for the benefit of
creditors,
If any of the events specified in (c) through (f) above shall occur,
Servicer shall give written notice of such occurrence to Owner within ten (10)
days of the happening of such event, Any such termination shall be effective as
of the date stated in a written notice delivered to Servicer.
21
<PAGE>
Section 6.5 Default by Owner
----------------
Servicer may terminate this Agreement upon the happening of any one or more
of the following events:
(a) Falsity in any material respect of any representation or warranty of
Owner contained in this Agreement and failure of Owner to cure the condition or
event causing such representation or warranty to be false within sixty (60) days
after Owner's receipt of written notice from Servicer specifying such falsity
and requesting that it be cured or corrected;
(b) Such other breach of this Agreement by Owner which materially and
adversely affects Servicer, which breach shall continue for a period of sixty
(60) days after receipt of written notice by Owner from Servicer, specifying
such breach and requesting that it be remedied; provided, however, if the breach
stated in the notice cannot be remedied within the applicable period, Servicer
shall consent to a reasonable extension of time if corrective action is
instituted by owner within the applicable period and is diligently pursued until
corrected;
(c) Decree or order of a court, agency or supervisory authority having
jurisdiction in the premises appointing a trustee, conservator, receiver or
liquidator in any insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceeding affecting Owner or any of its properties
utilized in connection with the performance of Services duties hereunder, or the
winding up or liquidation or the affairs of Owner, if such decree or order shall
have remained in force undischarged or unstayed for a period of ninety (90)
days;
(d) Commencement by Owner as debtor of any case of proceeding under any
bankruptcy, insolvency, reorganization, liquidation, dissolution or similar law;
(e) Consent by Owner to the appointment of a trustee, conservator, receiver
or liquidator in any insolvency, readjustment of debt, marshaling of assets and
liabilities, or similar proceeding affecting Owner or substantially all of its
properties; or
(f) Admission in writing by Owner of its inability to pay debts generally
as they mature, or the making of an assignment for the benefit of creditors.
If any of the events specified in (c) through (f) above shall occur, Owner
shall give written notice of such occurrence to Servicer within ten (10) days of
the happening of such event. Any such termination shall be effective as of the
date stated in a written notice delivered to Owner.
Section 6.6 Reserved for Future Use
-----------------------
Section 6.7 Indemnification by Owner
------------------------
Owner shall indemnify and hold Servicer harmless from and shall reimburse
Servicer for any losses, damages, deficiencies, claims, penalties, forfeitures,
causes of action or expenses of
22
<PAGE>
any nature (including reasonable attorneys' fees) incurred by Servicer which
arise out of or result from:
(a) The inaccuracy of any representation of Owner contained in this
Agreement or material breach of any warranty, covenant or agreement made or to
be performed by Owner pursuant to this Agreement;
(b) the failure of the originator of any Mortgage Loan to originate such
Mortgage Loan in accordance with applicable law;
(c) the failure of any prior servicer to service the Mortgage Loan in
accordance with any applicable law;
(d) any matters that occurred prior to the Transfer Date for the Mortgage
Loan involved or any incomplete or incorrect Mortgage Loan data, records or
information provided in connection with the origination or prior servicing of
any Mortgage Loan;
(e) Owner's failure to fulfill the Servicing responsibilities not assumed
by Servicer of otherwise result from Owner preventing, hampering or impeding
Servicer's performance of its duties and responsibilities under this Agreement;
or
(f) Any litigation or claim with respect to the Mortgage Loans not arising
out of, or resulting from, Servicer's failure to observe the terms and covenants
of the Mortgage Loans or this Agreement including specifically any litigation
relating to ARM Loans.
The Servicer shall promptly notify the Owner if a claim is made by a third
party with respect to this Agreement or the Mortgage Loans, and the Servicer at
its option may assume the defense of any such claim. The Owner shall, within
ten (10) Business Days of receiving a statement of amounts advanced by the
Servicer in connection with the defense of any such claim, reimburse the
Servicer for all amounts advanced by it pursuant to this Section 6.7, except to
the extent that such claim is not caused by the Servicer's failure to service
the Mortgage Loans in compliance with the terms of this Agreement.
Section 6.8 Fidelity Bond and Errors Omissions
----------------------------------
Servicer agrees to obtain and maintain at its expense and shall keep in
full force and effect throughout the term of this Agreement, a blanket fidelity
bond and an errors and omissions insurance policy covering its officers and
employees and other persons acting on its behalf in connection with the
servicing activities hereunder. The amount of coverage shall be at least equal
to the coverage that prudent mortgage loan servicers having servicing portfolios
of a similar size. In the event that any such bond or policy ceases to be in
effect, Servicer agrees to obtain a comparable replacement bond or policy with
equivalent coverage. No provision of this Section shall operate to diminish or
restrict or otherwise impair the Servicer's responsibilities and obligations set
forth in this Agreement.
23
<PAGE>
Section 6.9 Indemnification by Servicer
---------------------------
Servicer shall indemnify and hold Owner harmless from and shall reimburse
Owner for any losses, damages, deficiencies, claims, causes of action or
expenses of any nature (including reasonable attorneys' fees) incurred by Owner
which arise out of or result from:
(a) The inaccuracy of any representation of Servicer contained in this
Agreement or material breach of any warranty, covenant or agreement made or to
be performed by Servicer pursuant to this Agreement;
(b) Any litigation or claim arising out of, or resulting from, Servicer's
failure to observe the terms and covenants of this Agreement.
(c) The failure of the Servicer to service such Mortgage Loan in accordance
with applicable law.
Section 6.10 Amendment
---------
This Agreement may be amended from time to time by the Owner and the
Servicer by written Agreement signed by the Owner and the Service.
Section 6.11 Governing Law
-------------
This Agreement shall be construed in accordance with the laws of the State
of California, without regard to the conflict of laws or rules thereof, and the
obligations, rights and remedies of the parties hereunder shall be determined in
accordance with such laws.
Section 6.12 Notices
-------
(a) All demands, notices and communications hereunder shall be in writing
and shall be deemed to have been duly given if personally delivered at or mailed
by registered mail, postage prepaid, to (i) in case of the Servicer, Advanta
Mortgage Corp. USA, 16875 West Bernardo Drive, San Diego, California 92127,
Attention: SVP Loan Servicing and (ii) in the case of the Owner, Preferred
Mortgage Corporation, 19782 MacArthur Boulevard, Suite 250, Irvine, CA 92715.
Attention: Li-Lin Ko, CFO, or such other addressee as the Owner or the Servicer
may hereafter furnish.
(b) Any party may alter the address to which communications or copies are
to be sent by giving notice of such change of address in conformity with the
provisions of this Paragraph for giving of notice.
Section 6.13 Severability of Provisions
--------------------------
If any one or more of the covenants, agreements, provision or terms of this
Agreement shall be held invalid for any reason whatsoever, then such covenants,
agreements, provisions or terms shall be deemed severable from the remaining
covenants. agreements, provisions and
24
<PAGE>
terms of this Agreement and shall in no way affect the validity or
enforceability of the provisions of this Agreement.
Section 6.14 Document Deficiencies
---------------------
The Servicer shall have no obligations to (i) address or any deficiencies
in Mortgage Loan documents transferred to it, (ii) seek any document missing
from any assignments relating to the transfer of any Mortgage Loan to or from
the Owner. The Servicer's responsibility is solely limited to notifying the
Owner as to any missing or document deficiency it becomes aware of.
Section 6.15 Termination
-----------
(a) The obligations and responsibilities of the Servicer shall terminate
upon the latter of (i) the final payment or other liquidation of the last
Mortgage Loan or (ii) the disposition of all property acquired upon possession
of any Mortgage Loan and the remittance of all funds due thereunder.
(b) Either Owner or Servicer may, at any time and in its sole discretion,
terminate this Agreement upon at least 90 days prior written notice to other
party; provided if the Owner terminates this Agreement, Owner shall pay the
Servicer a termination fee of 1% of the aggregate principal balances of the
Mortgage Loans as of the last day of the related remittance period. If Servicer
terminates this Agreement it shall be liable to pay all reasonable costs
associated with the transfer of Mortgage Loans to Successor Servicer. Such
termination fee shall not be payable as to any Mortgage Loan transferred into a
securitization trust provided Servicer continues to service any such loan.
(c) If Owner transfers servicing of any amount of the Mortgage Loans to
another servicer within six months of the applicable Transfer Date of any such
Mortgage Loan, Owner shall pay to Servicer $100.00 per Mortgage Loan
transferred.
Section 6.16 Attorneys' Fees
---------------
In the event any party hereto brings an action to enforce any of the
provisions of this Agreement, the party against whom judgment is rendered in
such action shall be liable to the others for reimbursement of their costs,
expenses and attorneys' fees, including such costs, expresses and fees as may be
incurred on appeal.
Section 6.17 No Solicitation
---------------
Unless specifically permitted by the Owner in advance, the Servicer agrees
not to use Servicer's records to specifically solicit any Borrower with respect
to the refinancing of a Mortgage Loan, insurance or otherwise.
25
<PAGE>
Section 6.18 Counterparts
------------
This Agreement may be executed in one or more counterparts, each of which
shall be deemed to be an original, and all of which together shall constitute
one and same instrument.
IN WITNESS HEREOF, the parties hereto have caused this Agreement to be duly
executed by their respective officers, all as of the day and year first above
mentioned.
Advanta Mortgage Corp. USA Preferred Mortgage Corporation
By: /s/ William P. Garland By: /s/ Todd Rodriguez
---------------------- ------------------
Name: William P. Garland Name: Todd Rodriguez
------------------
Title: Senior Vice President Title: CEO
------------------
26
<PAGE>
EXHIBIT A
Mortgage Loan Schedule
----------------------
<TABLE>
<CAPTION>
=======================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loan No. Borrower Original Current Interest Interest Next Monthly Escrow
Principal Principal Rate Paid to Due Payment Account
Amount Balance Date Date Amount
========================================================================================================
</TABLE>
As of the below designated Transfer Date, the undersigned, Owner,
(a) hereby certifies that the information concerning each Mortgage Loan on
the within Mortgage Loan Schedule is true, accurate and complete, and
(b) hereby reaffirms all of its warranties and representations contained in
that certain Loan Servicing Agreement dated as of _____________________, 19__,
by and between the undersigned Owner and Advanta Mortgage Corp. USA, such
representations and warranties are incorporated heroin by this reference.
Owner: _______[insert name]_______
Transfer Date: ____________________ ____________________________________
By__________________________________
Title_______________________________
<PAGE>
EXHIBIT B
Permitted Investments
---------------------
(c) Direct general obligations of the United States or the obligation of
any agency or instrumentality of the United States fully and unconditionally
guaranteed, the timely payment or the guarantee of which constitutes a full
faith and credit obligation of the United States.
(d) Federal Housing Administration debentures.
(e) FHLMC participation certificates and senior debt obligations.
(f) Federal Home Loan Banks consolidated senior debt obligations.
(g) FNMA mortgage-backed securities (other than stripped mortgage
securities which are valued greater than par on the portion of unpaid principal)
and senior debt obligations.
(h) Federal funds, certificates of deposit, time and demand deposits, and
bankers acceptances (having original maturities of not more than 365 days) of
any domestic bank, the short-term debt obligations of which have been rated A-1
or better by SP and P-1 by Moody's.
(i) Investment agreements approved by the Owner provided:
(i) The agreement is with a bank or insurance Owner which has an
unsecured, uninsured, and unguaranteed obligation (or claims-paying
ability) rated Aa2 or better by Moody's and AA or better by SP, or is the
lead bank of a parent bank holding Owner with an uninsured, unsecured and
unguaranteed obligation meeting such rating requirements, and
(ii) Moneys invested thereunder may be withdrawn without any penalty,
premium or charge upon not more than one day's notice (provided such notice
may by amended or canceled at any time prior to the withdrawal date), and
(iii) The agreement is not subordinated to any other obligations of
such insurance Owner or bank, and
(iv) The same guaranteed interest rate will be paid on any future
deposits made pursuant to such agreement, and
(v) The Owner receives an opinion of counsel that such agreement is an
enforceable obligation of such insurance Owner or bank.
(j) Commercial paper (having original maturities of not more than 365 days)
rated A-1 or better by SP and P-1 or better by Moody's.
<PAGE>
(k) Investments in money market funds rated AAAm or AAAm-G by SP and P-1 by
Moody's.
(l) Investments approved in writing by the Owner.
Provided that no instrument described above is permitted to evidence either
--------
the right to receive (a) only interest with respect to obligations underlying
such instrument or (b) both principal and interest payments derived from
obligations underlying such instrument and the interest and principal payments
with respect to such instrument provided a yield to maturity at par greater than
120% of the yield to maturity at par of the underlying obligations; and provided
further, that no instrument described above may be purchased at a price greater
than par if such instrument may be prepaid or called at a price less than its
purchase price prior to stated maturity.
<PAGE>
EXHIBIT 10.21
CS FIRST BOSTON MORTGAGE CAPITAL CORP.
OWNER
and
T.A.R. PREFERRED MORTGAGE CORPORATION
PRIOR SERVICER/PRIOR OWNER
and
ADVANTA MORTGAGE CORP. USA
SERVICER
LOAN SERVICING AGREEMENT
Dated as of
August 23, 1996
Fixed Rate Non-Conforming Mortgage Loans
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I DEFINITIONS.............................................................. 1
Section 1.1 Definition of Terms............................................. 1
ARTICLE II DELIVERY OF MORTGAGE LOAN FILES SERVICING STANDARDS..................... 6
Section 2.1 Transfer of Mortgage Loan Files................................. 6
Section 2.2 Agreement to Service Mortgage Loans............................. 7
Section 2.3 Sub-Servicers................................................... 7
ARTICLE III REPRESENTATIONS AND WARRANTIES......................................... 8
Section 3.1 Representations and Warranties of the Servicer.................. 8
Section 3.2 Representations and Warranties of the Owner..................... 9
Section 3.3 Representations and Warranties of the Prior Servicer/Prior
Owner........................................................... 10
ARTICLE IV ACCOUNTING AND REPORTING................................................ 12
Section 4.1 Collection of Mortgage Loan Payments............................ 12
Section 4.2 Interest Calculations........................................... 13
Section 4.3 Application of Mortgage Loan Payments........................... 13
Section 4.4 Establishment of Collection Account; Deposits in Collection
Account......................................................... 13
Section 4.5 Withdrawals from the Collection Account......................... 14
Section 4.6 Establishment of Escrow Account; Deposits in Escrow Account..... 15
Section 4.7 Withdrawals From Escrow Account................................. 15
Section 4.8 Servicing Advances.............................................. 16
Section 4.9 Monthly Remittance Reports...................................... 16
Section 4.10 Servicing Compensation.......................................... 17
ARTICLE V ADMINISTRATION AND SERVICING OF MORTGAGE LOANS........................... 17
Section 5.1 Enforcement of Due-On-Sale Clause; Assumption................... 17
Section 5.2 Maintenance of Insurance........................................ 19
Section 5.3 Cancellation of Mortgage Insurance.............................. 20
Section 5.4 Reserved For Future Use......................................... 20
Section 5.5 Liquidation of Defaulted Mortgage Loans......................... 20
Section 5.6 Deed-in-Lieu of Foreclosure..................................... 20
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Section 5.7 Real Estate Owned............................................ 21
Section 5.8 Possession of Mortgage Files by Servicer..................... 22
ARTICLE VI MISCELLANEOUS PROVISIONS............................................... 22
Section 6.1 Owner to Cooperate........................................... 22
Section 6.2 Assignment of Agreement...................................... 22
Section 6.3 Access to Certain Documentation Regarding the Loans.......... 23
Section 6.4 Default By Servicer.......................................... 23
Section 6.5 Default by Owner............................................. 24
Section 6.6 Default by Prior Servicer/Prior Owner........................ 25
Section 6.7 Indemnification By Owner..................................... 26
Section 6.8 Fidelity Bond and Errors Omissions........................... 27
Section 6.9 Indemnification by Servicer.................................. 27
Section 6.10 Indemnification By Prior Servicer/Prior Owner................ 28
Section 6.11 Amendment.................................................... 28
Section 6.12 Governing Law................................................ 29
Section 6.13 Notices...................................................... 29
Section 6.14 Severability of Provisions................................... 29
Section 6.15 Document Deficiencies........................................ 29
Section 6.16 Termination.................................................. 29
Section 6.17 Continued Cooperation........................................ 30
Section 6.18 Master Servicer.............................................. 31
Section 6.19 Attorneys' Fees.............................................. 31
Section 6.20 No Solicitation.............................................. 31
Section 6.21 Counterparts................................................. 32
</TABLE>
<PAGE>
This Servicing Agreement, dated as of August 23, 1996 is entered into by
and among CS First Boston Mortgage Capital Corp., as owner of the Mortgage Loans
that are referred to herein together with its permitted successors and assigns
(the "Owner"), Advanta Mortgage.Corp. USA, as Servicer (together with its
permitted successors and assigns, the "Servicer"), and T.A.R. Preferred
Mortgage Corporation as prior servicer and prior owner of the Mortgage Loans
(the "Prior Servicer/Prior Owner").
WHEREAS, the Owner is the owner of certain second lien, fixed rate, non-
conforming residential mortgage loans; and
WHEREAS, the Owner desires to deliver from time to time to Servicer certain
Mortgage Loans, as more particularly specified in Exhibit A attached hereto, to
be serviced by Servicer for the Term of this Agreement in accordance with the
terms and conditions of the Mortgage Loans and this Agreement; and
WHEREAS, the Servicer currently services non-conforming residential
mortgage loans and desires to service the Mortgage Loans delivered to it from
time to time by Owner; and
WHEREAS, the Prior Serviced/Prior Owner has originated all Mortgage Loans
and serviced some of the Mortgage Loans prior to the transfer of service to
Servicer pursuant to that certain Loan Servicing Agreement between Servicer and
the Prior Serviced/Prior Owner dated March 8, 1996; and
WHEREAS, it is the intent of the parties that certain Mortgage Loans,
described in Exhibit A attached hereto, are to be delivered for servicing
concurrent with this Agreement and thereafter Owner may deliver additional
Mortgage Loans for Servicing pursuant to the terms hereof; and
NOW, THEREFORE, in consideration of the foregoing and mutual agreements
contained herein, the parties hereby agree as follows:
ARTICLE I
---------
DEFINITIONS
-----------
Section 1.1 Definition of Terms
- ----------- -------------------
Whenever used herein, the following words and phrases, unless the context
otherwise requires, shall have the following meanings:
1
<PAGE>
"Accepted Servicing Practices": With respect to any Mortgage Loan, those
- ------------------------------
mortgage servicing practices of prudent mortgage lending institutions which
service mortgage loans of the same type as such Mortgage Loan in the
jurisdiction where the related Mortgaged Property is located.
"Additional Servicing Compensation": Incidental fees or charges provided for in
- -----------------------------------
the applicable Note and/or Mortgage that are customarily charged by the Servicer
in the ordinary course of performing its obligations herein including but not
limited to late payment charges, prepayment charges/penalties, assumption
processing charges and assumption fees, modification charges, demand fees,
insufficient funds fees and reconveyance charges.
"Agreement": This Servicing Agreement, including all exhibits hereto, and all
- -----------
amendments hereof and supplements hereto.
"Authorized Officer": Any employee of Servicer who holds the title of Vice
- --------------------
President or above.
"Borrower": The individual or individuals obligated to repay the Mortgage Loan.
- ----------
"Book Value": The value of an REO Property which value represents the unpaid
- ------------
principal balance of the related Mortgage Loan on the date such Mortgage Loan
became an REO Property.
"Business Day": Any day other than (i) a Saturday or Sunday, or (ii) a day in
- --------------
which banking or savings and loan institutions in New York, New York, San Diego,
California or Wilmington, Delaware are authorized or obligated by law or
executive order to be closed.
"Collection Account": Any segregated, FDIC insured Eligible Account which is
- --------------------
created and maintained by Servicer specifically for the collection of principal
and interest, Insurance Proceeds, Liquidation Proceeds and other amounts
received with respect to the Mortgage Loans.
"Eligible Account": An account (I) which is with a bank or insurance company
- ------------------
which has an unsecured, uninsured and unguaranteed obligation (or claims-paying
ability) rated Aa2 or better by Moody's and AA or better by Standard & Poor's,
or is the lead bank of a parent bank holding company with an uninsured,
unsecured and unguaranteed obligation meeting such rating requirements, and (2)
for which all moneys invested thereunder may be withdrawn without any penalty,
premium or charge upon not more than one day's notice (provided such notice may
be amended or canceled at any time prior to the withdrawal date), and (3) the
account is not subordinated to any other obligations of such company or bank,
and (4) the same guaranteed interest rate will be paid on any future deposits
made pursuant to such account.
"Errors and Omissions Policy": An insurance policy insuring against losses
- -----------------------------
caused by errors and omissions of the Servicer and its personnel, including, but
not limited to, losses caused by the failure to pay insurance premiums or taxes
to record or perfect liens, or to properly service Mortgage Loans in accordance
with this Agreement.
2
<PAGE>
"Escrow Account": For each Mortgage Loan, a segregated FDIC insured Eligible
- ----------------
Account maintained by the Servicer specifically for the payment of real estate
tax assessments and insurance premiums against Mortgaged Property.
"Escrow Payments": All funds collected or advanced by the Servicer to cover
- -----------------
expenses of the Borrower required to be paid under the Mortgage Loan Documents,
including Hazard Insurance and Flood insurance, tax assessments and mortgage
insurance premiums paid pursuant to a Mortgage Insurance Policy.
"Event of Default": Any one of the conditions or circumstances enumerated in
- ------------------
Sections 6.4, 6.5 and 6.6.
FHLMC: The Federal Home Loan Mortgage Corporation, or any successor thereto.
- -----
"Fidelity Bond": An insurance policy insuring against losses caused by negligent
- ---------------
or unlawful acts of the Servicer's personnel.
"First Lien": With respect to each Mortgaged Property, the lien of the security
- ------------
instrument securing a mortgage note which creates a first lien on the Mortgaged
Property.
"Flood Insurance Policy": An insurance policy insuring against flood damage to a
- ------------------------
Mortgaged Property, required by loan originators for Mortgaged Premises located
in "flood hazard" areas identified by the Secretary of HUD or the Director of
the Federal Emergency Management Agency.
"Flood Zone Service Contract": A transferable contract maintained for the
- -----------------------------
Mortgaged Property with a nationally recognized flood zone service provider for
the purpose of obtaining the current flood zone status relating to such
Mortgaged Property.
"FNMA": The Federal National Mortgage Association, or any successor thereto.
- ------
"Hazard Insurance Policy": A fire and casualty extended coverage insurance
- -------------------------
policy insuring against loss or damage from fire and other perils covered within
the scope of standard extended hazard coverage, together with all riders and
endorsements thereto.
"Insurance Policy": Any insurance policy for a Mortgage Loan referred to in this
- ------------------
Agreement, including Mortgage Insurance Policy, Hazard Insurance Policy, Flood
Insurance Policy, and Title Insurance Policy, including all riders and
endorsements thereto.
"Liquidation Proceeds": Cash received in connection with the liquidation of a
- ----------------------
defaulted Mortgage Loan, whether through the sale or assignment of the Mortgage
Loan, trustee's sale, foreclosure sale, sale of the Mortgaged Property or
otherwise.
3
<PAGE>
"Mortgage Insurance Policy": Insurance which insures the holder of the Note
- ---------------------------
against covered losses in the event the Borrower defaults under the Note or the
Security Instrument, including all riders and endorsements thereto.
"Mortgage Insurer": A mortgage guaranty insurance company that has issued a
- ------------------
Mortgage Insurance Policy in respect of a Mortgage Loan.
"Mortgage Loan Documents": Any and all documents related to a Mortgage Loan,
- -------------------------
including the Note, Security Instrument and Insurance Policies.
"Mortgage Loan Schedule": The schedule of Mortgage Loans delivered to Servicer
- ------------------------
on each Transfer Date, setting forth the information for each related Mortgage
Loan, identical in form and substance to Exhibit A attached hereto.
"Mortgage Loan": The individual mortgage loan which is the subject of this
- ---------------
Agreement delivered from time to time being identified by a Mortgage Loan
Schedule. To the extent applicable and as the context so permits; any and all
references to "Mortgage Loan" or "Mortgage Loans" herein shall be deemed to
include any Mortgage Loan that has become an REO Property.
"Mortgaged Property": The property securing a Note and subject to the lien of
- --------------------
the related Security Instrument, which property consists of a single parcel of
real property on which is located a one-to four-family detached residential
dwelling, condominium unit or attached townhouse.
----
"Nonrecoverable Advance": Any previously made or proposed servicing advance, in
- ------------------------
the Servicer's good faith determination, that will not or would not be
ultimately recoverable from the related insurance proceeds or Liquidation
Proceeds.
"Note": A manually executed written instrument evidencing the Borrower's promise
- ------
to repay a stated sum of money, plus interest, to the noteholder by a specific
date according to a schedule of principal and interest payments.
"Officer's Certificate": A certificate signed by any Authorized Officer as
- -----------------------
designated by Servicer from time to time.
"Owner": CS First Boston Mortgage Capital Corp., any affiliate, any permitted
- -------
successor in interest, or any permitted assignee.
"Permitted Investments": Any one or more of the investments detailed on Exhibit
- -----------------------
B attached hereto.
4
<PAGE>
"Person": Any individual or group of individuals, corporation, partnership,
- --------
joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof.
"Principal Prepayment": Any payment or other recovery of principal on a Mortgage
- ----------------------
Loan which is received in advance of its scheduled due date, net of any
prepayment penalty or premium thereon which is retained by the Servicer, and is
not accompanied by an amount of interest representing scheduled interest due on
any date or dates in any month or months subsequent to the month of prepayment.
"Prior Servicer/Prior Owner": T.A.R. Preferred Mortgage Corporation.
- ----------------------------
"Remittance Date": The date each month on which Servicer distributes to the
- -----------------
Owner the Owner's portion of the collections on the Mortgage Loans. The
Remittance Date shall be the fifteenth (15th) day of each calendar month, or the
next succeeding Business Day if the fifteenth (15th) day of the month is not a
Business Day.
"Remittance Reports": Those monthly reports specified in Section 4.9.
- --------------------
"REO Property": Mortgaged Property the title to which is acquired on behalf of
- --------------
the Owner through foreclosure or deed-in-lieu of foreclosure.
"Security Instrument": A written instrument creating a valid lien on the related
- ---------------------
Mortgaged Property. A Security Instrument may be in the form of a mortgage,
deed of trust, deed to secure debt or security deed, including any riders and
addenda thereto.
"Servicer": Advanta Mortgage Corp. USA, any affiliate, any permitted successor
- ----------
in interest or any permitted assignee.
"Servicing Advance": All customary, reasonable and necessary "out of pocket"
- -------------------
costs and expenses incurred in the performance by the Servicer of its servicing
obligations and not part of the Servicer's general and administrative expenses,
including but not limited to, the cost of (a) the preservation, restoration and
protection of the Mortgaged Property, (b) any enforcement or judicial
proceedings, including foreclosures, relating to Mortgage Loans or Mortgaged
Properties (c) the management and liquidation of the Mortgaged Property if the
Mortgaged Property is acquired in satisfaction of the Mortgage, and (d) the
maintenance of hazard insurance, payment of property taxes (including tax
penalties) or mortgage insurance premiums.
"Servicing Fee": For each Mortgage Loan, the monthly compensation owed to the
- ---------------
Servicer by the Owner each month, as more particularly set forth in Section 4.10
hereunder.
"Servicing File": With respect to each Mortgage Loan all documents detailed in
- ----------------
Exhibit C, attached hereto and delivered to the Servicer, including photocopies
of the Note and Security
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Instrument and any other documents necessary for the Servicer to service the
Mortgage Loans in accordance with the terms of this Agreement.
"Tax Service Contract": A transferable contract maintained for the Mortgaged
- ----------------------
Property with a tax servicer provider for the purpose of obtaining current
information from local taxing authorities relating to such Mortgaged Property.
"Term": The term of this Agreement shall mean the time period during which the
- ------
Servicer has servicing obligations and responsibilities relative to any Mortgage
Loan. Such time period shall commence with the Transfer Date and shall
terminate pursuant to the events specified in Section 6.16 hereunder.
"Title Insurance Policy": An American Land Title Association (ALTA) or
- ------------------------
California Land Title Association ("CLTA") mortgage loan title policy form 1970,
or other form of lender's title insurance policy, or a limited liability title
policy where permitted by law, or a title "lot book report" insuring the lien
priority of the Security Instrument on the Mortgaged Property.
"Transfer Date": For each Mortgage Loan, the date on which the servicing
- ---------------
obligation for such Mortgage Loan is delegated to Servicer for servicing as
provided hereunder.
6
<PAGE>
ARTICLE II
----------
DELIVERY OF MORTGAGE LOAN FILES SERVICING STANDARDS
---------------------------------------------------
Section 2.1 Transfer of Mortgage Loan Files
- ----------- -------------------------------
On or prior to each Transfer Date, and from time to time thereafter until
the expiration of the Term in a manner the parties mutually agree to, the Owner
or the Prior Servicer/Prior Owner shall deliver the Servicing Files, to the
Servicer at the Owner's or the Prior Servicer's/Prior Owner's expense. Such
delivery shall be effected at the Servicer's facilities currently designated by
Servicer as Advanta Mortgage Corp. USA, 16875 West Bernardo Drive, San Diego,
California, 92127, Attention: Dept. 402. Each Servicing File shall be held in
trust by Servicer exclusively for the benefit of the Owner for the purpose of
servicing the related Mortgage Loan. The Servicer shall maintain custody of all
documents constituting the Servicing Files in accordance with Accepted Servicing
Practices. In the event the Prior Servicer/Prior Owner to pay for the cost of
the delivery of the Servicing Files, Owner agrees to fully reimburse Servicer
for the out of pocket delivery expenses incurred by the Servicer within 10 days
after written notice. Each Servicing File shall be segregated according to a
specifically assigned investor number to Owner and shall be marked appropriately
to reflect clearly the ownership of the related Mortgage Loan by the Owner.
Section 2.2 Agreement to Service Mortgage Loans
- ----------- -----------------------------------
(a) Servicer agrees to service and administer the Mortgage Loans on the
Owner's behalf, in accordance with the terms of this Agreement, the Mortgage
Loans and Accepted Servicing Practices, giving due consideration to customary
and usual standards of practice of prudent institutional residential mortgage
loan servicers of comparable Mortgage Loans and with a view to the maximization
of timely recovery of principal and interest on the Mortgage Loans, but without
regard to: (i) any relationship that Servicer or any of its affiliates may have
with any Borrower or affiliate or manager thereof, (ii) Servicer's obligations
to make advances or to incur servicing expenses with respect to the Mortgage
Loans, or (iii) Servicer's right to receive compensation for its services
hereunder.
(b) Subject to the provisions of Section 2.2(a), above, Servicer shall have
power and authority to do or cause to be done any and all things in connection
with such servicing and administration which Servicer may deem necessary or
desirable. In accordance with this Agreement, the Owner will provide Servicer
upon request with any powers of attorney necessary. to undertake the duties of
Servicer. Servicer agrees to service and administer the Mortgage Loans in
accordance with applicable state and federal law.
(c) Without limiting the generality of the foregoing, the Servicer shall
and is hereby authorized and empowered by the Owner to: (i) execute and deliver,
on behalf of the Owner, any and all instruments of satisfaction or cancellation,
or of partial or full release or discharge,
7
<PAGE>
with respect to the Mortgage Loans and with respect to the related Mortgaged
Property, (ii) waive, modify, or vary any term of any Mortgage Loan or consent
to the postponement of any such term or in any manner grant indulgence to any
Borrower if in the Servicer's reasonable and prudent determination such waiver,
modification, postponement or indulgence is not materially adverse to the Owner,
provided, however, that the Servicer shall not make any future advances with
respect to a Mortgage Loan and (unless the Borrower is in default with respect
to the Mortgage Loan or such default is, in the judgment of the Servicer,
imminent and the Servicer has obtained the prior written consent of the Owner)
the Servicer shall not permit any modification with respect to any Mortgage Loan
that would change the mortgage interest rate, defer or forgive the payment of
principal or interest, reduce or increase the outstanding principal balance
(except for actual payments of principal), or change the final maturity date on
such Mortgage Loan, (iii) institute foreclosure proceedings or obtain a deed-in-
lieu of foreclosure on behalf of the Owner, with the prior consent of Owner and
(iv) take title in the name of the Owner or its designee to any Mortgaged
Property upon such foreclosure or delivery of deed in lieu of foreclosure.
Section 2.3 Sub-Servicers
- ----------- -------------
The Servicer may perform its servicing responsibilities through agents or
independent contractors acting as sub-servicers, but shall not thereby be
released from any of its responsibilities hereunder, and the Servicer shall
diligently pursue all of its rights against such sub-servicer. Notwithstanding
any agreement with a sub-servicer, any of the provisions of this Agreement
relating to agreements or arrangements between the Servicer and a sub-servicer
or reference to actions taken through a sub-servicer or otherwise, the Servicer
shall remain obligated and liable to the Owner for the servicing and
administering of the Mortgage Loans in accordance with the provisions of this
Agreement without diminution of such obligation or liability by virtue of such
Sub-Servicing Agreements or arrangements or by virtue of indemnification from
the sub-servicer for any acts and omissions and to the same extent and under the
same terms and conditions as if the Servicer alone were servicing and
administering the Mortgage Loans and any other transactions or services relating
to the Mortgage Loans involving the sub-servicer shall be deemed to be between
the sub-servicer and the Servicer alone and the Owner shall have no obligations,
duties or liabilities with respect to the sub-servicer including no obligation,
duty or liability of the Owner to pay sub-servicer's fees and expenses. For
purposes of this Agreement, the Servicer shall be deemed to have received
payments on Mortgage Loans when the sub-servicer has received such payments.
The Servicer shall pay all fees and expenses of the sub-servicer from its own
funds, the Servicing Fee or other amounts permitted to be retained by or
reimbursed to the Servicer hereunder.
Notwithstanding the foregoing, Servicer may in its sole judgment delegate
specific servicing obligations to computer bureaus, credit bureaus, real estate
tax service companies, real estate brokers or agents, attorneys, trustees, and
others, provided Servicer remains responsible for all action taken or not taken
by such companies, agents, representatives and others throughout the term of
this Agreement.
8
<PAGE>
ARTICLE III
-----------
REPRESENTATIONS AND WARRANTIES
------------------------------
Section 3.1 Representations and Warranties of the Servicer
- ----------- ----------------------------------------------
Servicer represents and warrants to, and covenants with, the Owner that:
(a) Servicer is, and throughout the term of this Agreement will remain (i)
a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware, (ii) duly qualified and in good standing to
transact any and all of its business, including the duties under this Agreement
and (iii) licensed as necessary to carry on its business as now being conducted
and licensed in each state where a Mortgaged Property is located if the laws of
such state require licensing or qualification in order to conduct business of
the type conducted by the Servicer, and in any event the Servicer is in
compliance with the laws of any such state to the extent necessary to ensure the
servicing of the Mortgage Loans in accordance with the terms of this Agreement
(b) The execution, delivery and performance of this Agreement have been
duly authorized by all necessary corporate action and the execution and delivery
of this Agreement by Servicer in the manner contemplated and the performance of
and compliance with the terms will not violate, contravene or create a default
under any applicable federal, state or local laws, licenses or permits;
(c) The execution and delivery of this Agreement by Servicer and the
performance of and compliance with its obligations and covenants do not require
the consent or approval of any governmental authority or, if such consent or
approval is required, it has been or will be obtained prior to such becoming
required;
(d) Assuming the due authorization and valid execution and delivery of this
Agreement by Owner, this Agreement, when executed and delivered by Servicer,
will constitute a valid, legal and binding obligation of Servicer, enforceable
against Servicer in accordance with its terms, except as the enforcement thereof
may be limited by applicable debtor relief laws and except as certain equitable
remedies may be available regardless of whether enforcement is sought in equity
or law;
(e) There is no litigation pending or, to Servicer's knowledge threatened,
which, if determined adversely to Servicer, would adversely affect the
execution, delivery or enforceability of this Agreement or Servicer's ability to
perform its obligations hereunder;
(f) Servicer is an approved seller/servicer of conventional residential
mortgage loans for FNMA and FHLMC with the facilities, procedures, and
experienced personnel necessary for
9
<PAGE>
the sound servicing of mortgage loans of the same type as the Mortgage Loans.
The Servicer is in good standing to sell mortgage loans to and service mortgage
loans for FNMA and FHLMC and no event has occurred, including but not limited to
a change in insurance coverage, which would make the Servicer unable to comply
with FNMA and FHLMC eligibility requirements or which would require notification
to either FNMA and FHLMC; and
(g) The Servicer does not believe, nor does it have any reason or cause to
believe, that it cannot perform each and every covenant in tiffs Agreement.
Section 3.2 Representations and Warranties of the Owner
- ----------- -------------------------------------------
As of the date of this Agreement and each Transfer Date, Owner represents
and warrants to, and covenants with, the Servicer that:
(a) The Owner owns, without limitation, (i) all right, title and interest
in the Mortgage Loans (including, without limitation, the security interest
created thereby), (ii) all the rights as a lender trader any Insurance Policy
relating to a Mortgaged Property securing a Mortgage Loan for the benefit of the
owner of such Mortgage Loan, and (iii) all proceeds derived from any of the
foregoing;
(b) Owner is, (i) a corporation duly organized, validly existing and in
good standing under the laws of the state of its incorporation and (ii) duly
qualified and in good standing to transact any and all of its business;
(c) The execution, delivery and performance of this Agreement have been
duly authorized by all necessary corporate action and the execution and delivery
of this Agreement by Owner in the manner contemplated and the performance of and
compliance with the terms hereof by it will not violate, contravene or create a
default under any charter document or bylaw of the Owner or any contract,
agreement, or instrument to which the Owner is a party or by which Owner or any
of its property is bound;
(d) The execution and delivery of this Agreement by Owner and the
performance of and compliance with its obligations and covenants do not require
the consent or approval of any governmental authority or, if such consent or
approval is required, it has been or will be obtained prior to such becoming
required;
(e) Assuming the due authorization and valid execution and delivery of this
Agreement by Servicer, this Agreement, when executed and delivered by Owner,
will constitute a valid, legal and binding obligation of Owner, enforceable
against Owner in accordance with its terms, except as the enforcement may be
limited by applicable debtor relief laws and except as certain equitable
remedies may be available regardless of whether enforcement is sought in equity
or law;
10
<PAGE>
(f) There is no litigation pending or, to Owner's knowledge, threatened,
which, if determined adversely by Owner, would adversely affect the execution,
delivery or enforceability of this Agreement or Owner's ability to perform its
obligations;
(g) Owner holds legal right, title and interest to the Mortgage Loans and
no other party has the right to collect principal and interest payments with
respect thereto and the Owner has the full power and authority to assign the
servicing functions to Servicer;
Section 3.3 Representations and Warranties of the Prior Servicer/Prior Owner
- ----------- ----------------------------------------------------------------
As of each Transfer Date, Prior Servicer/Prior Owner represents and
warrants to and covenants with, the Servicer that
(a) Prior Servicer/Prior Owner is, (i) a corporation duly organized,
validly existing and in good standing under the laws of the state of its
incorporation and (ii) duly qualified and in good standing to transact any and
all of its business;
(b) The execution, delivery and performance of this Agreement have been
duly authorized by all necessary corporate action and the execution and delivery
of this Agreement by Prior Servicer/Prior Owner in the manner contemplated and
the performance of and compliance with the terms hereof by it will not violate,
contravene or create a default under any charter document or bylaw of the Prior
Servicer/Prior Owner or any contract, agreement, or instrument to which the
Prior Servicer/Prior Owner is a party or by which Prior Servicer/Prior Owner or
any of its property is bound;
(c) The execution and delivery of this Agreement by Prior Servicer/Prior
Owner and the performance of and compliance with its obligations and covenants
do not require the consent or approval of any governmental authority or, if such
consent or approval is required, it has been or will be obtained prior to such
becoming required;
(d) Assuming the due authorization and valid execution and delivery of this
Agreement by Servicer, this Agreement, when executed and delivered by Prior
Servicer/Prior Owner, will constitute a valid, legal and binding obligation of
Prior Servicer/Prior Owner, enforceable against Prior Servicer/Prior Owner in
accordance with its terms, except as the enforcement may be limited by
applicable debtor relief laws and except as certain equitable remedies may be
available regardless of whether enforcement is sought in equity or law;
(e) There is no litigation pending or, to Prior Servicer/Prior Owner's
knowledge, threatened, which, if determined adversely by Prior Servicer/Prior
Owner, would adversely affect the execution, delivery or enforceability of this
Agreement or Prior Servicer/Prior Owner's ability to perform its obligations;
11
<PAGE>
(f) All information provided to Servicer by Prior Servicer/Prior Owner,
including any copies of Mortgage Loan Documents, information relating to the
origination of such Mortgage Loan, the prior servicing experience and any and
all of the Mortgage Loan balances and identification of any litigation affecting
a contract or the servicing thereof is true, correct and complete in all
material respects;
(g) The information set forth in each Mortgage Loan Schedule is true and
correct in all material respects as of each Transfer Date;
(h) Each Security Instrument is a valid lien on the related Mortgaged
Property;
(i) To the Prior Servicer/Prior Owner's best knowledge, no Mortgage Loan is
subject to any offset, defense or counterclaim;
(j) To the Prior Servicer/Prior Owner's best knowledge, the physical
property subject to each Security Instrument is free of material damage;
(k) Each Mortgage Loan at the time it was made complied in all material
respects with applicable state and federal laws and regulations, including,
without limitation, usury, equal credit opportunity and disclosure laws and
regulations;
(l) The Prior Servicer/Prior Owner has not received a written notice of
default of any senior mortgage loan related to a Mortgage Loan which has been
cured by a party other than such Prior Servicer/Prior Owner;
(m) To the Prior Servicer/Prior Owner's best knowledge, no Mortgage Loan is
subject to (i) any mechanics lien or claim for work, labor or material of which
the Prior Servicer/Prior Owner has received written notice and that is or may be
a lien prior to, or equal or coordinate with, the lien of the related Security
Instrument, (ii) any delinquent tax or assessment lien against the related
Mortgage Property;
(n) A lender's Title Insurance Policy customary in the relevant
jurisdiction, is in full force and effect with respect to each Mortgage
Property;
(o) Each Mortgage Loan is covered by appropriate Hazard Insurance and/or
Flood Insurance, if applicable.
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<PAGE>
ARTICLE IV
----------
ACCOUNTING AND REPORTING
------------------------
Section 4.1 Collection of Mortgage Loan Payments
- ----------- ------------------------------------
(a) Continuously from the date hereof until the principal and interest on
the Mortgage Loans is paid in full, Servicer agrees to proceed diligently to
collect all payments called for under the terms and provisions of the Mortgage
Loans, and shall follow such collection procedures mutually agreed to and as may
be amended from time to time by Owner and Servicer with respect to mortgage
loans to the extent such procedures are consistent with this Agreement and the
terms of any Insurance Policy and in accordance with Accepted Servicing
Practices and applicable law.
(b) The Servicer may in its sole discretion waive (i) assumption fees,
charges for checks returned insufficient funds or other fees which may be
collected in the ordinary course of servicing the Mortgage Loans; provided
however, Servicer shall not be entitled to waive late payment charges or
prepayment penalties/charges without the prior consent of the Owner. (ii) if a
Borrower is in default (as defined in the Mortgage Loan), arrange with the
Borrower a schedule for the payment of delinquent payments due on the related
Mortgage Loan; provided however, that any delinquent payment schedule will not
--------
extend the maturity date of the related Mortgage Loan.
Section 4.2 Interest Calculations
- ----------- ---------------------
Monthly interest calculations for periods of a full month must be based on
a 30-day month and 360-day year, if permitted by the Note or by the law.
Interest calculations for periods of less than a full month (such as for a
Liquidation) must be calculated on the basis of actual days elapsed in a month
and a 365-day year unless otherwise provided by applicable federal or state law.
Section 4.3 Application of Mortgage Loan Payments
- ----------- -------------------------------------
A payment from the Borrower will normally consist of interest, principal
and, if applicable, deposits for insurance and taxes and late charges. Payments
received from Borrowers shall be applied in the following order unless otherwise
required by, the Mortgage Loan Documents, applicable state and federal
requirements or by a Mortgage Insurer:
(a) Deposits for taxes and insurance; and
(b) Required monthly interest; and
(c) Required monthly principal; and
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<PAGE>
(d) All other fees or penalties.
Section 4.4 Establishment of Collection Account; Deposits in Collection Account
- ----------- -------------------------------------------------------------------
(a) The Servicer shall establish and maintain a Collection Account, (the
"Collection Account"), which may be interest bearing, titled "Advanta Mortgage
Corp. USA in trust for the Owner".
(b) The Servicer shall deposit in the Collection Account within two (2)
Business Days of receipt, and retain therein the following payments and
collections received or made with respect to the Mortgage Loans:
(i) all principal collections, including Principal Prepayments;
(ii) all interest collections;
(iii) all Liquidation Proceeds net of expenses;
(iv) all proceeds received by the Servicer under any Insurance Policy,
other than proceeds to be held in the Escrow Account and applied to the
restoration or repair of the Mortgaged Property or released to the Borrower
in accordance with Accepted Servicing Practices; and
(v) all awards or settlements in respect of condemnation proceedings
or eminent domain affecting any Mortgaged Property which are not released
to the Borrower in accordance with Accepted Servicing Practices; and
(vi) any amounts required to be deposited in the Collection Account
pursuant to this Agreement.
(c) The Servicer may invest all or a portion of the funds in the Collection
Account in Permitted Investments in the name of the Servicer in trust for the
Owner. The Servicer shall receive as Additional Servicing Compensation all
income and gain realized from any such Permitted Investment. If any principal
losses are incurred in respect of any Permitted Investments, Servicer shall
reimburse and restore to the Collection Account the amount of any such principal
losses out of Servicer's own funds immediately as realized. Notwithstanding the
foregoing, Servicer's right to invest funds in the Collection Account shall in
no way limit the rights of Servicer to be compensated for its services as
provided in this Agreement.
(d) The requirements in this Section 4.4 for deposit in the Collection
Account shall be exclusive, it being understood and agreed that, without
limiting the generality of the foregoing, payments in the nature of assumption
processing charges, modification charges,
14
<PAGE>
demand fees, insufficient funds fees and reconveyance fees need not be deposited
by the Servicer in the Collection Account.
Section 4.5 Withdrawals from the Collection Account
- ----------- ---------------------------------------
The Servicer shall, from time to time, withdraw funds from the Collection
Account for the following purposes:
(a) to reimburse itself for unreimbursed Servicing Advances, and for
accrued and unpaid Servicing Fees as provided within Section 4.10(a) hereunder,
the Servicer's right to reimburse itself pursuant to this subclause (a) with
respect to any Mortgage Loan shall be limited to related Liquidation Proceeds,
condemnation proceeds, REO Disposition Proceeds, amounts representing proceeds
of any Insurance Policy related to such Mortgage Loan and such other amounts as
may be collected by the Servicer from the Borrower or otherwise relating to the
Mortgage Loan, it being understood that, in the case of any such reimbursement,
the Servicer's right thereto shall be prior to the rights of Owner;
(b) to reimburse itself for expenses incurred by and reimbursable to it
pursuant to Sections 4.10(b), 6.7, 6.16(b) and 6.17;
(c) to pay to itself any interest earned on funds deposited in the
Collection Account;
(d) to withdraw any amounts inadvertently deposited in the Collection
Account or not required to be deposited therein;
(e) to make payments to the Owner in the amounts and in the manner provided
herein; and
(f) to clear and terminate the Collection Account upon the termination of
this Agreement.
If after receipt and application of Liquidation Proceeds with respect to
any Mortgage Loan, the Servicer has sustained an unrecovered loss in connection
with a Servicing Advance, the amount of unrecovered loss shall be reimbursed to
the Servicer, first, from amounts in the Collection Account, or if such funds
are insufficient, by payment to the Servicer by the Owner within ten (10)
Business Days of the receipt of notice by such Owner of such amount.
The Servicer shall distribute that portion of collections on the Mortgage
Loans due to the Owner in the amounts and in the manner provided herein on each
Remittance Date.
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<PAGE>
Section 4.6 Establishment of Escrow Account; Deposits in Escrow Account
- ----------- -----------------------------------------------------------
(a) The Servicer shall establish and maintain an Escrow Account with
respect to Escrow Payments actually held by the Servicer, in the form of a time
deposit or demand account, which may be interest bearing, titled, "Advanta
Mortgage Corp. USA in trust for Borrower's Escrow Payments". The Servicer shall
have the right to draw funds from the Escrow Account as provided herein.
(b) The Servicer shall deposit in the Escrow Account within two (2)
Business Days of receipt or earlier if so required by law and retain therein:
(i) all Escrow Payments collected on account of the Mortgage Loans, for the
purpose of effecting timely payment of any such items as required under the
terms of this Agreement, and (ii) all amounts representing proceeds of any
Insurance Policy which are to be applied to the restoration or repair of any
Mortgaged Property. To the extent required by law, the Servicer shall pay
interest on escrowed funds to the Borrower, without reimbursement therefor,
notwithstanding that the Escrow Account may not bear interest.
Section 4.7 Withdrawals From Escrow Account
- ----------- -------------------------------
Withdrawals from the Escrow Account shall be made by the Servicer, only
(a) to effect timely payment of taxes, mortgage insurance premiums, flood,
fire and hazard insurance premiums or other items constituting Escrow Payments
for the related Mortgage Loan;
(b) to reimburse the Servicer for any Servicing Advance made by the
Servicer to effect the payment of taxes or insurance required under the terms of
the related Mortgage Loan, but only from amounts received on the related
Mortgage Loan which represent late payments or collections of Escrow Payments
thereunder;
(c) to refund to any Borrower any funds found to be in excess of the
amounts required under the terms of the related Mortgage Loan or applicable law;
(d) for application to restoration or repair of the Mortgaged Property;
(e) to pay to the Borrower, to the extent required by law, any interest
specifically earned and paid on the funds deposited in the Escrow Account;
(f) to pay to itself any interest earned on funds deposited in the Escrow
Account;
(g) to remove any deposits made in error; or
(h) to clear and terminate the Escrow Account upon termination of this
Agreement.
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<PAGE>
Section 4.8 Servicing Advances
- ----------- ------------------
As required, Servicer agrees to make Servicing Advances for the
preservation of any Mortgaged Property, including the payment of accrued and
unpaid taxes, force placed hazard insurance, and repayment of senior liens. It
is understood that Servicer's obligation to make such Servicing Advances shall
continue until (i) the payment in full of the Mortgage Loan or (ii) the date on
which the Mortgaged Property is liquidated; provided however, Servicer shall
have no obligation to make Servicing Advances if, in the sole determination of
Servicer, such Servicing Advance would constitute a Nonrecoverable Advance as
evidenced by an Officer's Certificate which will be delivered to the Owner.
Section 4.9 Monthly Remittance Reports
- ----------- --------------------------
(a) The Servicer shall service the Mortgage Loans on an actual/actual
remittance basis with the accounting cutoff with respect to each Remittance Date
of the last day of the month immediately preceding such Remittance Date.
(b) Not later than the fifteenth (15th) day of each calendar month, or the
succeeding Business Day should the fifteenth not be a Business Day, the Servicer
shall prepare and deliver the following reports with respect to activity for the
most recently ended prior calendar month:
(i) a trial balance report inclusive of all Mortgage Loans in both
electronic and hard copy formats;
(ii) a monthly remittance report in both electronic and hard copy
formats;
(iii) a hard copy report setting forth any Mortgage Loans added or
deleted;
(iv) a hard copy report setting forth curtailment or prepayments; and
(v) hard copy reports setting forth delinquency detail (including
bankruptcy, foreclosure and REO status).
Section 4.10 Servicing Compensation
- ------------ ----------------------
(a) As compensation for its servicing activities pursuant to this
Agreement, the Servicer shall be entitled to retain as to each Mortgage Loan, a
Servicing Fee of 0.375% (37.5 basis points) per annum which shall be retained by
Servicer from the interest portion of the Mortgage Loan payments as received
from a Borrower and from Liquidation Proceeds, as applicable.
(b) Servicer shall be entitled to retain the Additional Servicing
Compensation.
17
<PAGE>
Section 4.11 Payment of Taxes, Insurance and Other Charges
- ------------ ---------------------------------------------
With respect to each Mortgage Loan, the Servicer shall maintain accurate
records reflecting the status of ground rents, taxes, assessments, water rates,
sewer rents, and other charges which are or may become a lien upon the Mortgaged
Property and the status of Mortgage Insurance policy premiums and fire and
hazard insurance coverage and shall obtain, from time to time, all bills for the
payment of such charges (including renewal premiums) and shall effect payment
thereof prior to the applicable penalty or termination date, employing for such
purpose deposits of the Borrower in the Escrow Account which shall have been
estimated and accumulated by the Servicer in amounts sufficient for such-
purposes, as allowed tinder the terms of the Mortgage.
ARTICLE V
---------
ADMINISTRATION AND SERVICING OF MORTGAGE LOANS
----------------------------------------------
Section 5.1 Enforcement of Due-On-Sale Clause; Assumption
- ----------- ---------------------------------------------
The Servicer is required to enforce any due-on-sale clause in the Note or
Security Instrument to the extent permitted by applicable law upon the transfer
of title to the Mortgaged Property unless (i) the Mortgage Loan Documents,
including riders or addenda permit such a transfer or (ii) enforcement of the
due-on-sale clause will jeopardize the Mortgage Insurance coverage, if any, on
such Mortgage Loan. In all circumstances of unapproved transfer initiated by
the Borrower, the Servicer is required to promptly notify the Mortgage Insurer,
if any, of such transfer, and obtain written approval from the Mortgage Insurer
(if required under the applicable Mortgage Insurance Policy) before initiating
enforcement proceedings.
Notwithstanding the preceding paragraph, Owner authorizes Servicer, to
waive in the sole discretion of Servicer, the enforcement of a due-on-sale
clause on any Mortgage Loan and permit the assumption of such Mortgage Loan,
subject to the following conditions:
(a) No material term of the Note, including, but not limited to, the rate
of interest on the Note and the remaining term to maturity, may be changed in
connection with such assumption, provided however, such limitation shall not
apply to interest rate, payment or amortization changes otherwise provided for
under the terms of the Note, such as in the case of an adjustable rate mortgage;
(b) The Servicer has performed a credit review of the new borrower and
determined that the new borrower is a prudent credit risk in the sole opinion of
the Servicer. The credit review shall include prior mortgage payment history
and delinquency review. Owner hereby authorizes Servicer to apply more liberal
credit standards and underwriting in connection with a request for an assumption
of a Mortgage Loan than Servicer would apply for comparable new loans which
Servicer is then originating for its own account, if Servicer in its sole
discretion,
18
<PAGE>
reasonably believes there is a risk of foreclosure on the Mortgage Loan in the
event the assumption is denied;
(c) The Mortgage Insurer has approved in writing the assumption of the
Mortgage Loan by the new borrower and such Mortgage Loan will continue to be
insured by such Mortgage Insurer;
(d) The new borrower executes documents assuming all the obligations of the
Borrower under the Mortgage Loan Documents;
(e) The Mortgage Loan will continue to be secured, and insured with a Title
Insurance Policy, if any, by a valid security interest upon the Mortgaged
Property of the same lien priority as existed immediately prior to such
assumption; provided however, if Servicer has not been delivered a Title
Insurance Policy on the Transfer Date for any such Mortgage Loan, Servicer shall
have no obligation to inquire into or obtain any title insurance in connection
with any assumption of such a Mortgage Loan; and
(f) The Servicer has determined that the estimated net realizable value of
the Mortgaged Property, in the sole judgment of the Servicer, is less than the
then unpaid principal balance of the related Note, plus accrued interest to the
estimated date of the closing of the sale of Mortgaged Property to the new
borrower.
(g) The Servicer shall provide the Owner the original assumption agreement
following execution thereof.
Subject to the terms of the Note and Security Instrument, and applicable
law or regulation, the Servicer may charge a reasonable and customary assumption
fee, and the Servicer may retain such fee as Additional Servicing Compensation.
Section 5.2 Maintenance of Insurance
- ----------- ------------------------
(a) The Servicer shall cause to be maintained with respect to each Mortgage
Loan a Hazard Insurance Policy with a generally acceptable carrier rated A:VI or
better in the current Best's Key Rating Guide ("Best's") that provides for fire
and extended coverage, and for a recovery of any insurance proceeds relating to
such Mortgage Loan by the Servicer on behalf of the Owner in an amount which is
at least equal to the lesser of (i) the maximum insurable value of the
improvements securing such Mortgage Loan and (ii) the sum of the outstanding
principal balance of the Mortgage Loan and the outstanding principal balance of
the First Lien;
(b) If the Mortgage Loan relates to a Mortgaged Property identified at
origination in the Federal Register by the Federal Emergency Management Agency
as having a special flood hazard, the Servicer will cause to be maintained with
respect thereto a Flood Insurance Policy with a generally acceptable carrier
rated A:VI or better in the current Best's Key Rating Guide
19
<PAGE>
("Best's") which provides for a recovery of any insurance proceeds relating to
such Mortgage Loan by the Servicer on behalf of the Owner and in an amount
representing coverage equal to the lesser of (i) the minimum amount required,
under the terms of coverage, to compensate for any damage or loss on a
replacement cost basis (or the unpaid balance of the mortgage if replacement
cost coverage is not available for the type of building insured) and (ii) the
maximum amount of insurance which is available under the Flood Disaster
Protection Act of 1973, as amended;
(c) With respect to each Mortgage Loan that provides for the collection of
escrow funds for the payment of fire and hazard insurance or flood insurance,
the Servicer shall effect the payment thereof prior to the applicable policy
termination date employing for such purpose deposits in the Escrow Account which
shall have been estimated and accumulated by the Servicer in the amounts
sufficient for such purposes. To the extent a Mortgage Loan does not provide
for escrow payments and the Borrower fails to maintain any required insurance
coverage, the Servicer shall by a Servicing Advance make the payment required to
effect the applicable in-force policy for the related Mortgaged Property;
(d) Notwithstanding the preceding paragraphs, the Servicer at its option
may obtain and maintain, with respect to all or any portion of the Mortgage
Loans a blanket insurance policy with extended coverage insuring against fire,
hazard and flood, as applicable. The Servicer shall be deemed conclusively to
have satisfied its obligations with respect to Hazard Insurance and Flood
Insurance coverage under this Section if such blanket policy names the Servicer
as "Loss Payee" and provides coverage in an amount equal to the aggregate unpaid
principal balance of the Mortgage Loans without coinsurance.
Section 5.3 Cancellation of Mortgage Insurance
- ----------- ----------------------------------
If a Borrower requests cancellation of the Mortgage Insurance Policy, the
Servicer shall ensure that the FNMA guidelines governing cancellation are
followed in connection with any cancellation.
Section 5.4 Reserved For Future Use
- ----------- -----------------------
Section 5.5 Liquidation of Defaulted Mortgage Loans
- ----------- ---------------------------------------
(a) The Servicer, on behalf of the Owner or its designee, shall foreclose
upon or otherwise take title, in the name of Owner, to Mortgaged Property (such
as by a deed in lieu of foreclosure) for any Mortgage Loan which is in default
and as to which no satisfactory arrangements, in the sole reasonable opinion of
Servicer, can be made for collection of delinquent payments. In connection with
such foreclosure or other transfer of title, the Servicer shall exercise the
rights and powers vested in it hereunder, and use the same degree of care and
skill in such exercise or use, as prudent servicers would exercise or use under
similar circumstances in the conduct of their own affairs, including, but not
limited to, making Servicing
20
<PAGE>
Advances for the payment of taxes, amounts due with respect" to senior liens,
and insurance premiums.
Prior to commencing foreclosure proceedings, the Servicer shall notify the
Owner and the mortgagee under the First Lien in writing of the Servicer's
intention to do so, and the Servicer shall not commence foreclosure proceedings
if the Owner objects to such action within three (3) Business Days of receiving
such notice.
(b) In determining whether or not to foreclose upon or otherwise comparably
transfer title to such Mortgaged Property, the Servicer shall take into account
the existence of any condition upon or impacting the Mortgaged Property in the
nature of hazardous substances, hazardous wastes, infectious waste, toxic
substance, solid wastes and so forth, as such terms now or in the future are
defined or listed in, or otherwise classified pursuant to, or regulated by, any
applicable environmental laws, including but not limited to all present and
future federal, state or local laws, ordinances, rules, regulations, decisions
and other requirements of governmental authorities relating to the environment
or to any hazardous substance.
Section 5.6 Deed-in-Lieu of Foreclosure
- ----------- ---------------------------
If the Owner and, if applicable, the Mortgage Insurer have approved the
liquidation of a Mortgage Loan by accepting a deed-in-lieu of foreclosure, the
Servicer may accept such deed provided that:
(a) Marketable title, as evidenced by a Title Insurance Policy, can be
conveyed to and acquired by the Owner or its designee;
(b) The transaction complies with all requirements of each Mortgage
Insurer, if any, and does not and will not violate or contravene any restriction
or prohibition of any Mortgage Insurance Policy, if any, or otherwise result in
any loss of or reduction in the coverage of benefits under such policies;
(c) No cash consideration is paid to the Borrower;
(d) The Mortgaged Property is vacant at the time of the Borrower's
conveyance thereof unless occupancy has been approved by each Mortgage Insurer,
if any; and
(e) The Servicer has obtained from the Borrower a written acknowledgment
that the deed is being accepted as an accommodation to the Borrower and on the
condition that the Mortgaged Property will be transferred to the Owner that owns
such Mortgage Loan free and clear of all claims, liens, encumbrances,
attachments, reservations or restrictions except for those to which the
Mortgaged Property were subject at the time the Mortgaged Property became
subject to the lien of the Security Instrument.
21
<PAGE>
Upon acquisition of any such Mortgaged Property, the Servicer shall
promptly advise the Owner and each Mortgage Insurer by letter, indicating the
details of the transaction and reasons for the conveyance and providing such
other information as is required by each Mortgage Insurer. Title shall be
conveyed directly from the Borrower to the Owner, or to such other Person
designated by the Owner.
Section 5.7 Real Estate Owned
- ----------- -----------------
Title, Management and Disposition of REO Property. In the event that
-------------------------------------------------
title to the Mortgaged Property is acquired in foreclosure or by deed in lieu of
foreclosure, the deed or certificate of sale shall be taken in the name of the
Owner or its designee. The Owner agrees to cooperate with Servicer and take
such actions as shall be necessary for the Servicer to take title to the
Mortgaged Property in the name of the Owner or its designee.
Notwithstanding the generality of the foregoing provisions, the Servicer
shall manage, conserve, protect and operate each REO Property for the Owner
solely for the purpose of its prompt disposition and sale. Pursuant to its
efforts to sell such REO Property, the Servicer shall either itself or through
an agent selected by the Servicer protect and conserve such REO Property in the
same manner and to such extent as is customary in the locality where such REO
Property is located and may, but shall not be obligated to, incident to its
conservation and protection of the interests of the Owner, rent the same, or any
part thereof, as the Servicer deems to be in the best interests of the Owner for
the period prior to the sale of such REO Property. The Servicer shall attempt
to sell the same on such terms and conditions as the Servicer deems to be in the
best interest of the Owner, provided that the Servicer shall not sell an REO
Property for less than 90% of the Book Value of such REO Property without the
consent of the Owner.
The Servicer shall cause to be deposited within two (2) Business Days of
receipt in the Collection Account all revenues received with respect to the
conservation and disposition of each REO Property and shall be permitted to
retain from such revenues funds necessary for the proper operation, management
and maintenance of the REO Property, including reimbursement for its Servicing
Advances and fees of any managing agent acting on behalf of the Servicer.
Section 5.8 Possession of Mortgage Files by Servicer
- ----------- ----------------------------------------
From time to time in connection with the servicing of the Mortgage Loans
hereunder, the Servicer may take possession of all or a portion of the documents
relating to the Mortgage Loans as may be held by the Owner or the Custodian.
Such documents shall be held in trust by the Servicer for the benefit of the
Owner as the owner thereof and the Servicer's possession of such document or
documents is at the will of the Owner for the sole purpose of servicing the
related Mortgage Loan, and such retention and possession by the Servicer is in a
custodial capacity only.
22
<PAGE>
ARTICLE VI
----------
MISCELLANEOUS PROVISIONS
------------------------
Section 6.1 Owner to Cooperate
- ----------- ------------------
From time to time and as appropriate in the servicing of any Mortgage Loan,
including without limitation, the payment in full of any Mortgage Loan,
notification that payment in full will be escrowed, foreclosure or other
comparable conversion of a Mortgage or collection under any applicable Insurance
Policy, the Owner, upon request of the Servicer, shall release or cause the
release and delivery of the related Mortgage Loan Documents to the Servicer.
Section 6.2 Assignment of Agreement
- ----------- -----------------------
Servicer agrees not to sell, transfer, pledge or otherwise dispose of its
right to receive all or any portion of the Servicing Fees, and any such
attempted sale, transfer, pledge or disposition shall be void, unless such
transfer is made to a successor servicer with the prior written consent of the
Owner.
Any Person into which the Servicer may be merged or consolidated, or any
corporation resulting from any merger, conversion or consolidation to which the
Servicer shall be a party, or any Person succeeding to the business of the
Servicer, shall be the successor of the Servicer hereunder, without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, anything herein to the contrary notwithstanding, provided,
however, that the successor or surviving Person shall be an institution (i)
whose deposits are insured by the FDIC or a company whose business is the
servicing of mortgage loans, unless otherwise consented to by the Owner, which
consent shall not be unreasonably withheld, or (ii) which is qualified to
service mortgage loans on behalf of FNMA or FHLMC.
Without in any way limiting the generality of this Section 6.2, in the
event that the Servicer shall assign this Agreement without the prior written
consent of the Owner, other than as permitted within Section 2.3 herein, then
the Owner shall have the right to "terminate this Agreement upon written notice
to the Servicer, without any payment of any penalty or damages and without any
liability whatsoever to the Servicer or any third party.
Section 6.3 Access to Certain Documentation Regarding the Loans
- ----------- ---------------------------------------------------
Upon reasonable written advance notice, Servicer shall provide reasonable
access during normal business hours at its offices to the Owner, or any agents
or representatives thereof, to any reports and to information and documentation
regarding the Mortgage Loans.
23
<PAGE>
Section 6.4 Default By Servicer
- ----------- -------------------
Owner may terminate this Agreement upon the happening of any one or more of
the following events:
(a) Falsity in any material respect of any representation or warranty of
Servicer contained in this Agreement and failure of Servicer to cure the
condition or event causing any such representation or warranty to be false
within sixty (60) days after the Servicer's receipt of written notice from Owner
specifying such falsity and requesting that it be cured or corrected;
(b) Failure of Servicer to duly observe or perform in any material respect
any other covenant, condition, or agreement in this Agreement for a period of
forty-five (45) days after receipt of written notice by Servicer from Owner,
specifying such failure and requesting that it be remedied; provided, however,
if the failure stated in the notice cannot be corrected within the applicable
period, Owner shall consent to a reasonable extension of time if corrective
action is instituted by Servicer within the applicable period and is diligently
pursued until corrected; provided however, that Owner's consent shall not be
unreasonably withheld.
(c) Decree or order of a court, agency or supervisory authority having
jurisdiction in the premises appointing a trustee, conservator, receiver or in
any insolvency, readjustment of debt, marshaling of assets and liabilities or
similar voluntary or involuntary proceeding affecting Servicer or any of its
properties utilized in connection with the performance of servicing, or for
resolving the liquidation of the affairs of Servicer, if such decree or order
shall have remained in force undischarged or unstayed for a period of ninety
(90) days;
(d) Commencement by Servicer as debtor of any case or proceeding under any
bankruptcy, insolvency, reorganization, liquidation, dissolution or similar law;
(e) Consent by Servicer to the appointment of a trustee, conservator,
receiver or liquidator in any insolvency, readjustment of"debt, marshaling of
assets and liabilities, or similar proceeding affecting Servicer or
substantially all of its properties; or
(f) Admission in writing by Servicer of its inability to pay debts
generally as they mature, or the making of an assignment for the benefit of
creditors.
(g) any failure by the Servicer to remit to the Owner any payment required
to be made under the terms of this Agreement which continues unremedied for a
period of three Business Days after the date upon which written notice of such
failure, requiring the same to be remedied, shall have been given to the
Servicer by the Owner; or
(h) failure by the Servicer to maintain its license to do business or
service residential mortgage loans in any jurisdiction where the Mortgage
Properties are located; or
24
<PAGE>
(i) the Servicer attempts to assign its right to servicing compensation
hereunder or the Servicer attempts, without the consent of the Owner, to sell or
otherwise dispose of all or substantially all of its property or assets or to
assign this Agreement or the servicing responsibilities hereunder or to delegate
its duties hereunder or any portion thereof(to other than a subservicer) in
violation of Section 6.2, except as further provided within Section 2.3 of this
Agreement.
(j) failure by Servicer to maintain the net worth requirements as required
by FNMA for its designated servicers.
If any of the events specified in (c) through (j) above shall occur,
Servicer shall give written notice of such occurrence to Owner within ten (10)
days of the happening of such event. Any such termination shall be effective as
of the date stated in a written notice delivered to Servicer.
Section 6.5 Default by Owner
- ----------- ----------------
Servicer may terminate this Agreement upon the happening of any one or more
of the following events:
(a) Falsity in any material respect of any representation or warranty of
Owner contained in this Agreement and failure of Owner to cure the condition or
event causing such representation or warranty to be false within sixty (60) days
after Owner's receipt of written notice from Servicer specifying such falsity
and requesting that it be cured or corrected;
(b) Such other breach of this Agreement by Owner which materially and
adversely affects Servicer, which breach shall continue for a period of forty-
five (45) days after receipt of written notice by Owner from Servicer,
specifying such breach and requesting that it be remedied; provided however, if
the breach stated in the notice cannot be remedied within the applicable period.
Servicer shall consent to a reasonable extension of time if corrective action is
instituted by Owner within the applicable period and is diligently pursued until
corrected;
(c) Decree or order of a court, agency or supervisory authority having
jurisdiction in the premises appointing a trustee, conservator, receiver or
liquidator in any insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceeding affecting Owner or any of its properties
utilized in connection with the performance of Servicer's duties hereunder, or
the winding tip or liquidation of the affairs of Owner, if such decree or order
shall have remained in force undischarged or unstayed for a period of ninety
(90) days;
(d) Commencement by Owner as debtor of any case of proceeding under any
bankruptcy, insolvency, reorganization, liquidation, dissolution or similar law;
25
<PAGE>
(e) Consent by Owner to the appointment of a trustee, conservator, receiver
or liquidator in any insolvency, readjustment of debt, marshaling of assets and
liabilities, or similar proceeding affecting Owner or substantially all of its
properties; or
(f) Admission in writing by Owner of its inability to pay debts generally
as they mature, or the making of an assignment for the benefit of creditors.
If any of the events specified in (c) through (f) above shall occur, Owner
shall give written notice of such occurrence to Servicer within ten (10) days of
the happening of such event. Any such termination shall be effective as of the
date stated in a written notice delivered to Owner.
Section 6.6 Default by Prior Servicer/Prior Owner
- ----------- -------------------------------------
Servicer may terminate this Agreement upon the happening of any one or more
of the following events; provided however, that Owner shall be provided a 10 day
written option to: (i) cure within the applicable period provided in this
Section 6.6, or (ii) to provide indemnification to Servicer on terms identical
to Section 6.7, prior to Servicer's decision to terminate this Agreement:
(a) Falsity in any material respect of any representation or warranty of
Prior Servicer/Prior Owner contained in this Agreement and failure of Prior
Servicer/Prior Owner to cure the condition or event causing such representation
or warranty to be false within sixty (60) days after Prior Servicer/Prior
Owner's receipt of written notice from Servicer specifying such falsity and
requesting that it be cured or corrected;
(b) Such other breach of this Agreement by Prior Servicer/Prior Owner which
materially and adversely affects Servicer, which breach shall continue for a
period of forty-five (45) days after receipt of written notice by Prior
Servicer/Prior Owner from Servicer, specifying such breach and requesting that
it be remedied; provided however, if the breach stated in the notice cannot be
remedied within the applicable period, Servicer shall consent to a reasonable
extension of time if corrective action is instituted by Prior Servicer/prior
Owner within the applicable period and is diligently pursued until corrected;
(c) Decree or order of a court, agency or supervisory authority having
jurisdiction in the premises appointing a trustee, conservator, receiver or
liquidator in any insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceeding affecting Prior Servicer/Prior Owner or any of
its properties utilized in connection with the performance of Servicer's duties
hereunder, or the winding up or liquidation of the affairs of Prior
Servicer/Prior Owner, if such decree or order shall have remained in force
undischarged or unstayed for a period of ninety (90) days;
26
<PAGE>
(d) Commencement by Prior Servicer/Prior Owner as debtor of any case of
proceeding under any bankruptcy, insolvency, reorganization, liquidation,
dissolution or similar law;
(e) Consent by Prior Servicer/Prior Owner to the appointment of a trustee,
conservator, receiver or liquidator in any insolvency, readjustment of debt,
marshaling of assets and liabilities, or similar proceeding affecting Prior
Servicer/Prior Owner or substantially all of its properties; or
(f) Admission in writing by Prior Servicer/Prior Owner of its inability to
pay debts generally as they mature, or the making of an assignment for the
benefit of creditors.
If any of the events specified in (c) through (f) above shall occur, Prior
Servicer/prior Owner shall give written notice of such occurrence to Servicer
within ten (10) days of the happening of such event. Any such termination shall
be effective as of the date stated in a written notice delivered to Prior
Servicer/Prior Owner.
Section 6.7 Indemnification By Owner
- ----------- ------------------------
Owner shall indemnify and hold Servicer harmless from and shall reimburse
Servicer for any losses, damages, deficiencies, claims, penalties, forfeitures,
causes of action or expenses of any nature (including reasonable attorneys'
fees) incurred by Servicer which arise out of or result from:
(a) The material inaccuracy of any representation of Owner contained in
this Agreement or material breach of any warranty, covenant or agreement made or
to be performed by Owner pursuant to this Agreement;
(b) Any litigation or claim with respect to the Mortgage Loans not arising
out of, or resulting from, Servicer's failure to observe the terms and covenants
of the Mortgage Loans or this Agreement.
The Servicer shall promptly notify the Owner if a claim is made by a third
party with respect to this Agreement or the Mortgage Loans, and the Servicer at
its option may assume the defense of any such claim. The Owner shall, within
ten (10) Business Days of receiving a statement or amounts advanced by the
Servicer in connection with the defense of any such claim, reimburse the
Servicer for all amounts advanced by it pursuant to this Section 6.7. If Owner
fails to pay Servicer the advanced amounts within 10 days of receipt, Servicer
may withdraw such amounts from the Collection Account.
27
<PAGE>
Section 6.8 Fidelity Bond and Errors Omissions
- ----------- ----------------------------------
Servicer agrees to obtain and maintain at its expense and shall keep in
full force and effect throughout the term of this Agreement, a blanket fidelity
bond and an errors and omissions insurance policy covering its officers and
employees and other persons acting on its behalf in connection with the
servicing activities hereunder. The amount of coverage shall be at least equal
to the coverage that prudent mortgage loan servicers having servicing portfolios
of a similar size. In the event that any such bond or policy ceases to be in
effect, Servicer agrees to obtain a comparable replacement bond or policy with
equivalent coverage. No provision of this Section shall operate to diminish or
restrict or otherwise impair the Servicer's responsibilities and obligations set
forth in this Agreement.
Section 6.9 Indemnification by Servicer
- ----------- ---------------------------
Servicer shall indemnify and hold Owner harmless from and shall reimburse
Owner for any losses, damages, deficiencies, claims, causes of action or
expenses of any nature (including reasonable attorneys' fees) incurred by Owner
which arise out of or result from:
(a) The material inaccuracy of any representation of Servicer contained in
this Agreement or material breach of any warranty, covenant or agreement made or
to be performed by Servicer pursuant to this Agreement;
(b) Any litigation or claim arising out of, or resulting from, Servicer's
failure to observe the terms and covenants of this Agreement;
(c) The failure of the Servicer to service such Mortgage Loan in accordance
with applicable law or the Mortgage Loan Documents.
The Owner shall promptly notify the Servicer if a claim is made by a third
party with respect to this Agreement or the Mortgage Loans, and the Owner at its
option may assume the defense of any such claim. The Servicer shall, within ten
(10) Business Days of receiving a statement of amounts advanced by the Owner in
connection with the defense of any such claim, reimburse the Owner for all
amounts advanced by it pursuant to this Section 6.9.
Section 6.10 Indemnification By Prior Servicer/Prior Owner
- ------------ ---------------------------------------------
Prior Servicer/Prior Owner shall indemnify and hold Servicer harmless from
and shall reimburse Servicer for any losses, damages, deficiencies, claims,
penalties, forfeitures, causes of action or expenses of any nature (including
reasonable attorneys' fees) incurred by Servicer which arise out of or result
from:
28
<PAGE>
(a) The material inaccuracy of any representation of Prior Servicer/Prior
Owner contained in this Agreement or material breach of any warranty, covenant
or agreement made or to be performed by Prior Servicer/prior Owner pursuant to
this Agreement;
(b) the failure of Prior Servicer/Prior Owner to originate any related
Mortgage Loan herein in accordance with applicable law;
(c) the failure of any Prior Servicer/Prior Owner to service the Mortgage
Loan in accordance with any applicable law;
(d) any matters that occurred prior to the Transfer Date for the Mortgage
Loan involved or any incomplete or incorrect Mortgage Loan data, records or
information provided in connection with the origination or prior servicing of
any Mortgage Loan;
(e) Prior Servicer/Prior Owner's failure to fulfill the servicing
responsibilities not assumed by Servicer or otherwise resulting from Prior
Servicer/Prior Owner preventing, hampering or impeding Servicer's performance of
its duties and responsibilities under this Agreement; or
(f) Any litigation or claim with respect to the Mortgage Loans not arising
out of, or resulting from, Servicer's failure to observe the terms and covenants
of the Mortgage Loans.
The Servicer shall promptly notify the Prior Servicer/Prior Owner if a
claim is made by a third party with respect to this Agreement or the Mortgage
Loans, and the Servicer at its option may assume the defense of any such claim.
The Prior Servicer/Prior Owner shall, within ten (10) Business Days of receiving
a statement of amounts advanced by the Servicer in connection with the defense
of any such claim, reimburse the Servicer for all amounts advanced by it
pursuant to this Section 6.10.
Section 6.11 Amendment
- ------------ ---------
This Agreement may be amended from time to time by the Owner and the
Servicer by written agreement signed by the Owner and the Servicer.
Section 6.12 Governing Law
- ------------ -------------
This Agreement shall be construed in accordance with the laws of the State
of California, without regard to the conflict of laws or rules thereof, and the
obligations, rights and remedies of the parties hereunder shall be determined in
accordance with such laws.
29
<PAGE>
Section 6.13 Notices
- ------------ -------
(a) All demands, notices and communications hereunder shall be in writing
and shall be deemed to have been duly given if personally delivered at or mailed
by registered mail, postage prepaid, to (i) in case of the Servicer, Advanta
Mortgage Corp. USA, 16875 West Bernardo Drive, San Diego, California 92127,
Attention: SVP Loan Servicing, (ii) in the case of the Owner, CS First Boston
Mortgage Capital Corp., 55 East 52nd Street, New York, New York and (iii) in the
case of the Prior Servicer/Prior Owner, President, T.A.R. Preferred Mortgage
Corporation, 19782 MacArthur Boulevard, Suite 250, Irvine, California 92612, or
such other addressee as the parties may hereafter furnish.
(b) Any party may alter the address to which communications or copies are
to be sent by giving notice of such change of address in conformity with the
provisions of this Paragraph for giving of notice.
Section 6.14 Severability of Provisions
- ------------ --------------------------
If any one or more of the covenants, agreements, provision or terms of this
Agreement shall be held invalid for any reason whatsoever, then such covenants,
agreements, provisions or terms shall be deemed severable from the remaining
covenants, agreements, provisions and terms of this Agreement and shall in no
way affect the validity or enforceability of the provisions of this Agreement.
Section 6.15 Document Deficiencies
- ------------ ---------------------
The Servicer shall have no obligations to (i) address or any deficiencies
in Mortgage Loan documents transferred to it; (ii) seek any document missing
from any assignments relating to the transfer of any Mortgage Loan to or from
the Owner. The Servicer's responsibility is solely limited to noticing the
Owner as to any missing or document deficiency it becomes aware of.
Section 6.16 Termination
- ------------ -----------
(a) Unless pursuant to the default provisions in Sections 6.4, 6.5, or 6.6
of this Agreement, the obligations and responsibilities of the Servicer shall
terminate upon the earlier of (i) the execution of a Pooling and Servicing
Agreement pursuant to which Servicer will be engaged as a master servicer or
sub-servicer with respect to a securitization involving the Mortgage Loans, but
only with respect to the Mortgage Loans covered by such Pooling and Servicing
Agreement (ii) the whole loan sale of any Mortgaged Loans by Owner, but only
with respect to the Mortgage Loans covered in the Whole Loan Purchase Agreement
(iii) the final payment or other liquidation of the last Mortgage Loan (iv) the
disposition of all property acquired upon possession of any Mortgage Loan and
the remittance of all funds due thereunder, or (v) on December 31, 1996.
30
<PAGE>
(b) Either Owner or Servicer may, at any time and in its sole discretion,
terminate this Agreement upon at least ninety (90) days prior written notice to
other party. If Servicer terminates this Agreement pursuant to this Section, it
shall be liable to pay all reasonable out-of-pocket costs associated with the
transfer of Mortgage Loans to a Successor Servicer. If Owner terminates this
Agreement pursuant to this Section 6.16, it shall be liable to pay all
reasonable out-of-pocket costs associated with the transfer of Mortgage Loans to
a Successor Servicer, and Servicer shall have the right to withdraw all
reasonable out-of-pocket costs from the Collection Account.
Section 6.17 Continued Cooperation
- ------------ ---------------------
(a) Servicer shall cooperate with Owner in Owner's future efforts to (a)
pool the Mortgage Loans for securitization pursuant to which Servicer shall be
engaged as a master servicer or (b) to sell the Mortgage Loans on a whole loan
basis in which Servicer could potentially remain Servicer under a separate
servicing agreement. Such cooperation shall include the Servicer's execution
and delivery of the appropriate pooling and servicing agreement. Servicer shall
furnish historical delinquency statistics evidenced by appropriate comfort
letters for Mortgage Loans serviced and administered by Servicer, estoppel
certificates and other information reasonably requested by Owner. Owner shall
bear all out-of-pocket expenses, including legal expenses incurred in connection
with such securitizations. Servicer shall have the right to withdraw from the
Collection Account all costs described in this Section 6.17.
(b) In connection with marketing the Mortgage Loans, the Owner may make
available to a prospective owner an audited Consolidated Statement of Operations
of the Servicer for the most recently completed two fiscal years for which such
a statement is available, as well as an audited Consolidated Statement of
Condition at the end of the last two fiscal years covered by such Consolidated
Statement of Operations. The Servicer also shall make available any comparable
audited interim statements to the extent any such statements have been prepared
by or on behalf of the Servicer (and are available upon request to members or
stockholders of the Servicer or to the public at large). If it has not already
done so, the Servicer shall furnish promptly to the Owner copies of the
statement specified above.
The Servicer also shall make available to Owner or prospective owner a
knowledgeable financial or accounting officer for the purpose of answering
questions respecting recent developments affecting the Servicer or the financial
statements of the Servicer, and to permit any prospective owner to inspect the
Servicer's servicing facilities for the purpose of satisfying such prospective
owner that the Servicer has the ability to service the Mortgage Loans as
provided in this Agreement.
Section 6.18 Master Servicer
- ------------ ---------------
(a) Owner and Servicer agree and acknowledge that the Owner shall designate
Servicer to act as master servicer for Mortgage Loans sold into a
securitization. Subsequent to
31
<PAGE>
the securitization, all Mortgage Loans which have been securitized shall be
serviced in accordance with the terms of the related pooling and servicing
agreement, including but not limited to, the Servicer's obligation to:
(i) pay delinquency advances;
(ii) pay servicing advances;
(iii) dispose of any REO property within applicable REMIC provision
guidelines; and
(iv) provide applicable reports to the trustee.
(b) As compensation for its activities pursuant to this Section 6.17, the
Servicer shall be entitled to retain or withdraw from the Collection Account as
to each Mortgage Loan a Servicing Fee of 0.65% (65 basis points) per annum for
each Mortgage Loan serviced pursuant to the related pooling and servicing
agreement.
Section 6.19 Attorneys' Fees
- ------------ ---------------
In the event any party hereto brings an action to enforce any of the
provisions of this Agreement, the party against whom judgment is rendered in
such action shall be liable to the others for reimbursement of their costs,
expenses and attorneys' fees, including such costs, expenses and fees as may be
incurred on appeal.
Section 6.20 No Solicitation
- ------------ ---------------
Unless specifically permitted by the Owner in advance, the Servicer agrees
not to use Servicer's records to specifically solicit any Borrower with respect
to the refinancing of a Mortgage Loan.
32
<PAGE>
Section 6.21 Counterparts
- ------------ ------------
This Agreement may be executed in one or more counterparts, each of which
shall be deemed to be an original, and all of which together shall constitute
one and same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective officers, all as of the day and year first
above mentioned.
Advanta Mortgage Corp. USA CS First Boston Mortgage Capital Corp.
By: /s/ William P. Garland By: /s/ Heidi Davis
------------------------- -----------------------
Name: William P. Garland Name: Heidi Davis
------------------------- -----------------------
Title: Senior Vice President Title: Vice President
------------------------ -----------------------
T.A.R. Preferred Mortgage Corporation
By: /s/ Todd Rodriguez
---------------------------
Name: Todd Rodriguez
---------------------------
Title: C.E.O
---------------------------
33
<PAGE>
EXHIBIT B
Permitted Investments
---------------------
(a) Direct general obligations of the United States or the obligation of
any agency or instrumentality of the United States fully and unconditionally
guaranteed, the timely payment or the guarantee of which constitutes a full
faith and credit obligation of the United States.
(b) Federal Housing Administration debentures.
(c) FHLMC participation certificates and senior debt obligations.
(d) Federal Home Loan Banks consolidated senior debt obligations.
(e) FNMA mortgage-backed securities (other than stripped mortgage
securities which are valued greater than par on the portion of unpaid principal)
and senior debt obligations.
(f) Federal funds, certificates of deposit, time and demand deposits, and
bankers acceptances (having original maturities of not more than 365 days) of
any-domestic bank, the short-term debt obligations of which have been rated A-I
or better by Standard and Poor's ("SP") and P-1 by Moody's Investment Services
("Moody's").
(g) Investment agreements approved by the Owner provided:
(i) The agreement is with a bank or insurance company which has
an unsecured, uninsured and unguaranteed obligation (or claims-paying
ability) rated Aa2 or better by Moodys and AA or better by SP, or is
the lead bank of a parent bank holding company with an uninsured,
unsecured and unguaranteed obligation meeting such rating
requirements, and
(ii) Moneys invested thereunder may be withdrawn without any
penalty, premium or charge upon not more than one day s notice
(provided such notice may be amended or canceled at any time prior to
the withdrawal date), and
(iii) The agreement is not subordinated to any other
obligations of such insurance company or bank, and
(iv) The same guaranteed interest rate will be paid on any
future deposits made pursuant to such agreement, and
(v) The Owner receives an opinion of counsel that such agreement
is an enforceable obligation of such insurance company or bank.
34
<PAGE>
(h) Commercial paper (having original maturities of not more than 365 days)
rated A-1 or better by SP and P-I or better by Moodys.
(i) Investments in money market funds rated AAAm or AAAm-G by SP and P-1 by
Moody's.
(j) Investments approved in writing by the Owner.
Provided that no instrument described above is permitted to evidence either
--------
the right to receive (a) only interest with respect to obligations underlying
such instrument or (b) both principal and interest payments derived from
obligations underlying such instrument and the interest and principal payments
with respect to such instrument provided a yield to maturity at par greater than
120% of the yield to maturity at par of the underlying obligations; and provided
--------
further, that no instrument described above may be purchased at a price greater
- -------
than par if such instrument may be prepaid or called at a price less than its
purchase price prior to stated maturity.
35
<PAGE>
Exhibit C
Servicing File
--------------
<TABLE>
<S> <C>
Loan #: ____________________________ Prepared by:____________________________
Borrower Name: _____________________ Date: __________________________________
Left Side Right Side
- --------- ----------
[ ] Loan Transaction History (if applicable) [ ] Typed copy of 1003 (for all borrowers)
[ ] Copy of Original Note [ ] Copy of Appraisal (w/o pictures)
[ ] Copy of Original Recorded Security Inatrumwnt [ ] Copy of Borrower Note
(or copy of original RSI pending recordation) of Servicing Transfer Letter
[ ] Copy of Riders (if applicable) [ ] Copy of Lender Loss Payee Letter
(Hazard & Flood)
[ ] ARM Rider
[ ] Copy of PMI Transfer Notice Letter
[ ] Balloon Rider
[ ] Copy of Original Title Policy
[ ] Prepayment Rider (or copy of Prelim until original Title Policy is rec'd.)
[ ] Copy of W-9s [ ] Verification of First Mortgage
(if loan is a second mortgage)
[ ] Copy of TransAmerica Tax Contract Transfer Notice
(if applicable)
[ ] Notice of Impounds
[ ] Initial Escrow Disclosure
[ ] Escrow Information Worksheet
[ ] PMI Certificate
[ ] Evidence of Hazard Insurance
(50 or 90 day Binder, Policy or Declarations Page)
[ ] Pinnacle Life of Loan Flood Certification/Determination
[ ] Evidence of Flood Insurance (if applicable)
[ ] Copy of Truth-In-Lending Disclosure (Reg Z)
</TABLE>
36
<PAGE>
[ ] Copy of Good Faith (itemization of amount financed)
[ ] Copy of HUD-1
Place documents on the left and right sides of the file in the above stacking
order, using side tab folders with double accos.
37
<PAGE>
EXHIBIT 10.22
FIRST AMENDMENT TO LOAN SERVICING AGREEMENT
This First Amendment to Loan Servicing Agreement ("Amendment") dated and
effective October 1, 1996 is entered into by and among CS First Boston Mortgage
Capital Corp. ("Owner"), T.A.R. Preferred Mortgage Corporation ("Prior Owner")
and Advanta Mortgage Corp. USA ("Servicer").
WHEREAS, Owner, Prior Owner and Servicer (collectively, the "Parties")
executed that certain Loan Servicing Agreement dated August 23, 1996 (the
"Servicing Agreement").
WHEREAS, the Servicing Agreement provides that Servicer shall not waive
late payment charges or prepayment penalties/charges without the prior consent
of Owner.
WHEREAS, the Parties desire that Servicer have the authority to waive late
payment charges and prepayment penalties/charges, if any, without obtaining
Owner's consent.
THEREFORE, in consideration of the foregoing, the Parties hereby agree as
follows:
Section 4(b)(i) of the Servicing Agreement is deleted in its entirety and
replaced with the following:
(i) waive assumption fees, late payment charges, prepayment
penalties/charges, charges for checks returned insufficient funds or
other fees which may be collected in the ordinary course of servicing
the Mortgage Loans;
Except as amended by this Amendment, the Servicing Agreement shall remain
in full force and effect.
Advanta Mortgage Corp. USA CS First Boston Mortgage Capital Corp.
By: /s/ William P. Garland By: /s/ Heidi Davis
---------------------- ---------------
Name: William P. Garland Name: Heidi Davis
Title: Senior Vice President Title: Vice President
T.A.R. Preferred Mortgage Corporation
By: _____________________________
Name: ___________________________
Title: __________________________
<PAGE>
EXHIBIT 10.23
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement (this "Agreement") is made and entered into as of
September 1, 1996, by and between PREFERRED CREDIT CORPORATION, a California
corporation (the "Company'), and TODD RODRIGUEZ, an individual ("Executive").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Executive and the Company wish to provide for the terms and
conditions of Executive's employment as Chief Executive Officer of the Company.
A G R E E M E N T
- - - - - - - - -
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and Executive agree as
set forth below.
1. Employment and Duties. The Company hereby employs Executive to serve
---------------------
as Chief Executive Officer of the Company, with full authority and
responsibility to operate and manage, on a day-to-day basis, the business and
affairs of the Company. Executive shall perform such other duties and fulfill
such other responsibilities prescribed by the Bylaws of the Company and which
are customarily accorded to such position. Executive shall report directly to
the Board of Directors of the Company (the "Board"). Executive shall endeavor
in good faith to perform his duties in an efficient, faithful and business-like
manner. During the term of his employment, it is intended that Executive also
serve as a Director on the Board and the Company will take action within its
powers to include Executive among the slate of directors proposed to be
nominated by the Board at any applicable stockholders meeting. In the event
Executive shall not be elected to the Board or selected as a nominee for the
Board, such event shall constitute termination of Executive without cause under
Section 6(b)(iii). At such time that the Board forms any subcommittees of the
Board, the Board shall appoint Employee to serve on such subcommittee. If the
Company becomes a publicly held company, the Board shall not be obligated to
appoint Employee to either of the Compensation Committee or the Audit Committee,
or any committee serving like functions, to the extent such appointment would
violate the rules of any national securities exchange, the Nasdaq Stock Market
or the provisions of Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code") or the rules and regulations promulgated thereunder.
In the event that the Company undergoes a reorganization pursuant to which
a holding company ("NewCo") for the common stock of the Company is formed, in
addition to serving as an employee of the Company, Employee shall be deemed an
employee of NewCo which additional employment also shall be governed pursuant to
the terms and conditions of this Agreement.
1
<PAGE>
2. Term. The initial term of this Agreement shall begin on September 1,
----
1996 and expire on August 31, 2001 unless terminated earlier as set forth in
Section 6 hereof or by mutual agreement of the parties hereto (the "Initial
Term"). At the expiration of the Initial Term and each anniversary thereafter,
the term of this Agreement shall automatically be extended for an additional
year (the "Extension Term") unless either party shall have given written notice
to the other party at least six months prior to the end of the Initial Term or
the Extension Term, as the case may be, that it does not desire to extend the
term of this Agreement. If Executive's employment under this Agreement is
extended for an Extension Term, it shall thereafter or during any Extension Term
be terminable (other than upon expiration) only as provided in Section 6 or by
mutual agreement of the parties hereto.
3. Compensation.
------------
(a) Base Salary. During the term of this Agreement, Executive shall
-----------
be paid a base salary (the "Base Salary"), payable in accordance with the
Company's normal payroll practice. During the first year of the term of this
Agreement, Executive's Base Salary shall be $420,000. The annual Base Salary
--------
payable to Executive shall be reviewed at least annually; provided, however,
-------- -------
that Executive's Base Salary shall not be reduced below $420,000 per annum
--------
during the term of this Agreement.
(b) Bonus. Executive shall be entitled to an annual bonus (the
-----
"Bonus") equal to 2.5% of the Company's earnings before taxes, as set forth in
the Company's annual audited financial statements. For purposes of determining
the Bonus, earnings before taxes shall be determined exclusive of the Bonus.
The Bonus shall be paid to Executive prior to April 15 of each year.
4. Other Executive Benefits. During the term of this Agreement, the
------------------------
Company shall provide to Executive benefits commensurate with his position,
including each of the following benefits:
(a) Medical and Dental Coverage. The Company agrees to provide
---------------------------
coverage to Executive and dependent members of his family under the same medical
and dental plans as may be maintained from time to time in the discretion of the
Board for the other executive officers of the Company.
(b) Vacation. Executive shall be entitled to four (4) weeks of paid
--------
vacation during Executive's first year of employment with the Company and shall
be entitled to five (5) weeks during each year of employment with the Company
thereafter for the term of this Agreement. In each case, such entitlement shall
accrue pro rata over the contract year and shall be taken at such time or times
as not to interfere with the necessary performance of Executive's duties and
obligations under this Agreement.
2
<PAGE>
(c) Business Expenses. The Company will pay or reimburse Executive
-----------------
for any out-of-pocket expenses incurred by Executive in the course of providing
his services hereunder, which comply with the Company's travel and expense
policies adopted from time to time by the Board for the executive officers.
Notwithstanding the foregoing, Executive shall be entitled to first class air
travel both within and outside the United States and to first-rate
accommodations. Such reimbursement shall be made by the Company in the same
manner and within the same time period as applicable to the other executive
officers of the Company.
(d) Automobile. The Company shall pay lease expenses in an amount up
----------
to $1,250 per month in connection with Executive's use of an automobile.
Alternatively, the Company shall purchase an automobile at a comparable monthly
cost for use by Executive (subject to the cost limitations described above). As
to such automobile, on the earlier of significant damage or destruction or
attaining three years of age, the Company shall replace such automobile with a
new automobile selected by Executive. The Company shall pay all costs of
insurance, repair, maintenance and operation of such automobile.
(e) Benefit Plans. Executive shall be entitled to participate in any
-------------
pension, profit-sharing, stock option, stock purchase or other benefit plan of
the Company now existing or hereafter adopted for the benefit of employees
generally or the senior executives of the Company to the same extent as the
other senior executives of the Company.
(f) Life Insurance. Provided the following policies may be obtained
--------------
at a reasonable cost, the Company shall provide Executive with a $1,000,000
standard term life insurance policy and a $1,000,000 standard term accidental
death policy.
(g) Disability. Provided the following policy may be obtained at a
----------
reasonable cost, the Company shall provide Executive with a long-term disability
policy which provides for an annual disability payment in an amount equal to
125% of Executive's Base Salary.
5. Confidential Information.
------------------------
(a) Non-Disclosure. Executive hereby agrees, during the term of this
--------------
Agreement, he will not disclose to any person or otherwise use or exploit any
proprietary or confidential information, including, without limitation, trade
secrets, processes, records of research, proposals, reports, methods, processes,
techniques, computer software or programming, or budgets or other financial
information, regarding the Company, its business, properties, customers or
affairs (collectively, "Confidential Information") obtained by him at any time
during the term, except to the extent required by Executive's performance of
assigned duties for the Company. Notwithstanding anything herein to the
contrary, the term "Confidential Information" shall not include information
which (i) is or becomes generally available to the public other than as a result
of disclosure by Executive in violation of this Agreement, (ii) is or becomes
available to Executive on a non-confidential basis from a source other than the
Company, provided that such source is not known by Executive to be furnishing
such
3
<PAGE>
information in violation of a confidentiality agreement with or other obligation
of secrecy to the Company or (iii) has been made available, or is made
available, on an unrestricted basis to a third party by the Company, by an
individual authorized to do so. Executive may use and disclose Confidential
Information to the extent necessary to assert any right or defend against any
claim arising under this Agreement or pertaining to Confidential Information or
its use, to the extent necessary to comply with any applicable statute,
constitution, treaty, rule, regulation, ordinance or order, whether of the
United States, any state thereof, or any other jurisdiction applicable to
Executive, or if Executive receives a request to disclose all or any part of the
information contained in the Confidential Information under the terms of a
subpoena, order, civil investigative demand or similar process issued by a court
of competent jurisdiction or by a governmental body or agency, whether of the
United States or any state thereof, or any other jurisdiction applicable to
Executive.
(b) Injunctive Relief. Executive agrees that the remedy at law for
-----------------
any breach by him of the covenants and agreements set forth in this Section 5
may be inadequate and that in the event of any such breach, the Company may, in
addition to the other remedies that may be available to it at law, seek
injunctive relief prohibiting him (together with all those persons associated
with him) from the breach of such covenants and agreements.
6. Termination.
-----------
(a) Termination by Company for "Cause." The Company may terminate
-----------------------------------
this Agreement for "Cause" effective immediately upon written notice thereof to
Executive. For purposes of this Agreement, "Cause" shall mean and be limited to
the following events: (i) an act of fraud, embezzlement or similar conduct by
Executive involving the Company; (ii) any action by Executive involving the
arrest of Executive for violation of any criminal statute constituting a felony
if the Board reasonably determines that the continuation of Executive's
employment after such event would have a adverse impact on the operations or
reputation of the Company in the financial community; or (iii) a continuing,
repeated willful failure or refusal by Executive to perform his duties;
provided, however, that this Agreement may not be terminated under this
- -------- -------
subclause (iii) unless Executive shall have first received written notice signed
by all members of the Board (other than Executive) advising Executive of the
specific acts or omissions alleged to constitute a failure or refusal to perform
and such failure or refusal to perform continues after Executive shall have had
a reasonable opportunity (not less than 60 days) to correct the acts or
omissions cited in such notice.
In the event of termination for "Cause," Executive shall be entitled to
receive that portion of the Base Salary and all benefits accrued through the
date of termination.
(b) Termination by Company Other Than for "Cause."
----------------------------------------------
i) Death. Provided that notice of termination has not
-----
previously been given under any Section hereof, if Executive shall die during
the term of this Agreement, this
4
<PAGE>
Agreement and all of the Company's obligations hereunder shall terminate, except
that Executive's estate or designated beneficiaries shall be entitled to receive
(A) all earned and unpaid Base Salary through the date of termination; (B) the
Base Salary, Bonus, and all benefits with respect to the then current contract
year which would have been payable or provided to Executive had the term ended
one year following the last day of the month in which Executive's death
occurred; and (C) all other benefits that may be due to Executive or Executive's
estate or beneficiaries under the general provisions of any benefit plan, stock
incentive plan or other plan in which Executive is then a participant, which
benefits shall continue to be provided for a period of one year following the
date of death. In addition, all stock options that have become exercisable as
of the date of death shall remain so for a period of twelve (12) months. All
payments required to be made under this Section 6(b)(i) shall be made pursuant
to the payment schedule in effect at the date of Executive's death.
ii) Disability. Provided that notice of termination has not
----------
previously been given under any Section hereof, if Executive becomes ill or is
injured or disabled during the term such that Executive fails to perform all or
substantially all of the duties to be rendered hereunder and such failure
continues for a period in excess of 26 consecutive weeks (a "Disability"), the
Company shall continue to employ Executive under this Agreement for one year
from the date of the Disability (which one year period shall commence at the
beginning of the 26 week period referred to herein) and shall continue to pay
Executive the Base Salary in effect on the date of the Disability (determined at
the beginning of the 26 week period referred to herein), the Bonus, and all
benefits then in effect; provided, that (A) the Company may relieve Executive of
his duties and responsibilities hereunder to the extent permitted by law and (B)
any long-term disability payments received by Executive under any disability
insurance plan made available to Executive by the Company if the premiums were
paid by the Company shall be deducted from the salary and bonus payments
otherwise required to be paid to Executive hereunder. If during the term and
subsequent to the Disability commencement date (which shall be at any time
following the end of the 26 week period referred to herein) Executive shall
fully recover, the Company shall have the right (exercisable within 60 days
after receipt of notice from Executive of such recovery), but not the
obligation, to restore Executive to full-time service at full compensation. If
the Company elects not to restore Executive to full-time service, Executive
shall be entitled to obtain other employment. If Executive is not restored to
full-time employment with the Company, all stock options that have become
exercisable as of the date of Disability (determined at the end of the 26 week
period referred to herein) shall remain so for a period of twelve (12) months.
iii) Without Cause. If the Company elects to terminate Executive
-------------
for any reason whatsoever (a "Severance Termination"), Executive shall receive
three times the greater of (i) Employee's Base Salary and Bonus received during
the immediately preceding year; and (ii) Employee's Base Salary and Bonus
(determined on a pro rata basis if employment is terminated pursuant to this
Section during the year) for the current year. In addition, all options
granted over the term shall become immediately exercisable and shall remain
exercisable for a period of twelve (12) months. In the event of a Severance
Termination, Executive will
5
<PAGE>
also be provided with reasonable office space and secretarial support as well as
the same mailing address and telephone number which Executive had during the
term for up to twelve months, and the Company shall pay the costs of
outplacement services with a provider of Executive's choice at a level
appropriate to Executive's title and position as requested by Executive.
The parties believe that the above payments do not constitute "Excess
Parachute Payments" under Section 280G of the Code. Notwithstanding such
belief, if any benefit under the preceding paragraph is determined to be an
"Excess Parachute Payment" the Company shall pay Executive an additional amount
("Tax Payment") such that (x) the excess of all Excess Parachute Payments
(including payments under this sentence) over the sum of excise tax thereon
under Section 4999 of the Code and income tax thereon under Subtitle A of the
Code and under applicable state law is equal to (y) the excess of all Excess
Parachute Payments (excluding payments under this sentence) over income tax
thereon under Subtitle A of the Code and under applicable state law.
(c) Prohibited Termination. Notwithstanding any other provision in
----------------------
this Section 6, so long as Executive beneficially owns 10% or more of the
outstanding shares of common stock of the Company (the "Common Stock"), or,
collectively with Mr. Walter Villaume, beneficially owns 20% or more of the
outstanding shares of Common Stock, the Company may not terminate Employee under
any circumstances. For purposes of this paragraph, "beneficial ownership" shall
have the meaning set forth in Rule 13d-3 promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
(d) Termination by Executive. Executive may (but shall not be
------------------------
obligated to) terminate this Agreement effective 30 days after the giving of
such notice given at any time within two years following a Change in Control (as
defined herein) or upon the occurrence of any of the following events: (i) the
Company shall fail to pay or shall reduce the Base Salary, Bonus or other
benefits provided herein, except as permitted hereunder, or shall otherwise
breach any material provision hereof which breach is not cured within 10 days
after receipt of notice thereof from Executive; (ii) the Company shall fail to
cause Executive to remain the Chief Executive Officer of the Company; (iii)
Executive shall not be continuously afforded the authority, powers,
responsibilities and privileges contemplated in Section 1 above (whether or not
accompanied by a change in title); (iv) the Company shall require Executive's
primary services to be rendered in an area other than the Company's principal
offices in the Irvine, California area; or (v) after a Change in Control, the
Company increases the base salary for senior executives of the Company generally
without similarly increasing the Base Salary of Executive. For purposes of
clause (iii), Executive shall be deemed not to have been continuously afforded
the authority, powers, responsibilities and privileges contemplated in Section 1
above if there shall occur any reduction in the scope, level or nature of
Executive's employment hereunder, or any demotion, any phasing out or assignment
to others, of the duties contemplated herein.
6
<PAGE>
As full payment of any amounts due and owing to Executive if
termination occurs under this Section, if Executive elects to terminate the
Agreement as a result of a Change in Control or for any other reason set forth
in clauses (i) through (v) above, then Executive shall have no further
obligation to perform services for the Company but shall be entitled to receive
from the Company the Severance Package (as defined above). In addition, all
options which would vest as of the next scheduled vesting date term shall become
immediately exercisable and all vested options shall remain exercisable for the
balance of their 10-year term.
(e) Payment of Termination Amounts. Executive may elect to have all
------------------------------
amounts to be paid to Executive pursuant to this Section 6 payable (i) over the
remaining term of this Agreement or for such shorter period as expressly
provided for herein, as applicable, or (ii) in a lump sum within 30 days
following termination; provided, however, in each case, the Bonus component
-----------------
shall be payable as scheduled in Section 3(b) hereof. In the event Executive
elects to be paid pursuant to clause (i), Executive agrees promptly to notify
the Company in writing of Executive's acceptance of full-time employment; within
15 days after receipt of such notice, the Company shall pay Executive in a lump
sum any amounts which remain otherwise due to Executive hereunder.
(f) Stock and Similar Rights. Except with regard to the vesting and
------------------------
exercise dates of options as set forth in this Section 6, Executive's rights
under any other agreement or plan under which stock options, restricted stock or
similar awards are granted shall be determined in accordance with the terms and
provisions of such plans or agreements.
(g) No Mitigation or Offset. Payment of any sum under this Section 6
-----------------------
shall not be subject to any claim of mitigation nor shall the Company be
entitled to any right of offset with respect thereto.
(h) Other Insurance Policies. Upon any termination of Executive's
------------------------
employment, and upon reimbursement of the Company of all amounts paid by the
Company in connection with such policies, Executive shall have the right to
purchase or otherwise direct the disposition or assignment of any disability
insurance policy on him held by the Company (excluding only group disability
insurance policies) upon the payment of One Dollar ($1.00) as the total
consideration for each such policy.
7. Change in Control. For purposes of this Agreement, a "Change in
-----------------
Control" shall mean the occurrence of any of the following events which occur
after the date hereof:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act ("Rule 13d-3")) of 20% or more of the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Voting Securities"); provided,
--------
however, that neither of the following acquisitions shall constitute a Change in
- -------
7
<PAGE>
Control; (i) any acquisition by the Company or (ii) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by the Company
or any corporation controlled by the Company; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
-------- -------
the date hereof whose election, or nomination for election by the stockholders
of the Company, shall be approved by a vote of a least a majority of the
directors then compromising the Incumbent Board shall be considered as though
such individual were a member of the Incumbent Board; or
(c) The election of a director absent the approval of both Executive
and Walter Villaume; or
(d) Approval by the stockholders of the Company of a reorganization,
merger or consolidation, in each case, unless, following such reorganization,
merger or consolidation: (i) more than 60% of the combined voting power of the
then outstanding voting securities of the corporation resulting from such
reorganization, merger, or consolidation, which may be the Company (the
"Resulting Corporation") entitled to vote generally in the election of directors
(the "Resulting Corporation Voting Securities") shall then be owned
beneficially, directly or indirectly, by all or substantially all of the Persons
who were the beneficial owners of Outstanding Voting Securities immediately
prior to such reorganization, merger or consolidation, in substantially the same
proportions as their respective ownerships of Outstanding Voting Securities
immediately prior to such reorganization, merger, or consolidation; (ii) no
Person (excluding the Company, any employee benefit plan (or related trust) of
the Company, the Resulting Corporation, and any Person beneficially owning,
immediately prior to such reorganization, merger or consolidation, directly or
indirectly, 20% or more of the combined voting power of Outstanding Voting
Securities) shall own beneficially, directly or indirectly 20% or more of the
combined voting power of the Resulting Corporation Voting Securities; and (iii)
at least a majority of the members of the Board of the Resulting Corporation
shall have been members of the Incumbent Board at the time of the execution of
the initial agreement providing for such reorganization, merger or
consolidation; or
(e) Approval by the stockholders of the Company of (i) a complete
liquidation or dissolution of the Company or (ii) the sale or other disposition
of all or substantially all of the assets of the Company, other than to a
corporation (the "Buyer") with respect to which (x) following such sale or other
disposition, more than 60% of the combined voting power of securities of Buyer
entitled to vote generally in the election of directors ("Buyer Voting
Securities"), shall be owned beneficially, directly or indirectly, by all or
substantially all of the Persons who were the beneficial owners of the
Outstanding Voting Securities immediately prior to such sale or other
disposition, in substantially the same proportion as their respective ownership
of Outstanding Voting Securities, immediately prior to such sale or other
disposition; (y) no Person (excluding the Company and any employee benefit plan
(or related trust) of the
8
<PAGE>
Company or Buyer and any Person that shall immediately prior to such sale or
other disposition own beneficially, directly or indirectly, 20% or more of the
combined voting power of Outstanding Voting Securities), shall own beneficially,
directly or indirectly, 20% or more of the combined voting power or, Buyer
Voting Securities; and (z) at least a majority of the members of the board of
directors of Buyer shall have been members of the Incumbent Board at the time of
the execution of the initial agreement or action of the Board providing for such
sale or other disposition or assets of the Company.
8. Insurance. During the term, the Company shall maintain, at no cost to
---------
Executive, officers and directors liability insurance that would cover Executive
in an amount of no less than $5,000,000.
9. Registration Rights.
-------------------
(a) Piggyback Registration Rights. If at any time the Company shall
-----------------------------
propose to register any shares of Common Stock (but excluding any shares or
securities being registered pursuant to Form S-8 or Form S-4 or any successor
form thereto), the Company shall (i) give the Executive written notice, or
telegraphic, telecopy or telephonic notice followed as soon as practicable by
written confirmation thereof, of such proposed registration at least 20 business
days prior to the filing of such registration statement and, (ii) upon written
notice, or telegraphic or telephonic notice followed as soon as practicable by
written confirmation thereof, given to the Company by the Executive within 15
days after the giving of such written confirmation or written notice by the
Company, the Company shall include or cause to be included in any such
registration statement all or such portion of the shares of common stock of the
Company owned by Executive (the "Shares") as the Executive may request;
provided, however, that the Company may at any time withdraw or cease proceeding
- -------- -------
with any such registration if it shall at the same time withdraw or cease
proceeding with the registration of the Common Stock originally proposed to be
registered; and provided further, that in connection with any registered public
----------------
offering involving an underwriting, the managing underwriter may (if in its
reasonable opinion marketing factors so require) limit the number of securities
(including any Shares) included in such offering (other than securities of the
Company); and provided further, that the registration rights granted in this
----------------
Section 9(a) are granted subject to the demand registration rights granted to CS
First Boston Corporation pursuant to that certain Warrant Agreement dated
October 2, 1996 between CS First Boston Corporation and the Company (the
"Warrant Agreement") which may serve to further limit or extinguish Executive's
right to include any portion of the Shares in certain registrations. In the
event of any such limitation, and to the extent the provisions of the Warrant
Agreement permit, the total number of Shares to be offered for the account of
Executive in the registration shall be reduced in proportion to the respective
number of shares requested to be included therein by all holders of the
Company's Common Stock (other than the Company) entitled to include shares of
Common Stock in the registration to the extent necessary to reduce the total
number of shares proposed to be registered to the number of shares recommended
by the managing underwriter.
9
<PAGE>
(b) Company's Obligations in Piggyback Registration. The following
-----------------------------------------------
provisions shall also be applicable at the sole cost and expense of the Company
in the case of registrations under Section 7(a):
i) Following the effective date of such registration statement,
the Company shall, upon the request of Executive, forthwith supply such number
of prospectuses meeting the requirements of the Securities Act of 1933, as
amended (the "Securities Act") as shall be requested by Executive to permit
Executive to make a public distribution of all of the Shares, provided that
Executive shall from time to time furnish the Company with such appropriate
information (relating to the intentions of Executive) in connection therewith as
the Company shall request in writing.
ii) the Company shall bear the entire cost and expense of the
registration of securities provided for in this Section (but not the selling
expenses of Executive).
iii) the Company shall indemnify and hold harmless Executive from
and against any and all losses, claims, damages and liabilities (including
reasonable fees and expenses of counsel) arising out of or based upon any untrue
statement or alleged untrue statement of a material fact contained in any
registration statement or any prospectus included therein required to be filed
or furnished by reason of this Section or otherwise or in any application or
other filing under, the Securities Act or any other applicable Federal or state
securities law, or arising out of or based upon any omission or alleged omission
to state therein a material fact required to be stated therein (i.e., in any
such registration statement, prospectus, application or other filing) or
necessary to make the statements therein not misleading, to which such person
may become subject, or any violation or alleged violation by the Company to
which such Person may become subject, under the Securities Act, the Exchange Act
or other Federal or state laws or regulations, at common law or otherwise,
except to the extent that such losses, claims, damages or liabilities are caused
by any such untrue statement or alleged untrue statement or omission or alleged
omission based upon and in strict conformity with written information furnished
to the Company by such person expressly for use therein; provided however, that
-------- -------
Executive shall at the same time indemnify the Company, its directors, each
officer signing the related registration statement, and each person, if any, who
controls the Company within the meaning of the Securities Act, from and against
any and all losses, claims, damages and liabilities (including reasonable fees
and expenses of counsel) arising out of or based upon any untrue statement or
alleged untrue statement of a material fact contained in any registration
statement or any prospectus included therein required to be filed or furnished
by reason of this Section, or otherwise or in any application or other filing
under, the Securities Act or any other applicable Federal or state securities
law, or arising out of or based upon any omission or alleged omission to state
therein a material fact required to be stated therein (i.e., in any such
registration statement, prospectus, application or other filing) or necessary to
make the statements therein not misleading, to which such person may become
subject, or any violation or alleged violation by Executive to which the
Company, its directors, each officer signing the related registration statement,
and each person, if any, who controls the Company
10
<PAGE>
within the meaning of the Securities Act, may become subject, under the
Securities Act, the Exchange Act, or other Federal or state laws or regulations,
at common law or otherwise, to the extent that such losses, claims, damages or
liabilities are caused by any such untrue statement or alleged untrue statement
or omission or alleged omission based upon and in strict conformity with written
information furnished to the Company by Executive expressly for use therein.
iv) In the event any person entitled to indemnification hereunder
receives in writing a complaint, claim or other written notice of any loss,
claim, damage, liability or action giving rise to a claim for indemnification
under Section 10(b)(iii), the person claiming indemnification under Section
10(b)(iii) shall promptly notify the person or persons against whom
indemnification is sought (the "Indemnitor") of such complaint, notice, claim or
action, and the Indemnitor shall have the right to investigate and defend any
such loss, claim, damage, liability or action. The person claiming
indemnification shall have the right to employ separate counsel in any such
action and to participate in the defense thereof but the fees and expenses of
such counsel shall not be at the expense of the Indemnitor. In no event shall
the Indemnitor be obligated to indemnify any person for any settlement of any
claim or action effected without the Indemnitor's consent, which consent shall
not be unreasonably withheld.
10. Waiver of Conflict.
------------------
The Company hereby acknowledges that Employee had an equity interest in
Pacific Prime, a sole proprietorship, engaged in the origination of mortgage
loans and the subsequent sale of all or a portion of such loans to the Company.
The Company hereby waives any conflict of interest and/or claims for relief
relating to transactions that have occurred or may occur between Pacific Prime
and the Company.
11. General Provisions.
------------------
(a) Notices. All notices, requirements, requests, demands, claims or
-------
other communications hereunder shall be in writing. Any notice, requirement,
request, demand, claim or other communication hereunder shall be deemed duly
given (i) if personally delivered, when so delivered, (ii) if mailed, two (2)
business days after having been set by registered or certified mail, return-
receipt requested, postage prepaid and addressed to the intended recipient as
set forth below, (iii) if given by telecopier, once such notice or other
communication is transmitted to the telecopier number specified below, and the
appropriate telephonic confirmation is received, provided that such notice or
other communication is promptly thereafter mailed in accordance with the
provisions of clause (ii) above or (iv) if sent through an overnight delivery
service under circumstances by which such service guarantees next day delivery,
the date following the date so sent:
11
<PAGE>
If to the Company, to:
---------------------
Preferred Credit Corporation
3347 Michelson, Suite 400
Irvine, California 92612
Attn: President
Telecopy: (714) 660-3872
If to Executive to:
------------------
to the address set forth in
the records of the Company
Any party may change the address to which notices, requests, demands, claims and
other communications hereunder are to be delivered by giving the other party
notice in the manner herein set forth.
(b) Assignment. This Agreement and the benefits hereunder are
----------
personal to the Company and are not assignable or transferable, nor may be the
services to be performed hereunder be assigned by the Company to any person,
firm or corporation; provided however, that this Agreement and the benefits
-------- -------
hereunder may be assigned by the Company to any corporation into which the
Company may be merged or consolidated, and this Agreement and the benefits
hereunder will automatically be deemed assigned to any such corporation,
subject, however, to Executive's right to terminate this Agreement to the extent
provided in Section 6. In the event of any assignment of this Agreement to any
corporation acquiring all or substantially all of the assets of the Company or
to any other corporation into which the Company may be merged or consolidated,
the responsibilities and duties assigned to Executive by such successor
corporation shall be the responsibilities and duties of, and compatible with the
status of, a senior executive officer of such successor corporation. The
Company may delegate any of its obligations hereunder to any subsidiary of the
Company, provided that such delegation shall not relieve the Company of any of
its obligations hereunder. Executive may not assign its rights hereunder or
delegate his duties hereunder to any Person.
(c) Complete Agreement. This Agreement contains the entire agreement
------------------
among the parties hereto with respect to the subject matter hereof and
supersedes and cancels any and all previous written or oral negotiations,
commitments, understandings, agreements and any other writings or communications
in respect of such subject matter.
(d) Amendments. This Agreement may be modified, amended, superseded
----------
or terminated only by a writing duly signed by both parties.
(e) Severability. Any provision of this Agreement which is invalid,
------------
illegal or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such
12
<PAGE>
invalidity, illegality or unenforceability, without affecting in any way the
remaining provisions hereof in such jurisdiction or rendering that or any other
provision of this Agreement invalid, illegal or unenforceable in any other
jurisdiction.
(f) No Waiver. Any waiver by either party of a breach of any
---------
provisions of this Agreement shall not operate as or be construed to be a waiver
of any other breach of such provision or of any breach of any other provision of
this Agreement. The failure of either party to insist upon strict adherence to
any term of this Agreement on one or more occasions shall not be considered a
waiver or to deprive such party of the right thereafter to insist upon strict
adherence to that term or any other term of this Agreement.
(g) Binding Effect. This Agreement shall be binding on, and shall
--------------
inure to the benefit of, the parties hereto and their permitted assigns,
successors and legal representatives.
(h) Counterparts. This Agreement may be executed by the parties
------------
hereto in separate counterparts, each of which when so executed shall be deemed
to be an original and all of which when taken together shall constitute one and
the same document.
(i) Governing Law. This Agreement has been negotiated and entered
-------------
into in the State of California and shall be construed in accordance with the
laws of the State of California.
(j) Headings. The headings included in this Agreement are for the
--------
convenience of the parties only and shall not affect the construction or
interpretation of this Agreement.
13
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on
its behalf by its duly authorized officer and Executive has executed the same as
of the day and year first above written.
PREFERRED CREDIT CORPORATION
-----------------------------------------
By:
--------------------------------------
Its:
-------------------------------------
TODD RODRIGUEZ
-----------------------------------------
14
<PAGE>
EXHIBIT 10.24
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement (this "Agreement") is made and entered into as of
September 1, 1996, by and between PREFERRED CREDIT CORPORATION, a California
corporation (the "Company'), and WALTER VILLAUME, an individual ("Executive").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Executive and the Company wish to provide for the terms and
conditions of Executive's employment as President of the Company.
A G R E E M E N T
- - - - - - - - -
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and Executive agree as
set forth below.
1. Employment and Duties. The Company hereby employs Executive to serve
---------------------
as President of the Company, with the powers and duties customarily accorded to
such position, including those powers and duties set forth in the Bylaws of the
Company for such office and such other duties consistent therewith as may be
assigned to Executive from time to time by the Board of Directors (the "Board")
of the Company. Initially, Executive's managerial and supervisorial duties
shall be limited to those departments and operations as determined by the Board
and subsequently expanded to include other departments and operations as
directed by the Board. Executive shall report directly to the Board. Executive
shall endeavor in good faith to perform his duties in an efficient, faithful and
business-like manner. During the term of his employment, it is intended that
Executive also serve as a Director on the Board and the Company will take action
within its powers to include Executive among the slate of directors proposed to
be nominated by the Board at any applicable stockholders meeting. In the event
Executive shall not be elected to the Board or selected as a nominee for the
Board, such event shall constitute termination of Executive without cause under
Section 6(b)(iii). At such time that the Board forms any subcommittees of the
Board, the Board shall appoint Employee to serve on such subcommittee. If the
Company becomes a publicly held company, the Board shall not be obligated to
appoint Employee to either of the Compensation Committee or the Audit Committee,
or any committee serving like functions, to the extent such appointment would
violate the rules of any national securities exchange, the Nasdaq Stock Market
or the provisions of Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code") or the rules and regulations promulgated thereunder.
In the event that the Company undergoes a reorganization pursuant to which
a holding company ("NewCo") for the common stock of the Company is formed, in
addition to serving as an employee of the Company, Employee shall be deemed an
employee of NewCo which
1
<PAGE>
additional employment also shall be governed pursuant to the terms and
conditions of this Agreement.
2. Term. The initial term of this Agreement shall begin on September 1,
----
1996 and expire on August 31, 2001 unless terminated earlier as set forth in
Section 6 hereof or by mutual agreement of the parties hereto (the "Initial
Term"). At the expiration of the Initial Term and each anniversary thereafter,
the term of this Agreement shall automatically be extended for an additional
year (the "Extension Term") unless either party shall have given written notice
to the other party at least six months prior to the end of the Initial Term or
the Extension Term, as the case may be, that it does not desire to extend the
term of this Agreement. If Executive's employment under this Agreement is
extended for an Extension Term, it shall thereafter or during any Extension Term
be terminable (other than upon expiration) only as provided in Section 6 or by
mutual agreement of the parties hereto.
3. Compensation.
------------
(a) Base Salary. During the term of this Agreement, Executive shall
-----------
be paid a base salary (the "Base Salary"), payable in accordance with the
Company's normal payroll practice. During the first year of the term of this
Agreement, Executive's Base Salary shall be $420,000. The annual Base Salary
--------
payable to Executive shall be reviewed at least annually; provided, however,
-------- -------
that Executive's Base Salary shall not be reduced below $420,000 per annum
--------
during the term of this Agreement.
(b) Bonus. Executive shall be entitled to an annual bonus (the
-----
"Bonus") equal to 2.5% of the Company's earnings before taxes, as set forth in
the Company's annual audited financial statements. For purposes of determining
the Bonus, earnings before taxes shall be determined exclusive of the Bonus.
The Bonus shall be paid to Executive prior to April 15 of each year..
4. Other Executive Benefits. During the term of this Agreement, the
------------------------
Company shall provide to Executive benefits commensurate with his position,
including each of the following benefits:
(a) Medical and Dental Coverage. The Company agrees to provide
---------------------------
coverage to Executive and dependent members of his family under the same medical
and dental plans as may be maintained from time to time in the discretion of the
Board for the other executive officers of the Company.
(b) Vacation. Executive shall be entitled to four (4) weeks of paid
--------
vacation during Executive's first year of employment with the Company and shall
be entitled to five (5) weeks during each year of employment with the Company
thereafter for the term of this Agreement. In each case, such entitlement shall
accrue pro rata over the contract year and shall be taken at such time or times
as not to interfere with the necessary performance of Executive's duties and
obligations under this Agreement.
2
<PAGE>
(c) Business Expenses. The Company will pay or reimburse Executive
-----------------
for any out-of-pocket expenses incurred by Executive in the course of providing
his services hereunder, which comply with the Company's travel and expense
policies adopted from time to time by the Board for the executive officers.
Notwithstanding the foregoing, Executive shall be entitled to first class air
travel both within and outside the United States and to first-rate
accommodations. Such reimbursement shall be made by the Company in the same
manner and within the same time period as applicable to the other executive
officers of the Company.
(d) Automobile. The Company shall pay lease expenses in an amount up
----------
to $1,250 per month in connection with Executive's use of an automobile.
Alternatively, the Company shall purchase an automobile at a comparable monthly
cost for use by Executive (subject to the cost limitations described above). As
to such automobile, on the earlier of significant damage or destruction or
attaining three years of age, the Company shall replace such automobile with a
new automobile selected by Executive. The Company shall pay all costs of
insurance, repair, maintenance and operation of such automobile.
(e) Benefit Plans. Executive shall be entitled to participate in any
-------------
pension, profit-sharing, stock option, stock purchase or other benefit plan of
the Company now existing or hereafter adopted for the benefit of employees
generally or the senior executives of the Company to the same extent as the
other senior executives of the Company.
(f) Life Insurance. Provided the following policies may be obtained
--------------
at a reasonable cost, the Company shall provide Executive with a $1,000,000
standard term life insurance policy and a $1,000,000 standard term accidental
death policy.
(g) Disability. Provided the following policy may be obtained at a
----------
reasonable cost, the Company shall provide Executive with a long-term disability
policy which provides for an annual disability payment in an amount equal to
125% of Executive's Base Salary.
5. Confidential Information.
------------------------
(a) Non-Disclosure. Executive hereby agrees, during the term of this
--------------
Agreement, he will not disclose to any person or otherwise use or exploit any
proprietary or confidential information, including, without limitation, trade
secrets, processes, records of research, proposals, reports, methods, processes,
techniques, computer software or programming, or budgets or other financial
information, regarding the Company, its business, properties, customers or
affairs (collectively, "Confidential Information") obtained by him at any time
during the term, except to the extent required by Executive's performance of
assigned duties for the Company. Notwithstanding anything herein to the
contrary, the term "Confidential Information" shall not include information
which (i) is or becomes generally available to the public other than as a result
of disclosure by Executive in violation of this Agreement, (ii) is or becomes
available to Executive on a non-confidential basis from a source other than the
Company, provided that such source is not known by Executive to be furnishing
such information in violation of a confidentiality agreement with or other
obligation of secrecy to the
3
<PAGE>
Company or (iii) has been made available, or is made available, on an
unrestricted basis to a third party by the Company, by an individual authorized
to do so. Executive may use and disclose Confidential Information to the extent
necessary to assert any right or defend against any claim arising under this
Agreement or pertaining to Confidential Information or its use, to the extent
necessary to comply with any applicable statute, constitution, treaty, rule,
regulation, ordinance or order, whether of the United States, any state thereof,
or any other jurisdiction applicable to Executive, or if Executive receives a
request to disclose all or any part of the information contained in the
Confidential Information under the terms of a subpoena, order, civil
investigative demand or similar process issued by a court of competent
jurisdiction or by a governmental body or agency, whether of the United States
or any state thereof, or any other jurisdiction applicable to Executive.
(b) Injunctive Relief. Executive agrees that the remedy at law for
-----------------
any breach by him of the covenants and agreements set forth in this Section 5
may be inadequate and that in the event of any such breach, the Company may, in
addition to the other remedies that may be available to it at law, seek
injunctive relief prohibiting him (together with all those persons associated
with him) from the breach of such covenants and agreements.
6. Termination.
-----------
(a) Termination by Company for "Cause." The Company may terminate
-----------------------------------
this Agreement for "Cause" effective immediately upon written notice thereof to
Executive. For purposes of this Agreement, "Cause" shall mean and be limited to
the following events: (i) an act of fraud, embezzlement or similar conduct by
Executive involving the Company; (ii) any action by Executive involving the
arrest of Executive for violation of any criminal statute constituting a felony
if the Board reasonably determines that the continuation of Executive's
employment after such event would have a adverse impact on the operations or
reputation of the Company in the financial community; or (iii) a continuing,
repeated willful failure or refusal by Executive to perform his duties;
provided, however, that this Agreement may not be terminated under this
- -------- -------
subclause (iii) unless Executive shall have first received written notice signed
by all members of the Board (other than Executive) advising Executive of the
specific acts or omissions alleged to constitute a failure or refusal to perform
and such failure or refusal to perform continues after Executive shall have had
a reasonable opportunity (not less than 60 days) to correct the acts or
omissions cited in such notice.
In the event of termination for "Cause," Executive shall be entitled to
receive that portion of the Base Salary and all benefits accrued through the
date of termination.
(b) Termination by Company Other Than for "Cause."
----------------------------------------------
i) Death. Provided that notice of termination has not
-----
previously been given under any Section hereof, if Executive shall die during
the term of this Agreement, this Agreement and all of the Company's obligations
hereunder shall terminate, except that Executive's estate or designated
beneficiaries shall be entitled to receive (A) all earned and
4
<PAGE>
unpaid Base Salary through the date of termination; (B) the Base Salary, Bonus,
and all benefits with respect to the then current contract year which would have
been payable or provided to Executive had the term ended one year following the
last day of the month in which Executive's death occurred; and (C) all other
benefits that may be due to Executive or Executive's estate or beneficiaries
under the general provisions of any benefit plan, stock incentive plan or other
plan in which Executive is then a participant, which benefits shall continue to
be provided for a period of one year following the date of death. In addition,
all stock options that have become exercisable as of the date of death shall
remain so for a period of twelve (12) months. All payments required to be made
under this Section 6(b)(i) shall be made pursuant to the payment schedule in
effect at the date of Executive's death.
ii) Disability. Provided that notice of termination has not
----------
previously been given under any Section hereof, if Executive becomes ill or is
injured or disabled during the term such that Executive fails to perform all or
substantially all of the duties to be rendered hereunder and such failure
continues for a period in excess of 26 consecutive weeks (a "Disability"), the
Company shall continue to employ Executive under this Agreement for one year
from the date of the Disability (which one year period shall commence at the
beginning of the 26 week period referred to herein) and shall continue to pay
Executive the Base Salary in effect on the date of the Disability (determined at
the beginning of the 26 week period referred to herein), the Bonus, and all
benefits then in effect; provided, that (A) the Company may relieve Executive of
his duties and responsibilities hereunder to the extent permitted by law and (B)
any long-term disability payments received by Executive under any disability
insurance plan made available to Executive by the Company if the premiums were
paid by the Company shall be deducted from the salary and bonus payments
otherwise required to be paid to Executive hereunder. If during the term and
subsequent to the Disability commencement date (which shall be at any time
following the end of the 26 week period referred to herein) Executive shall
fully recover, the Company shall have the right (exercisable within 60 days
after receipt of notice from Executive of such recovery), but not the
obligation, to restore Executive to full-time service at full compensation. If
the Company elects not to restore Executive to full-time service, Executive
shall be entitled to obtain other employment. If Executive is not restored to
full-time employment with the Company, all stock options that have become
exercisable as of the date of Disability (determined at the end of the 26 week
period referred to herein) shall remain so for a period of twelve (12) months.
iii) Without Cause. If the Company elects to terminate Executive
-------------
for any reason whatsoever (a "Severance Termination"), Executive shall receive
three times the greater of (i) Employee's Base Salary and Bonus received during
the immediately preceding year; and (ii) Employee's Base Salary and Bonus
(determined on a pro rata basis if employment is terminated pursuant to this
Section during the year) for the current year. In addition, all options
granted over the term shall become immediately exercisable and shall remain
exercisable for a period of twelve (12) months. In the event of a Severance
Termination, Executive will also be provided with reasonable office space and
secretarial support as well as the same mailing address and telephone number
which Executive had during the term for up to twelve months,
5
<PAGE>
and the Company shall pay the costs of outplacement services with a provider of
Executive's choice at a level appropriate to Executive's title and position as
requested by Executive.
The parties believe that the above payments do not constitute "Excess
Parachute Payments" under Section 280G of the Code. Notwithstanding such
belief, if any benefit under the preceding paragraph is determined to be an
"Excess Parachute Payment" the Company shall pay Executive an additional amount
("Tax Payment") such that (x) the excess of all Excess Parachute Payments
(including payments under this sentence) over the sum of excise tax thereon
under Section 4999 of the Code and income tax thereon under Subtitle A of the
Code and under applicable state law is equal to (y) the excess of all Excess
Parachute Payments (excluding payments under this sentence) over income tax
thereon under Subtitle A of the Code and under applicable state law.
(c) Prohibited Termination. Notwithstanding any other provision in
----------------------
this Section 6, so long as Executive beneficially owns 10% or more of the
outstanding shares of common stock of the Company (the "Common Stock"), or,
collectively with Mr. Walter Villaume, beneficially owns 20% or more of the
outstanding shares of Common Stock, the Company may not terminate Employee under
any circumstances. For purposes of this paragraph, "beneficial ownership" shall
have the meaning set forth in Rule 13d-3 promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
(d) Termination by Executive. Executive may (but shall not be
------------------------
obligated to) terminate this Agreement effective 30 days after the giving of
such notice given at any time within two years following a Change in Control (as
defined herein) or upon the occurrence of any of the following events: (i) the
Company shall fail to pay or shall reduce the Base Salary, Bonus or other
benefits provided herein, except as permitted hereunder, or shall otherwise
breach any material provision hereof which breach is not cured within 10 days
after receipt of notice thereof from Executive; (ii) the Company shall fail to
cause Executive to remain the President of the Company; (iii) Executive shall
not be continuously afforded the authority, powers, responsibilities and
privileges contemplated in Section 1 above (whether or not accompanied by a
change in title); (iv) the Company shall require Executive's primary services to
be rendered in an area other than the Company's principal offices in the Irvine,
California area; or (v) after a Change in Control, the Company increases the
base salary for senior executives of the Company generally without similarly
increasing the Base Salary of Executive. For purposes of clause (iii),
Executive shall be deemed not to have been continuously afforded the authority,
powers, responsibilities and privileges contemplated in Section 1 above if there
shall occur any reduction in the scope, level or nature of Executive's
employment hereunder, or any demotion, any phasing out or assignment to others,
of the duties contemplated herein.
As full payment of any amounts due and owing to Executive if
termination occurs under this Section, if Executive elects to terminate the
Agreement as a result of a Change in Control or for any other reason set forth
in clauses (i) through (v) above, then Executive shall have no further
obligation to perform services for the Company but shall be entitled to receive
6
<PAGE>
from the Company the Severance Package (as defined above). In addition, all
options which would vest as of the next scheduled vesting date term shall become
immediately exercisable and all vested options shall remain exercisable for the
balance of their 10-year term.
(e) Payment of Termination Amounts. Executive may elect to have all
------------------------------
amounts to be paid to Executive pursuant to this Section 6 payable (i) over the
remaining term of this Agreement or for such shorter period as expressly
provided for herein, as applicable, or (ii) in a lump sum within 30 days
following termination; provided, however, in each case, the Bonus component
-----------------
shall be payable as scheduled in Section 3(b) hereof. In the event Executive
elects to be paid pursuant to clause (i), Executive agrees promptly to notify
the Company in writing of Executive's acceptance of full-time employment; within
15 days after receipt of such notice, the Company shall pay Executive in a lump
sum any amounts which remain otherwise due to Executive hereunder.
(f) Stock and Similar Rights. Except with regard to the vesting and
------------------------
exercise dates of options as set forth in this Section 6, Executive's rights
under any other agreement or plan under which stock options, restricted stock or
similar awards are granted shall be determined in accordance with the terms and
provisions of such plans or agreements.
(g) No Mitigation or Offset. Payment of any sum under this Section 6
-----------------------
shall not be subject to any claim of mitigation nor shall the Company be
entitled to any right of offset with respect thereto.
(h) Other Insurance Policies. Upon any termination of Executive's
------------------------
employment, and upon reimbursement of the Company of all amounts paid by the
Company in connection with such policies, Executive shall have the right to
purchase or otherwise direct the disposition or assignment of any disability
insurance policy on him held by the Company (excluding only group disability
insurance policies) upon the payment of One Dollar ($1.00) as the total
consideration for each such policy.
7. Change in Control. For purposes of this Agreement, a "Change in
-----------------
Control" shall mean the occurrence of any of the following events which occur
after the date hereof:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act ("Rule 13d-3")) of 20% or more of the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Voting Securities"); provided,
--------
however, that neither of the following acquisitions shall constitute a Change in
- -------
Control; (i) any acquisition by the Company or (ii) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by the Company
or any corporation controlled by the Company; or
7
<PAGE>
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
-------- -------
the date hereof whose election, or nomination for election by the stockholders
of the Company, shall be approved by a vote of a least a majority of the
directors then compromising the Incumbent Board shall be considered as though
such individual were a member of the Incumbent Board; or
(c) The election of a director absent the approval of both Executive
and Todd Rodriguez; or
(d) Approval by the stockholders of the Company of a reorganization,
merger or consolidation, in each case, unless, following such reorganization,
merger or consolidation: (i) more than 60% of the combined voting power of the
then outstanding voting securities of the corporation resulting from such
reorganization, merger, or consolidation, which may be the Company (the
"Resulting Corporation") entitled to vote generally in the election of directors
(the "Resulting Corporation Voting Securities") shall then be owned
beneficially, directly or indirectly, by all or substantially all of the Persons
who were the beneficial owners of Outstanding Voting Securities immediately
prior to such reorganization, merger or consolidation, in substantially the same
proportions as their respective ownerships of Outstanding Voting Securities
immediately prior to such reorganization, merger, or consolidation; (ii) no
Person (excluding the Company, any employee benefit plan (or related trust) of
the Company, the Resulting Corporation, and any Person beneficially owning,
immediately prior to such reorganization, merger or consolidation, directly or
indirectly, 20% or more of the combined voting power of Outstanding Voting
Securities) shall own beneficially, directly or indirectly 20% or more of the
combined voting power of the Resulting Corporation Voting Securities; and (iii)
at least a majority of the members of the Board of the Resulting Corporation
shall have been members of the Incumbent Board at the time of the execution of
the initial agreement providing for such reorganization, merger or
consolidation; or
(e) Approval by the stockholders of the Company of (i) a complete
liquidation or dissolution of the Company or (ii) the sale or other disposition
of all or substantially all of the assets of the Company, other than to a
corporation (the "Buyer") with respect to which (x) following such sale or other
disposition, more than 60% of the combined voting power of securities of Buyer
entitled to vote generally in the election of directors ("Buyer Voting
Securities"), shall be owned beneficially, directly or indirectly, by all or
substantially all of the Persons who were the beneficial owners of the
Outstanding Voting Securities immediately prior to such sale or other
disposition, in substantially the same proportion as their respective ownership
of Outstanding Voting Securities, immediately prior to such sale or other
disposition; (y) no Person (excluding the Company and any employee benefit plan
(or related trust) of the Company or Buyer and any Person that shall immediately
prior to such sale or other disposition own beneficially, directly or
indirectly, 20% or more of the combined voting power of Outstanding Voting
Securities), shall own beneficially, directly or indirectly, 20% or more of the
combined voting power or, Buyer Voting Securities; and (z) at least a majority
of the members of the board of directors of Buyer shall have been members of the
Incumbent Board
8
<PAGE>
at the time of the execution of the initial agreement or action of the Board
providing for such sale or other disposition or assets of the Company.
8. Insurance. During the term, the Company shall maintain, at no cost to
---------
Executive, officers and directors liability insurance that would cover Executive
in an amount of no less than $5,000,000.
9. Registration Rights.
--------------------
(a) Piggyback Registration Rights. If at any time the Company shall
-----------------------------
propose to register any shares of Common Stock (but excluding any shares or
securities being registered pursuant to Form S-8 or Form S-4 or any successor
form thereto), the Company shall (i) give the Executive written notice, or
telegraphic, telecopy or telephonic notice followed as soon as practicable by
written confirmation thereof, of such proposed registration at least 20 business
days prior to the filing of such registration statement and, (ii) upon written
notice, or telegraphic or telephonic notice followed as soon as practicable by
written confirmation thereof, given to the Company by the Executive within 15
days after the giving of such written confirmation or written notice by the
Company, the Company shall include or cause to be included in any such
registration statement all or such portion of the shares of common stock of the
Company owned by Executive (the "Shares") as the Executive may request;
provided, however, that the Company may at any time withdraw or cease proceeding
- -------- -------
with any such registration if it shall at the same time withdraw or cease
proceeding with the registration of the Common Stock originally proposed to be
registered; and provided further, that in connection with any registered public
----------------
offering involving an underwriting, the managing underwriter may (if in its
reasonable opinion marketing factors so require) limit the number of securities
(including any Shares) included in such offering (other than securities of the
Company); and provided further, that the registration rights granted in this
----------------
Section 9(a) are granted subject to the demand registration rights granted to CS
First Boston Corporation pursuant to that certain Warrant Agreement dated
October 2, 1996 between CS First Boston Corporation and the Company (the
"Warrant Agreement") which may serve to further limit or extinguish Executive's
right to include any portion of the Shares in certain registrations. In the
event of any such limitation, and to the extent the provisions of the Warrant
Agreement permit, the total number of Shares to be offered for the account of
Executive in the registration shall be reduced in proportion to the respective
number of shares requested to be included therein by all holders of the
Company's Common Stock (other than the Company) entitled to include shares of
Common Stock in the registration to the extent necessary to reduce the total
number of shares proposed to be registered to the number of shares recommended
by the managing underwriter.
(b) Company's Obligations in Piggyback Registration. The following
-----------------------------------------------
provisions shall also be applicable at the sole cost and expense of the Company
in the case of registrations under Section 7(a):
9
<PAGE>
i) Following the effective date of such registration statement, the
Company shall, upon the request of Executive, forthwith supply such number of
prospectuses meeting the requirements of the Securities Act of 1933, as amended
(the "Securities Act") as shall be requested by Executive to permit Executive to
make a public distribution of all of the Shares, provided that Executive shall
from time to time furnish the Company with such appropriate information
(relating to the intentions of Executive) in connection therewith as the Company
shall request in writing.
ii) the Company shall bear the entire cost and expense of the
registration of securities provided for in this Section (but not the selling
expenses of Executive).
iii) the Company shall indemnify and hold harmless Executive from and
against any and all losses, claims, damages and liabilities (including
reasonable fees and expenses of counsel) arising out of or based upon any untrue
statement or alleged untrue statement of a material fact contained in any
registration statement or any prospectus included therein required to be filed
or furnished by reason of this Section or otherwise or in any application or
other filing under, the Securities Act or any other applicable Federal or state
securities law, or arising out of or based upon any omission or alleged omission
to state therein a material fact required to be stated therein (i.e., in any
such registration statement, prospectus, application or other filing) or
necessary to make the statements therein not misleading, to which such person
may become subject, or any violation or alleged violation by the Company to
which such Person may become subject, under the Securities Act, the Exchange Act
or other Federal or state laws or regulations, at common law or otherwise,
except to the extent that such losses, claims, damages or liabilities are caused
by any such untrue statement or alleged untrue statement or omission or alleged
omission based upon and in strict conformity with written information furnished
to the Company by such person expressly for use therein; provided however, that
-------- -------
Executive shall at the same time indemnify the Company, its directors, each
officer signing the related registration statement, and each person, if any, who
controls the Company within the meaning of the Securities Act, from and against
any and all losses, claims, damages and liabilities (including reasonable fees
and expenses of counsel) arising out of or based upon any untrue statement or
alleged untrue statement of a material fact contained in any registration
statement or any prospectus included therein required to be filed or furnished
by reason of this Section, or otherwise or in any application or other filing
under, the Securities Act or any other applicable Federal or state securities
law, or arising out of or based upon any omission or alleged omission to state
therein a material fact required to be stated therein (i.e., in any such
registration statement, prospectus, application or other filing) or necessary to
make the statements therein not misleading, to which such person may become
subject, or any violation or alleged violation by Executive to which the
Company, its directors, each officer signing the related registration statement,
and each person, if any, who controls the Company within the meaning of the
Securities Act, may become subject, under the Securities Act, the Exchange Act,
or other Federal or state laws or regulations, at common law or otherwise, to
the extent that such losses, claims, damages or liabilities are caused by any
such untrue statement or alleged untrue statement or omission or alleged
omission based upon and in strict conformity with written information furnished
to the Company by Executive expressly for use therein.
10
<PAGE>
iv) In the event any person entitled to indemnification hereunder
receives in writing a complaint, claim or other written notice of any loss,
claim, damage, liability or action giving rise to a claim for indemnification
under Section 10(b)(iii), the person claiming indemnification under Section
10(b)(iii) shall promptly notify the person or persons against whom
indemnification is sought (the "Indemnitor") of such complaint, notice, claim or
action, and the Indemnitor shall have the right to investigate and defend any
such loss, claim, damage, liability or action. The person claiming
indemnification shall have the right to employ separate counsel in any such
action and to participate in the defense thereof but the fees and expenses of
such counsel shall not be at the expense of the Indemnitor. In no event shall
the Indemnitor be obligated to indemnify any person for any settlement of any
claim or action effected without the Indemnitor's consent, which consent shall
not be unreasonably withheld.
10. Waiver of Conflict.
-------------------
The Company hereby acknowledges that Employee had an equity interest in
Pacific Prime, a sole proprietorship, engaged in the origination of mortgage
loans and the subsequent sale of all or a portion of such loans to the Company.
The Company hereby waives any conflict of interest and/or claims for relief
relating to transactions that have occurred or may occur between Pacific Prime
and the Company.
11. General Provisions.
------------------
(a) Notices. All notices, requirements, requests, demands, claims or
-------
other communications hereunder shall be in writing. Any notice, requirement,
request, demand, claim or other communication hereunder shall be deemed duly
given (i) if personally delivered, when so delivered, (ii) if mailed, two (2)
business days after having been set by registered or certified mail, return-
receipt requested, postage prepaid and addressed to the intended recipient as
set forth below, (iii) if given by telecopier, once such notice or other
communication is transmitted to the telecopier number specified below, and the
appropriate telephonic confirmation is received, provided that such notice or
other communication is promptly thereafter mailed in accordance with the
provisions of clause (ii) above or (iv) if sent through an overnight delivery
service under circumstances by which such service guarantees next day delivery,
the date following the date so sent:
If to the Company, to:
---------------------
Preferred Credit Corporation
3347 Michelson, Suite 400
Irvine, California 92612
Attn: President
Telecopy: (714) 660-3872
11
<PAGE>
If to Executive to:
------------------
to the address set forth in
the records of the Company
Any party may change the address to which notices, requests, demands, claims and
other communications hereunder are to be delivered by giving the other party
notice in the manner herein set forth.
(b) Assignment. This Agreement and the benefits hereunder are
----------
personal to the Company and are not assignable or transferable, nor may be the
services to be performed hereunder be assigned by the Company to any person,
firm or corporation; provided however, that this Agreement and the benefits
-------- -------
hereunder may be assigned by the Company to any corporation into which the
Company may be merged or consolidated, and this Agreement and the benefits
hereunder will automatically be deemed assigned to any such corporation,
subject, however, to Executive's right to terminate this Agreement to the extent
provided in Section 6. In the event of any assignment of this Agreement to any
corporation acquiring all or substantially all of the assets of the Company or
to any other corporation into which the Company may be merged or consolidated,
the responsibilities and duties assigned to Executive by such successor
corporation shall be the responsibilities and duties of, and compatible with the
status of, a senior executive officer of such successor corporation. The
Company may delegate any of its obligations hereunder to any subsidiary of the
Company, provided that such delegation shall not relieve the Company of any of
its obligations hereunder. Executive may not assign its rights hereunder or
delegate his duties hereunder to any Person.
(c) Complete Agreement. This Agreement contains the entire agreement
------------------
among the parties hereto with respect to the subject matter hereof and
supersedes and cancels any and all previous written or oral negotiations,
commitments, understandings, agreements and any other writings or communications
in respect of such subject matter.
(d) Amendments. This Agreement may be modified, amended, superseded
----------
or terminated only by a writing duly signed by both parties.
(e) Severability. Any provision of this Agreement which is invalid,
------------
illegal or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity, illegality or unenforceability,
without affecting in any way the remaining provisions hereof in such
jurisdiction or rendering that or any other provision of this Agreement invalid,
illegal or unenforceable in any other jurisdiction.
(f) No Waiver. Any waiver by either party of a breach of any
---------
provisions of this Agreement shall not operate as or be construed to be a waiver
of any other breach of such provision or of any breach of any other provision of
this Agreement. The failure of either party to insist upon strict adherence to
any term of this Agreement on one or more occasions shall not
12
<PAGE>
be considered a waiver or to deprive such party of the right thereafter to
insist upon strict adherence to that term or any other term of this Agreement.
(g) Binding Effect. This Agreement shall be binding on, and shall
--------------
inure to the benefit of, the parties hereto and their permitted assigns,
successors and legal representatives.
(h) Counterparts. This Agreement may be executed by the parties
------------
hereto in separate counterparts, each of which when so executed shall be deemed
to be an original and all of which when taken together shall constitute one and
the same document.
(i) Governing Law. This Agreement has been negotiated and entered
-------------
into in the State of California and shall be construed in accordance with the
laws of the State of California.
(j) Headings. The headings included in this Agreement are for the
--------
convenience of the parties only and shall not affect the construction or
interpretation of this Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on
its behalf by its duly authorized officer and Executive has executed the same as
of the day and year first above written.
PREFERRED CREDIT CORPORATION
------------------------------------
By:
---------------------------------
Its:
--------------------------------
WALTER VILLAUME
------------------------------------
13
<PAGE>
EXHIBIT 10.25
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement (this "Agreement") is made and entered into as of
December 1, 1996, by and between PREFERRED CREDIT CORPORATION, a California
corporation (the "Company"), and Terrance J. Wolfe, an individual ("Executive").
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, Executive and the Company wish to provide for the terms and
conditions of Executive's employment as Chief Credit Officer of the Company.
A G R E E M E N T
- - - - - - - - -
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and Executive agree as
set forth below.
1. Employment and Duties. The Company hereby employs Executive to serve
---------------------
as Chief Credit Officer of the Company, with the powers and duties customarily
accorded to such position, including those powers and duties set forth in the
Bylaws of the Company for such office and such other duties consistent therewith
as may be assigned to Executive from time to time by the Chief Executive
Officer, the President or the Board of Directors (the "Board") of the Company.
Initially, Executive's managerial and supervisorial duties shall be limited to
those departments and operations as determined by the Board and subsequently
expanded to include other departments and operations as directed by the Board.
Executive shall report directly to the Board. Executive shall endeavor in good
faith to perform his duties in an efficient, faithful and business-like manner.
In the event that the Company undergoes a reorganization pursuant to which
a holding company ("NewCo") for the common stock of the Company is formed, in
addition to serving as an employee of the Company, Employee shall be deemed an
employee of NewCo which additional employment also shall be governed pursuant to
the terms and conditions of this Agreement.
2. Term. The initial term of this Agreement shall begin on December 1,
----
1996 and expire on November 30, 2001 unless terminated earlier as set forth in
Section 6 hereof or by mutual agreement of the parties hereto (the "Initial
Term"). At the expiration of the Initial Term and each anniversary thereafter,
the term of this Agreement shall automatically be extended for an additional
year (the "Extension Term") unless either party shall have given written notice
to the other party at least six months prior to the end of the Initial Term or
the Extension Term, as the case may be, that it does not desire to extend the
term of this Agreement. If Executive's employment under this Agreement is
extended for an Extension Term, it shall thereafter or
<PAGE>
during any Extension Term be terminable (other than upon expiration) only as
provided in Section 6 or by mutual agreement of the parties hereto.
3. Base Salary. During the term of this Agreement, Executive shall be
-----------
paid a base salary (the "Base Salary"), payable in accordance with the Company's
normal payroll practice. During the first year of the term of this Agreement,
Executive's Base Salary shall be $240,000. The annual Base Salary payable to
Executive shall be reviewed at least annually; provided, however, that
-------- -------
Executive's Base Salary shall not be reduced below $240,000 per annum during the
term of this Agreement.
4. Other Executive Benefits. During the term of this Agreement, the
------------------------
Company shall provide to Executive benefits commensurate with his position,
including each of the following benefits:
(a) Medical and Dental Coverage. The Company agrees to provide
---------------------------
coverage to Executive and dependent members of his family under the same medical
and dental plans as may be maintained from time to time in the discretion of the
Board for the other executive officers of the Company.
(b) Vacation. Executive shall be entitled to three (3) weeks of paid
--------
vacation during Executive's first year of employment with the Company and shall
be entitled to four (4) weeks during each year of employment with the Company
thereafter for the term of this Agreement. In each case, such entitlement shall
accrue pro rata over the contract year and shall be taken at such time or times
as not to interfere with the necessary performance of Executive's duties and
obligations under this Agreement. Upon termination, Executive shall not be paid
the cash value of any accrued but unused vacation time.
(c) Business Expenses. The Company will pay or reimburse Executive
-----------------
for any out-of-pocket expenses incurred by Executive in the course of providing
his services hereunder, which comply with the Company's travel and expense
policies adopted from time to time by the Board for the executive officers.
(d) Other Benefits. The Company agrees to provide to Executive the
--------------
same level of benefits offered generally to the other executive officers,
including, if any, life insurance, pension or profit sharing plans and cafeteria
plans; provided, however, Executive shall have no right to participate in any
-------- -------
performance bonus or commission-based plan provided generally to other executive
officers nor shall this section be interpreted as giving the Executive the right
to benefits specifically provided to certain executive officers pursuant to
employment agreements.
5. Assignment of Developments and Non-Disclosure of Information.
------------------------------------------------------------
(a) Assignment. Executive hereby assigns and agrees to assign to the
----------
Company or its nominees, all of his rights to ideas, research, business plans
and strategies,
2
<PAGE>
computer programs, inventions, discoveries, improvements, and developments
("Developments"), whether or not copyrightable, patentable, or subject to trade
secret protection, which, during the period of Executive's employment by the
Company, Executive has made, conceived, or conducted, or hereafter may make or
conceive or conduct, either solely or jointly with others: (i) with the use of
the Company's time, materials, or facilities; or (ii) resulting from or
suggested by Executive's work for the Company; or (iii) in any way pertaining to
any subject matter related to the Company's existing or contemplated business,
products, and services; provided, however, that if such Developments pertain to
-------- -------
any matters related to the Company's contemplated business, products or
services, Executive shall not have been deemed to assign such Developments to
the Company if the Company does not engage in or actively market such business,
products or services within one year after termination of Executive's employment
by the Company. Notwithstanding the foregoing and in accordance with California
Labor Code Sections 2870 and 2872, the provisions of this Section 5(a) shall not
apply to any Development that Executive developed entirely on his own time
without using the Company's equipment, supplies, facilities or Information (as
that term is defined below), except for those Developments that either:
i) relate at the time of conception or reduction to practice of
the Development to the Company's business, or actual or demonstrably anticipated
research or development of the Company; or
ii) result from any work performed by Executive for the Company.
(b) Report of Developments. Executive shall make and maintain
----------------------
adequate and current written records of all such Developments and other
information generated or possessed by Executive which may be the subject of
trade secret protection, which may be in the form of notes, sketches, data input
and output formats, design specifications, flowcharts, drawings, forms, computer
program listings, data, or reports relating thereto; which records shall be and
remain the property of and available to the Company at all times. Executive
shall promptly disclose to the Company all such Developments and other
information generated or possessed by Executive.
(c) Execution of Documents. At any time requested by the Company,
----------------------
either during employment or after termination thereof, and without charge to the
Company, but at its expense, Executive agrees to execute, acknowledge, and
deliver all such further papers, including applications for patents and
registrations of copyrights, and to perform such other lawful acts as, in the
opinion of the Company, are necessary to obtain, maintain, or register patents
or copyrights for such Development in any and all countries and to vest title
thereto in the Company or its nominees.
(d) Non-Disclosure. Executive realizes that in the course of his
--------------
employment the Company will necessarily reveal to him or he may develop
proprietary, secret or confidential information, and in addition to all other
obligations with respect to the observance of federal and state statutes and
U.S. Government security regulations, Executive hereby agrees as follows:
3
<PAGE>
i) Executive agrees to keep in strictest confidence during and
subsequent to his employment all information identified as secret or
confidential or which, from the circumstances, in good faith and good
conscience ought to be treated as confidential, relating to the Company's
underwriting process or regarding the business plans and strategies,
computer programs and listings, inventions, discoveries, source code,
object or other executable code, manuals, hardcopy screen displays, data
input or output formats, improvements, developments, design specifications,
or trade secrets or secret processes, printouts, reports, client lists,
profit margins, or any other information of the business or affairs of the
Company (hereinafter collectively referred to as "Information") which
Executive may acquire or develop in connection with or as a result of his
employment.
ii) Executive covenants and agrees that, except as instructed by
Company during his employment, Executive will not use any Information and
without the prior written consent of Company, Executive will not directly
or indirectly publish, communicate, divulge, or describe to any
unauthorized person, nor patent or register a copyright for, any
Information during the period of his employment or at any time subsequent
thereto.
iii) This Section 5(d) shall not apply to Information already in
the public domain or Information which has been dedicated to or released to
the public by the Company.
(e) Return of Company Property. Upon termination of Executive's
--------------------------
employment, Executive agrees to return to the Company all property of the
Company of which Executive has had custody, including but not limited to all
Information, and all notebooks and other data relating to Developments made or
conceived by Executive, alone or in conjunction with others, and to make full
disclosure relating to such Developments.
(f) Prior Inventions. If, prior to employment with the Company,
----------------
Executive has made or conceived any Development, whether or not copyrightable or
patentable, which Executive desires to have excluded from this Agreement,
Executive has listed below a complete description thereof.
Asset-Backed Securitization Model Gain On Sale Model Excel ABS57.xls
- -------------------------------------------------------------------------------
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(g) Perpetual Nonexclusive License. Executive hereby grants to the
------------------------------
Company a perpetual nonexclusive license to use any Development, whether or not
copyrightable or patentable, made, developed, perfected, devised, conceived or
first reduced to practice by Executive prior to the date of this Agreement and
while not working for the Company which is
4
<PAGE>
utilized by the Company during the term of Executive's employment.
Notwithstanding anything contained herein to the contrary, this Section shall
survive the termination of this Agreement and the termination of Executive's
employment.
(h) Compliance Not Contingent Upon Additional Consideration.
-------------------------------------------------------
Executive has not been promised and Executive shall not require any additional
or special payment for compliance with the covenants and agreements herein
contained in this Section 5.
(i) Injunctive Relief. Executive agrees that the Company may suffer
-----------------
irreparable harm in the event that Executive fails or threatens not to comply
with any terms of this Agreement, and that monetary damages may be inadequate to
compensate the Company in such event. Accordingly, subject to the proviso in
Section 5(j), below, Executive agrees that the Company, in addition to any other
remedies available to it at law or in equity, including the right to monetary
damages, will be entitled to injunctive relief, without the posting of bond or
other security, to enforce this Agreement.
(j) Indemnification. Executive agrees to indemnify and hold Company
---------------
harmless from any loss or damage resulting from Executive's breach of this
Section 5; provided, however, that the Company's sole remedy for a breach of
-------- -------
Section 5(a), above, shall be injunctive relief and the Company shall not be
entitled to monetary damages.
6. Termination.
-----------
(a) Termination by Company for "Cause." The Company may terminate
-----------------------------------
this Agreement for "Cause" effective immediately upon written notice thereof to
Executive. For purposes of this Agreement, "Cause" shall include, but not be
limited to, the following events: (i) an act of fraud, embezzlement or similar
conduct by Executive involving the Company; (ii) any action by Executive
involving the arrest of Executive for violation of any criminal statute; or
(iii) a failure or refusal by Executive to perform his duties under this
Agreement.
In the event of termination for "Cause," Executive shall be entitled to
receive that portion of the Base Salary and all benefits accrued through the
date of termination.
(b) Termination by Company Other Than for "Cause."
----------------------------------------------
i) Death. Provided that notice of termination has not
-----
previously been given under any Section hereof, if Executive shall die during
the term of this Agreement, this Agreement and all of the Company's obligations
hereunder shall terminate, except that Executive's estate or designated
beneficiaries shall be entitled to receive (i) all earned and unpaid Base Salary
through the date of termination; and (ii) all other benefits that may be due to
Executive or Executive's estate or beneficiaries under the general provisions of
any benefit plan, stock incentive plan or other plan in which Executive is then
a participant.
5
<PAGE>
ii) Disability. Provided that notice of termination has not
----------
previously been given under any Section hereof, if Executive becomes ill or is
injured or disabled during the term of this Agreement, such that Executive fails
to perform all or substantially all of the duties to be rendered hereunder and
such failure continues for a period in excess of 26 consecutive weeks, this
Agreement and all of the Company's obligations hereunder may be terminated by
the Company effective immediately upon written notice thereof to Executive,
except that Executive shall be entitled to receive (i) all earned and unpaid
Base Salary through the date of termination; and (ii) all other benefits that
may be due to Executive under the general provisions of any benefit plan, stock
incentive plan or other plan in which Executive is then a participant.
iii) Without Cause. The Company may terminate this Agreement
-------------
without "Cause" effective immediately upon written notice thereof to Executive.
In the event of termination without "Cause," Executive shall be entitled to
receive that portion of the Base Salary and all benefits accrued through the
date of termination.
(c) Termination by Executive. Executive may terminate this Agreement
------------------------
for "Good Cause" effective 30 days after giving the Company written notice of
the event(s) constituting Good Cause; provided, the Company does not cure the
--------
situation giving rise to Good Cause within 15 days after receipt of such notice
from Executive. Unless initiated or concurred in by Executive, each of the
following events shall constitute an event for "Good Cause:" (i) a decrease in
Executive's Base Salary; (ii) action on the part of the Board that makes it
impossible or impractical for Executive to perform his duties under this
Agreement; (iii) a change in the location at which Executive customarily
performs his duties of more than 50 miles from the present location in Irvine,
California; (iv) the acquisition of all or substantially all of the business of
the Company (whether by sale of stock, sale of assets, merger, or consolidation
or otherwise) in connection with which the purchaser(s) thereof do not either
confirm, in writing, the continued effectiveness of this Agreement or assume
this Agreement; or (v) a breach by the Company of any of its material
obligations to Executive under this Agreement.
(d) Stock and Similar Rights. Executive's rights under any other
------------------------
agreement or plan under which stock options, restricted stock or similar awards
are granted shall be determined in accordance with the terms and provisions of
such plans or agreements.
(e) No Mitigation or Offset. Payment of any sum under this Section 6
-----------------------
shall not be subject to any claim of mitigation nor shall the Company be
entitled to any right of offset with respect thereto.
7. Directors and Officers Insurance. The Company agrees to provide, at
--------------------------------
its sole cost, at all times after its initial public offering to the extent
appropriate and necessary, directors and officers insurance naming Executive as
an insured, which directors and officers insurance shall provide for coverage
for covered actions occurring while Executive is employed by the Company,
notwithstanding that at the time of any action against Executive, he may not be
employed by the Company. Such directors and officers insurance shall be at
least as favorable
6
<PAGE>
as the coverage generally recommended for companies engage in the business in
which the Company is engaged.
8. General Provisions.
------------------
(a) Notices. All notices, requirements, requests, demands, claims or
-------
other communications hereunder shall be in writing. Any notice, requirement,
request, demand, claim or other communication hereunder shall be deemed duly
given (i) if personally delivered, when so delivered, (ii) if mailed, two (2)
business days after having been set by registered or certified mail, return-
receipt requested, postage prepaid and addressed to the intended recipient as
set forth below, (iii) if given by telecopier, once such notice or other
communication is transmitted to the telecopier number specified below, and the
appropriate telephonic confirmation is received, provided that such notice or
other communication is promptly thereafter mailed in accordance with the
provisions of clause (ii) above or (iv) if sent through an overnight delivery
service under circumstances by which such service guarantees next day delivery,
the date following the date so sent:
If to the Company, to:
---------------------
Preferred Credit Corporation
3347 Michelson, Suite 400
Irvine, California 92612
Attn: President
Telecopy: (714) 660-3872
If to Executive to:
------------------
to the address set forth in
the records of the Company
Any party may change the address to which notices, requests, demands, claims and
other communications hereunder are to be delivered by giving the other party
notice in the manner herein set forth.
(b) Assignment. This Agreement and the benefits hereunder are
----------
personal to the Company and are not assignable or transferable, nor may be the
services to be performed hereunder be assigned by the Company to any person,
firm or corporation; provided however, that this Agreement and the benefits
-------- -------
hereunder may be assigned by the Company to any corporation into which the
Company may be merged or consolidated, and this Agreement and the benefits
hereunder will automatically be deemed assigned to any such corporation,
subject, however, to Executive's right to terminate this Agreement to the extent
provided in Section 6. In the event of any assignment of this Agreement to any
corporation acquiring all or substantially all of the assets of the Company or
to any other corporation into which the Company may be merged or consolidated,
the responsibilities and duties assigned to Executive by such successor
7
<PAGE>
corporation shall be the responsibilities and duties of, and compatible with the
status of, a senior executive officer of such successor corporation. The
Company may delegate any of its obligations hereunder to any subsidiary of the
Company, provided that such delegation shall not relieve the Company of any of
its obligations hereunder. Executive may not assign its rights hereunder or
delegate his duties hereunder to any Person.
(c) Complete Agreement. This Agreement contains the entire agreement
------------------
among the parties hereto with respect to the subject matter hereof and
supersedes and cancels any and all previous written or oral negotiations,
commitments, understandings, agreements and any other writings or communications
in respect of such subject matter.
(d) Amendments. This Agreement may be modified, amended, superseded
----------
or terminated only by a writing duly signed by both parties.
(e) Severability. Any provision of this Agreement which is invalid,
------------
illegal or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity, illegality or unenforceability,
without affecting in any way the remaining provisions hereof in such
jurisdiction or rendering that or any other provision of this Agreement invalid,
illegal or unenforceable in any other jurisdiction.
(f) No Waiver. Any waiver by either party of a breach of any
---------
provisions of this Agreement shall not operate as or be construed to be a waiver
of any other breach of such provision or of any breach of any other provision of
this Agreement. The failure of either party to insist upon strict adherence to
any term of this Agreement on one or more occasions shall not be considered a
waiver or to deprive such party of the right thereafter to insist upon strict
adherence to that term or any other term of this Agreement.
(g) Binding Effect. This Agreement shall be binding on, and shall
--------------
inure to the benefit of, the parties hereto and their permitted assigns,
successors and legal representatives.
(h) Counterparts. This Agreement may be executed by the parties
------------
hereto in separate counterparts, each of which when so executed shall be deemed
to be an original and all of which when taken together shall constitute one and
the same document.
(i) Governing Law. This Agreement has been negotiated and entered
-------------
into in the State of California and shall be construed in accordance with the
laws of the State of California.
(j) Headings. The headings included in this Agreement are for the
--------
convenience of the parties only and shall not affect the construction or
interpretation of this Agreement.
8
<PAGE>
(k) Attorneys' Fees. In the event of any controversy, claim or
---------------
dispute between the parties hereto arising out of or relating to this Agreement,
the prevailing party shall be entitled to receive his or its reasonable
attorneys' fees, expenses and costs.
9
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on
its behalf by its duly authorized officer and Executive has executed the same as
of the day and year first above written.
PREFERRED CREDIT CORPORATION
/s/ Todd Rodriguez
------------------------------------------------------
By: Todd Rodriguez
-------------------------------------------------
Its: Chief Executive Officer
-------------------------------------------------
TERRANCE J. WOLFE
/s/ Terrance J. Wolfe
-----------------------------------------------------
10
<PAGE>
EXHIBIT 10.26
PREFERRED MORTGAGE CORPORATION
EMPLOYMENT AGREEMENT
This Agreement is made among T.A.R. Preferred Mortgage Corporation, a
California corporation ("PMC") and LI-LIN KO ("KO"), as of this 14th day of
September, 1995.
PMC and KO hereby agree that KO shall act as Chief Financial Officer.
1. RESPONSIBILITIES.
1.1 KO'S DUTIES.
1.1.1 FINANCIAL MANAGEMENT. KO shall be responsible for financial
management, accounting, banking and credit requirements of PMC.
2. COMPENSATION OF KO.
2.1 COMPENSATION RATE. KO shall be paid a annual salary of $110,000.00,
payable in equal installments twice monthly. On the 15th day of each month, KO
shall be paid salary for the 23rd day of the previous month through the 7th day
of the current month, and on the last day of the month KO shall be paid salary
for the 8th through the 23rd day of the current month. In the discretion of PMC,
the company may elect to pay additional compensation to KO as a bonus on all
annual basis.
2.2 STOCK OPTION. In addition, in the event PMC elects to issue shares of
common stock to the general public through an initial public offering, KO shall
be granted an option to acquire the number of shares equal to 1/2 of 1% of the
shares retained by the management of PMC following the initial public offering.
The purchase price to be equal to the 5 times the earnings per share based on
audited financial statements for PMC dated 12/31/95, as adjusted for the number
of shares to be issued and outstanding at time of public offering. As of
12/31/95 PMC has 1999 shares issued and outstanding. Stock option to be 100%
vested as of 12/31/95, and shall expire upon: i) the termination of employment
of KO for cause; ii) employment of KO with a competitor of PMC; or iii) the
expiration of 6 months from the date of termination of KO for any other reason.
2.3 BENEFITS AND EMPLOYMENT. KO shall be employed by PMC as Chief
Financial Officer, in such capacity KO is entitled to all normal PMC benefits to
which equivalent PMC employees are entitled. It is understood that KO's
employment should not be construed as employment for a fixed term, but that it
is employment at will, terminable by either KO or PMC at any time, with or
without cause. KO shall devote full working time, attention and energy to the
performance of the duties set forth herein, and shall not represent, perform
services for or be employed in any other business pursuits.
<PAGE>
Notwithstanding PMC's usual vacation policy, KO shall receive two weeks
paid vacation in her First year of employment which may be taken during the
first year of employment. Vacation days not taken in the current year will be
allowed to accrue into the next year.
2.4 BUSINESS EXPENSES. KO shall not incur any expenses or obligations on
behalf of PMC. PMC shall reimburse KO for reasonable expenses incurred by KO,
including but not limited to expenses for promotional activities, membership
dues, equipment or transportation, pager, work related educational courses and
transportation, subject to management approval.
3. REMEDIES AND TERMINATION.
3.1 TERMINATION OF AGREEMENT. This Agreement shall terminate immediately
upon (i) any habitual neglect or willful breach of duty by KO, (ii) financial
insolvency or bankruptcy filing by KO or PMC, (iii) KO's assignment or attempted
assignment of any of her rights or obligations under this Agreement, or (iv) the
restriction of KO's activities by any agency of the State or Federal government.
In addition, KO and PMC shall each have the right to immediately terminate this
Agreement at any time with or without cause upon the delivery of written notice
to the other.
4. MISCELLANEOUS.
4.1 NO ASSIGNMENT. This Agreement is in the nature of a personal service
agreement and accordingly may not be assigned by KO.
4.2 PROPRIETARY INFORMATION. During the term of this agreement, KO shall
become aware of certain confidential information regarding PMC and its projects
and activities. KO shall not directly or indirectly disclose to any third person
or use for the benefit of anyone other than PMC, either during or after the term
of this Agreement, any trade secret or confidential information of PMC, whether
relating to the work performed hereunder or to the business and affairs of PMC
or any client or vendor of PMC.
4.3 NOTICES. All notices, requests, demands and other communication which
are required or permitted to be given trader this Agreement shall be in writing
and shall be deemed to have been duly given upon the deliver or mailing thereof,
sent by registered or certified mail, return receipt requested, postage paid,
unless another address is subsequently stated in writing by that party, as
follows:
If to KO to:
Li-Lin Ko
34 Dewey
Irvine, CA 92720
2
<PAGE>
If to PMC to:
Preferred Mortgage Corporation
23722 Birtcher Drive
Lake Forest, CA 92630
Attn: Todd A. Rodriguez, President
with a copy to;
Preferred Mortgage Corporation
19782 MacArthur Boulevard
Suite 250
Irvine, CA 92715
Attn: Walter F. Villaume
4.4 GOVERNING LAW. This Agreement is made and entered into in the State
of California, County of Orange, and shall be governed by the laws of such
state. Exclusive venue for any dispute under this agreement shall be in the
Superior Court of the State of California, for the County of Orange, Santa Ana,
California or the United States District Court located in Santa Ana, California.
4.5 SEVERABILITY. If one or more of the covenants, agreements, provisions
or terms of this Agreement shall be for any reason whatsoever held to be invalid
or unenforceable, then such covenants, agreements, provisions and terms shall be
deemed severable from the remaining covenants, agreements, provision and terms
of this Agreement and shall in no way affect the validity or enforceability of
the other covenants, agreements, provisions or terms of this Agreement.
4.6 SUCCESSORS. This Agreement shall be binding upon, and inure to the
benefit of, the parties hereto and their respective successors and assigns,
provided, however, that KO may not assign any of her rights or obligations
hereunder.
4.7 ATTORNEYS FEES. The prevailing party in any litigation arising under
this agreement shall be entitled to recover its costs incurred, including
reasonable attorneys' fees, from the other party.
4.8 ENTIRE AGREEMENT. This Agreement constitutes the entire understanding
between the parties hereto and supersedes all other agreements, understanding
and communications between the parties whether written or oral, with respect to
rite transact on contemplated by this Agreement. Any prior agreements, promises,
negotiations, or representations not expressly set forth in this Agreement are
of no force and effect. Any modifications or waivers must be in writing,
executed by authorized officers of the party granting the modification or
waiver. Any deferral, forbearance or extension of time granted by PMC, or other
action by PMC which has
3
<PAGE>
the effect of allowing KO to perform outside the written letters of this
Agreement (i) shall not operate to release KO from any of KO's obligations,
duties, covenants, agreements, representations, and/or warranties under this
Agreement; (ii) shall not be a waiver or preclude PMC from exercising any of
PMC's rights or remedies under this Agreement; and (iii) shall not be deemed to
establish a "course of conduct" which rises to the level of a modification or
amendment to this Agreement.
4.9 INTERPRETATION. Unless the context otherwise requires, all words used
in the singular form shall extend to the plural and all words in the plural form
shall extend to and include the singular; all words used in any gender shall
extend to and include all genders. The paragraph headings of this Agreement are
inserted for convenience only, and do not in any manner limit or expand this
Agreement and do not constitute a part of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
PMC: KO:
T.A.R. MORTGAGE CORPORATION,
a California corporation
By: /s/ Todd A. Rodriguez /s/ Li-Lin Ko
--------------------- -------------
Todd A. Rodriquez Li-Lin Ko
Chief Executive Officer
By: /s/ Walter F. Villaume
----------------------
Walter F. Villaume
President and Secretary
4
<PAGE>
EXHIBIT 10.27
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement (this "Agreement") is made and entered into as of
April 1, 1997, by and between PREFERRED CREDIT CORPORATION, a California
corporation (the "Company"), and John M. Shurance, an individual ("Executive").
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, Executive and the Company wish to provide for the terms and
conditions of Executive's employment as Chief Information Officer of the
Company.
A G R E E M E N T
- - - - - - - - -
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and Executive agree as
set forth below.
1. Employment and Duties. The Company hereby employs Executive to serve
---------------------
as Chief Information Officer of the Company, with the powers and duties
customarily accorded to such position, including those powers and duties set
forth in the Bylaws of the Company for such office and such other duties
consistent therewith as may be assigned to Executive from time to time by the
Chief Executive Officer, the President or the Board of Directors (the "Board")
of the Company. Initially, Executive's managerial and supervisorial duties shall
be limited to those departments and operations as determined by the Board and
subsequently expanded to include other departments and operations as directed by
the Board. Executive shall report directly to the Chief Executive Officer and
the President. Executive shall endeavor in good faith to perform his duties in
an efficient, faithful and business-like manner.
In the event that the Company undergoes a reorganization pursuant to which
a holding company ("NewCo") for the common stock of the Company is formed, in
addition to serving as an employee of the Company, Employee shall be deemed an
employee of NewCo which additional employment also shall be governed pursuant to
the terms and conditions of this Agreement.
2. Term. The initial term of this Agreement shall begin on April 1, 1997
----
and expire on March 31, 2002 unless terminated earlier as set forth in Section 6
hereof or by mutual agreement of the parties hereto (the "Initial Term"). At the
expiration of the Initial Term and each anniversary thereafter, the term of this
Agreement shall automatically be extended for an additional year (the "Extension
Term") unless either party shall have given written notice to the other party at
least six months prior to the end of the Initial Term or the Extension Term, as
the case may be, that it does not desire to extend the term of this Agreement.
If Executive's employment under this Agreement is extended for an Extension
Term, it shall thereafter or during any Extension Term be terminable (other than
upon expiration) only as provided in Section 6 or by mutual agreement of the
parties hereto.
<PAGE>
3. Base Salary. During the term of this Agreement, Executive shall be
-----------
paid a base salary (the "Base Salary"), payable in accordance with the Company's
normal payroll practice. During the first year of the term of this Agreement,
Executive's Base Salary shall be $240,000. The annual Base Salary payable to
Executive shall be reviewed at least annually; provided, however, that
-------- -------
Executive's Base Salary shall not be reduced below $240,000 per annum during the
term of this Agreement.
4. Other Executive Benefits. During the term of this Agreement, the
------------------------
Company shall provide to Executive benefits commensurate with his position,
including each of the following benefits:
(a) Medical and Dental Coverage. The Company agrees to provide
---------------------------
coverage to Executive and dependent members of his family under the same medical
and dental plans as may be maintained from time to time in the discretion of the
Board for the other executive officers of the Company.
(b) Vacation. Executive shall be entitled to three (3) weeks of paid
--------
vacation during Executive's first year of employment with the Company and shall
be entitled to four (4) weeks during each year of employment with the Company
thereafter for the term of this Agreement. In each case, such entitlement shall
accrue pro rata over the contract year and shall be taken at such time or times
as not to interfere with the necessary performance of Executive's duties and
obligations under this Agreement. Upon termination, Executive shall not be paid
the cash value of any accrued but unused vacation time.
(c) Business Expenses. The Company will pay or reimburse Executive for
-----------------
any out-of-pocket expenses incurred by Executive in the course of providing his
services hereunder, which comply with the Company's travel and expense policies
adopted from time to time by the Board for the executive officers.
5. Assignment of Developments and Non-Disclosure of Information.
------------------------------------------------------------
(a) Assignment. Executive hereby assigns and agrees to assign to the
----------
Company or its nominees, all of his rights to ideas, research, business plans
and strategies, computer programs, inventions, discoveries, improvements, and
developments ("Developments"), whether or not copyrightable, patentable, or
subject to trade secret protection, which, during the period of Executive's
employment by the Company, Executive has made, conceived, or conducted, or
hereafter may make or conceive or conduct, either solely or jointly with others:
(i) with the use of the Company's time, materials, or facilities; or (ii)
resulting from or suggested by Executive's work for the Company; or (iii) in any
way pertaining to any subject matter related to the Company's existing or
contemplated business, products, and services. Notwithstanding the foregoing and
in accordance with California Labor Code Sections 2870 and 2872, the provisions
of this Section 5(a) shall not apply to any Development that Executive developed
entirely on his own time without using the Company's equipment, supplies,
facilities or Information (as that term is defined below), except for those
Developments that either:
2
<PAGE>
i) relate at the time of conception or reduction to practice of
the Development to the Company's business, or actual or demonstrably anticipated
research or development of the Company; or
ii) result from any work performed by Executive for the Company.
(b) Report of Developments. Executive shall make and maintain
----------------------
adequate and current written records of all such Developments and other
information generated or possessed by Executive which may be the subject of
trade secret protection, which may be in the form of notes, sketches, data input
and output formats, design specifications, flowcharts, drawings, forms, computer
program listings, data, or reports relating thereto; which records shall be and
remain the property of and available to the Company at all times. Executive
shall promptly disclose to the Company all such Developments and other
information generated or possessed by Executive.
(c) Execution of Documents. At any time requested by the Company,
----------------------
either during employment or after termination thereof, and without charge to the
Company, but at its expense, Executive agrees to execute, acknowledge, and
deliver all such further papers, including applications for patents and
registrations of copyrights, and to perform such other lawful acts as, in the
opinion of the Company, are necessary to obtain, maintain, or register patents
or copyrights for such Development in any and all countries and to vest title
thereto in the Company or its nominees.
(d) Non-Disclosure. Executive realizes that in the course of his
--------------
employment the Company will necessarily reveal to him or he may develop
proprietary, secret or confidential information, and in addition to all other
obligations with respect to the observance of federal and state statutes and
U.S. Government security regulations, Executive hereby agrees as follows:
i) Executive agrees to keep in strictest confidence during and
subsequent to his employment all information identified as secret or
confidential or which, from the circumstances, in good faith and good
conscience ought to be treated as confidential, relating to the Company's
underwriting process or regarding the business plans and strategies,
computer programs and listings, inventions, discoveries, source code,
object or other executable code, manuals, hardcopy screen displays, data
input or output formats, improvements, developments, design specifications,
or trade secrets or secret processes, printouts, reports, client lists,
profit margins, or any other information of the business or affairs of the
Company (hereinafter collectively referred to as "Information") which
Executive may acquire or develop in connection with or as a result of his
employment.
ii) Executive covenants and agrees that, except as instructed
by Company during his employment, Executive will not use any Information
and without the prior written consent of Company, Executive will not
directly or indirectly publish, communicate, divulge, or describe to any
unauthorized person, nor patent or register a copyright for, any
Information during the period of his employment or at any time subsequent
thereto.
3
<PAGE>
(iii) This Section 5(d) shall not apply to Information already in
the public domain or Information which has been dedicated to or released to
the public by the Company.
(e) Return of Company Property. Upon termination of Executive's
--------------------------
employment, Executive agrees to return to the Company all property of the
Company of which Executive has had custody, including but not limited to all
Information, and all notebooks and other data relating to Developments made or
conceived by Executive, alone or in conjunction with others, and to make full
disclosure relating to such Developments.
(f) Prior Inventions. If, prior to employment with the Company,
----------------
Executive has made or conceived any Development, whether or not copyrightable or
patentable, which Executive desires to have excluded from this Agreement,
Executive has listed below a complete description thereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(g) Perpetual Nonexclusive License. Executive hereby grants to the
------------------------------
Company a perpetual nonexclusive license to use any Development, whether or not
copyrightable or patentable, made, developed, perfected, devised, conceived or
first reduced to practice by Executive prior to the date of this Agreement and
while not working for the Company which is utilized by the Company during the
term of Executive's employment. Notwithstanding anything contained herein to the
contrary, this Section shall survive the termination of this Agreement and the
termination of Executive's employment. In particular, Executive has developed a
computer software program known as Loan Management System ("LMS"). Executive
grants to Company an irrevocable license to LMS.
(h) Compliance Not Contingent Upon Additional Consideration. Executive
-------------------------------------------------------
has not been promised and Executive shall not require any additional or special
payment for compliance with the covenants and agreements herein contained in
this Section 5.
(i) Injunctive Relief. Executive agrees that the Company may suffer
-----------------
irreparable harm in the event that Executive fails or threatens not to comply
with any terms of this Agreement, and that monetary damages may be inadequate to
compensate the Company in such event. Accordingly, Executive agrees that the
Company, in addition to any other remedies available to it at law or in equity,
including the right to monetary damages, will be entitled to injunctive relief,
without the posting of bond or other security, to enforce this Agreement.
(j) Indemnification. Executive agrees to indemnify and hold Company
---------------
harmless from any loss or damage resulting from Executive's breach of this
Section 5.
6. Termination.
-----------
4
<PAGE>
(a) Termination by Company for "Cause." The Company may terminate
-----------------------------------
this Agreement for "Cause" effective immediately upon written notice thereof to
Executive. For purposes of this Agreement, "Cause" shall include, but not be
limited to, the following events: (i) an act of fraud, embezzlement or similar
conduct by Executive involving the Company; (ii) any action by Executive
involving the arrest of Executive for violation of any criminal statute; or
(iii) a failure or refusal by Executive to perform his duties.
In the event of termination for "Cause," Executive shall be entitled to
receive that portion of the Base Salary and all benefits accrued through the
date of termination.
(b) Termination by Company Other Than for "Cause."
----------------------------------------------
i) Death. Provided that notice of termination has not
-----
previously been given under any Section hereof, if Executive shall die during
the term of this Agreement, this Agreement and all of the Company's obligations
hereunder shall terminate, except that Executive's estate or designated
beneficiaries shall be entitled to receive (i) all earned and unpaid Base Salary
through the date of termination; and (ii) all other benefits that may be due to
Executive or Executive's estate or beneficiaries under the general provisions of
any benefit plan, stock incentive plan or other plan in which Executive is then
a participant.
ii) Disability. Provided that notice of termination has not
----------
previously been given under any Section hereof, if Executive becomes ill or is
injured or disabled during the term of this Agreement, such that Executive fails
to perform all or substantially all of the duties to be rendered hereunder and
such failure continues for a period in excess of 26 consecutive weeks, this
Agreement and all of the Company's obligations hereunder may be terminated by
the Company effective immediately upon written notice thereof to Executive,
except that Executive shall be entitled to receive (i) all earned and unpaid
Base Salary through the date of termination; and (ii) all other benefits that
may be due to Executive under the general provisions of any benefit plan, stock
incentive plan or other plan in which Executive is then a participant.
iii) Without Cause. The Company may terminate this Agreement
-------------
without "Cause" effective immediately upon written notice thereof to Executive.
In the event of termination without "Cause," Executive shall be entitled to
receive that portion of the Base Salary and all benefits accrued through the
date of termination.
(c) Termination by Executive. Executive may terminate this Agreement
------------------------
effective 30 days after giving the Company written notice of a breach by the
Company of any material provision of this Agreement; provided, the Company does
--------
not cure such breach within 15 days after receipt of such notice from Executive.
(d) Stock and Similar Rights. Executive's rights under any other
------------------------
agreement or plan under which stock options, restricted stock or similar awards
are granted shall be determined in accordance with the terms and provisions of
such plans or agreements.
5
<PAGE>
(e) No Mitigation or Offset. Payment of any sum under this Section 6
-----------------------
shall not be subject to any claim of mitigation nor shall the Company be
entitled to any right of offset with respect thereto.
7. General Provisions.
------------------
Notices. All notices, requirements, requests, demands, claims or other
-------
communications hereunder shall be in writing. Any notice, requirement, request,
demand, claim or other communication hereunder shall be deemed duly given
(i) if personally delivered, when so delivered, (ii) if mailed, two (2) business
days after having been set by registered or certified mail, return-receipt
requested, postage prepaid and addressed to the intended recipient as set forth
below, (iii) if given by telecopier, once such notice or other communication is
transmitted to the telecopier number specified below, and the appropriate
telephonic confirmation is received, provided that such notice or other
communication is promptly thereafter mailed in accordance with the provisions of
clause (ii) above or (iv) if sent through an overnight delivery service under
circumstances by which such service guarantees next day delivery, the date
following the date so sent:
If to the Company, to:
---------------------
Preferred Credit Corporation
3347 Michelson, Suite 400
Irvine, California 92612
Attn: President
Telecopy: (714) 660-3872
If to Executive to:
------------------
to the address set forth in
the records of the Company
Any party may change the address to which notices, requests, demands, claims and
other communications hereunder are to be delivered by giving the other party
notice in the manner herein set forth.
(a) Assignment. This Agreement and the benefits hereunder are personal
----------
to the Company and are not assignable or transferable, nor may be the services
to be performed hereunder be assigned by the Company to any person, firm or
corporation; provided however, that this Agreement and the benefits hereunder
-------- -------
may be assigned by the Company to any corporation into which the Company may be
merged or consolidated, and this Agreement and the benefits hereunder will
automatically be deemed assigned to any such corporation, subject, however, to
Executive's right to terminate this Agreement to the extent provided in Section
6. In the event of any assignment of this Agreement to any corporation acquiring
all or substantially all of the assets of the Company or to any other
corporation into which the Company may be merged or consolidated, the
responsibilities and duties assigned to Executive by such successor corporation
shall be the responsibilities and duties of, and compatible with the status of,
a senior
6
<PAGE>
executive officer of such successor corporation. The Company may delegate any of
its obligations hereunder to any subsidiary of the Company, provided that such
delegation shall not relieve the Company of any of its obligations hereunder.
Executive may not assign its rights hereunder or delegate his duties hereunder
to any Person.
(b) Complete Agreement. This Agreement contains the entire agreement
------------------
among the parties hereto with respect to the subject matter hereof and
supersedes and cancels any and all previous written or oral negotiations,
commitments, understandings, agreements and any other writings or communications
in respect of such subject matter.
(c) Amendments. This Agreement may be modified, amended, superseded or
----------
terminated only by a writing duly signed by both parties.
(d) Severability. Any provision of this Agreement which is invalid,
------------
illegal or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity, illegality or unenforceability,
without affecting in any way the remaining provisions hereof in such
jurisdiction or rendering that or any other provision of this Agreement invalid,
illegal or unenforceable in any other jurisdiction.
(e) No Waiver. Any waiver by either party of a breach of any
---------
provisions of this Agreement shall not operate as or be construed to be a waiver
of any other breach of such provision or of any breach of any other provision of
this Agreement. The failure of either party to insist upon strict adherence to
any term of this Agreement on one or more occasions shall not be considered a
waiver or to deprive such party of the right thereafter to insist upon strict
adherence to that term or any other term of this Agreement.
(f) Binding Effect. This Agreement shall be binding on, and shall
--------------
inure to the benefit of, the parties hereto and their permitted assigns,
successors and legal representatives.
(g) Counterparts. This Agreement may be executed by the parties hereto
------------
in separate counterparts, each of which when so executed shall be deemed to be
an original and all of which when taken together shall constitute one and the
same document.
(h) Governing Law. This Agreement has been negotiated and entered into
-------------
in the State of California and shall be construed in accordance with the laws of
the State of California.
(i) Headings. The headings included in this Agreement are for the
--------
convenience of the parties only and shall not affect the construction or
interpretation of this Agreement.
7
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on
its behalf by its duly authorized officer and Executive has executed the same as
of the day and year first above written.
PREFERRED CREDIT CORPORATION
----------------------------------------------
By:
__________________________________________
Its:
__________________________________________
JOHN M. SHURANCE
-----------------------------------------------
8
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Preferred Credit Corporation:
We consent to the use of our report included herein and to the reference to
our firm under the headings "Selected Financial Data" and "Experts" in the
prospectus.
/s/ KPMG Peat Marwick LLP
-------------------------------------
KPMG Peat Marwick LLP
Orange County, California
June 24, 1997
