<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 14, 1998
REGISTRATION NO. 333-48653
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
REALTRUST ASSET CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS GOVERNING INSTRUMENTS)
2855 EAST COTTONWOOD PARKWAY, SUITE 500
SALT LAKE CITY, UTAH 84121
(ADDRESS OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JOHN D. FRY, CHIEF EXECUTIVE OFFICER
REALTRUST ASSET CORPORATION
2855 EAST COTTONWOOD PARKWAY, SUITE 500
SALT LAKE CITY, UTAH 84121
(801) 365-3000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
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CHRISTOPHER A. WILSON, ESQ. PETER T. HEALY, ESQ.
JEFFERS, WILSON, SHAFF & FALK, LLP O'MELVENY & MYERS LLP
18881 VON KARMAN AVENUE, SUITE 1400 275 BATTERY STREET
IRVINE, CALIFORNIA 92612 SAN FRANCISCO, CALIFORNIA 94111
TELEPHONE: (714) 660-7700 TELEPHONE : (415) 984-8700
FACSIMILE: (714) 660-7799 FACSIMILE: (415) 984-8701
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================================================================
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) OFFERING PRICE PER SHARE AGGREGATE OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.001... 5,750,000 $16.00 $ 92,000,000 $27,140.00
Common Stock Purchase
Warrants...................... 5,750,000 (3) (3) (3)
Representative's Warrants....... 172,500 $ 0.01 $ 1,725 $ 0.51
Common Stock, par value $.001
per share, issuable upon
exercise of Common Stock
Purchase Warrants(4).......... 5,750,000 $16.00 $ 92,000,000 $27,140.00
Common Stock, par value $.001
per share, issuable upon
exercise of Representative's
Warrants(4)................... 172,500 $16.00 $ 2,760,000 $ 814.20
------------ ----------
Total................. $186,761,725 $55,094.11
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</TABLE>
(1) Assumes exercise of an over-allotment option granted to the Underwriters to
purchase 750,000 Units.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a).
(3) Included in the Units at no additional cost.
(4) This Registration Statement also covers any additional shares of Common
Stock which may become issuable by virtue of the anti-dilution provisions of
the Common Stock Purchase Warrants and Representative's Warrants. No
additional registration fee is included for these shares.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BE COME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
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 SALES OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 14, 1998
[logo] 5,000,000 UNITS
REALTRUST ASSET CORPORATION
EACH UNIT TO CONSIST OF ONE SHARE OF COMMON STOCK AND ONE STOCK PURCHASE WARRANT
All of the units (the "Units") offered hereby are being sold by RealTrust
Asset Corporation, a newly formed Maryland corporation (the "Company"). Each
Unit consists of one share of Company common stock, par value $.001 per share
("Common Stock"), and one warrant to purchase one share of Common Stock (a
"Warrant"). The Warrants included with the Units will automatically detach from
the Common Stock six months after the closing of this offering (the "Offering").
See "Description of Capital Stock." Each Warrant entitles the holder thereof to
purchase one share of Common Stock (a "Warrant Share"), subject to certain
anti-dilution adjustments. The Warrants will become exercisable six months after
the initial closing of this Offering and will remain exercisable until 5:00 p.m.
New York Time on the third anniversary of the date the Warrants first become
exercisable, at an exercise price equal to the Price to Public (as set forth
below). The Company will elect to be taxed as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"), and
generally will not be subject to federal taxation on its income to the extent
that it distributes its net income to its stockholders and maintains its
qualification as a REIT.
------------------------
SEE "RISK FACTORS" COMMENCING ON PAGE FOR MATERIAL RISK FACTORS THAT SHOULD
BE CONSIDERED BY PROSPECTIVE INVESTORS. THESE RISKS INCLUDE:
- - Adoption of the 1999 Budget Plan would prohibit a REIT from owning, by vote or
value, more than 10% of the stock of a corporation and would require the
Company to combine and/or fully divest itself of its interest in the Taxable
Subsidiary and to make other significant changes in the Company's operations,
which may reduce earnings and distributions.
- - The Company has no commitments to purchase specific assets and none of the
anticipated net proceeds from Offering have been allocated to specific
investments. Inability to acquire or delays in investing the net proceeds from
this Offering will reduce the Company's anticipated income and may have a
material adverse effect on its results of operations. The Company will have
broad discretion (i) in the allocation of the net proceeds, (ii) in the types
and percentages of any type of Mortgage Assets included in its investment
portfolio, and (iii) in changing its investment and operating policies and
strategies without the consent of the stockholders. Such discretion creates
uncertainty for stockholders and could adversely affect results of operations.
- - The Taxable Subsidiary was organized in April, 1996 and has experienced losses
of $1,774,311 and $1,305,866 for fiscal years ended December 31, 1997 and
1996, respectively, and had an accumulated deficit of $1,494,072 as of
December 31, 1997. The management of an investment portfolio is a change in
operations. Management of the Company has no experience in managing a REIT,
which could adversely affect the Company's results of operations.
- - Conflicts of interest arising from the relationships between the Company and
each of ContiFinancial Corporation and the Founders may result in decisions
regarding the Company and its operations, which may not be in the best
interest of the other stockholders or the Company as a whole. The Company has
agreed to sell 75% of its fixed rate Subprime Mortgage Loans to ContiFinancial
Corporation at prices established by ContiFinancial Corporation and has
appointed ContiFinancial Corporation as exclusive placement agent for
structured debt offerings at fees which may exceed those offered by third
parties. Of the net proceeds of the Offering, $2.0 million will be used to
repay the Taxable Subsidiary's working capital debt to ContiFinancial
Corporation and $2.2 million will be paid to redeem the Company's preferred
stock held by ContiFinancial Corporation.
- - The Company's officers and directors and ContiFinancial Corporation owns in
the aggregate 20.6% of the Common Stock of the Company outstanding immediately
after the closing of the Offering and could exert significant influence over
the Company. The Founders and ContiFinancial Corporation will own all of the
voting stock of the Taxable Subsidiary and will control its operations.
- - The Company intends to invest in Subprime Mortgage Loans, which are generally
subject to higher delinquency and loss rates than Prime Mortgage Loans and no
assurance can be given that the Company's underwriting criteria or methods
will adequately protect the Company.
- - Subprime Mortgage Loans are subject to prepayment risks even during periods of
stable or rising interest rates in that Subprime Mortgage Loan borrowers may
be able to improve their credit ratings and refinance their Mortgage Loans to
benefit from reduced interest rate costs.
- - The Company will face substantial competition for Subprime Mortgage Loans,
which may adversely affect future performance and results of operations.
- - The Company may invest in Mortgage Loans with high loan-to-value ratios and
subordinated Mortgage Securities, which are subject to greater loss and credit
risks than senior or more adequately collateralized Mortgage Loans.
(continued on next page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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PRICE TO PUBLIC UNDERWRITING DISCOUNT(1) PROCEEDS TO COMPANY(2)
- --------------------------------------------------------------------------------------------------------------------
Per Unit.................. $ $ $
- --------------------------------------------------------------------------------------------------------------------
Total(3).................. $ $ $
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</TABLE>
(1) Excludes value of the Warrants to be issued to Stifel, Nicolaus & Company,
Incorporated (the "Representative"), to purchase 150,000 shares of Common
Stock (172,500 shares of Common Stock if the Underwriters' over-allotment
option is exercised) at an exercise price equal to the Price to Public (the
"Representative's Warrants"). The Company and certain of its affiliates have
agreed to indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
to be $1,100,000.
(3) The Company has granted the Underwriters an option exercisable within 30
days after the date of this Prospectus to purchase up to 750,000 additional
Units on the same terms and conditions set forth above to cover
over-allotments, if any. If all such additional Units are purchased, the
total Price to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
------------------------
The Securities are offered by the Underwriters subject to receipt and
acceptance by them, prior sale and the Underwriters' right to reject any order
in whole or in part and to withdraw, cancel or modify the offer without notice.
It is expected that delivery of certificates for the Securities will be made
through The Depository Trust Company, on or about , 1998.
STIFEL, NICOLAUS & COMPANY, EVEREN SECURITIES, INC.
INCORPORATED
, 1998
<PAGE> 3
(continued from previous page)
- The Company intends to invest in Mortgage Securities, which may include
interest-only and principal-only Mortgage Securities and non-investment
grade Mortgage Securities, which may be subject to a greater risk of loss
than investments in senior, investment-grade securities.
- Sudden and significant increases in interest rates may adversely affect
the Company's cost of short-term borrowings used to finance the purchase
of long-term Mortgage Assets, and may thereby substantially reduce the
Company's income or result in losses from operations.
- Declining interest rates may increase prepayment rates and reduce net
interest income.
- The Company intends to use hedging strategies, including interest rate
swaps and interest rate collars, caps or floors, which have significant
transaction costs (and therefore will reduce the Company's overall returns
on its investments) and may not be effective in mitigating interest rate
and prepayment risks. The Company has no specific hedging policies and
generally will have broad discretion in the types of hedging transactions
it utilizes.
- The Company intends to borrow against a substantial portion of the market
value of its assets (up to approximately 92%) and to maintain a ratio of
equity to total assets of approximately 8% to 15%; such leverage is likely
to increase the volatility of income and asset value and may result in
losses. The Company's governing instruments do not restrict management's
ability to leverage the Company's assets.
- Mortgage Loan prepayments may reduce the average lives of certain Mortgage
Assets and thereby reduce the Company's operating income.
- Defaults on Mortgage Loans held by the Company may reduce earnings and
distributions or result in losses.
- Purchasers of the Units will be subject to immediate and substantial
dilution and may be subject to further and substantial dilution resulting
from additional equity offerings in the future.
- Failure to maintain REIT status will subject the Company to
corporate-level tax and thereby reduce or eliminate earnings and the
amount of cash available for distributions to shareholders.
See "Underwriting." For purposes of this Prospectus, the Units, the Common
Stock, the Warrants and the Warrant Shares are referred to collectively as the
"Securities" unless the context indicates otherwise.
Prior to the closing of the Offering, there has been no public market for
the Securities. It is currently estimated that the Price to Public for the Units
will be between $14.00 and $16.00 per Unit. See "Underwriting" for information
relating to the factors considered in determining the Price to Public. The
Company intends to apply for quotation of the Units on the American Stock
Exchange under the symbol "RAC.U" The Company intends to apply for quotation of
the Common Stock and Warrants on the American Stock Exchange effective on the
date the Warrants automatically detach from the Common Stock under the symbols
"RAC" and "RAC.WS," respectively. There can be no guarantee that a public market
for the Securities will develop or be sustained.
------------------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE UNITS. SUCH
TRANSACTIONS MAY INCLUDE STABILIZING BIDS AND PURCHASES IN THE OPEN MARKET,
OVER-ALLOTMENTS, SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 4
TABLE OF CONTENTS
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PROSPECTUS SUMMARY.............. 1
The Company................... 1
Competitive Advantages........ 2
Summary Risk Factors.......... 2
Management.................... 7
Business Strategies........... 7
Marketing and Production
Strategy.................. 7
Underwriting and Quality
Control................... 9
Loan Sales.................. 9
Mortgage Investment
Portfolio................. 9
Structured Debt
Instruments............... 11
Capital Allocation
Guidelines................ 11
Servicing Activities........ 11
Structure and Formation
Transactions................ 12
Structure of the Company.... 12
Formation Transactions and
Post-Closing
Transactions.............. 12
Dividend Policy and
Distributions............... 15
The Offering.................. 15
Conflicts of Interest and
Related Party
Transactions................ 16
ContiFinancial
Corporation............... 16
Capstone Investments,
Inc. ..................... 17
Control of Taxable
Subsidiary................ 17
Formation Transactions...... 17
Employment Agreements....... 17
RISK FACTORS.................... 18
General....................... 18
President's 1999 Budget Plan,
If Enacted, Would Adversely
Affect Results of
Operations.................. 18
Operation of a New Enterprise
Involves Uncertainty........ 19
Inability to Acquire or
Delays in Acquiring
Mortgage Assets Will
Reduce Income to the
Company................... 19
Limited Operating History of
the Company Creates
Uncertainty About Future
Results................... 19
The Management of an
Investment Portfolio of
Mortgage Assets is a
Change in Operations...... 20
Lack of Experience Managing
a REIT May Adversely
Affect Operating
Results................... 20
Loss of Any Key Personnel
May Adversely Affect
Operations................ 20
Future Revisions in
Investment and Operating
Policies and Strategies by
Board of Directors Creates
Uncertainty............... 20
Failure to Raise Additional
Capital May Adversely
Affect Future Growth and
Results of Operations..... 20
Conflicts of Interest May
Result in Decisions That Do
Not Fully Reflect the
Stockholders' Best
Interest.................... 21
Conflicts of Interest With
and Dependence Upon
ContiFinancial Corporation
May Not be in the
Stockholders' Best
Interest.................. 21
A Portion of the Net
Proceeds From This
Offering Will Be Used to
Retire Debt to and Redeem
Stock of ContiFinancial
Corporation............... 21
Investors Will Have No
Voting Control of the
Taxable Subsidiary........ 22
The Founders and
ContiFinancial Corporation
May Exert Influence Over
the Company............... 22
Investments in Subprime
Mortgage Loans Involve
Greater Risk of Loss........ 22
Higher Delinquency and Loss
Rates on Subprime Mortgage
Loans May Result in
Losses.................... 22
Subprime Mortgage Loans May
Experience High Prepayment
Rates Which Reduces Income
From Operations........... 22
Competition in the Subprime
Mortgage Lending Market
May Have a Material
Adverse Effect on Results
of Operations............. 23
Investments in High LTV
Mortgage Loans and
Subordinated Mortgage
Securities Involve Greater
Risks of Loss............... 23
Defaults on High
Loan-to-Value Mortgage
Loans May Result in
Losses.................... 23
Subordinated Classes of
Mortgage Securities Are
Subject to Greater Credit
Risks Than Senior
Classes................... 23
Interest Rate Fluctuations May
Adversely Affect Operations
and Net Interest Income..... 24
Interest Rate Mismatches
Between Mortgage Assets
and Borrowings May Result
in Reduced Income or
Losses.................... 24
Interest Rate Increases May
Reduce Mortgage Loan
Originations and Income... 25
Declining Interest Rates May
Increase Prepayment Rates
and Reduce Net Interest
Income.................... 25
Hedging Transactions Limit
Gains and May Increase
Exposure to Losses........ 26
Interest-Only and
Principal-Only Mortgage
Securities Are Subject to
Substantial Interest Rate
and Prepayment Risks Which
May Adversely Affect
Results of Operations..... 26
The Company Has No Specific
Hedging Policies and
Failure to Appropriately
Hedge May Adversely Affect
Results of Operations..... 27
Counterparty and
Unenforceability Risk in
Hedging Transactions May
Result in Losses.......... 27
Basis Risk in Hedging
Transactions May Result in
Losses.................... 27
Borrowing to Finance
Investment Portfolio May
Adversely Affect Results of
Operations.................. 28
Leverage Increases Exposure
to Loss................... 28
Inability to Implement
Leveraging Strategy May
Reduce Income or Result in
Losses.................... 28
Inability to Renew or
Replace Maturing
Borrowings May Result in
Losses.................... 29
Decline in Market Value of
Mortgage Asset May Limit
the Company's Ability to
Borrow or Result in
Losses.................... 29
Contingent and Residual
Risks in Structured Debt
Financings May Adversely
Affect Results of
Operations................ 29
Unavailability of Structured
Debt Financing May
Adversely Affect Results
of Operations............. 30
The Company Depends Upon
Several Lenders to Finance
Operations................ 30
Lender Bankruptcy May Result
in Losses................. 30
Risks Relating to Mortgage
Lending Operations.......... 31
Default on Mortgage Loans
May Result in Losses...... 31
Competition for Mortgage
Loans From Independent
Mortgage Brokers and
Correspondents May
Adversely Affect Results
of Operations............. 31
</TABLE>
(i)
<PAGE> 5
<TABLE>
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Commitments to Purchase Mortgage Assets
Exposes the Company to Interest Rate Risk.. 32
Payments to Brokers in Violation of RESPA May
Result in Adverse Claims................... 32
Lack of Geographic Diversification Exposes
the Company to Greater Default Risk........ 32
Inadequate or Ineffective Servicing May
Increase Delinquency and Default Rates..... 32
Inability to Sell Mortgage Loans May
Adversely Affect Results of Operations..... 33
Legislation and Regulation May Subject the
Company to Costs of Compliance and Adverse
Claims For Noncompliance................... 33
Mortgage Loans Secured By Properties With
Environmental Problems May Result in
Liability and Losses....................... 34
Changes in Economic Conditions May Adversely
Affect Results of Operations............... 34
Factors Beyond Control of the Company May
Affect Performance of the Investment
Portfolio.................................... 35
Investors Will Incur Immediate and Substantial
Economic Dilution............................ 35
Future Debt and Equity Offering May Dilute
Investors.................................... 35
Failure to Develop a Trading Market May Result
in Depressed Common Stock Price.............. 35
Failure to Maintain REIT Status Would Have
Adverse Tax Consequences..................... 36
Failure to Qualify for Exemption From
Investment Company Act May Adversely Affect
the Company.................................. 36
Issuances of Preferred Stock May Adversely
Affect the Value of Common Stock............. 36
Restrictions on Ownership of Capital Stock
Could Discourage a Change of Control......... 37
THE COMPANY...................................... 38
USE OF PROCEEDS.................................. 38
DIVIDEND POLICY AND DISTRIBUTIONS................ 39
DIVIDEND REINVESTMENT PLAN....................... 39
DILUTION......................................... 40
CAPITALIZATION................................... 41
REALTRUST ASSET CORPORATION PRO FORMA FINANCIAL
DATA........................................... 41
REALTRUST ASSET CORPORATION PRO FORMA BALANCE
SHEET (unaudited).............................. 42
REALTRUST ASSET CORPORATION PRO FORMA STATEMENT
OF OPERATIONS (unaudited)...................... 43
SELECTED FINANCIAL DATA OF REALTRUST ASSET
CORPORATION AND CMG FUNDING CORP............... 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............ 45
Overview....................................... 45
Certain Accounting Policies and Procedures..... 45
Results of Operations.......................... 46
Liquidity and Capital Resources................ 46
Inflation...................................... 47
Year 2000 Compliance........................... 47
BUSINESS......................................... 49
General........................................ 49
Competitive Advantages......................... 50
Overview of Subprime Mortgage Market........... 52
Industry Developments.......................... 53
Mortgage Lending Business...................... 54
Marketing and Production Strategy.............. 55
Underwriting and Quality Control Strategies.... 61
Financing Loans Held for Sale and Investment
Prior to Structured Debt Financing........... 65
Information Management Systems................. 67
Mortgage Investment Portfolio.................. 68
Retained Interests in Structured Debt
Instruments.................................. 69
Capital and Liquidity Management............... 70
Capital Allocation Guidelines.................. 71
Servicing Activities........................... 72
Interest Rate Risk Management.................. 73
Credit Risk Management......................... 75
Mortgage Loan Prepayments...................... 76
Future Changes in Operating, Investment and
Accounting Policies.......................... 77
MANAGEMENT....................................... 79
Directors and Executive Officers............... 79
Key Employees.................................. 80
Terms of Directors and Officers................ 81
Committees of the Board........................ 82
Compensation of Directors...................... 82
Compensation Committee Interlocks.............. 82
Executive Compensation......................... 82
Stock Option Grants............................ 88
Individual Grants.............................. 88
STRUCTURE AND FORMATION TRANSACTIONS............. 89
Structure of the Company....................... 89
RealTrust Asset Corporation.................... 89
The Taxable Subsidiary......................... 90
Formation Transactions......................... 90
CONFLICTS OF INTEREST AND RELATED PARTY
TRANSACTIONS................................... 91
ContiFinancial Corporation..................... 91
Capstone Investments, Inc...................... 93
Control of Taxable Subsidiary.................. 93
Formation Transactions......................... 93
Employment Agreements.......................... 93
PRINCIPAL STOCKHOLDERS........................... 94
DESCRIPTION OF CAPITAL STOCK..................... 94
General........................................ 94
Historical Capital Structure................... 94
Common Stock................................... 95
Preferred Stock................................ 95
Warrants and Options........................... 96
Repurchase of Shares and Restriction on
Transfer..................................... 98
Limitation of Liability and Indemnification.... 101
Control Share Acquisitions..................... 102
Business Acquisitions Statutes................. 103
Transfer Agent and Registrar................... 103
</TABLE>
(ii)
<PAGE> 6
<TABLE>
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SHARES ELIGIBLE FOR FUTURE SALE.................. 104
General........................................ 104
Registration Rights............................ 104
FEDERAL INCOME TAX CONSIDERATIONS................ 106
General........................................ 106
Opinion of Counsel............................. 106
Qualification as a REIT........................ 107
Taxation of the Company........................ 110
Taxation of Taxable Subsidiary................. 111
Termination or Revocation of REIT Status....... 111
Taxation of the Company's Stockholders......... 111
Taxation of Tax-Exempt Entities................ 113
Foreign Investors.............................. 113
Recordkeeping Requirement...................... 113
Backup Withholding............................. 114
Recent Legislative Proposals................... 114
State and Local Taxes.......................... 114
ERISA Considerations........................... 114
UNDERWRITING..................................... 116
LEGAL MATTERS.................................... 118
EXPERTS.......................................... 118
ADDITIONAL INFORMATION........................... 118
GLOSSARY......................................... 119
TABLE OF CONTENTS TO FINANCIAL STATEMENTS........ F-1
</TABLE>
(iii)
<PAGE> 7
PROSPECTUS SUMMARY
The summary information below should be read in conjunction with, and is
qualified in its entirety by, the detailed information appearing elsewhere in
this Prospectus. All references to the "Company" shall include all Qualified
REIT subsidiaries and all taxable subsidiaries through which the Company
conducts its business, unless the context indicates otherwise. Capitalized terms
used herein shall have the definitive meanings assigned to them in the text
below and in the Glossary beginning at page .
THE COMPANY
RealTrust Asset Corporation, a Maryland corporation formed on April 1, 1998
("RealTrust" or, with its subsidiaries, the "Company"), is a specialty finance
company engaged in the business of originating, purchasing, selling and
servicing mortgage loans secured (i) primarily by first mortgages on
single-family residences ("First Lien Mortgage Loans") and (ii) to a much lesser
extent by second lien Mortgage Loans ("Second Lien Mortgage Loans"; collectively
with First Lien Mortgage Loans, "Mortgage Loans"). RealTrust will own and manage
a portfolio composed primarily of First Lien Mortgage Loans that do not conform
to one or more of the underwriting criteria of Federal Home Loan Mortgage
Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA"). Such
Mortgage Loans are referred to as "Subprime Mortgage Loans." RealTrust expects
to acquire Subprime Mortgage Loans primarily from CMG Funding Corp., a Delaware
corporation and RealTrust's taxable subsidiary (the "Taxable Subsidiary").
RealTrust intends to build a portfolio of primarily Subprime Mortgage Loans
and securities backed by Mortgage Loans ("Mortgage Securities"; together with
Mortgage Loans, "Mortgage Assets") financed with structured debt instruments and
reverse repurchase agreements. The portfolio is expected to generate net
interest income, which, upon election to be taxed as a real estate investment
trust ("REIT"), will not be taxed at the corporate level. RealTrust is now and
intends to remain self-advised and self-managed.
The Taxable Subsidiary has operated a mortgage lending business since
April, 1996 and currently originates Mortgage Loans through 12 wholesale and two
retail branch offices. The Taxable Subsidiary's mortgage lending operations
originate and purchase fixed and adjustable-rate Subprime Mortgage Loans, as
well as Mortgage Loans that conform to FHLMC or FNMA underwriting criteria
("Prime Mortgage Loans"). In addition, the Taxable Subsidiary has built a
correspondent lending operation that began purchasing Subprime Mortgage Loans in
the fourth quarter of 1997. The Taxable Subsidiary will sell its Prime Mortgage
Loans and selected Subprime Mortgage Loans to generate current income and cash
flow to partially fund the Company's mortgage lending operations. See
"Business -- Industry Developments." For the fiscal quarter ended March 31,
1998, the Taxable Subsidiary had originated or purchased $60.5 million of
Subprime Mortgage Loans, including $2.8 million of Subprime Mortgage Loans
purchased through its correspondent operations, and originated $91.6 million of
Prime Mortgage Loans. RealTrust owns 100% of the preferred stock (representing
95% of the economic interest) of the Taxable Subsidiary but does not control its
operations. See "Structure and Formation Transactions."
To date, the Taxable Subsidiary has sold all of its Subprime Mortgage Loan
production in whole loan sales for cash. From September 1, 1996 to March 31,
1998, the Taxable Subsidiary sold approximately $150.5 million of Subprime
Mortgage Loans, or approximately 54% of all Subprime Mortgage Loan sales during
such period, to ContiFinancial Corporation (with its affiliates ContiMortgage
Corporation, ContiTrade Services L.L.C., and ContiFinancial Services
Corporation, "ContiFinancial Corporation"). Subsequent to the closing of the
Offering, the Taxable Subsidiary will shift from selling all of its Subprime
Mortgage Loan production to building a portfolio of Subprime Mortgage Loans
owned by RealTrust and financed with structured debt. See "Business -- Industry
Developments" and "Risk Factors -- Operation of a New Enterprise Involves
Uncertainty." The Taxable Subsidiary will continue to sell certain Mortgage
Loans for cash gains, including 75% of its fixed-rate Subprime Mortgage Loans to
ContiFinancial Corporation. See "Conflicts of Interest and Related Party
Transactions."
RealTrust will elect to be taxed as a REIT under the Internal Revenue Code
of 1986, as amended (the "Code"), beginning with the tax year ending December
31, 1998. Upon such election, RealTrust will generally not be subject to federal
income tax to the extent that it distributes its earnings to its stockholders
and
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maintains its qualification as a REIT. The Taxable Subsidiary has been and will
continue to be taxed as a "C" corporation and, therefore, was subject to tax on
any earnings.
The Company's principal business objectives are to increase earnings per
share, to increase cash available for distribution to stockholders and to
enhance stockholder value. The Company intends to accomplish these goals
primarily by capitalizing on the relatively high yields available from investing
in Subprime Mortgage Loans compared to Prime Mortgage Loans, and managing the
risks of such investments. The Company will derive income from two principal
business activities, as follows:
(i) the management of an investment portfolio of Mortgage Assets
which, similar to banks and savings institutions, will generate net
interest income based upon the difference between the interest earned on
its Mortgage Assets and the interest paid on its borrowings used to acquire
the Mortgage Assets; and
(ii) the operation of the Taxable Subsidiary's mortgage origination
business, which will generate income from its mortgage lending activities
and will supply adjustable-rate Subprime Mortgage Loans for long-term
investment through the proposed REIT structure which avoids Federal income
tax at the corporate level.
COMPETITIVE ADVANTAGES
Management believes that the Company will be able to compete effectively
against, and generate relatively attractive rates of return to stockholders
compared to, certain of its competitors as a result of the following factors:
- The Company's management team has previously built extensive mortgage
banking operations.
- The Company's Mortgage Loan production franchise and investment
portfolio will focus on relatively higher margin Subprime Mortgage
Loans.
- The use of structured debt instruments to finance Mortgage Assets held
in the Company's investment portfolio is expected to mitigate interest
rate risk.
- The Company's status as a REIT offers tax advantages by eliminating
corporate level federal income tax.
- The Company is self-advised and self-managed which limits potential
conflicts of interest between the stockholders and management.
- The Company is exempt from state and federal banking regulations imposed
on banks and thrifts and the corresponding costs of insurance and
oversight.
- The Taxable Subsidiary structure affords the Company the ability to sell
Mortgage Loans for cash gains when management determines that such sales
will provide favorable returns (see "Business -- Industry
Developments").
- The Company's relationship with the Taxable Subsidiary and management's
experience in mortgage banking and acquiring Mortgage Assets allows the
Company to intensively manage the cost and quality of the Mortgage Loans
held for investment.
The Company is, however, subject to numerous risks and uncertainties with
respect to its operations. Such risks and uncertainties include management's
lack of experience in managing a REIT, financing a portfolio with structured
debt financing and retaining or investing in Mortgage Securities. For a
description of these and other risks associated with an investment in the Units,
see "Summary Risk Factors" below.
SUMMARY RISK FACTORS
Each prospective purchaser of the Units offered hereby should review the
"Risk Factors" beginning on page for a discussion of certain risk factors that
should be considered before acquiring the Units, including the following:
- President's 1999 Budget Plan, if Enacted, Would Adversely Affect Results
of Operations. Provisions of the President's 1999 Budget Plan would
prohibit REITs from owning, by vote or value, more than
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10% of the stock of any corporation. If enacted, the 1999 Budget Plan would
cause the Company to either combine and/or divest itself of the Taxable
Subsidiary and its mortgage lending operations and impair the Company's ability
to qualify as a REIT for the fiscal year ending December 31, 1998,
subjecting the Company to federal taxation on its income, and thereby
reducing or eliminating earnings and cash available for distributions,
and may otherwise adversely affect the Company's operations.
- Inability to Acquire or Delays in Acquiring Mortgage Assets Will Reduce
Income to the Company. The Company has not entered into any commitment
to purchase Mortgage Assets. There can be no assurance that a sufficient
quantity or quality of Mortgage Assets will be provided by the Taxable
Subsidiary or otherwise available at all to the Company. The Company's
results of operations also may be adversely affected during the period
in which it is initially implementing its investment, leveraging and
hedging strategies, at which time the Company will likely invest in
short-term Mortgage Assets which generally provide a lower rate of
return than long-term investments. The Company's inability to acquire
quality long-term Mortgage Assets in a sufficient quantity will reduce
the Company's income and may adversely affect its results of operations.
In addition, management will have broad discretion in the allocation of
the net proceeds of this Offering and in the type and percentages of
Mortgage Assets included in its investment portfolio. Such discretion
further creates uncertainty for stockholders and could result in losses
to the Company.
- Limited Operating History of the Company Creates Uncertainty About
Future Results. RealTrust was organized on April 1, 1998 and the Taxable
Subsidiary began its operations in April, 1996; as such, the Company has
not developed an extensive earnings history. Since its inception, the
Taxable Subsidiary has experienced net losses of $1,774,311 and
$1,305,866 for the fiscal years ended December 31, 1997 and 1996,
respectively, and had an accumulated deficit of $1,494,072 as of
December 31, 1997. Accordingly, there is substantial uncertainty
regarding the Company's future performance and results of operations.
- The Management of an Investment Portfolio of Mortgage Assets is a Change
in Operations. The Company's plans to invest in and manage a portfolio
of Mortgage Assets represent a substantial departure from its historic
operations and the development of an entirely new business enterprise.
To the extent that management of an investment portfolio requires the
Company's involvement in activities in which the Company has not
previously engaged (such as financing with structured debt information,
hedging activities and the investment in Mortgage Securities), the
Company's management may not have the experience necessary to
successfully develop or manage such new and expanded business
enterprise.
- Lack of Relevant Experience Managing a REIT May Adversely Affect
Operating Results. The Company's management has had no prior experience
in managing a REIT. The Company's results of operation and earnings will
be adversely affected if the Company is unable to manage a REIT
successfully in the manner described in this Prospectus or otherwise.
- Loss of Any Key Personnel May Adversely Affect Operations. The Company's
operations depend in significant part upon the skills and experience of
Messrs. John D. Fry, Terry L. Mott, John P. McMurray and Steven K.
Passey. The loss of any such persons could have a material adverse
effect on the Company's business.
- Future Revisions in Investment and Operating Policies and Strategies by
Board of Directors Creates Uncertainty. The Board of Directors has
established, but generally can waive and modify, the investment and
operating policies and strategies of the Company. These policies and
strategies do not limit the amount of capital which may be invested in
any one type of Mortgage Asset. These changes may have a material
adverse effect on the Company's business, results of operations and
financial condition.
- Conflicts of Interest May Result in Decisions That Do Not Fully Reflect
the Stockholders' Best Interest. The Company is subject to various
potential conflicts of interest arising from its relationship with
ContiFinancial Corporation and the Founders. ContiFinancial Corporation
may be in a position to exercise significant influence over the
Company's operations in that it will beneficially own a
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substantial portion of the Company's Common Stock (6.9% after this
Offering) and because of the Company's dependence on ContiFinancial
Corporation for many financial and financial advisory services. The
Company has appointed ContiFinancial Corporation as its exclusive
placement agent for structured debt offerings at a fee which may be
higher than those available from third parties and has agreed to sell to
ContiFinancial Corporation 75% of its fixed-rate Subprime Mortgage Loan
production at prices established by ContiFinancial Corporation. In
addition, $2.0 million of the proceeds from the Offering will be used to
retire the Company's outstanding balance on a working capital line and
$2.2 million of the proceeds will be used to redeem shares of preferred
stock held by ContiFinancial Corporation. The Founders and
ContiFinancial Corporation also control 100% of the voting stock of the
Taxable Subsidiary. Investors in this Offering will not acquire an
interest in any entity that controls the Taxable Subsidiary. The
Founders and ContiFinancial Corporation will also own approximately
20.6% of the Common Stock of the Company outstanding after the closing
of the Offering and can collectively exert substantial influence on its
operations. These relationships may create potential conflicts of
interest which may result in decisions that do not fully reflect the
best interest of the stockholders or the Company as a whole and may
materially reduce the Company's earnings and distributions.
- Higher Delinquency and Loss Rates on Subprime Mortgage Loans May Result
in Losses. Subprime Mortgage Loans are made to borrowers who do not
qualify for Prime Mortgage Loans, generally as a result of past
derogatory credit items. Thus, Subprime Mortgage Loans may result in
increased delinquency rates and/or credit losses which could have an
adverse effect on the Company's business and results of operations.
- Subprime Mortgage Loans May Experience High Prepayment Rates Which
Reduces Income From Operations. Prepayment rates on Subprime Mortgage
Loans may increase even in periods of stable or rising interest rates
since subprime borrowers may be able to improve their credit ratings and
refinance the Mortgage Loan to reduce their interest rate. Rapid
prepayments could reduce the Company's income from operations.
- Competition in the Subprime Mortgage Lending Market May Have a Material
Adverse Effect on Results of Operations. The market for Subprime
Mortgage Loans is highly competitive and dynamic. As the Company expands
into particular geographic markets, it will face increasing competition
from larger lenders with substantially easier access to capital and
other resources than the Company. Continued and increasing competition
from new entrants into the market and the changing competitive
environment may have a material adverse effect on the Company's
financial condition and its future results of operation.
- Investments in High LTV Mortgage Loans and Subordinated Mortgage
Securities Involve Greater Risks of Loss. The Company's current
underwriting guidelines allow for the acquisition of Mortgage Loans with
up to a 90% loan-to-value ratio ("LTV"), which creates a substantial
risk that the Company will not be able to recover full amounts due on
its Mortgage Loans in the event the borrower defaults and the Company
forecloses and sells the underlying collateral. The Company's planned
investments in other subordinated classes of debt are subject to similar
risks of loss upon default, which could have a material adverse effect
on the Company's business and results of operations.
- Interest Rate Mismatches Between Mortgage Assets and Borrowings May
Result in Reduced Income or Losses. Sudden and significant increases in
interest rates may increase the cost of the Company's short-term
borrowings more rapidly than the earnings on its long-term Mortgage
Assets, and thereby may substantially reduce income from operations and
adversely affect the Company's business and its results of operations.
In addition, such interest rate increases may also reduce Mortgage Loan
originations.
- Declining Interest Rates May Increase Prepayment Rates and Reduce Net
Interest Income. In the event that prepayments on the Company's Mortgage
Assets exceed expectations, the Company may (i) lose the opportunity to
receive interest at the fully indexed rate, (ii) need to write-off
capitalized
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premium amounts and (iii) be unable to acquire new or replacement
Mortgage Assets with similar yields.
- Hedging Transactions Limit Gains and May Increase Exposure to Losses;
Company Has No Specific Hedging Policies. The Company intends to
purchase interest rate caps, swaps and other financial instruments such
as interest-only Mortgage Securities ("IOs") and principal-only Mortgage
Securities ("POs") to mitigate the risk of interest rate fluctuations.
Hedging transactions involve costs which costs increase as the period
covered by the hedge increases and which increase in periods of rising
or volatile interest rates. The Company does not have specific hedging
policies and no hedging policy can entirely eliminate interest rate
risk. Failure to inappropriately hedge may affect the Company's results
of operations. The value of IOs and POs are highly sensitive to
fluctuations in prepayment and interest rates, which may adversely
affect the Company's results of operations.
- Counterparty, Unenforceability and Basis Risks in Hedging Transactions
May Result in Losses. The Company bears the risk that the counterparty
in any hedging transaction will be unable to perform its obligations.
Such risk could arise from insufficient documentation, insufficient
capacity or authority of the counterparty or from the bankruptcy or
insolvency of the counterparty. In addition, the Company will be subject
to exposure to differences in price performance between the Company's
Mortgage Assets and the hedges. Such risks may result in losses on
hedging transactions.
- Leverage Increases Exposure to Loss. The Company expects to borrow
against a substantial portion of the market value of its assets (up to
approximately 92%, depending upon the nature of the underlying Mortgage
Asset). The Company expects to maintain a ratio of equity to total
assets of approximately 10% to 15%. Such ratio may change depending upon
market conditions. The Company does not have any limits on the amount of
indebtedness. Leverage increases the volatility of income and asset
value. Failure to implement the Company's leveraging strategy may result
in losses if the return on its Mortgage Assets is less than its
borrowing cost and result in reduced profits if the optimal degree of
leverage is not achieved.
- Inability to Renew or Replace Maturing Borrowings May Result in
Losses. The Company relies on short-term borrowings to fund acquisitions
of long-term Mortgage Assets. Any failure to obtain or renew adequate
funding on favorable terms could have a material adverse effect on the
Company's operations. In such event, the Company could be required to
sell Mortgage Assets under adverse market conditions and incur losses as
a result.
- Defaults on Mortgage Loans May Result in Losses. In the event of a
default on any Mortgage Loan held by the Company, the Company will bear
the risk of loss of principal and the Mortgage Loan will cease to be
eligible collateral for borrowings. To the extent any property
collateralizing Mortgage Loans is contaminated by hazardous substances,
the Company may bear the costs of cleanup which could result in losses.
- Lack of Geographic Diversification Exposes the Company to Greater
Default Risk. The Company's Mortgage Loans originated in the first
quarter of 1998 were predominantly concentrated in the following states:
Florida (32.92%), Utah (17.80%), California (14.04%), Georgia (9.43%)
and Arizona (5.16%). Lack of geographic diversification may subject the
Company to a greater default risk in the event of adverse economic,
political, business developments and material hazards.
- Inadequate or Ineffective Servicing May Increase Delinquency and Default
Rates. The Company will initially contract for servicing of its Mortgage
Loans by third-party servicers. The Company is subject to risks
associated with insufficient or untimely services which may result in
increased delinquency and default rates. The Company has entered into a
servicing agreement with Advanta which requires the Company to pay
termination fees of $100 per Mortgage Loan serviced by Advanta at the
time of termination. Such termination fee may increase costs and reduce
the Company's net income from operations, if any.
- Legislation and Regulation May Subject the Company to Costs of
Compliance and Claims for Noncompliance. The mortgage lending operations
of the Company are subject to extensive state and federal laws,
regulations, supervision and licensing. The Company incurs costs to
comply with such laws and regulations and may be subject to regulatory
or enforcement actions and private proceedings
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for non-compliance. The Real Estate Settlement Procedures Act ("RESPA")
prohibits certain yield spread premium payments to brokers. While the
Company has adopted procedures to mitigate the risk of claims for
violation of RESPA, the Company may be required to change its broker
compensation program or be subject to adverse claims.
- Changes in Economic Conditions May Adversely Affect Results of
Operations. The Company's business may be adversely affected by periods
of economic slowdown or recession which may be accompanied by decreasing
demand for consumer credit and declining real estate values. Declining
real estate values decrease the demand for borrowings and increases the
loan-to-value ratios of Mortgage Loans previously made by the Company,
thereby impairing collateral coverage and increasing the possibility of
a loss in the event of default. Depressed economic conditions also
increase the risk of delinquencies, foreclosures and losses. Improving
economic conditions, on the other hand, may increase prepayments and
lead to further losses. As such, any substantial changes in economic
conditions could have a material adverse effect on the Company and its
results of operations.
- Purchasers Will Incur Immediate and Substantial Dilution. Purchasers of
the Units offered hereby will be subject to immediate and substantial
economic dilution of $2.12 (14.13%) in the per share net tangible book
value of the Common Stock components of such Units (assuming sale of all
the Units offered hereby at $15.00 per Unit).
- Future Debt and Equity Offerings May Dilute Investors. In addition, the
Company plans to increase its capital resources in the future through
additional offerings of equity and debt securities. Accordingly,
purchasers of the Units offered hereby can expect further and
substantial dilution of their equity in the future.
- Failure to Develop a Trading Market May Result in Depressed Common Stock
Price. There has not been a public market for the securities prior to
this Offering and there can be no assurance that a trading market for
the securities will develop immediately after the closing of the
Offering or at all. The price of the Units have been determined by the
Underwriters and may not reflect the fair value of the Units. As such,
there can be no assurance that the price of the Units will not fall
below the public offering price. Even if a public market for the
Company's securities develops in the future, such market price may not
reflect the Company's earnings performance and may be subject to
substantial volatility as a result of fluctuations in interest rates and
other factors.
- Consequences of Failure to Maintain REIT Status Would Have Adverse Tax
Consequences. If the Company fails to qualify as a REIT in any taxable
year, the Company may be subject to federal income tax as a regular,
domestic corporation, thereby significantly reducing or eliminating the
amount of cash available for distribution to its stockholders. Failure
to qualify for REIT status may reduce or eliminate any advantage over
non-REIT companies.
- Restrictions on Ownership of Capital Stock Could Discourage a Change of
Control. The Company's Amended and Restated Articles of Incorporation
prohibit any person from owning more than 9.8% in value of the capital
stock of the Company. Such a restriction on ownership may inhibit market
activity and reduce or eliminate any premium that may otherwise have
existed on the Securities.
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MANAGEMENT
The Company will be governed by a Board of Directors comprised of five
members, three of whom are not officers or employees of the Company or its
affiliates ("Independent Directors"). Day-to-day operations will be conducted by
the Company's executive officers. Although the Company's management does not
have experience managing or operating a REIT, management does have experience
managing taxable entities with similar operations including originating,
purchasing, underwriting, and securitizing Mortgage Loans as well as the
management of Mortgage Asset portfolios.
The Company's two primary executive officers, Mr. John D. Fry and Mr. Terry
L. Mott, collectively have extensive experience in building and operating
mortgage banking operations in a variety of environments, including building
Mortgage Loan production and management teams and creating and implementing
policies, budgets and controls. Mr. Fry, Certified Mortgage Banker (CMB), formed
the Company in February, 1996 and has been the President, Chief Executive
Officer and Chairman of the Board of Directors since inception. Mr. Fry began
his mortgage banking career in 1966. From 1989 to 1994, Mr. Fry was Senior Vice
President of Wholesale Lending of ComUnity Lending, Inc., a mortgage bank
located in San Jose, California. From 1984 to 1989, Mr. Fry was Vice President
and Western Division Manager of Goldome Realty Credit Corp., a thrift located in
Buffalo, New York. See "Management."
Mr. Mott has been the Executive Vice President of the Company primarily
responsible for Mortgage Loan production and a Director since inception. Mr.
Mott began his career in mortgage banking in 1977. From 1980 to 1988, Mr. Mott
was the regional Vice President at Fleet Mortgage Corp. where he developed and
managed the retail and wholesale mortgage loan production for the western United
States. From 1988 to 1994, Mr. Mott was Executive Vice President and served on
the executive committee for Medallion Mortgage Company. Mr. Mott left AccuBanc
Mortgage, the successor to Medallion Mortgage Company, in December, 1995, to
form the Company with Mr. Fry. See "Management."
In contemplation of the Offering and the proposed business strategy of the
Company, the Company has hired additional executive management team members,
including Mr. John P. McMurray and Mr. Steven K. Passey. Mr. McMurray joined the
Company in February, 1998, as the Executive Vice President of Secondary
Marketing and Asset Liability Management. Prior to joining the Company, Mr.
McMurray was the President of Keystroke Financial, Inc., a start-up internet
mortgage origination company. From 1995 to 1996, Mr. McMurray was Executive Vice
President and Director, Risk Management and Capital Markets for Crestar Mortgage
Corporation where he was responsible for interest rate and credit risk
management, as well as hedging, securitization and loan/securities trading
activities. From 1982 to 1995, Mr. McMurray served in various management
positions with BancPlus Mortgage Corp., most recently serving as the Senior Vice
President, Capital Markets. Mr. McMurray is a Chartered Financial Analyst and a
Certified Public Accountant. He received a Master of Science degree in Real
Estate from Massachusetts Institute of Technology, a Masters of Business
Administration degree from the University of Texas, San Antonio and a Bachelor
of Science degree from Trinity University. Mr. Passey joined the Company in
October, 1997 as the Senior Vice President and Chief Financial Officer. Prior to
joining the Company, Mr. Passey was employed by KPMG Peat Marwick LLP in the
financial services area for eight years, most recently as a manager responsible
for accounting and audit work for financial services companies. Mr. Passey is a
Certified Public Accountant. See "Management."
BUSINESS STRATEGIES
MARKETING AND PRODUCTION STRATEGY
The Taxable Subsidiary acquires or will acquire Mortgage Loans from four
sources: (i) its wholesale channel through which Mortgage Loans are acquired
from a network of independent wholesale brokers, (ii) its correspondent channel
through which closed Mortgage Loans are purchased from other lenders, (iii) its
retail channel through which direct originations are obtained from its retail
branches, and (iv) to a lesser extent, its bulk acquisitions of Mortgage Loans
from other mortgage banks and financial institutions.
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The wholesale channel, which originates Mortgage Loans through independent
wholesale brokers, accounted for $115.9 million, or 76.2%, of the Company's
Mortgage Loan production during the first quarter of 1998. Of the wholesale
channel Mortgage Loans originated during the first quarter of 1998, $56.6
million, or 48.8%, were Subprime Mortgage Loans. As of March 31, 1998, the
wholesale channel originated Mortgage Loans through 12 branch offices located
nationwide. These offices are owned by the Company and are staffed with Company
employees, generally between two and 15 loan officers, zero to five underwriters
and two to 20 support personnel. The Company believes that it has been
successful in penetrating the broker market by providing prompt, consistent
service, which includes (i) response time efficiencies in the purchase process
as a result of decentralized underwriting, (ii) direct and frequent contact with
brokers through a trained sales force, (iii) competitive pricing, and (iv) a
variety of pricing programs and Mortgage Loan products. The Company intends to
initially increase wholesale Mortgage Loan production through expanded marketing
efforts by existing branches and to identify new areas of the United States
where it will establish additional wholesale branches. The Company intends to
continue to increase the percentage of Subprime Mortgage Loans originated
through its wholesale channel. The Company does not have exclusive arrangements
with any wholesale brokers who remain free to sell Mortgage Loans to others.
The correspondent lending channel acquires closed Subprime Mortgage Loans
through a national network of approved Mortgage Loan originators that fund and
close each Subprime Mortgage Loan using their own funds and subsequently sell
the Mortgage Loans to the Company. The correspondent lending channel accounted
for $2.8 million, or 1.8%, of the Company's Mortgage Loan production during the
first quarter of 1998, all of which were Subprime Mortgage Loans. The goal of
the correspondent lending channel is to increase the volume of Subprime Mortgage
Loan production while maintaining the comprehensive quality control systems
currently employed by the wholesale and retail channels of the Company. Subprime
Mortgage Loans will be purchased from mortgage bankers, commercial bankers and
savings and loans on a servicing released basis. Each seller will maintain
certain eligibility criteria such as net worth requirements, Mortgage Loan
origination experience and warehouse line capability. In October, 1997, the
Company entered into a letter agreement with Nomura Asset Capital Corporation
("Nomura") to acquire from Nomura Subprime Mortgage Loans and certain
non-binding seller relationships between Nomura and several sellers through
which Nomura has actively purchased Subprime Mortgage Loans since 1994. See
"Business -- Marketing and Production Strategy -- Correspondent Lending."
Pursuant to the terms of the letter agreement, the Company agreed to purchase
certain Subprime Mortgage Loans from Nomura and Nomura agreed to introduce to
the Company correspondents and sellers from whom Nomura formerly acquired
Subprime Mortgage Loans. The Company agreed to pay Nomura a fee of 25 basis
points to the extent that the Company purchases more than $90.0 million of
Subprime Mortgage Loans from such correspondents prior to June 30, 1998. The
Company does not expect to purchase any additional loans from such
correspondents until after June 30, 1998 and, therefore, does not expect to pay
any additional fees to Nomura under the agreement. Nomura also agreed to provide
a $100 million reverse repurchase facility. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." The Company views the assumption of the Nomura seller
relationships as a platform to build and develop the Subprime Mortgage Loans
necessary to implement the Company's Mortgage Asset portfolio strategy.
The retail channel, which originates Mortgage Loans through the direct
solicitation of borrowers, accounted for $33.4 million, or 22.0%, of the
Company's Mortgage Loan production during the first quarter of 1998. Of the
Mortgage Loans originated through the retail channels during the first quarter
of 1998, $1.2 million, or 3.5%, were Subprime Mortgage Loans. As of March 31,
1998, the retail channel originated Mortgage Loans through two branch offices
located in Salt Lake City, Utah and Las Vegas, Nevada. Such offices are staffed
with five to 10 loan officers, one underwriter and five to seven support
personnel. The retail channel includes traditional marketing activities
conducted by retail loan officers, all of whom are commissioned employees of the
Company, who seek to identify potential borrowers through referral sources and
individual sales efforts, as well as high-volume targeted direct mail and
telephone solicitation. The Company intends to maintain Prime Mortgage Loan
production and to focus on increasing Subprime Mortgage Loan production within
its existing retail branch offices by staffing each retail office with a minimum
of two Subprime Mortgage Loan officers who will utilize direct mail and
telephone solicitation methods to generate such Mortgage Loans.
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The Company may also acquire a portion of its Mortgage Asset portfolio
through occasional bulk acquisitions of Mortgage Asset pools ranging in size
from $2.0 million to $50.0 million. The Taxable Subsidiary has made two bulk
acquisitions of Mortgage Loans in an aggregate principal amount of $63.1
million.
UNDERWRITING AND QUALITY CONTROL
The Company underwrites all Mortgage Loans originated through its retail
and wholesale channels with a staff of in-house underwriters. The Company staffs
each office with senior underwriters with a minimum of five years experience and
trains each underwriter on the Company's underwriting policies and procedures at
the Company's headquarters in Salt Lake City, Utah. The underwriters are
permitted to staff retail or wholesale offices after approval by the Chief
Credit Officer, and are subject to a 30-day probation, during which their work
is closely scrutinized by the Company. The Company has an extensive,
systematized quality control and audit plan currently in place to monitor the
quality of the Mortgage Loans originated and purchased, personnel and processes.
LOAN SALES
The Taxable Subsidiary has historically followed a strategy of selling for
cash gains all of its Mortgage Loan originations and purchases through Mortgage
Loan sales in which the Company disposes of its entire economic interest in the
Mortgage Loans (including servicing rights) for a cash price that represents a
premium over the principal balance of the Mortgage Loans sold. For the fiscal
year ended December 31, 1997, the Taxable Subsidiary sold $477.1 million of
Mortgage Loans through whole Mortgage Loan sales transactions. The Taxable
Subsidiary did not sell any Mortgage Loans through securitization during this
period; however, substantially all of the Mortgage Loans sold during this period
were ultimately securitized by the purchasers thereof. Ultimately, the Company
plans to build an investment portfolio by retaining selected Subprime Mortgage
Loans. The Taxable Subsidiary, however, intends to continue to sell to various
Mortgage Loan investors for cash gains, all of its Prime Mortgage Loans, all of
its Second Lien Mortgage Loans and certain of its Subprime Mortgage Loans. See
"Business -- Industry Developments." The sale of these Mortgage Loans is
expected to generate current income and cash flow to partially fund the Taxable
Subsidiary's mortgage lending operations. See "Risk Factors -- Risks Relating to
Mortgage Lending Operations."
MORTGAGE INVESTMENT PORTFOLIO
The Company will acquire and manage a portfolio of Mortgage Assets,
primarily composed of Subprime Mortgage Loans originated and purchased by the
Taxable Subsidiary and financed with structured debt instruments. As with a bank
or savings and loan association, the Company's portfolio of Mortgage Assets is
expected to generate net income to the extent that the yield on its Mortgage
Assets exceeds the overall cost of its borrowings. The Company will attempt to
construct a portfolio of Mortgage Assets which will provide a relatively
consistent level of net interest income through a variety of interest rate
environments. The Company intends to develop and manage this portfolio of
Mortgage Assets to maximize net interest income within prescribed risk
constraints.
The Company's Mortgage Assets will be comprised of both whole Subprime
Mortgage Loans and Subprime Mortgage Securities. The Company anticipates that
such Mortgage Assets will be subject to numerous risks, primarily interest rate
risk, credit risk and prepayment risk, among others. The Company has established
policies to attempt to manage the risks relating to the use of substantial
leverage, interest rate risks, credit risks and prepayment risks associated with
its long-term investment in Mortgage Assets. The Board of Directors and
management have broad discretion to amend such policies without the consent of
the stockholders. See "Risk Factors -- Operation of a New Enterprise Involves
Uncertainty -- Future Revisions in Investment and Operating Policies and
Strategies by Board of Directors Creates Uncertainty."
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<PAGE> 16
USE OF LEVERAGE
The Company employs capital allocation guidelines to manage the risks
associated with the use of substantial leverage. See "Summary -- Capital
Allocation Guidelines."
CREDIT RISK MANAGEMENT
The Company attempts to manage credit risk through a number of policies and
strategies, including early intervention and aggressive collection servicing
techniques. See "Summary -- Servicing Activities." In addition, the Company
attempts to mitigate credit risk through its underwriting, appraisal and quality
control programs. To manage credit risk, the Company has adopted underwriting
guidelines wherein all Mortgage Loans are subjected to a detailed review by
Company underwriters. The underwriting guidelines determine maximum LTV ratios
that will be accepted (generally not in excess of 90%), which LTVs are expected
to provide sufficient protection in the event of default and foreclosure. In
addition, the Company requires appraisals by FIRREA-qualified appraisers to
determine the LTV. The Company purchases loans only from Correspondents who meet
minimum net worth requirements ($400,000), and each of whom make extensive
representations and warranties regarding Mortgage Loans sold to the Company.
Upon any breach of such representations or warranties, the Correspondents are
required to repurchase the corresponding Mortgage Loan. Finally, the Company
employs a quality assurance program to monitor the performance of its
underwriters as well as Correspondents and brokers which sell Mortgage Loans to
the Company. See "Business -- Credit Risk Management."
INTEREST RATE RISK MANAGEMENT
To manage interest rate risk, which arises primarily from potential
mismatches in the interest rate on the Company's borrowings and those on its
Mortgage Assets, the Company has adopted a number of policies. The Company will
attempt to structure its liabilities to have interest rate indices and
adjustment periods that correspond as closely as possible with the indices and
adjustment periods on its Mortgage Assets. The Company also intends to use
interest rate caps, swaps and similar instruments to limit, fix or partially
offset changes in interest rates on its borrowings. See "Business -- Interest
Rate Risk Management" and "Risk Factors -- Interest Rate Fluctuations May
Adversely Affect Operations and Net Interest Income." The Company will finance
its Mortgage Assets with CMOs which mitigate some interest rate risk. See
"Summary -- Structured Debt Financing." No interest rate management strategy can
completely insulate the Company from interest rate risks. Moreover, certain
provisions of the Code limit the hedging strategies of REITs. See "Risk
Factors -- Interest Rate Fluctuations May Adversely Affect Operations and Net
Interest Income -- Hedging Transactions Limit Gains and May Increase Exposure to
Losses."
PREPAYMENT RISK MANAGEMENT
Prepayments of Mortgage Loans prior to their maturity date generally
increase as interest rates decline. Subprime Mortgage Loans may be subject to
increased rates of prepayment in stable or rising interest rates if borrowers
are able to repair their credit ratings and refinance at lower rates. Prepayment
affects the Company in several ways. First, to the extent the Company pays a
premium over the outstanding principal balance of the Mortgage Loan, significant
unexpected expenses may be recognized upon prepayment. Second, since prepayments
tend to accelerate in declining interest rate environments, it may be difficult
to replace prepaid Mortgage Loans with Mortgage Loans offering similar yields.
Replacement Mortgage Loans may have low introductory rates that would reduce the
Company's earnings. The Company attempts to mitigate prepayment rates by
acquiring Mortgage Loans that carry prepayment penalties. During the first
quarter of 1998, 84.5% of the Taxable Subsidiary's Subprime Mortgage Loans had
prepayment fees. The Company also intends to structure into its CMO financing
with certain hedging instruments which may mitigate some prepayment risk. The
Company further intends to implement procedures for soliciting borrowers who are
expected to refinance and prepay. No policies or procedures can fully protect
the Company from prepayment risks. See "Risk Factors -- Interest Rate
Fluctuations May Adversely Affect Operations and Reduce Net Interest Income --
Declining Interest Rates May Increase Prepayment Rate and Reduce Net Interest
Income."
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<PAGE> 17
STRUCTURED DEBT INSTRUMENTS
The Company intends to hold for long-term investment Subprime Mortgage
Loans originated or acquired by its mortgage lending operation and to finance
such Mortgage Loans with long-term financings through the issuance of structured
debt instruments, or collateralized mortgage obligations ("CMOs"). Pursuant to
this approach, for accounting purposes, the Mortgage Loans collateralizing any
CMO remain on the balance sheet as assets and the debt obligations (i.e., CMOs)
appear as liabilities, if such obligations meet the requirements of Statement of
Financial Accounting Standards No. 125, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities, to be accounted for as
financings. The Company's retained interest under this approach is reflected by
the excess of the assets over the related liabilities on its balance sheet. The
Company will recognize net interest income to the extent that the interest rate
on the Mortgage Loans collateralizing CMOs exceeds the interest payable to the
holders of the CMOs. Unlike other forms of securitization, CMOs are not
considered sales of the Mortgage Loans which result in immediate accounting
recognition of the expected stream of future income, referred to as "gain on
sale." Gain-on-sale securitizations result in income recognition in excess of
actual cash received. In the event that the actual income is less than expected
at the time of the gain-on-sale securitization, the issuer may be required to
restate income or take losses. The Company believes that CMO financing is
preferable because it reflects only actual net interest income and reduces the
risk of future earnings volatility.
CAPITAL ALLOCATION GUIDELINES
The Company's goal is to maintain a balance between the under-utilization
of leverage, which may diminish returns to stockholders, and the
over-utilization of leverage, which could limit the Company's funding
alternatives during adverse market conditions. See "Risk Factors -- Leverage
Increases Exposure to Loss." Therefore, the Company has adopted Capital
Allocation Guidelines (the "CAG"). The primary factors influencing the Company
under circumstances of adverse market conditions are (i) increases in interest
rates, and (ii) increases in general market perception of credit risk associated
with residential Mortgage Loans. Interest rate increases reduce the market value
of the Company's Mortgage Assets and therefore reduce the amount of available
financing since financing is dependent on market values. An increase in the
perceived credit risk tends to increase the level of over-collateralization
required by rating agencies so that the Company can obtain investment grade
ratings on its senior classes of structured financings, such as CMOs. Higher
levels of over-collateralization reduce the quantity of total financing
prospectively available to the Company for a given quantity of Mortgage Loans.
The Company's CAG are designed for purposes of sustaining liquidity and funding
alternatives during each of these adverse market conditions.
SERVICING ACTIVITIES
Initially, the Company intends to engage a third-party servicer to service
all Mortgage Loans in the Company's investment portfolio while management
focuses on Mortgage Loan production, Mortgage Loan processing, asset/liability
management, administrative operations and securitization. Such a subservicing
agreement will allow the Company to take advantage of the experience of
Advanta's servicing staff, their computer and customer service systems and
collection procedure. Although there can be no assurances, the Company intends
to develop its own servicing capability in order to oversee the performance of
its Mortgage Loans more directly and to manage the servicing relationship with
its borrowers. The timing of this action will be based on the time required to
obtain the personnel and computer systems necessary to properly manage a
servicing department capable of servicing over $1.0 billion in Subprime Mortgage
Loans.
The Company currently has a Loan Servicing Agreement with Advanta Mortgage
Corp. (the "Advanta Servicing Agreement"). Under the Advanta Servicing
Agreement, the Company is obligated to pay Advanta a monthly servicing fee on
the declining principal of each Mortgage Loan serviced and a set-up fee for each
Mortgage Loan delivered to Advanta for servicing. Upon termination by the
Company of this servicing agreement, the Company will be obligated to pay a
termination fee equal to $100 per Mortgage Loan then serviced by Advanta, and
will incur additional costs incident to such termination. See
"Business -- Servicing Activities." As of March 31, 1998, the Company had an
immaterial number and principal amount of Mortgage Loans under the Advanta
Servicing Agreement (five Mortgage Loans with a principal balance of
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<PAGE> 18
$0.4 million). The Company intends to select the servicer offering the most
favorable terms and highest quality services and believes the Advanta Servicing
Agreement will not, now or in the future, deter the Company from selecting
another servicer.
STRUCTURE AND FORMATION TRANSACTIONS
STRUCTURE OF THE COMPANY
The Company will initially conduct its operations through at least two
entities as follows: (i) RealTrust Asset Corporation, a newly formed Maryland
corporation which will elect REIT status beginning with the taxable year ending
December 31, 1998 (for purposes of this discussion, sometimes referred to as
"RealTrust"), and (ii) CMG Funding Corp., a Delaware corporation which will not
elect REIT status (for purposes of this discussion, sometimes referred to as the
"Taxable Subsidiary"). This structure is designed primarily to permit RealTrust
to acquire the ownership of a substantial portion of the economic interest of
the Taxable Subsidiary while qualifying for REIT status. See "Federal Income Tax
Considerations -- Qualification as a REIT -- Nature of Assets" and "Risk
Factors -- President's 1999 Budget Plan, If Enacted, Would Adversely Affect
Results of Operations."
[STRUCTURE CHART]
FORMATION TRANSACTIONS AND POST-CLOSING TRANSACTIONS
FORMATION TRANSACTIONS
Immediately prior to or upon the closing of this Offering, the following
transactions will be consummated (the "Formation Transactions"):
- As of April 15, 1998, the stockholders of the Taxable Subsidiary have
contributed 95% of their capital stock of the Taxable Subsidiary to
RealTrust in exchange for shares of capital stock issuable by RealTrust,
including the Common Stock and preferred stock (the "Capital Stock");
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<PAGE> 19
- The capital stock of the Taxable Subsidiary will be recapitalized such
that RealTrust will own 100% of the non-voting preferred stock
representing 95% of the economic interest of the Taxable Subsidiary and
the stockholders of the Taxable Subsidiary prior to this Offering (other
than ContiFinancial Corporation, the "Founders") and ContiFinancial
Corporation, will own all of the common stock representing five percent
of the economic interest of the Taxable Subsidiary (reflecting their
respective ownership percentages of the Taxable Subsidiary's entire
capital stock);
- The outstanding shares of preferred stock of RealTrust, owned by
ContiFinancial Corporation, John Fry and Terry Mott, and all of the
shares of Common Stock of RealTrust held by the Founders and
ContiFinancial Corporation will be converted into an aggregate of
1,295,807 shares of Common Stock of RealTrust, par value $.001 per share
(the "Common Stock"); except the 410,581 shares of Class B Redeemable
Preferred Stock owned by ContiFinancial Corporation which will be
redeemed after the closing of this Offering (see "Conflicts of Interest
and Related Party Transactions -- ContiFinancial Corporation" and "Use
of Proceeds");
- The Company will amend its Articles of Incorporation to adopt provisions
necessary for qualification as a REIT;
- The Company will sell 5,000,000 Units in the Offering (assuming no
exercise of the Underwriters' over-allotment option); and
- The Company will grant the Representative's Warrants.
POST-CLOSING TRANSACTIONS
Following the closing of the Offering, the following transactions will be
consummated (the "Post-Closing Transactions"):
- The Company will elect to be taxed as a REIT;
- The Company will conduct certain aspects of its mortgage lending
operations through the Taxable Subsidiary. The Company will own all of
the shares of non-voting preferred stock of the Taxable Subsidiary,
which shares shall represent 95% of the economic interest of the Taxable
Subsidiary. See "Risk Factors -- President's 1999 Budget Plan, If
Enacted, Would Adversely Affect Results of Operations";
- The Founders will own all of the voting common stock of the Taxable
Subsidiary, which shares shall represent five percent of the economic
interest of the Taxable Subsidiary;
- The Company will redeem the 410,581 shares of Class B Redeemable
Preferred Stock held by ContiFinancial Corporation for $2,000,000, plus
dividends accrued since January 1, 1998, at the rate of 18% per annum;
and
- In addition to the options to purchase 72,925 shares of Common Stock
granted to officers, directors and employees under the 1996 Stock Option
Plan, the Company will also grant to officers, directors and employees
(including ContiFinancial Corporation) options to purchase an aggregate
of 407,569 shares of Common Stock under the 1998 Stock Option Plan (See
"Management -- Executive Compensation -- 1998 Stock Option Plan").
CONSEQUENCES OF FORMATION TRANSACTIONS AND POST-CLOSING TRANSACTIONS
The consummation of the Formation Transactions and the Post-Closing
Transactions will have the following consequences:
- The purchasers of Units in the Offering will own 79.4% of the
outstanding shares of Common Stock (assuming no exercise of the
Warrants, the Representative's Warrants, the over-allotment option or
outstanding stock options) and will own all of these Warrants, except
the Representative's Warrants;
- The Founders will collectively own 20.6% of the outstanding shares of
Common Stock of the Company (assuming no exercise of the Warrants, the
Representative's Warrants, the over-allotment option or outstanding
stock options);
- In addition to options granted to officers, directors and employees of
the Company to purchase 72,925 shares of Common Stock at exercise prices
ranging from $7.33 to $15.00 under the 1996 Stock
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<PAGE> 20
Option Plan, officers, directors and employees of the Company (including
ContiFinancial Corporation) will have options to purchase an aggregate
of 407,569 shares of Common Stock, subject to certain vesting
provisions, at an exercise price equal to the Price to Public (See
"Management -- Executive Compensation -- 1998 Stock Option Plan);
- The Company will own all of the non-voting preferred stock of the
Taxable Subsidiary, which shares will represent 95% of the economic
interest of the Taxable Subsidiary; and
- The Founders will own all of the voting shares of common stock of the
Taxable Subsidiary, which stock will represent five percent of the
economic value of the Taxable Subsidiary.
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<PAGE> 21
DIVIDEND POLICY AND DISTRIBUTIONS
As a REIT, the Company must distribute substantially all of its taxable
income to stockholders during each year. See "Dividend Policy and Distributions"
and "Federal Income Tax Considerations -- Qualification as a
REIT -- Distributions." The Company expects to declare four regular
distributions each year commencing with a pro rata distribution for the quarter
ending June, 1998. After the closing of this Offering, the Company intends to
adopt a Dividend Reinvestment Plan (the "DRP") that will allow stockholders to
have their distributions reinvested automatically in additional shares of Common
Stock. Upon adoption of the DRP, each stockholder will be notified in writing of
the procedure for enrolling in the DRP. See "Dividend Reinvestment Plan."
THE OFFERING
<TABLE>
<S> <C>
Units Offered by the Company and Outstanding
After This Offering(1)......................... 5,000,000
Common Stock to be Outstanding After the
Offering(2)(3)................................. 6,295,807
Common Stock Purchase Warrants to be Outstanding
After the Offering(4).......................... 5,000,000
Common Stock Options Outstanding After the
Offering(5).................................... 480,494
Use of Proceeds... Mortgage Asset acquisition... $59,375,000
Redemption of ContiFinancial
Corporation Preferred
Stock...................... 2,180,000
Repayment of ContiFinancial
Corporation Working
Capital Debt............... 2,025,000
Repayment of Capstone Note... 850,000
Working Capital.............. 4,220,000
-----------
Net Proceeds................. $68,650,000
===========
American Stock Exchange Symbol
For the Units.................................. RAC.U
For the Common Stock(6)........................ RAC
For the Warrants(6)............................ RAC.WS
</TABLE>
- ---------------
(1) Assumes the Underwriters' over-allotment option to purchase up to 750,000
additional Units is not exercised. Includes Units issuable upon exercise of
the option granted to Capstone Investments, Inc. to convert all or any
portion of a Convertible Secured Promissory Note into Units of the Company
offered hereby at the Price to Public. See "Conflicts of Interest and
Related Party Transactions -- Capstone Investments, Inc."
(2) Does not include (i) 5,000,000 shares of Common Stock reserved for issuance
upon exercise of the Warrants which will be a part of the outstanding Units
(5,750,000 if the over-allotment option is exercised), or (ii) 150,000
shares of Common Stock reserved for issuance upon exercise of the
Representative's Warrants (172,500 if the over-allotment option is
exercised).
(3) Excludes the 410,581 shares of Class B Redeemable Preferred Stock owned by
ContiFinancial Corporation which will be redeemed after the closing of the
Offering. See "Conflicts of Interest and Related Party
Transactions -- ContiFinancial Corporation."
(4) Exercisable at the Price to Public. Excludes the Representative's Warrants.
The Warrants shall automatically detach from the Common Stock six months
after the closing of the Offering. Also excludes warrants granted to
ContiFinancial Corporation which terminate upon the closing of the Offering
and excludes warrants to purchase 50,000 shares of Common Stock at the Price
to Public granted to Capstone Investments, Inc. See "Conflicts of Interest
and Related Party Transactions -- ContiFinancial Corporation" and
" -- Capstone Investments, Inc."
(5) Includes options to purchase 42,925 shares of Common Stock at an exercise
price of $7.33 per share and options to purchase 30,000 shares at an
exercise price of $15.00 per share granted to employees of the Company under
the 1996 Stock Option Plan and options to purchase 407,569 shares of Common
Stock at
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<PAGE> 22
an exercise price equal to the Price to Public granted to employees of the
Company under the 1998 Stock Option Plan. See "Management -- Executive
Compensation -- 1998 Stock Option Plan."
(6) The Common Stock and Warrants will not be separately listed and traded until
the Warrants are detachable, six months after the closing of the Offering.
CONFLICTS OF INTEREST AND RELATED PARTY TRANSACTIONS
CONTIFINANCIAL CORPORATION
The Taxable Subsidiary has entered into the following transactions with
ContiFinancial Corporation.
Stock Ownership. Immediately prior to the closing of the Offering,
ContiFinancial Corporation will own 546,883 shares of Common Stock, 252,117
shares of Class A Convertible Preferred Stock and 410,581 shares of Class B
Redeemable Preferred Stock, which in the aggregate represents approximately
43.0% of the outstanding shares of Capital Stock (approximately 42.0% on a fully
diluted basis). Immediately prior to the closing of this Offering, each share of
Class A Convertible Preferred Stock, including those owned by ContiFinancial
Corporation, will be converted into one share of Common Stock. All of the
outstanding shares of Common Stock will be reverse split into an aggregate of
1,295,807 shares of Common Stock. As a result, immediately prior to the closing
of the Offering, ContiFinancial Corporation will own 431,418 shares of Common
Stock, representing 33.3% of the outstanding shares (32.4% on a fully diluted
basis). Upon closing of the Offering, the Company intends to redeem the Class B
Redeemable Preferred.
The redemption price for all shares of the Class B Redeemable Preferred
Stock equals the original purchase price of $2,000,000, plus dividends accrued
from January 1, 1998 at the rate of 18% per annum, for a total redemption price
of $2,180,000, assuming redemption occurs on June 30, 1998. The Class B
Redeemable Preferred Stock is also entitled to a liquidation preference of
$2,000,000 plus accrued dividends. The Class B Redeemable Preferred Stock is not
convertible into Common Stock.
Agreements to Sell Mortgage Loans. Upon the closing of the Offering until
December 31, 2001, the Taxable Subsidiary has agreed to sell to ContiFinancial
Corporation not less than 75% of the fixed-rate Subprime Mortgage Loans
originated or acquired by the Taxable Subsidiary in each month. The purchase
price for such Subprime Mortgage Loans shall be the fair market value as
determined by the best published rate sheet at ContiMortgage Corporation, an
affiliate of ContiFinancial Corporation. In any month, the Taxable Subsidiary
may substitute adjustable-rate Subprime Mortgage Loans for up to 50% of the
amount required to be offered for sale to ContiFinancial Corporation. To the
extent that the Taxable Subsidiary offers to sell less than 75% of the monthly
fixed-rate Subprime Mortgage Loan production, the Taxable Subsidiary has agreed
to pay ContiFinancial Corporation a fee equal to 40 basis points multiplied by
the amount of the principal shortfall.
Warehouse, Standby and Working Capital Financing Agreements. The Taxable
Subsidiary currently has a warehouse facility with ContiFinancial Corporation in
the principal amount of $50.0 million and a working capital facility in the
maximum principal amount of $2.0 million. As of March 31, 1998, the Company had
outstanding borrowings under such lines of $40.3 million and $2.0 million,
respectively. The Company anticipates that, immediately after the closing of
this Offering, the Company will repay all amounts borrowed under the working
capital facility. See "Use of Proceeds." The Taxable Subsidiary may continue to
finance the acquisition of Mortgage Loans under the warehouse facility. Although
the Company anticipates that it will be able to obtain financing on terms more
favorable than those provided by the warehouse facility after the closing of the
Offering, the Company believes that the warehouse facility is currently on terms
not less favorable to the Company than those available from independent third
parties in arm's-length transactions.
Warrants to Purchase Capital Stock. The Taxable Subsidiary has granted to
ContiFinancial Corporation two warrants to purchase shares of common stock. If
the amount of principal and interest due under the working capital facility is
not repaid in full by January 1, 1999, the first warrant allows ContiFinancial
Corporation to purchase, for a nominal amount, shares of common stock
representing up to five percent of the outstanding shares (on a fully diluted
basis) of the Taxable Subsidiary. If the Company repays in full the working
capital facility, the warrant is not exercisable and automatically terminates.
The Company anticipates
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<PAGE> 23
that the working capital facility will be repaid upon closing of the Offering
from the net proceeds thereof. See "Use of Proceeds."
The Taxable Subsidiary has also granted ContiFinancial Corporation a
warrant to purchase, for a nominal amount, shares of common stock representing
one percent of the outstanding shares (on a fully diluted basis) for each
quarter ending prior to the closing of the Offering in which the Taxable
Subsidiary does not attain at least 90% of its pre-tax net income target. Such
warrant automatically expires and may not be exercised by ContiFinancial
Corporation after the closing of this Offering. The Taxable Subsidiary has
established the pre-tax net income targets.
Structured Debt Placement Agent/Underwriter. Until December, 2001, the
Company has appointed ContiFinancial Corporation as its exclusive placement
agent for structured debt offerings and other securitizations and has agreed to
pay to ContiFinancial Corporation a fee of 25 basis points of the principal
amount of any such structured debt public offering and 50 basis points of the
gross proceeds of any such structured debt private offering. These fees are
payable to ContiFinancial Corporation for financial advisory services to be
rendered pursuant to the Investment Banking Services Agreement and will not be
reduced by any fees payable or paid to others, including the underwriters, the
placement agent or to other agents or advisors, if any, in connection with any
structured debt offering. Such combined fees may exceed those available from a
single third party. See "Conflicts of Interest and Related Party
Transactions -- ContiFinancial Corporation" and "Risk Factors -- Conflicts of
Interest May Result in Decisions That Do Not Fully Reflect the Stockholders'
Best Interests."
CAPSTONE INVESTMENTS, INC.
In March, 1998, the Taxable Subsidiary borrowed $850,000 from Capstone
Investments, Inc., a Nevada corporation, evidenced by a Convertible Secured
Promissory Note (the "Note") bearing simple interest at 9% per annum. The Note
matures upon the earlier of (i) January 1, 1999 or (ii) the closing of the
Offering. Interest on the Note is payable monthly and principal is payable upon
maturity. Capstone Investments, Inc. has the option to convert all or any
portion of the Note into Units of the Company offered hereby at the Price to
Public. In addition, the Company has granted Capstone Investments, Inc. warrants
to purchase 50,000 shares of Common Stock at a price equal to the Price to
Public. See "Conflicts of Interest and Related Party Transactions -- Capstone
Investments, Inc."
CONTROL OF TAXABLE SUBSIDIARY
Although RealTrust will be entitled to 95% of the economic benefits of the
Taxable Subsidiary, it will not own any voting securities. All voting securities
will be owned by the Founders and ContiFinancial Corporation. As a result, the
Founders and ContiFinancial Corporation can conduct the affairs of the Taxable
Subsidiary in a manner that may not be in the best interests of the Stockholders
of RealTrust. See "Risk Factors -- Conflicts of Interest May Result in Decisions
That Do Not Fully Reflect the Stockholders' Best Interests."
FORMATION TRANSACTIONS
The Formation Transactions that will occur on or prior to the closing of
the Offering will benefit the Founders of the Company. See "Structure and
Formation Transactions."
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of Messrs.
Fry, Mott, McMurray and Passey. Such employment agreements will provide for an
initial term of five years for Messrs. Fry and Mott and three years for Messrs.
McMurray and Passey, among other benefits. See "Management -- Executive
Compensation -- Employment Agreements."
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<PAGE> 24
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following material risk factors should be carefully considered in evaluating the
Company and its business before purchasing any of the Units offered hereby. This
Prospectus contains forward-looking statements which are indicated by the words
"may," "will," "expect," "anticipate," "continue," "believe," "intend," and
similar expressions. Discussions containing such forward-looking statements may
be found in the material set forth under "Prospectus Summary," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," as well as within the Prospectus
generally. Actual results may differ materially from those described in the
forward-looking statements as a result of the risks and uncertainties set forth
below and within the Prospectus generally.
GENERAL
The Company's mortgage lending operations conducted through CMG Funding
Corp., a Delaware corporation (the "Taxable Subsidiary" or "CMG Funding Corp.")
and the proposed management of a portfolio of Mortgage Assets involve numerous
risk factors, many of which overlap. For example, the risks associated with
changes in interest rates affect the mortgage lending business (e.g., by
impacting the level of Mortgage Loan originations) as well as the Mortgage Asset
portfolio business (e.g., by impacting the value of the Mortgage Assets and the
prepayment rate and, hence, the rate of amortization of premium and discount).
In addition, both of the Company's lines of business are subject to risks
generally impacting the Company as a whole, such as loss of REIT status for tax
purposes. See "-- Failure to Maintain REIT Status Would Have Adverse Tax
Consequences."
The reader is cautioned, however, that the risk factors must be read in
their entirety for a full understanding of the Company's risk profile. It should
be noted that many of the risk factors discussed below apply to both lines of
business in different ways which could have offsetting effects on the Company's
combined businesses.
PRESIDENT'S 1999 BUDGET PLAN, IF ENACTED, WOULD ADVERSELY AFFECT RESULTS OF
OPERATIONS
Certain provisions in the President's 1999 Budget Plan, if enacted, would
adversely affect both the Company's ability to conduct operations through the
Taxable Subsidiary and the Company's ability to qualify as a REIT for the fiscal
year ended December 31, 1998. The President's 1999 Budget Plan, as presented to
Congress on February 2, 1998, contains several provisions which affect REITs.
One such provision, if enacted, could have a potentially adverse effect on the
way that the Company intends to operate its mortgage conduit operations. That
provision would prohibit a REIT from owning, by vote or value, more than 10% of
the stock of another corporation. The rules currently in place for REIT
compliance limit (i) a REIT to owning less than 10% of the outstanding voting
securities of another corporation and (ii) the value of a REIT's ownership of
the securities of any one issuer to less than five percent of the value of the
REIT's assets. See "Federal Income Tax Considerations -- Qualification as a
REIT -- Nature of Assets." By limiting a REIT's ownership of the securities of
another corporation to 10% of the value of the issuing corporation, the
proposal, if enacted, would force the Company to divest itself of most of the
preferred stock of the Taxable Subsidiary that the Company currently owns or
terminate activities in the Taxable Subsidiary that would be prohibited
activities by a REIT, including, but not limited to, the origination of Mortgage
Loans for sale. In such an event the Company would not receive the dividends
that the Company expects to earn from the Taxable Subsidiary, which could have a
material adverse effect on the Company's net earning (loss) after such
divestiture. See "Business -- Industry Developments" and "Federal Income Tax
Considerations -- Recent Legislative Proposals." In addition, in the event the
Company could no longer engage in Mortgage Loan sales, the Company would be
unable to fulfill its contractual obligation to sell certain fixed-rate Mortgage
Loans to ContiFinancial Corporation. See "Certain Transactions -- ContiFinancial
Corporation." If the Company fails to sell to ContiFinancial Corporation 75% of
the Company's fixed-rate Mortgage Loan production, the Company would have to pay
ContiFinancial Corporation a fee equal to 40 basis points multiplied by the
principal amount of the shortfall. Such payment may reduce the earnings and
distributions of the Company.
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<PAGE> 25
In addition, if the 1999 Budget Plan is adopted with a retroactive date of
application which is after the effective date of a quarterly REIT test date, the
Company would not be able to qualify as REIT for 1998. See "Business -- Industry
Developments." As a result, the Company would be taxed as a "C" corporation for
1998, and would be subject to corporate level tax on all of its net earnings. In
such an event, the anticipated dividends and distributions of the Company would
be materially reduced.
Further, the 1999 Budget Plan, if adopted as proposed, would result in the
recognition by the Company of tax on the built-in gain on its assets. Under
current law, a "C" corporation may be acquired by or converted into a REIT on a
tax-free basis. If the REIT makes the appropriate election, the tax on the
built-in gain (the difference between (a) the purchase price for the "C"
corporation or the fair market value of the "C" corporation's stock and (b) the
adjusted tax basis of the "C" corporation's assets) would only be imposed if the
REIT disposed of an asset of the acquired corporation within 10 years after the
acquisition of the "C" corporation. The 1999 Budget Plan proposes to treat the
acquisition of a "C" corporation by a REIT as a taxable liquidation by the "C"
corporation to its shareholders followed by a deemed contribution of the "C"
corporation's assets to the REIT. Such treatment would result in corporate level
tax to the "C" corporation in the amount of the built-in gain on the "C"
corporation's assets followed by shareholder level tax to the extent that the
value of the assets deemed distributed from the "C" corporation to its
shareholders exceeds the shareholders' tax basis in their stock in the "C"
corporation. The 1999 Budget Plan proposes that such changes would first be
effective for years beginning after January 1, 1999.
Adoption of the 1999 Budget Plan could have a material adverse effect on
the Company's operations and profitability. No assurance can be given that
future legislation, regulations, administrative interpretations or court
decisions will not significantly change the tax laws with respect to the
Company's qualification as a REIT or the federal income tax consequences of such
qualification, which may reduce or eliminate the Company's competitive advantage
over non-REIT competitors. See "Federal Income Tax Considerations --
Qualification as a REIT" and "Federal Income Tax Considerations -- Taxation of
the Company."
OPERATION OF A NEW ENTERPRISE INVOLVES UNCERTAINTY
INABILITY TO ACQUIRE OR DELAYS IN ACQUIRING MORTGAGE ASSETS WILL REDUCE INCOME
TO THE COMPANY
As of the date of this Prospectus, the Company has not entered into
commitments to purchase any specific Mortgage Assets. The Company's income and
its ability to make distributions to its stockholders will depend upon its
ability to acquire investments on acceptable terms and at favorable spreads over
the Company's borrowing costs. The Company expects that a significant portion of
its portfolio of Mortgage Assets will be originated or otherwise made available
to it through the Taxable Subsidiary. See "-- President's 1999 Budget Plan, If
Effected, Would Adversely Affect Results of Operations." There can be no
assurance, however, that a sufficient quantity or quality of Mortgage Assets
will be provided by the Taxable Subsidiary or will be otherwise available to the
Company. The Company presently intends to fully invest the net proceeds of this
Offering in Mortgage Assets within 12 months after the closing of the Offering.
The Company's results of operations may be adversely affected during the period
in which the Company is initially implementing its investment, leveraging and
hedging strategies, because during this time the Company may be primarily
investing in short-term investments in Mortgage Securities which are expected to
provide a lower net return than the Company expects to achieve from its
long-term investments in Subprime Mortgage Loans. See "Use of Proceeds." To the
extent that the Company is unable to acquire and maintain a sufficient volume of
Subprime Mortgage Loans, the Company's income and, thus, the Company's ability
to make distributions to its stockholders, will be adversely affected.
LIMITED OPERATING HISTORY OF THE COMPANY CREATES UNCERTAINTY ABOUT FUTURE
RESULTS
The Taxable Subsidiary began mortgage lending operations in April, 1996 and
RealTrust was formed on April 1, 1998. Accordingly, the Company has not yet
developed an extensive earnings history or experienced a wide variety of
interest rate or market conditions. Although the Taxable Subsidiary has grown
its Mortgage Loan origination volume significantly since the beginning of
operations, there can be no assurances that it will
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be able to successfully operate its business as described in this Prospectus.
Therefore, the Taxable Subsidiary's historical operating performance may be of
limited relevance in predicting future performance.
Further, the Taxable Subsidiary has experienced net losses of $1,774,311
and $1,305,866 for the fiscal years ended December 31, 1997 and 1996,
respectively, and had an accumulated deficit of $1,494,072 as of December 31,
1997.
THE MANAGEMENT OF AN INVESTMENT PORTFOLIO OF MORTGAGE ASSETS IS A CHANGE IN
OPERATIONS
The Company's earnings will depend primarily upon management's ability to
acquire and manage a portfolio of Mortgage Assets, which is a new and unproven
business for the Company. The past experience of the officers and directors of
the Company may not be sufficient for the successful management of an investment
portfolio of Mortgage Assets. Specifically, management of an investment
portfolio entails certain activities not previously engaged in by the Company,
such as the issuance of structured debt financing, the purchase of Mortgage
Securities, the retention of subordinated classes of Mortgage Securities and
certain hedging activities. Therefore, there can be no assurance that the
Company will be able to successfully develop or manage its new business
operations. The past performance of the Taxable Subsidiary may not be indicative
of future results.
LACK OF EXPERIENCE MANAGING A REIT MAY ADVERSELY AFFECT OPERATING RESULTS
None of the officers or directors have managed a REIT. See
"Management -- Directors and Executive Officers." There can be no assurance that
the Company will be able to successfully manage a REIT in the manner described
in this Prospectus or in compliance with the Code. The Company's results of
operation and earnings will be adversely affected if the Company is unable to
manage a REIT successfully in the manner described in this Prospectus and in
compliance with the Code. See "-- Failure To Maintain REIT Status Would Have
Adverse Tax Consequences."
LOSS OF ANY KEY PERSONNEL MAY ADVERSELY AFFECT OPERATIONS
The Company's operations will depend heavily upon the contributions of
Messrs. John D. Fry, Terry L. Mott, John McMurray and Steven K. Passey, each of
whom may be difficult to replace. There can be no assurance that they will
remain in the Company's employ. The loss of any of these individuals could have
a material adverse effect upon the Company's business and results of operations.
See "Management -- Executive Compensation -- Employment Agreements."
FUTURE REVISIONS IN INVESTMENT AND OPERATING POLICIES AND STRATEGIES BY BOARD
OF DIRECTORS CREATES UNCERTAINTY
Management has established the Company's investment and operating policies
and strategies as set forth in this Prospectus. However, these policies and
strategies may be modified or waived by the Board of Directors, subject in
certain cases to approval by a majority of the Independent Directors, without
stockholder approval. Ultimately, these changes may have a material adverse
effect on the Company's business, results of operations or financial condition.
FAILURE TO RAISE ADDITIONAL CAPITAL MAY ADVERSELY AFFECT FUTURE GROWTH AND
RESULTS OF OPERATIONS
To implement fully the Company's strategy to rapidly grow a portfolio of
Mortgage Assets, the Company will be required to raise capital in addition to
the capital raised in this Offering. Accordingly, the Company expects to
increase its capital resources by making additional offerings of equity and debt
securities, which may include classes of preferred stock, Common Stock,
commercial paper, medium-term notes, mortgage-backed obligations and senior or
subordinated debt. There can be no assurances that such additional capital
resources will be available on terms acceptable to the Company. Further, there
can be no assurance that the Company will successfully or economically raise the
capital required to implement its business plan. If the Company is unable to
raise sufficient capital or raise capital on favorable terms, the Company's
business, results of operation and financial condition may be materially
adversely affected.
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CONFLICTS OF INTEREST MAY RESULT IN DECISIONS THAT DO NOT FULLY REFLECT THE
STOCKHOLDERS' BEST INTEREST
CONFLICTS OF INTEREST WITH AND DEPENDENCE UPON CONTIFINANCIAL CORPORATION MAY
NOT BE IN THE STOCKHOLDERS' BEST INTEREST
The Company is subject to various potential conflicts of interest arising
from its relationship with ContiFinancial Corporation. See "Conflicts of
Interest and Related Party Transactions." In summary, immediately prior to the
Offering, ContiFinancial Corporation (a) will beneficially own 32.2% (on a fully
diluted basis) of the outstanding Common Stock of the Company, (b) will
beneficially own all of the Class B Redeemable Preferred, (c) until December,
2001, will have the right to purchase not less than 75% of the fixed rate
Subprime Mortgage Loans originated or acquired by the Taxable Subsidiary at a
price determined by the best published rates of ContiFinancial Corporation, (d)
will have lent the Company substantial funds under the warehouse credit facility
($40.3 million at March 31, 1998), (e) may beneficially own warrants to purchase
additional shares of the Common Stock, and (f) will have the right to be the
Company's exclusive placement agent for all structured debt offerings and other
securitizations for a fee. See "Conflicts of Interest and Related Party
Transactions -- ContiFinancial Corporation."
As a stockholder, ContiFinancial Corporation may be in a position to
exercise significant direct and indirect influence over the affairs of the
Company. Consequently, ContiFinancial Corporation may be able to influence the
election of certain members of the Board of Directors.
In addition, in light of the Company's dependence upon ContiFinancial
Corporation for many financial and financial advisory services, the Company may
act in a manner which does not fully reflect the best interests of all of the
Company's stockholders. For example, the Company may elect to retain certain of
its credit facilities with ContiFinancial Corporation when credit facilities
from others third parties may be obtained at a lower cost. Moreover, if the fees
payable at ContiFinancial Corporation are higher than those required by other
third parties, the Company's earnings and distributions to stockholders may be
materially reduced.
Further, pursuant to the Investment Banking Services Agreement, until
December, 2001, the Company has appointed ContiFinancial Corporation as its
exclusive placement agent for structured debt offerings and other
securitizations and has agreed to pay a placement agent fee of 25 basis points
of the principal amount of any such structured debt on public offerings and 50
basis points of the gross proceeds of any such private offering. Such fees are
payable to ContiFinancial Corporation for financial advisory services to be
rendered and will not be reduced by any fees payable or paid to others,
including the underwriters, placement agent or to other agents or advisors, if
any, in connection with any structured debt offering. If the fees payable to
ContiFinancial Corporation are higher than those available from other third
parties, the Company's earnings and distributions may be materially reduced. See
"Conflicts of Interest and Related Party Transactions -- ContiFinancial
Corporation."
In an effort to mitigate the foregoing potential conflicts of interest, the
Company has implemented policies and procedures which require, among other
things, that each decision that implicates a conflict of interest must be
approved by a majority of the Independent Directors. However, there can be no
assurance that the Company's policies or procedures will be successful in
eliminating the influence of such conflicts and, thus, the Company may take
courses of action which fail to fully represent the best interests of all
stockholders of the Company.
A PORTION OF THE NET PROCEEDS FROM THIS OFFERING WILL BE USED TO RETIRE DEBT TO
AND REDEEM STOCK OF CONTIFINANCIAL CORPORATION
The Taxable Subsidiary has obtained a working capital credit facility from
ContiFinancial Corporation in the maximum principal amount of $2.0 million. See
"Conflicts of Interest and Related Party Transactions -- ContiFinancial
Corporation." Any outstanding principal balance and accrued interest under this
facility ($2.0 million as of March 31, 1998) is expected to be retired with a
portion of the net proceeds of the Offering. In addition, $2.2 million of the
net proceeds of the Offering will be used to redeem the outstanding shares of
Class B Redeemable Preferred Stock held by ContiFinancial Corporation (which was
issued in exchange for
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$2.0 million of working capital debt). Thus, ContiFinancial Corporation will
receive a portion of the net proceeds from the Offering as repayment of debt.
INVESTORS WILL HAVE NO VOTING CONTROL OF THE TAXABLE SUBSIDIARY
The Company will own 95% of the economic value of the Taxable Subsidiary,
but will not own any voting securities. In fact, all voting power will be held
by the Founders and ContiFinancial Corporation. As a result, the Company will
not control the management or operations of the Taxable Subsidiary. Therefore,
the Founders and ContiFinancial Corporation, and not the Company, will own or
control the voting stock of the Taxable Subsidiary and, thus, may direct the
business and operations of the Taxable Subsidiary in a manner inconsistent with
the best interests of the Company and its stockholders.
THE FOUNDERS AND CONTIFINANCIAL CORPORATION MAY EXERT INFLUENCE OVER THE
COMPANY
The Founders and ContiFinancial Corporation will beneficially own or have a
right to control approximately 20.6% of the outstanding shares of Common Stock
of the Company (assuming no exercise of the Warrants, the Representative's
Warrants, the Underwriter's over-allotment option or options granted under the
1996 and 1998 Stock Option Plans). As stockholders, the Founders and
ContiFinancial Corporation could exert significant influence over corporate
actions requiring stockholder approval.
INVESTMENTS IN SUBPRIME MORTGAGE LOANS INVOLVE GREATER RISK OF LOSS
HIGHER DELINQUENCY AND LOSS RATES ON SUBPRIME MORTGAGE LOANS MAY RESULT IN
LOSSES
A large portion of the Company's Mortgage Loans are made to borrowers who
do not qualify for Mortgage Loans from conventional Mortgage Loan lenders. For
the year ended December 31, 1997, approximately 2.73% and 0.57% of the Company's
Subprime Mortgage Loan purchases and originations were comprised of Mortgage
Loans made to borrowers graded "C" or "C-" respectively, the Company's two
lowest credit grade classifications. See "Business -- Underwriting and Quality
Control Strategies." No assurances can be given that the Company's underwriting
criteria or methods will afford adequate protection against the higher risks
associated with Mortgage Loans made to Subprime Mortgage Loan borrowers. The
failure of the Company to adequately address the risk of Subprime Mortgage Loan
lending would have a material adverse impact on the Company's results of
operations, financial condition or business prospects.
Credit risks associated with Subprime Mortgage Loans may be relatively
greater than those associated with Prime Mortgage Loans. Certain of the
important differences between Subprime Mortgage Loans and Prime Mortgage Loans
include the applicable loan-to-value ratios ("LTV"), the credit and income
histories of the borrowers, the documentation required for approval of the
borrowers, the types of properties securing the Mortgage Loans, Mortgage Loan
sizes and the borrowers' occupancy status with respect to the related mortgaged
property. As a result of these and other factors, the interest rates charged on
Subprime Mortgage Loans are often higher than those charged for Prime Mortgage
Loans. The combination of different underwriting criteria and higher rates of
interest may lead to higher delinquency rates and/or credit losses for Subprime
Mortgage Loans as compared to Prime Mortgage Loans and could have an adverse
effect on the Company to the extent that the Company invests in such Mortgage
Loans or Mortgage Securities secured by such Mortgage Loans.
SUBPRIME MORTGAGE LOANS MAY EXPERIENCE HIGH PREPAYMENT RATES WHICH REDUCES
INCOME FROM OPERATIONS
Rapid prepayments of Mortgage Loans in the Company's investment portfolio
adversely affects the Company's income and distributions to stockholders. See
"-- Interest Rate Fluctuations May Adversely Affect the Company's Investments
and Results of Operations" and " -- Declining Interest Rates May Increase
Prepayment Rates and Reduce Net Interest Income." Since there is less
information and historical data than exists for Prime Mortgage Loans, there is
uncertainty about prepayment rates on Subprime Mortgage Loans.
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Prepayment rates on Subprime Mortgage Loans may increase even in periods
when interest rates are stable or rising since subprime borrowers may be able to
improve their credit ratings and refinance their Mortgage Loans to reduce the
interest rate. The Company intends to attempt to minimize the effect of rapid
prepayment by investing in Mortgage Loans with prepayment penalties. However,
not all Subprime Mortgage Loans will have prepayment penalties. Ultimately,
increasing prepayment rates could materially reduce income from operations.
COMPETITION IN THE SUBPRIME MORTGAGE LENDING MARKET MAY HAVE A MATERIAL ADVERSE
EFFECT ON RESULTS OF OPERATIONS
As an originator and purchaser of Subprime Mortgage Loans, the Company will
face intense competition, primarily from commercial banks, savings and loans,
other independent mortgage lenders and certain other mortgage REITs and
specialty finance companies. As the Company expands into particular geographic
markets across the nation, it will face competition from lenders with
established positions in these locations. Many of the Company's competitors in
the financial services business are substantially larger and have more capital
and other resources than the Company. In addition, competition can take place on
various other levels, including convenience in obtaining a Mortgage Loan,
service, marketing, origination channels and pricing. Failure to be competitive
on these levels could have a material adverse effect on the Company's results of
operations.
Additionally, the Subprime Mortgage Loan market is currently undergoing
substantial changes. There are new entrants into the market, which is a changing
competitive environment. Furthermore, certain large national finance companies
and Prime Mortgage Loan originators have announced their intention to adapt
their Prime Mortgage Loan origination programs by allocating resources to the
origination of Subprime Mortgage Loans. Certain of these larger mortgage
companies and commercial banks have begun to offer products similar to those
offered by the Company and to target customers similar to those that the Company
targets. For example, FHLMC has announced its intention to make a secondary
marketplace for Subprime Mortgage Loans originated by certain financial
institutions. The entrance of these and other potential competitors into the
Company's markets could have a material adverse effect upon the Company's
results of operations and financial condition. In particular, the increasing
level of capital resources being devoted to Subprime Mortgage Loan lending may
increase the competition among lenders to originate or purchase Subprime
Mortgage Loans and result in either (i) reduced interest rates and, thus,
compressed spreads on such Mortgage Loans compared to present levels, which
would decrease potential profit margins, or (ii) revised underwriting standards
permitting higher loan-to-value ratios on properties securing Subprime Mortgage
Loans, which would increase the risk of loss in the event of default. There can
be no assurance that the Company will be able to compete successfully in this
market environment and any failure in this regard could have a material adverse
effect on the Company's results of operations and financial condition.
INVESTMENTS IN HIGH LTV MORTGAGE LOANS AND SUBORDINATED MORTGAGE SECURITIES
INVOLVE GREATER RISKS OF LOSS
DEFAULTS ON HIGH LOAN-TO-VALUE MORTGAGE LOANS MAY RESULT IN LOSSES
The Company's current underwriting guidelines allow for the acquisition of
Mortgage Loans with up to a 90% loan-to-value ratio ("LTV"). See
"Business -- Underwriting and Quality Control Strategies." The higher the LTV,
the greater the risk that the Company may be unable to recover full amounts due
on its Mortgage Loans in the event the borrower defaults and the Company
forecloses and sells the underlying collateral. The failure of the Company to
adequately address the risk of high LTV Mortgage Loan products could have a
material adverse effect on the Company's results of operations and financial
condition.
SUBORDINATED CLASSES OF MORTGAGE SECURITIES ARE SUBJECT TO GREATER CREDIT
RISKS THAN SENIOR CLASSES
The Company expects its investment portfolio to include Mortgage Securities
acquired from third parties, including "first loss" classes of subordinated
Mortgage Securities. A "first loss" class is the most subordinated class of
securities and is the first to bear the loss upon a default on the underlying
Mortgage Loans.
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Subordinated Mortgage Securities are subject to special risks than more senior
classes, including a substantially greater risk of loss of principal and
non-payment of interest. While the market value of most subordinated interest
classes tend to react less to fluctuations in interest rate levels than more
senior classes, the market values of subordinated Mortgage Securities tend to be
more sensitive to changes in economic conditions than more senior classes. As a
result of these and other factors, subordinated Mortgage Securities generally
are not actively traded, are more difficult to pledge as collateral for
borrowings and may not provide the holders thereof with liquidity.
Additionally, the yield to maturity on subordinated Mortgage Securities of
the type that the Company intends to acquire will be extremely sensitive to the
default and loss experience of the underlying mortgage pass-through securities
or pools of whole loans securing or backing a series of Mortgage Securities and
the timing of any such defaults or losses. Because the subordinated Mortgage
Securities of the type the Company intends to acquire generally have no credit
support, to the extent there are realized losses on the Mortgage Loans
collateralizing such classes, the Company may recover less than the full amount,
if any, of its initial investment in such subordinated Mortgage Securities.
Further, the subordination of Mortgage Securities to more senior classes
may adversely affect the yield on such Mortgage Securities even if realized
losses are not ultimately allocated to such classes. On any payment date,
interest and principal are paid on the more senior classes before interest and
principal are paid with respect to the unrated or non-investment grade credit
support classes. Typically, interest deferred on these credit support classes is
payable on subsequent payment dates to the extent funds are available, but such
deferral may not itself bear interest. Such deferral of interest will affect
adversely the yield on the Mortgage Securities.
Finally, the Mortgage Securities that the Company retains from its
structured debt financings may be subordinated Mortgage Securities that are not
supported by credit enhancements, are not investment grade and have limited
liquidity. To the extent third parties have been contracted to provide the
credit enhancement, the Company is dependent in part upon the creditworthiness
and the ability of the insurer to pay claims and the timeliness of reimbursement
in the event of a default on the underlying obligations. The insurance coverage
for various types of losses is limited in amount and, consequently, losses in
excess of the limitation would be borne by the Company. Credit enhancements on
non-investment grade Mortgage Securities are less likely to fully absorb the
losses from mortgage defaults which tend to be significantly higher for non-
investment grade Mortgage Securities as compared to investment grade Mortgage
Securities. Non-investment grade Mortgage Securities are also generally less
liquid than investment grade securities. Accordingly, to the extent that the
Company invests in non-investment grade securities, it will be subject to
greater credit and liquidity risks the consequences of which may result in
losses and adversely affect results of operations.
INTEREST RATE FLUCTUATIONS MAY ADVERSELY AFFECT OPERATIONS AND NET INTEREST
INCOME
INTEREST RATE MISMATCHES BETWEEN MORTGAGE ASSETS AND BORROWINGS MAY RESULT IN
REDUCED INCOME OR LOSSES
A substantial portion of all Mortgage Assets are expected to have
adjustable rates or are fixed initially, but have interest rate indices that
will adjust at some point in the future. Interest rates on the Company's
borrowings are, and generally will be, based on short-term indices. To the
extent any of the Company's Mortgage Assets are financed with borrowings bearing
interest based on, or varying with, an index different from that used for the
related Mortgage Assets, so-called "basis" interest rate risk will arise. In
such event, if the index used for the Mortgage Assets is a "lagging" index (such
as the 11th District Cost of Funds) that reflects market interest rate changes
on a delayed basis, and the rate borne by the related borrowings reflects market
rate changes more rapidly, the Company's net interest income will be adversely
affected in periods of increasing market interest rates.
Additionally, the Company's adjustable-rate Mortgage Assets will be subject
to periodic rate adjustments which may be more or less frequent than the
increases or decreases in rates borne by the borrowings or financings utilized
by the Company. Accordingly, in a period of increasing interest rates, the
Company could experience a decrease in net interest income or a net loss because
the interest rates on borrowings could adjust
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faster than the interest rates on the Company's adjustable-rate Mortgage Loans
("ARMs") or Mortgage Assets backed by ARMs. Moreover. ARMs are typically subject
to periodic and lifetime interest rate caps which limit the amount an ARMs
interest rate can change during any given period. The Company's borrowings will
not be subject to similar restrictions. Hence, in a period of rapidly increasing
interest rates, the Company could also experience a decrease in net interest
income or a net loss in the absence of effective hedging because the interest
rates on borrowings could increase without limitation while the interest rates
on the Company's ARMs and Mortgage Assets backed by ARMs would be limited by
caps. Furthermore, some ARMs may be subject to periodic payment caps that result
in some portion of the interest accruing on the ARM being deferred and added to
the principal outstanding. This could result in receipt by the Company of less
cash income on its ARMs than the debt service that the Company is required to
pay on the related borrowings, which will not have such payment caps. The
Company expects that the net effect of these factors, all other factors being
equal, will be to lower the Company's net interest income or cause a net loss
during periods of rapidly rising market interest rates (but not necessarily in
an environment of gradually rising market interest rates), which could
negatively impact the level of dividend distributions and the market price of
the Common Stock.
The Company acquires the majority of its Mortgage Assets at a premium over
face amount. For financial reporting purposes, these premiums are amortized as
an adjustment to the yield of the acquired Mortgage Asset. During periods of
decreasing interest rates, borrowers are more likely to refinance Mortgage
Loans. As Mortgage Loans are prepaid, premiums may be amortized faster than
originally expected. Sudden declines in interest rates may increase prepayments,
which would cause a significant portion of premiums to be amortized, resulting
in a significant negative impact on net interest income or result in a net loss.
Although many of the Mortgage Loans originated by the Company have penalties for
prepayment, certain Mortgage Loans originated and Mortgage Loans acquired from
third-party correspondents may not have prepayment penalties, thereby increasing
the Company's exposure to prepayment risks.
Changes in anticipated prepayment rates of Mortgage Assets could affect the
Company in several adverse ways. A portion of the ARMs acquired by the Company
will have been recently originated and will still bear initial interest rates
which are lower than their "fully-indexed" rates (the applicable index, plus a
margin). In the event that such an ARM is prepaid faster than anticipated, such
as prior to or soon after the time of adjustment to a fully-indexed rate, the
Company will have experienced an adverse effect on its net interest income
during the time it held such ARM (compared with holding a fully-indexed ARM) and
will have lost the opportunity to receive interest at the fully-indexed rate
over the expected life of the ARM. In addition, the faster than anticipated
prepayment of any Mortgage Asset that had been purchased at a premium by the
Company would generally result in a faster than anticipated write-off of any
remaining capitalized premium amount and consequent reduction of the Company's
net interest income by such amount.
INTEREST RATE INCREASES MAY REDUCE MORTGAGE LOAN ORIGINATIONS AND INCOME
A substantial or sustained increase in interest rates could adversely
affect the ability of the Company to originate and purchase Mortgage Loans and
would reduce the interest rate differential between newly originated Mortgage
Loans and the pass-through rate on Mortgage Loans that are financed.
Historically, interest rate increases have resulted in a reduction in the level
of re-financed Mortgage Loan originations. In such event, the Company's
origination volume may significantly decrease, prohibiting the Company from
acquiring or originating sufficient new Mortgage Loans to replace those Mortgage
Loans that are prepaid. In periods of declining production, the Company may be
required to purchase Mortgage Assets in the secondary market at higher costs,
thereby reducing earnings and income.
DECLINING INTEREST RATES MAY INCREASE PREPAYMENT RATES AND REDUCE NET INTEREST
INCOME
Prepayment rates vary from time to time and may cause changes in the amount
of the Company's net interest income. Prepayments of ARMs and Mortgage Assets
backed by ARMs usually can be expected to increase when mortgage interest rates
fall below the then-current interest rates on such ARMs and decrease when
mortgage interest rates exceed the then-current interest rate on the ARMs,
although such effects are not predictable. Prepayment experience also may be
affected by the geographic location of the property securing
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the Mortgage Loans, the assumability of the Mortgage Loans, conditions in the
housing and financial markets and general economic conditions. In addition,
prepayments on certain ARMs may be affected by the ability of the borrower to
convert an ARM to a fixed-rate Mortgage Loan and by conditions in the fixed-rate
Mortgage Loan market. If the interest rates on ARMs increase at a rate greater
than the interest rates on fixed-rate Mortgage Loans, prepayments on ARMs may
tend to increase. In periods of fluctuating interest rates, interest rates on
ARMs may exceed interest rates on fixed-rate Mortgage Loans, which may tend to
cause prepayments on ARMs to increase at a rate greater than anticipated.
Mortgage Securities backed by Mortgage Loans are often structured so that
certain classes are provided protection from prepayments for a period of time.
However, in a period of extremely rapid prepayments, during which earlier-paying
classes may be retired faster than expected, the protected classes may receive
unscheduled payments of principal earlier than expected and would have average
lives that, while longer than the average lives of the earlier-paying classes,
would be shorter than originally expected. The Company will seek to minimize
prepayment risk through a variety of means, including structuring a diversified
portfolio of Mortgage Assets with a variety of prepayment characteristics,
originating and investing in Mortgage Assets with prepayment prohibitions and
penalties, investing in certain Mortgage Security structures which have
prepayment protection, and balancing Mortgage Assets purchased at a premium with
Mortgage Assets purchased at a discount. In addition, the Company may in the
future purchase IOs as part of its hedging strategy. However, no strategy can
completely insulate the Company from prepayment risks arising from the effects
of interest rate changes.
HEDGING TRANSACTIONS LIMIT GAINS AND MAY INCREASE EXPOSURE TO LOSSES
The Company follows an asset/liability management strategy intended to
protect against interest rate changes and prepayments. See "Business
-- Interest Rate Risk Management." Nevertheless, developing an effective
asset/liability management strategy is complex and no strategy can completely
insulate the Company from risks associated with interest rate changes and
prepayments. In addition, there can be no assurance that the Company's hedging
activities will have the desired beneficial impact on the Company's results of
operations or financial condition. Hedging typically involves costs, including
transaction costs, which increase dramatically as the period covered by the
hedge increases and which also increase during periods of rising and volatile
interest rates. The Company may increase its hedging activity, and, thus,
increase its hedging costs, during such periods when interest rates are volatile
or rising and hedging costs have increased. Moreover, federal tax laws
applicable to REITs may substantially limit the Company's ability to engage in
certain asset/ liability management transactions. Such federal tax laws may
prevent the Company from effectively implementing particular hedging strategies
that the Company determines, absent such restrictions, would best insulate the
Company from the risks associated with changing interest rates and prepayments.
See "Federal Income Tax Considerations -- Taxation of the Company."
INTEREST-ONLY AND PRINCIPAL-ONLY MORTGAGE SECURITIES ARE SUBJECT TO SUBSTANTIAL
INTEREST RATE AND PREPAYMENT RISKS WHICH MAY ADVERSELY AFFECT RESULTS OF
OPERATIONS.
The Company may invest a portion of its assets in interest-only Mortgage
Securities ("IOs") and principal-only Mortgage Securities ("POs"), which are
subject to substantial interest rate and related risks, in conjunction with its
other hedging activities. IOs represent investments in the interest payments
from a pool of Mortgage Loans, whereas POs represent investments in the
principal payments from a pool of Mortgage Loans. The returns from IOs and POs
are subject to significant prepayment risks. To the extent that the average
prepayment rate on a pool of Mortgage Loans is higher than expected, the IOs
issued on such pool will generate less interest income than IOs issued on pools
of Mortgage Loans with lower prepayment rates. As interest rates decline,
prepayment rates will generally increase and thereby reduce the stream of income
which can be generated through an investment in IOs. Conversely, POs benefit
from higher prepayment rates since the holders are entitled to receive such
prepayments. The present value of the cash flow generated from POs will
generally decline in the event that prepayments are slower than expected. In
addition, rising interest rates will negatively impact the present value of the
future cash flows from both IOs and POs. Accordingly, any such fluctuations in
interest rates or prepayment rates may reduce or eliminate the effectiveness of
hedging strategies using IOs and POs, and thereby may have an adverse effect on
the Company's results of operations.
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THE COMPANY HAS NO SPECIFIC HEDGING POLICIES AND FAILURE TO APPROPRIATELY HEDGE
MAY ADVERSELY AFFECT RESULTS OF OPERATIONS
The Company intends to purchase interest rate caps, interest rate swaps and
other appropriate financial instruments to mitigate the risk of the interest
cost of its variable rate liabilities increasing at a faster rate than the
earnings on its Mortgage Assets during a period of rising rates. In this way,
the Company intends generally to hedge as much of the interest rate risk as
management determines is in the best interests of the Company given the cost of
such hedging transactions and the need to maintain the Company's status as a
REIT. In this regard, the amount of income the Company may earn from its hedging
is subject to limitation under the REIT provisions of the Code. The Company may
hedge the risk of its borrowing costs on its liabilities increasing faster than
its income, due to the effect of the periodic and lifetime caps on its Mortgage
Assets, through the acquisition of (i) Qualified REIT Assets, such as
interest-only REMIC regular interests, that function in a manner similar to
hedging instruments, (ii) Qualified Hedges, the income from which qualifies for
the 95% income test, but not the 75% income test for REIT qualification
purposes, and (iii) other hedging instruments, whose income qualifies for
neither the 95% income test nor the 75% income test. See "Federal Income Tax
Considerations -- Qualification as a REIT -- Sources of Income." The latter form
of hedging may be accomplished through the Taxable Subsidiary. See
"Business -- Industry Developments," "Business -- Interest Rate Risk Management"
and "Federal Income Tax Considerations -- Taxation of the Company." The
Company's policies do not contain specific requirements as to the percentage or
amount of interest rate risks which the Company is required to hedge. The Board
of Directors will, from time to time, review the extent and effectiveness of
hedging transactions conducted by the Company. The Company may attempt to
increase its overall yield by saving the cost of acquiring and carrying hedging
instruments by not hedging certain periodic interest rate adjustments when the
Company determines, based on all relevant facts, that bearing such risk is
advisable and does not present an unacceptable risk. However, there can be no
assurance that the Company's estimation of the risks will be accurate and
failure to hedge appropriately may effect the Company's results of operations.
COUNTERPARTY AND UNENFORCEABILITY RISK IN HEDGING TRANSACTIONS MAY RESULT IN
LOSSES
Hedging instruments are not always traded on regulated exchanges,
guaranteed by an exchange or its clearing house, or regulated by any U.S. or
foreign governmental authorities. Consequently, there are no requirements with
respect to record-keeping, financial responsibility or segregation of customer
funds and positions. Hedging transactions subject the Company to risks that the
counterparty will be unable or unwilling to perform its obligations. Such risks
could result from insufficient documentation, insufficient capacity or authority
of a counterparty and unenforceability in the event of bankruptcy or insolvency.
If a hedging transaction entered into by the Company was determined to be
unenforceable, the Company could incur unrecoverable losses from such
transaction. The business failure of a counterparty with which the Company has
entered into a hedging transaction will most likely result in a default. Default
by a party with which the Company has entered into a hedging transaction may
result in the loss of unrealized profits and force the Company to cover its
resale commitments, if any, at their then current market price. Although
generally the Company will seek to reserve for itself the right to terminate its
hedging positions, it may not always be possible to dispose of or close out a
hedging position without the consent of the counterparty, and the Company may
not be able to enter into an offsetting contract in order to cover its risk.
There can be no assurance that a liquid secondary market will exist for hedging
instruments purchased or sold, and the Company may be required to maintain a
position until exercise or expiration which could result in losses.
BASIS RISK IN HEDGING TRANSACTIONS MAY RESULT IN LOSSES
To the extent the Company utilizes a derivatives transaction to hedge
another position, such transaction will also subject the Company to basis or
correlation risk. Basis or correlation risk refers to the exposure of a
transaction or portfolio to the differences in the price performance of the
derivatives it contains and their hedges. If the Company enters into a
transaction in which an instrument and its hedge are not perfectly correlated,
changes in applicable indices or other price movements will result in a change
(which could
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include a loss) in the market value of the combined hedge position. The Company
does not have any policies limiting the amount of derivatives used for hedging
transactions which increases uncertainty for stockholders.
BORROWING TO FINANCE INVESTMENT PORTFOLIO MAY ADVERSELY AFFECT RESULTS OF
OPERATIONS
LEVERAGE INCREASES EXPOSURE TO LOSS
The Company's operations are expected be highly leveraged. The Company
expects to borrow against a substantial portion of the market value of its
assets (up to approximately 92%, depending upon the nature of the underlying
Mortgage Assets). The Company generally expects to maintain a ratio of equity
capital to book value of total assets of approximately 8% to 15%. The actual
ratio may be higher or lower from time to time depending upon market conditions
and other factors deemed relevant by management, subject to the review of the
Board of Directors. The Company's Amended and Restated Articles of Incorporation
and Bylaws do not limit the amount of indebtedness the Company can incur, and
management will have the discretion to deviate from or change its indebtedness
policy at any time, without consent from or notice to the Company's
stockholders. See "-- Operations of a New Enterprise Involves
Uncertainty -- Future Revisions in Investment and Operating Policies and
Strategies by Board of Directors Creates Uncertainty." The Company intends to
finance its acquisition of Mortgage Assets through the net proceeds of the
Offering and by borrowing against or "leveraging" its investment portfolio. The
Company will leverage primarily with reverse repurchase agreements,
securitizations of its Mortgage Loans and secured and unsecured borrowings.
Leverage increases the volatility in the Company's income and the value of
its investment portfolio of Mortgage Assets. The Company will leverage its
investment portfolio only when there is an expectation that it will enhance
returns; however, there can be no assurance that the Company's use of leverage
will prove to be beneficial or advantageous to the Company, relative to the
Company's risks. Moreover, there can be no assurance that the Company will be
able to meet its debt service obligations. The Company's ability to meet its
debt service obligations will depend upon the Company's receipt of sufficient
income from its Mortgage Assets investment portfolio. In the event of a mismatch
in interest rates between the Company's borrowings and the yield on its Mortgage
Assets investment portfolio or other reductions in cash flow, including without
limitation reductions resulting from payment defaults on the Company's Mortgage
Assets, the Company may not have sufficient cash flow to meet its debt service
obligations.
A substantial portion of the Company's borrowings are expected to be in the
form of securitizations and reverse repurchase agreements. If the value of the
Mortgage Assets pledged to secure such borrowings were to decline, the Company
would be required to post additional collateral in order to reduce the amount
borrowed or suffer forced sales of its collateral. If sales were made at prices
lower than the carrying value of the collateral, the Company would experience
additional losses. If the Company is forced to liquidate its Mortgage Assets,
there can be no assurance that it will be able to maintain compliance with the
REIT provisions of the Code regarding asset and source of income requirements.
See "-- Failure to Maintain REIT Status Would Have Adverse Tax Consequences."
INABILITY TO IMPLEMENT LEVERAGING STRATEGY MAY REDUCE INCOME OR RESULT IN
LOSSES
The Company employs a financing strategy to increase the size of its
Mortgage Asset portfolio by borrowing a substantial portion (which may vary
depending upon the mix of the Mortgage Assets in the Company's portfolio and the
application of the Company's Capital Allocation Guidelines with respect to such
mix of Mortgage Assets) of the market value of its Mortgage Assets. If the
returns on the Mortgage Assets purchased with borrowed funds fail to cover the
cost of its borrowings, the Company will experience net interest losses. In
addition, through increases in haircuts (i.e., the equity capital required by a
lender or purchaser to finance the Company's Mortgage Assets), decreases in the
market value of the Company's Mortgage Assets, increases in interest rate
volatility, availability of financing in the market, circumstances then
applicable in the lending market and other factors, the Company may not be able
to achieve the degree of leverage it believes to be optimal, which may cause the
Company to be less profitable than it might be otherwise.
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INABILITY TO RENEW OR REPLACE MATURING BORROWINGS MAY RESULT IN LOSSES
The ability of the Company to achieve its investment objectives depends not
only on its ability to borrow money in sufficient amounts and on favorable
terms, but also on the Company's ability to renew or replace on a continuous
basis its maturing short-term borrowings. The Company's business strategy relies
on warehouse facilities and short-term reverse repurchase agreements to fund
Mortgage Loan originations and purchases. See "Business -- Capital and Liquidity
Management." In the event the Company is not able to renew or replace maturing
borrowings, the Company could be required to sell Mortgage Assets under adverse
market conditions and could incur losses as a result. See "Business -- Industry
Developments." In addition, in such event, the Company may be required to
terminate hedge positions, which could result in further costs to the Company.
An event or development such as a sharp rise in interest rates or increasing
market concern about the value or liquidity of a type or types of Mortgage
Assets in which the Company's Mortgage Loan portfolio is concentrated will
reduce the market value of the Mortgage Assets, which would likely cause lenders
to require additional collateral. At the same time, the market value of the
Mortgage Assets in which the Company's liquid capital is invested may have
decreased. A number of such factors in combination may cause difficulties for
the Company, including a possible liquidation of a major portion of the
Company's Mortgage Asset portfolio at disadvantageous prices with consequent
losses, which could have a material adverse effect on the Company and its
solvency.
DECLINE IN MARKET VALUE OF MORTGAGE ASSET MAY LIMIT THE COMPANY'S ABILITY TO
BORROW OR RESULT IN LOSSES
A decline in the market value of the Company's portfolio of Mortgage Assets
may limit the Company's ability to borrow or result in lenders initiating margin
calls (i.e., requiring a pledge of cash or additional Mortgage Assets to
re-establish the ratio of the amount of the borrowing to the value of the
collateral). This remains true despite effective hedging against such
fluctuations because the hedging instruments may not be part of the collateral
securing the collateralized borrowings. Additionally, it may be difficult to
realize the full value of the hedging instrument when desired for liquidity
purposes due to the applicable REIT provisions of the Code. See "Federal Income
Tax Considerations -- Qualification as a REIT -- Sources of Income -- The 95%
Test." The Company could be required to sell Mortgage Assets under adverse
market conditions in order to maintain liquidity. See "Business -- Industry
Developments." Such sales may be effected by management when deemed by it to be
necessary in order to preserve the capital base of the Company. If these sales
were made at prices lower than the amortized cost of the Mortgage Assets, the
Company would experience additional losses. A default by the Company under its
collateralized borrowings could also result in a forced liquidation of
collateral, including any cross-collateralized assets, and resulting in a loss
equal to the difference between the value of the collateral and the amount
borrowed.
CONTINGENT AND RESIDUAL RISKS IN STRUCTURED DEBT FINANCINGS MAY ADVERSELY
AFFECT RESULTS OF OPERATIONS
In connection with any structured debt financings the Company may
undertake, the Company will be required to repurchase or substitute Mortgage
Loans in the event of a breach of representation or warranty made by the
Company. While the Company may have recourse to the sellers of Mortgage Loans it
purchases, there can be no assurance of the sellers' abilities to honor their
obligations to the Company. Likewise, in connection with any whole loan sales
made by the Company, the Company will enter into agreements with the purchaser
thereof, which generally will require the Company to repurchase or substitute
Mortgage Loans in the event of a breach of a representation or warranty made by
the Company to the Mortgage Loan purchaser, any misrepresentation during the
Mortgage Loan origination process or, in some cases, upon any fraud or default
on such Mortgage Loans. The remedies available to a purchaser of Mortgage Loans
from the Company may be generally broader than those available to the Company
against the sellers of such Mortgage Loans. If a purchaser enforces its remedies
against the Company, the Company may not be able to enforce on a cost-effective
basis whatever remedies the Company may have against its sellers. During the
period of time that the Mortgage Loans are held by the Company, the Company is
subject to the various business risks associated with the lending business,
including borrower default, foreclosure and the risk that a rapid increase in
interest rates would result in a decline in the value of Mortgage Loans held for
sale to potential purchasers.
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To the extent the Company maintains an interest in structured debt financings
backed by Mortgage Loans it acquires or originates, the Company retains some
degree of prepayment, credit, default and interest rate risk.
In addition, borrowers, purchasers of the Company's Mortgage Loans,
monoline insurance carriers and trustees in any structured debt financing
undertaken by the Company may make claims against the Company arising from (i)
alleged breaches of fiduciary obligations, misrepresentations, errors and
omissions of employees, officers and agents of the Company, including
appraisers, (ii) incomplete documentation, and (iii) failure by the Company to
comply with various laws and regulations applicable to its business. Any claims
asserted in the future may result in liabilities or legal expenses that could
have a material adverse effect on the Company's results of operations, financial
conditions and business prospects.
UNAVAILABILITY OF STRUCTURED DEBT FINANCING MAY ADVERSELY AFFECT RESULTS OF
OPERATIONS
The Company intends to pool and finance through structured debt financing a
substantial portion of the Mortgage Loans it acquires or originates. The Company
may be required in such financings to continue to bear some risk of loss on the
underlying Mortgage Loans. Adverse changes in the structured debt financing
market could impair the Company's ability to originate, acquire and finance
Mortgage Loans through financings on a favorable or timely basis. Any such
impairment could have a material adverse effect upon the Company's results of
operations or financial condition. In addition, in order to gain access to the
structured debt financing market, the Company may rely upon credit enhancements
provided by one or more monoline insurance carriers. Any substantial reductions
in the size or availability of the structured debt financing market for the
Company's Mortgage Loans, or the unwillingness of insurance companies to provide
credit enhancement for the Company's Mortgage Securities could have a material
adverse effect upon the Company's results of operations or financial condition.
THE COMPANY DEPENDS UPON SEVERAL LENDERS TO FINANCE OPERATIONS
The Company finances substantially all of the Mortgage Loans which it
originates or acquires through interim financing facilities, including its
warehouse credit line and reverse repurchase agreements. See
"Business -- Capital and Liquidity Management." Historically, these borrowings
have been repaid with the proceeds received by the Company through Mortgage Loan
sales. See "-- Presidents 1999 Budget Plan, If Enacted Would Adversely Affect
Results of Operation." The Company is currently dependent upon ContiFinancial
Corporation and Nomura Asset Capital Corporation to provide the primary credit
facilities for its Mortgage Loan originations and acquisitions. For a
description of the terms of the Company's arrangements and agreements with
ContiFinancial Corporation and Nomura Asset Capital Corporation, see
"Business -- Marketing and Production Strategy -- Correspondent
Lending -- Initial Correspondent Platform" and "Conflicts of Interest and
Related Party Transactions -- ContiFinancial Corporation." Any failure to renew
or obtain adequate funding under these financing arrangements, or any
substantial reduction in the size of, or pricing in, the market for the
Company's Mortgage Loans, could have a material adverse effect on the Company's
operations. Furthermore, the Company would not be able to hold a large volume of
Mortgage Loans pending structured debt financing, and, therefore, would have to
curtail its Mortgage Loan production or sell Mortgage Loans either through whole
loan sales or through smaller structured debt financing, potentially having a
material adverse effect on the Company's results of operations. Upon the sale of
Mortgage Loans, the Company would terminate the hedge positions associated with
such Mortgage Loans, which could result in further costs to the Company. A sharp
rise in interest rates or increasing market concern about the value or liquidity
of a type or types of Mortgage Assets being held by the Company will reduce the
market value of the Mortgage Assets, which may cause lenders to require
additional collateral. A number of such factors in combination may cause
difficulties for the Company, including a possible liquidation of a major
portion of the Company's Mortgage Assets at disadvantageous prices, which can
cause additional losses and could have a material adverse effect on the Company
and its solvency.
LENDER BANKRUPTCY MAY RESULT IN LOSSES
Additionally, in the event of a bankruptcy of the Company, certain reverse
repurchase agreements may qualify for special treatment under the Bankruptcy
Code, the effect of which is, among other things, to allow
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<PAGE> 37
the creditors under such agreements to avoid the automatic stay provisions of
the Bankruptcy Code and to liquidate the collateral under such agreements
without delay. Conversely, in the event of the bankruptcy of a party with whom
the Company had a reverse repurchase agreement, the Company might experience
difficulty recovering the collateral subject to such agreement if the agreement
were repudiated by the bankrupt lender and the Company's claim against the
bankrupt lender for damages resulting therefrom were to be treated simply as one
of an unsecured creditor. Should this occur, the Company's claims would be
subject to significant delay and recoveries, if and when received, and may be
substantially less than the damages actually suffered by the Company. Although
the Company has, and intends to continue to, enter into reverse repurchase
agreements with several different parties and has developed policies to reduce
its exposure to such risks, no assurance can be given that the Company will be
able to avoid such third-party risks.
RISKS RELATING TO MORTGAGE LENDING OPERATIONS
DEFAULT ON MORTGAGE LOANS MAY RESULT IN LOSSES
Prior to completing a structured debt financing with respect to any
Mortgage Assets, the Company generally does not intend to obtain credit
enhancements such as mortgage pool or special hazard insurance for its Mortgage
Loans, other than Federal Housing Association ("FHA") insurance, Veterans
Association ("VA") guarantees and private mortgage insurance, in each case
relating only to individual Mortgage Loans. Accordingly, during the time it
holds such Mortgage Loans for which third-party insurance is not obtained, the
Company will be subject to risks of borrower defaults, bankruptcies and special
hazard losses that are not covered by standard hazard insurance (including,
without limitation, those occurring from earthquakes or floods). In the event of
a default on any Mortgage Loan held by the Company, including, without
limitation, resulting from declining property values and worsening economic
conditions, among other factors, the Company would bear the risk of loss of
principal to the extent of any deficiency between the market value of the
underlying real property, plus any payments from an insurer or guarantor, and
the amount owing on the Mortgage Loan. Defaulted Mortgage Loans would also cease
to be eligible collateral for borrowings and would have to be financed by the
Company out of other funds until ultimately liquidated, resulting in increased
financing costs and reduced net income or a net loss.
Many of the risks of holding Subprime Mortgage Loans and retaining, after
structured debt financing, a portion of the credit risk derived therefrom
reflect the risks of investing directly in the real estate securing the
underlying Mortgage Loans. This may be especially true in the case of a
relatively small or less diverse pool of Subprime Mortgage Loans. In the event
of a default on the underlying Mortgage Loan, the ultimate extent of the loss,
if any, may only be determined after a foreclosure of the Mortgage Loan
encumbering the property and, if the Company takes title to the property, upon
liquidation of the property. Factors such as title or the property's physical
condition (including environmental considerations) may make a third-party
unwilling to purchase the property at a foreclosure sale or for a price
sufficient to satisfy the obligations with respect to the related Mortgage
Loans. Foreclosure laws in various states may protract the foreclosure process.
In addition, the condition of a property may deteriorate during the pendency of
foreclosure proceedings. Moreover, certain Mortgage Loan borrowers may become
subject to bankruptcy proceedings, preventing the Company from immediately
liquidating the underlying real property. In each of the foregoing cases, the
amount and timing of amounts due to the Company may be materially adversely
affected.
COMPETITION FOR MORTGAGE LOANS FROM INDEPENDENT MORTGAGE BROKERS AND
CORRESPONDENTS MAY ADVERSELY AFFECT RESULTS OF OPERATIONS
The Company depends upon independent Mortgage Loan brokers and
correspondent lenders for a portion of its originations and purchases of new
Mortgage Loans. The Company has not entered into any exclusive arrangements with
independent brokers or correspondent lenders, who thus remain free to sell
Mortgage Loans to others. The Company competes with many other purchasers for
the correspondents' business based on pricing, service, loan fees, costs and
other factors. The Company's competitors also seek to establish relationships
with brokers and correspondents. The Company's future results may become more
exposed to fluctuations in the volume and cost of acquiring its Mortgage Loans
resulting from, among other things, competition from other prospective
purchasers of such Mortgage Loans.
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COMMITMENTS TO PURCHASE MORTGAGE ASSETS EXPOSES THE COMPANY TO INTEREST RATE
RISK
The Company may issue commitments obligating it to purchase a specific
aggregate principal amount of Mortgage Assets from time to time during the
commitment term. As of the date of this Prospectus, the Company has not entered
into any commitments to purchase specific Mortgage Assets but may do so if
management believes the offered price is favorable and such commitment does not
expose the Company to excessive risk. From the date the price for the Mortgage
Assets to be acquired by the Company is determined and the date of delivery of
such Mortgage Assets occurs, interest rates on borrowings of the type to be used
to finance the purchase of such Mortgage Assets may rise. If the interest rates
on the Mortgage Assets do not rise by a corresponding amount and the Company's
hedge, if any, against the commitments does not perform as expected, the Company
will nonetheless be required to purchase such Mortgage Assets and such Mortgage
Assets may produce a lower than anticipated net earnings or a net loss, which
could have a material adverse effect upon the Company's results of operations.
PAYMENTS TO BROKERS IN VIOLATION OF RESPA MAY RESULT IN ADVERSE CLAIMS
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") by making certain payments to independent 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,
and are therefore illegal. In Culpepper v. Inland Mortgage Corporation, U.S.
Court of Appeals for the 11th Circuit, 1998 U.S. App. LEXIS 274 (January 9,
1998), the Court of Appeals determined that the payment of yield spread premiums
was an illegal referral fee. The Company has adopted disclosure requirements for
brokers as suggested by the Mortgage Bankers Association. While the Company has
been advised that such disclosure may mitigate the risk of claims, the Culpepper
decision 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 or business prospects.
LACK OF GEOGRAPHIC DIVERSIFICATION EXPOSES THE COMPANY TO GREATER DEFAULT RISK
The Company seeks geographic diversification of the properties underlying
its Mortgage Assets and has originated Mortgage Loans in more than 25 states.
Nevertheless, properties underlying such Mortgage Assets may be located in the
same or a limited number of geographical regions. The loans originated by the
Company in 1997 were predominantly concentrated in the following states: Florida
(23.0%), Utah (17.92%), Georgia (11.66%), California (11.33%), Colorado (5.55%)
and New York (5.02%). To the extent that properties underlying such Mortgage
Assets are located in the same geographical region, such Mortgage Assets may be
subject to a greater risk of default than other comparable, geographically
dispersed Mortgage Assets in the event of adverse economic, political or
business developments and natural hazard risks in such region and, ultimately,
the ability of property owners to make payments of principal and interest on the
underlying Mortgage Loans.
INADEQUATE OR INEFFECTIVE SERVICING MAY INCREASE DELINQUENCY AND DEFAULT RATES
Initially, the Company intends to contract for the servicing of all
Mortgage Loans it originates, purchases and holds to maturity with a third-party
mortgage servicer pursuant to an interim servicing agreement. See
"Business -- Servicing Activities." In addition, a third-party mortgage servicer
will subservice each structured debt financing of the Company's Mortgage Loans
pursuant to a related pooling and servicing agreement and a corresponding
subservicing agreement between the Company and the third-party servicer. As with
any external service provider, the Company is subject to risks associated with
insufficient or untimely services. Many of the Company's borrowers will require
notices and reminders to keep their Mortgage Loans current and to prevent
delinquencies and foreclosures. Any failure of the subservicer to adequately
service the Company's Mortgage Loans could cause a substantial increase in the
Company's delinquency or foreclosure rates, which could adversely effect the
Company's ability to access equity or debt capital resources.
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Ultimately, inadequate or ineffective servicing could have a material adverse
effect on the Company's results of operations, financial condition and business
prospects.
Additionally, the Company has entered into a servicing agreement with
Advanta which requires the Company to pay certain termination or transfer
penalties, fees and costs in the event the Company terminates such servicing
agreement without cause or transfers the servicing of any Mortgage Loans
serviced thereunder to another servicer. The Company will be subject to a fee
equal to $100 per Mortgage Loan upon termination of the servicing agreement. The
payment of such a termination fee may reduce the Company's earnings and amounts
available for distribution to stockholders. See "Business -- Servicing
Activities -- Advanta Servicing Agreement."
INABILITY TO SELL MORTGAGE LOANS MAY ADVERSELY AFFECT RESULTS OF OPERATIONS
The Company's Taxable Subsidiary plans to sell certain Mortgage Loans
(primarily fixed-rate Subprime Mortgage Loans, Prime Mortgage Loans and Second
Lien Mortgage Loans) to secondary market purchasers. See "-- Risk Associated
with the Company's Combined Operations and this Offering -- President's 1999
Budget Plan, If Enacted, Would Adversely Affect Results of Operations" and
"Business -- Industry Developments." The Company's ability to manage its
Mortgage Loan portfolio according to its plan necessitates the existence of
purchasers for such Mortgage Loans. Any such difficulty may have a material
adverse effect on the Company's results of operations, financial condition or
business prospects.
LEGISLATION AND REGULATION MAY SUBJECT THE COMPANY TO COSTS OF COMPLIANCE AND
ADVERSE CLAIMS FOR NONCOMPLIANCE
Members of Congress and government officials from time to time have
suggested the elimination of the mortgage interest deduction for federal income
tax purposes, either entirely or in part, based on borrower income, type of
Mortgage Loan or principal amount. Since many of the Company's Mortgage Loans
will be made to borrowers for the purpose of consolidating consumer debt or
financing other consumer needs, 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 the Mortgage Loans offered by the Company.
The Company's business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and will be
subject to various laws and judicial and administrative decisions imposing
requirements and restrictions on part or all of its operations. Regulated
matters include, without limitation, Mortgage Loan origination marketing
efforts, credit application and underwriting activities, maximum finance and
other charges, disclosure to customers, certain rights of rescission on Mortgage
Loans, closing and servicing Mortgage Loans, collection and foreclosure
procedures, qualification and licensing requirements for doing business in
various jurisdictions and other trade practices. Mortgage Loan origination
activities are subject to the laws and regulations in each of the states in
which those activities are conducted. Activities as a lender are also subject to
various federal laws including the Truth in Lending Act ("TILA"), the Equal
Credit Opportunity Act of 1974, as amended ("ECOA"), the Home Mortgage
Disclosure Act ("HMDA") and the Debt Collection Practices Act and the Fair
Credit Reporting Act. TILA and Regulation Z, issued under TILA, as amended,
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. TILA further imposes disclosure, underwriting and documentation
requirements on Mortgage Loans, known as "Section 32 loans," which are Mortgage
Loans with (i) total points and fees upon origination in excess of 8% of the
Mortgage Loan amount or (ii) an annual percentage rate of more than 10% higher
than comparably maturing United States Treasury securities. The Company is also
required to comply with the ECOA, which prohibits creditors from discriminating
against applicants on the basis of race, color, sex, age or marital status.
Regulation B interpreting 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
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denial. In instances where the applicant is denied credit or the rate or charge
for a Mortgage Loan increases as a result of information obtained from a
consumer credit agency, the Fair Credit Reporting Act of 1970, as amended,
requires the lender to supply the applicant with the name and address of the
reporting agency.
The Company will also be subject to the RESPA and will be required to file
an annual report with the Department of Housing and Urban Development ("HUD")
pursuant to the HMDA. The Company will also be subject to the rules and
regulations of, and examinations by, GNMA, HUD and state regulatory authorities
with respect to originating, processing, underwriting, selling and servicing
Mortgage Loans. Failure to comply with these requirements can lead to loss of
approved status, termination or suspension of servicing contracts without
compensation to the servicer, demands for indemnifications or Mortgage Loan
repurchases, certain rights of rescission for Mortgage Loans, class action
lawsuits and administrative enforcement actions. There can be no assurance that
the Company will maintain compliance with these requirements in the future
without additional expenses, or that more restrictive local, state or federal
laws, rules and regulations will not be adopted or that existing laws and
regulations will not be interpreted in a more restrictive manner, which would
make compliance more difficult for the Company.
The laws and regulations described above are subject to legislative,
administrative and judicial interpretation, and certain of these laws and
regulations have been infrequently interpreted or only recently enacted.
Infrequent interpretations of these laws and regulations or an insignificant
number of interpretations of recently enacted regulations can result in
ambiguity with respect to permitted conduct under these laws and regulations.
Any ambiguity under the regulations to which the Company is subject may lead to
regulatory investigations or enforcement actions and private causes of action,
such as class action lawsuits, with respect to the Company's compliance with the
applicable laws and regulations. As a mortgage lender, the Company will be
subject to regulatory enforcement actions and private causes of action from time
to time with respect to its compliance with applicable laws and regulations.
MORTGAGE LOANS SECURED BY PROPERTIES WITH ENVIRONMENTAL PROBLEMS MAY RESULT IN
LIABILITY AND LOSSES
Certain properties securing Mortgage Loans may be contaminated by hazardous
substances. As a result, the value of the real property may be diminished. In
the event that the Company is forced to foreclose on a defaulted Mortgage Loan
on such a property, the Company may be subject to environmental liabilities
regardless of whether the Company was responsible for the contamination. While
the Company intends to exercise due diligence to discover potential
environmental liabilities prior to the acquisition of any such property through
foreclosure, hazardous substances or wastes, contaminants, pollutants or sources
thereof (as defined by state and federal laws and regulations) may be discovered
on properties during the Company's ownership or after a sale thereof to a
third-party. If such hazardous substances are discovered on a property, the
Company may be required to remove those substances or sources and clean-up the
property. The Company may also be liable to tenants and other users of
neighboring properties. In addition, the Company may find it difficult or
impossible to sell the property prior to or following any such clean-up. Any
exposure to environmental liability could have a material adverse effect on the
Company's results of operations or financial condition.
CHANGES IN ECONOMIC CONDITIONS MAY ADVERSELY AFFECT RESULTS OF OPERATIONS
The Company's business may be adversely affected by periods of economic
slowdown or recession which may be accompanied by decreased demand for consumer
credit and declining real estate values. Any material decline in real estate
values reduces the ability of borrowers to use home equity to support borrowings
and increases the LTVs of Mortgage Loans previously made by the Company, thereby
weakening collateral coverage and increasing the possibility of a loss in the
event of default. Further, delinquencies, foreclosures and losses generally
increase during economic slowdowns or recessions. Because of the Company's focus
on borrowers who are unable or unwilling to obtain Mortgage Loans from
conventional mortgage sources, the actual rates of delinquencies, foreclosures
and losses on Subprime Mortgage Loans could be higher under adverse economic
conditions than those experienced in the conventional mortgage lending industry.
Any sustained period of such increased delinquencies, foreclosures and losses
would adversely affect the pricing of the Company's Mortgage Loan sales, the
rate paid to investors and the over-collateralization required on the
34
<PAGE> 41
Company's long-term financing or whole loan sales. On the other hand, the
Company faces certain risks related to an improving economy, including, but not
limited to, the risk that during times of falling interest rates borrowers tend
to prepay their Mortgage Loans. "-- Risks Associated with the Acquisition and
Management of a Portfolio of Mortgage Assets -- Increased Levels of Prepayment
May Reduce Net Interest Income."
FACTORS BEYOND CONTROL OF THE COMPANY MAY AFFECT PERFORMANCE OF THE INVESTMENT
PORTFOLIO
Although the Company hedges certain aspects of its interest rate risk, the
results of the Company's Mortgage Assets portfolio operation is affected by
various factors, many of which are difficult to predict or are beyond the
control of the Company. The performance of the Company's Mortgage Assets
portfolio depends on, among other things, the level of net interest income
generated by the Company's Mortgage Assets, the market value of such Mortgage
Assets, credit losses on Mortgage Assets held and the supply of, and demand for,
such Mortgage Assets. The Company's net interest income varies primarily as a
result of changes in short-term interest rates, borrowing costs and prepayment
rates, the behavior of which involve various risks and uncertainties as set
forth below. Prepayment rates, interest rates, borrowing costs and credit losses
depend upon the nature and terms of the Mortgage Assets, the geographic location
of the properties securing the Mortgage Loans included in or underlying the
Mortgage Assets, conditions in financial markets, the fiscal and monetary
policies of the United States government and the Board of Governors of the
Federal Reserve System, international economic and financial conditions,
competition and other factors, none of which can be predicted with any
certainty. Because changes in interest rates may significantly affect the
Company's activities, the operating results of the Company depend, in large
part, upon the ability of the Company to effectively manage its interest rate
and prepayment risks while maintaining its status as a REIT. See "-- Potential
Consequences of Failing to Effectively Hedge Against Interest Rate Changes,"
"-- Consequences Associated with Hedging," and "-- Risks of Substantial Leverage
and Potential Losses in Connection with Borrowings -- Counterparty Risks."
INVESTORS WILL INCUR IMMEDIATE AND SUBSTANTIAL ECONOMIC DILUTION
The Price to Public of the Units offered hereby is higher than the net
tangible book per share of the Common Stock. Because prior purchasers of Common
Stock paid less than the Price to Public, purchasers of the Units offered hereby
will be subject to immediate and substantial economic dilution in the net
tangible book value attributable to the Common Stock included as a component of
the Units purchased by them of $2.12 per share (assuming the sale of 5,000,000
Units offered hereby at $15.00 per Unit).
FUTURE DEBT AND EQUITY OFFERINGS MAY DILUTE INVESTORS
The Company expects in the future to increase its capital resources by
making additional offerings of equity and debt securities, including classes of
preferred stock, Common Stock, commercial paper, medium-term notes,
mortgage-backed obligations and senior or subordinated debt. See "-- Operation
of a New Enterprise Involves Uncertainty -- Failure to Raise Additional Capital
May Adversely Affect Future Growth and Results of Operations." All debt
securities and classes of preferred stock will be senior to the Common Stock in
the event of a liquidation of the Company. Additional equity offerings may
dilute the equity of stockholders of the Company or reduce the price of shares
of the Company's Common Stock, or both. The Company is unable to estimate the
amount, timing or nature of additional offerings as they will depend upon market
conditions and other factors.
FAILURE TO DEVELOP A TRADING MARKET MAY RESULT IN DEPRESSED COMMON STOCK PRICE
There has not been a public market for the Securities prior to the
Offering. Accordingly, there can be no assurance that a liquid trading market
for the Securities offered hereby will develop or, if developed, that the market
will be sustained. In the absence of a public trading market, an investor may be
unable to liquidate his investment in the Company. The Price to Public was
determined by the Company and the Underwriter. See "Underwriting." There can be
no assurance that the price of the Units in the public market after the closing
of the Offering will not be lower than the Price to Public. While there can be
no assurance that a market for the
35
<PAGE> 42
Company's Securities will develop, the Company intends to apply for listing of
the Units, the Common Stock and the Warrants on the American Stock Exchange.
If a public market for the Securities exists, it is likely that the market
price of the Securities will be influenced by any variation between the net
yield on the Company's Mortgage Assets and prevailing market interest rates.
However, earnings will not necessarily be greater in high interest rate
environments than in low interest rate environments. Moreover, in periods of
high interest rates, the net earnings of the Company, and, therefore, the
dividend yield on the Common Stock, may be less attractive compared with
alternative investments, which could negatively impact the price of the
Securities. If the anticipated or actual net yield on the Company's Mortgage
Assets declines or if prevailing market interest rates rise, thereby decreasing
the positive spread between the net yield on such investments and the cost of
the Company's borrowings, the market price of the Securities may be adversely
affected.
FAILURE TO MAINTAIN REIT STATUS WOULD HAVE ADVERSE TAX CONSEQUENCES
The Company intends, for the fiscal year ending December 31, 1998, and all
times thereafter, to operate so as to qualify as a REIT for federal income tax
purposes. In order to maintain its qualification as a REIT for federal income
tax purposes, the Company must satisfy certain tests with respect to the sources
of its income, the nature and diversification of its assets, the amount of its
distributions to stockholders and the ownership of its Capital Stock. See
"Federal Income Tax Considerations -- Qualification as a REIT -- Distributions."
If the Company fails to qualify as a REIT in any taxable year and certain relief
provisions of the Code do not apply, the Company would be subject to federal
income tax as a regular, domestic corporation for four subsequent years, and its
stockholders would be subject to tax in the same manner as stockholders of such
a corporation. Distributions to stockholders in any year in which the Company
fails to qualify as a REIT, including the fiscal year 1998, would not be
deductible by the Company in computing its taxable income. As a result, the
Company could be subject to income tax liability, thereby significantly reducing
or eliminating the amount of cash available for distribution to its
stockholders. Further, the Company could also be disqualified from re-electing
REIT status for the four taxable years following the year during which it became
disqualified.
FAILURE TO QUALIFY FOR EXEMPTION FROM INVESTMENT COMPANY ACT MAY ADVERSELY
AFFECT THE COMPANY
The Company at all times intends to conduct its business so as not to
become regulated as an investment company under the Investment Company Act of
1940, as amended (the "Investment Company Act"). Accordingly, the Company does
not expect to be subject to the restrictive provisions of the Investment Company
Act. The Investment Company Act exempts entities that are "primarily engaged in
the business of purchasing or otherwise acquiring mortgages and other liens on
and interests in real estate" ("Qualifying Interests"). Under the current
interpretation of the staff of the Commission, in order to qualify for this
exemption, the Company must maintain at least 55% of its assets directly in
Mortgage Loans, qualifying Pass-Through Certificates and certain other
qualifying interests in real estate. In addition, unless certain Mortgage Assets
owned by the Company represent all the certificates representing economic
interests issued with respect to an underlying pool of Mortgage Loans, such
Mortgage Assets may be treated as securities separate from the underlying
Mortgage Loans and, thus, may not qualify as Qualifying Interests for purposes
of the 55% safe harbor. Therefore, the Company's ownership of certain Mortgage
Assets may be limited by the provisions of the Investment Company Act. If the
Company fails to qualify for exemption from registration as an investment
company, its ability to use leverage would be substantially reduced and it would
be unable to conduct its business as described herein. Any such failure to
qualify for such exemption could have a material adverse effect on the Company.
ISSUANCES OF PREFERRED STOCK MAY ADVERSELY AFFECT THE VALUE OF COMMON STOCK
Subject to the limitations set forth in the Amended and Restated Articles
of Incorporation, the Board of Directors is authorized to reclassify any of the
unissued shares of authorized capital stock into a class or classes of preferred
stock. The issuance of additional preferred stock could have the effect of
making an attempt to gain control of the Company more difficult by means of a
merger, tender offer, proxy contest or otherwise. The additional preferred
stock, if issued, could have a preference on dividend payments over the
36
<PAGE> 43
Common Stock which could affect the ability of the Company to make dividend
distributions to the holders of Common Stock. Further, the shares of preferred
stock may be entitled to preferential liquidation, voting and other rights which
could have a material adverse effect on the value of the Company's other
Securities.
RESTRICTIONS ON OWNERSHIP OF CAPITAL STOCK COULD DISCOURAGE A CHANGE OF CONTROL
In order that the Company may meet the requirements for qualification as a
REIT at all times, the Amended and Restated Articles of Incorporation prohibit
any person from acquiring or holding, directly or indirectly, shares of Capital
Stock in excess of 9.8% in value of the aggregate of the outstanding shares of
Capital Stock or in excess of 9.8% (in value or in number of shares, whichever
is more restrictive) of the aggregate of the outstanding shares of Common Stock
of the Company. For this purpose, the term "ownership" is defined in accordance
with REIT provisions of the Code and the constructive ownership provisions of
Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code. Under
such rules, for example, certain types of entities such as widely-held
corporations may hold in excess of the 9.8% limit because shares held by such
entities are attributed to such entities' stockholders. Conversely, shares of
Capital Stock owned or deemed to be owned by a person who individually owns less
than 9.8% of the shares outstanding may nevertheless be in violation of the
ownership limitations set forth in the Amended and Restated Articles of
Incorporation if, under certain circumstances, shares owned by others (such as
family members) are attributed to such individual. See "Federal Income Tax
Considerations -- Qualification as a REIT -- Ownership of Stock." The Amended
and Restated Articles of Incorporation further prohibit (i) any person from
beneficially or constructively owning shares of Capital Stock that would result
in the Company being "closely held" under Section 856(h) of the Code or
otherwise cause the Company to fail to qualify as a REIT, and (ii) any person
from transferring shares of Capital Stock if such transfer would result in
shares of Capital Stock being owned by fewer than 100 persons.
Subject to certain limitations, the Board of Directors may increase or
decrease the ownership limitations. In addition, to the extent consistent with
the REIT provisions of the Code, the Board of Directors may waive the ownership
limitations for and at the request of certain purchasers in this Offering. The
provisions described above may inhibit market activity and the resulting
opportunity for the holders of the Company's Capital Stock and Warrants to
receive a premium for their Securities that might otherwise exist in the absence
of such provisions. Such provisions also may make the Company an unsuitable
investment vehicle for any person seeking to obtain ownership of more than 9.8%
of the outstanding shares of Capital Stock.
In addition, other provisions of the Amended and Restated Articles and
Bylaws of the Company (i.e., super majority voting requirements to remove
director, staggered Board of Directors) and Maryland law (control share and
business acquisitions statutes) may also have the effect of delaying, deterring
or preventing take over attempt thereby reducing the price of the Common Stock.
See "Description of Capital Stock -- Control Share Acquisitions" and
"-- Business Acquisitions Statutes" and "Management -- Terms of Directors and
Officers."
Further, the employment agreements with Messrs. Fry, Mott and McMurray
provide for severence payments of three times their respective and bonus
compensation upon termination following a "Change in Control," as defined
therein. Such provisions would result in minimum payments to Messrs. Fry, Mott
and McMurray of $750,000, $600,000 and $600,000, respectively, which may also
defer or prohibit takeover attempts.
37
<PAGE> 44
THE COMPANY
RealTrust Asset Corporation is a newly formed Maryland corporation
incorporated on April 1, 1998. The Taxable Subsidiary, CMG Funding Corp., was
organized in February, 1996 as a mortgage banking company and is located in Salt
Lake City, Utah. The Taxable Subsidiary now has 14 branch offices located in 12
states which originated or purchased approximately $507.4 million in
single-family residential Mortgage Loans during the calendar year ended December
31, 1997 and $152.1 million during the first quarter of 1998.
The Company intends to avail itself of the federal income tax advantages of
electing REIT status for the tax year ending December 31, 1998, subject to the
discussion under "Business -- Industry Developments" and "Risk
Factors -- President's 1999 Budget Plan, If Enacted, Would Adversely Affect
Results of Operations." As a REIT, the Company must distribute to its
stockholders on a pro rata basis each year an amount equal to 95% of its taxable
income before deduction of dividends paid and excluding net capital gain, plus
(ii) 95% of the excess of the net income from foreclosure property over the tax
imposed on such income by the Code, less (iii) any "excess noncash income." See
"Federal Income Tax Considerations -- Qualification as a REIT." The Company
intends to make distributions to its stockholders in amounts sufficient to meet
these 95% distribution requirements. In any year in which the Company qualifies
as a REIT, it generally will not be subject to federal income tax on that
portion of its taxable income or net capital gain which is distributed to its
stockholders. See "Federal Income Tax Considerations."
The Company will manage a portfolio of Mortgage Assets. In addition, the
Company conducts a mortgage lending business through the Taxable Subsidiary. See
"Business -- Industry Developments" and "Risk Factors -- President's 1999 Budget
Plan, If Enacted, Would Adversely Affect Results of Operations." The Company
owns all of the issued and outstanding shares of non-voting preferred stock of
the Taxable Subsidiary which entitles the Company to 95% of the economic value
of the Taxable Subsidiary. The Founders of the Company own all of the issued and
outstanding shares of voting common stock of the Taxable Subsidiary which
entitle them to voting control but only five percent of the economic value of
the Taxable Subsidiary. The Taxable Subsidiary will not be consolidated with the
Company for accounting purposes because the Company will not own any of the
Taxable Subsidiary's voting common stock and, thus, the Company will not control
the Taxable Subsidiary.
As a REIT, the Company will be self-advised and self-managed. Management of
the Company conducts the day-to-day operations of the Company, subject to the
direction of the Board of Directors. The Company's offices are located at 2855
East Cottonwood Parkway, Suite 500, Salt Lake City, Utah 84121, and its
telephone number is (801) 365-3000.
USE OF PROCEEDS
The net proceeds of the Offering, assuming a Price to Public of $15.00 per
Unit, are estimated to be $68,650,000 ($79,112,500 if the Underwriters'
over-allotment option is exercised). The net proceeds will be used to acquire a
portfolio of Mortgage Assets, to fund the origination and purchase of Mortgage
Loans through the Taxable Subsidiary's mortgage lending operation, to expand the
Mortgage Loan production capacity, to repay the outstanding balance on the
working capital credit facility from ContiFinancial Corporation ($2.0 million as
of March 31, 1998), to redeem shares of Class B Redeemable Preferred Stock held
by ContiFinancial Corporation ($2.2 million), to repay the Convertible Secured
Promissory Note to Capstone Investments, Inc. ($850,000), and for general
working capital and other corporate purposes. Any proceeds resulting from the
exercise of the Underwriters' over-allotment option will be entirely used to
purchase Mortgage Assets which have not been identified. Pending the use of the
net proceeds of the Offering for such purposes, the net proceeds will be
invested in Mortgage Assets acquired in the secondary mortgage market. The
Company intends to increase its investment in Mortgage Assets by borrowing
against existing Mortgage Assets and using the loan proceeds to acquire
additional Mortgage Assets. The Company's borrowings generally will be secured
by the Mortgage Assets owned by the Company. Until the Company has fully
implemented this financing strategy and increased its Mortgage Asset investments
to the desired level, the net earnings on the Company's portfolio of Mortgage
Assets are expected to be lower than would be the case if the investment
strategy were fully implemented promptly after the closing of this Offering.
38
<PAGE> 45
The following table sets forth certain information concerning the estimated
use of the gross proceeds of the Offering:
<TABLE>
<CAPTION>
PERCENTAGE OF
AMOUNT TOTAL FUNDS
----------- -------------
<S> <C> <C>
Estimated Offering Expenses:
Underwriting Discount(1)............................. $ 5,250,000 7.0%
Offering Expenses(2)................................. 1,100,000 1.5
Funding of Mortgage Loan Originations and Purchases of
Mortgage Assets(3)...................................... 59,375,000 79.2
Repayment of ContiFinancial Corporation's Working Capital
Debt(4)................................................. 2,025,000 2.7
Repayment of Capstone Note(5)............................. 850,000 1.1
Redemption of Preferred Stock and Accrued Dividends(4).... 2,180,000 2.9
Working Capital and Other Corporate Purposes.............. 4,220,000 5.6
----------- -----
Gross Offering Proceeds(6)................................ $75,000,000 100.0%
=========== =====
</TABLE>
- ---------------
(1) The underwriting discount is seven percent, plus Representative's Warrants
to acquire, at the Price to Public, a number of Warrant Shares equal to
three percent of the number of Units sold (including those sold pursuant to
the over-allotment option).
(2) This amount consists of estimated legal, accounting, printing and other
expenses of this Offering, and organizational expenses, which have been or
will be paid by the Company.
(3) See "Business."
(4) See "Conflicts of Interest and Related Party Transactions -- ContiFinancial
Corporation."
(5) See "Conflicts of Interest and Related Party Transactions -- Capstone
Investments, Inc."
(6) Assumes no exercise of the Underwriter's over-allotment option.
DIVIDEND POLICY AND DISTRIBUTIONS
Commencing with the 1998 fiscal year, the Company generally intends to
distribute substantially all of its taxable income each year (which does not
ordinarily equal net income as calculated in accordance with GAAP) to its
stockholders so as to comply with the REIT provisions of the Code. The Company
intends to make distributions quarterly. Any taxable income remaining after the
distribution of the final regular quarterly distribution each year will be
distributed together with the first regular quarterly dividend payment of the
following taxable year or in a special distribution distributed prior thereto.
The dividend policy is subject to revision at the discretion of the Board of
Directors. All distributions will be made by the Company at the discretion of
the Board of Directors and will depend on the taxable income of the Company, the
financial condition of the Company, maintenance of REIT status and such other
factors as the Board of Directors deems relevant. See "Federal Income Tax
Considerations -- Qualification as a REIT -- Distributions."
Distributions to stockholders will generally be subject to tax as ordinary
income, although a portion of such distributions may be designated by the
Company as capital gain or may constitute a tax-free return of capital. The
Company will annually furnish to each of its stockholders a statement setting
forth distributions paid during the preceding year and their characterization as
ordinary income, capital gains, or return of capital. For a discussion of the
Federal income tax treatment of distributions by the Company, see "Federal
Income Tax Considerations -- Taxation of the Company's Stockholders."
DIVIDEND REINVESTMENT PLAN
The Company will, after the closing of the Offering, adopt a dividend
reinvestment plan ("DRP") for stockholders who wish to reinvest their
distributions in additional shares of Common Stock. The DRP will be administered
by American Securities Transfer & Trust Incorporated which will maintain
records, prepare and
39
<PAGE> 46
send out statements to all participants, provide safe-keeping for the shares
purchased under the DRP and perform other duties related to the DRP. Generally,
under a DRP, dividends paid with respect to shares of Capital Stock are
automatically invested in additional shares of Common Stock at a discount to the
then current market price. Such discount will be determined, from time to time,
by the Board of Directors consistent with the REIT provisions of the Code. The
DRP will also allow each stockholder to make additional investments in Common
Stock by contributing cash to the DRP administrator (up to a specified maximum).
Upon adoption of the DRP, each stockholder will be notified in writing of the
procedure for enrolling in the DRP.
DILUTION
As of April 1, 1998, there were 1,295,807 shares of the Company's Common
Stock outstanding, having a net tangible book value per share of Capital Stock
of approximately $1.19. Net tangible book value per share represents the amount
of the Company's total tangible assets less its total liabilities, divided by
the number of shares of its Capital Stock outstanding. On a pro forma basis
after giving effect to the Formation Transactions (other than the issuance and
sale of the Units offered hereby) and the Post-Closing Transactions, the net
tangible book value of the Company was $1,540,728 (the net book value of the CMG
Funding Corp. capital stock being contributed).
After giving effect to the net proceeds from the sale of Units offered
hereby at the Price to Public of $15.00 per Unit and the net proceeds from the
exercise of the Warrants and the Representative's Warrants, assuming no exercise
of the Underwriters' over-allotment option, the pro forma net tangible book
value of the Company as of April 1, 1998 would have been $147,440,728 or $12.88
per share. This represents a dilution of $2.12 per share to new investors
purchasing Units at $15.00 per Unit.
<TABLE>
<CAPTION>
PER SHARE
---------
<S> <C> <C>
Price to Public per Unit................................. $15.00
Dilution attributable to underwriting discount and
offering expenses................................. (1.27)
Dilution attributable to Formation Transactions and
Post-Closing Transactions......................... (2.58)
Accretion attributable to exercise of the Warrants
and the Representative's Warrants................. 1.73 (2.12)
------ ------
Book value per share after underwriting discount and
offering expenses, Formation Transactions, accretion
for the Warrants and the Representative's Warrants..... $12.88
======
</TABLE>
The following table summarizes, on a pro forma basis as of April 1, 1998,
after giving effect to the Formation Transactions, the difference between the
existing stockholders and the investors in the Offering with respect to the
number of shares of Common Stock (assuming no exercise of the Underwriters'
over-allotment option, the Warrants or the Representative's Warrants) purchased
from the Company, the total consideration paid and the average price per share:
<TABLE>
<CAPTION>
SHARES OF THE COMPANY TOTAL CONSIDERATION
---------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... 1,295,807 20.6% $ 1,540,728(1) 2.0% $ 1.19
New investors(2).................... 5,000,000 79.4 75,000,000 98.0 15.00
--------- ----- ----------- -----
Total.......................... 6,295,807 100.0% $76,540,728 100.0%
========= ===== =========== =====
</TABLE>
- ---------------
(1) Reflects the capital contributions to CMG Funding Corp. by each of the
Founders and ContiFinancial Corporation, and includes the $2.0 million paid
by ContiFinancial Corporation for its 410,581 shares of Class B Redeemable
Preferred Stock in December, 1997, which will be redeemed after the closing
of the Offering for the purchase price plus accrued dividends at 18% per
annum, for a total price of $2.18 million, assuming redemption occurs on
June 30, 1998.
(2) Assumes no exercise of the Warrants, the warrants granted to Capstone
Investments, Inc., the Representative's Warrants or the Underwriters'
over-allotment option.
40
<PAGE> 47
CAPITALIZATION
The table below sets forth the capitalization of the Company, as of April
1, 1998 and as adjusted to reflect the issuance of the Units offered in the
Offering at a Price to Public of $15.00 per Unit and the application of the
estimated net proceeds therefrom as described under "Use of Proceeds."
<TABLE>
<CAPTION>
PRO FORMA
APRIL 1, 1998 --------------------------
------------- AS AS
ACTUAL ADJUSTED(1) ADJUSTED(2)
------------- ----------- -----------
<S> <C> <C> <C>
STOCKHOLDERS' EQUITY:
Class A Convertible Preferred Stock, par value $0.001
per share; 1,263,472 shares authorized; no shares
issued and outstanding; As adjusted: 1,263,472 and
5,000,000 shares authorized; 852,891 and no shares
issued and outstanding............................... $ -- $ -- $ --
Class B Redeemable Preferred Stock, par value $.001;
410,581 shares authorized; no shares issued and
outstanding; As adjusted: 410,581 and no shares
issued and outstanding, respectively................. -- 410 --
Common Stock, par value $.001 per share; 2,810,455
authorized; 66 shares issued and outstanding; As
adjusted: 100,000,000 shares authorized; 1,295,807
and 6,295,807 shares issued and outstanding,
respectively......................................... -0- 1,296 6,296
Additional paid-in capital............................. 1,000 1,540,022 68,004,432
------ ---------- -----------
Total Stockholders' Equity........................ $1,000 $1,541,728 $68,010,728
====== ========== ===========
</TABLE>
- ---------------
(1) Gives effect to the shares of RealTrust Capital Stock issued to Founders and
ContiFinancial Corporation in the Formation Transactions. Total
Stockholders' Equity reflects 95% of the stockholders' equity of CMG Funding
Corp. as of March 31, 1998.
(2) Assumes the sale of 5,000,000 Units in the Offering and that none of the
Underwriters' over-allotment option, the Warrants, the warrants granted to
Capstone Investments, Inc. or the Representative's Warrants are exercised.
After deducting the underwriting discount of seven percent and estimated
offering expenses of $1,100,000 payable by the Company. Excludes all options
granted to officers, directors and employees of the Company pursuant to the
1996 Stock Option Plan and the 1998 Stock Option Plan. See
"Management -- Executive Compensation -- 1996 Stock Option Plan" and
"-- 1998 Stock Option Plan."
REALTRUST ASSET CORPORATION
PRO FORMA FINANCIAL DATA
The following pro forma balance sheet has been prepared based on the
historical audited April 1, 1998 balance sheet of RealTrust Asset Corporation.
The unaudited pro forma balance sheet gives effect to the formation
transactions, which will occur upon the effective date of this Offering. See
"Structure and Formation Transactions." Upon completion of the Formation
Transactions, RealTrust intends to invest substantially all of the net proceeds
of the Offering in Qualified REIT Assets, which Qualified REIT Assets will
comprise the investment portfolio. The investment portfolio is expected to
generate in excess of 95% of RealTrust's gross revenues. The balance of
RealTrust's gross revenues is expected to be generated from its equity
investment in CMG Funding Corp. The pro forma adjustments are based upon
currently available information and upon certain assumptions that management
believes to be reasonable under the circumstances. This pro forma information is
for illustrative purposes only and should not be viewed as a projection or
forecast of RealTrust's performance. The pro forma balance sheet does not
purport to represent RealTrust's actual financial position had such events
occurred on the aforementioned dates. Such pro forma information should be read
in conjunction with RealTrust's financial statements and the notes relating
hereto included elsewhere herein.
RealTrust is a recently formed Maryland corporation, which will elect to be
taxed as a REIT. CMG Funding Corp. is a Delaware corporation, established in
1996. RealTrust will account for its investment in CMG Funding Corp. on the
equity method of accounting.
41
<PAGE> 48
REALTRUST ASSET CORPORATION
PRO FORMA BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
AT APRIL 1, 1998
-------------------------------------------------------
INCREASE INCREASE
HISTORICAL (DECREASE) (DECREASE) PRO FORMA
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
ASSETS
68,650,000(2)
(2,180,000)(3)
(2,875,000)(4)
Cash........................................................ $1,000 (1,000)(5) $63,595,000
Receivable due from CMG Funding Corp. ...................... 2,875,000(4) 2,875,000
Investment in CMG Funding Corp. ............................ -- 1,540,728(1) 1,540,728
------ ---------- ---------- -----------
TOTAL ASSETS................................................ $1,000 1,540,728 66,469,000 $68,010,728
====== ========== ========== ===========
STOCKHOLDERS' EQUITY
Class A Convertible Preferred Stock, par value $.001;
1,263,472 shares authorized, no shares outstanding; As
adjusted: 1,263,472 and 5,000,000 shares authorized,
852,891 and no shares outstanding, 853(1)
respectively.............................................. $ -- (853)(6) $ --
Class B Redeemable Preferred Stock, par value $.001; 410,581
shares authorized, no shares outstanding; As adjusted:
410,581 and no shares authorized; 410,581 and no shares
outstanding, respectively................................. -- 410(1) (410)(3) --
Common Stock, par value $.001; 4,484,508 shares authorized;
66 shares outstanding; As adjusted: 4,484,508 and
100,000,000 shares 1,547(1) 5,000(2) 6,296
authorized; 66 and 6,295,807 shares outstanding,
respectively............................................ -- (251)(6) (2,179,590)(3)
68,645,000(2)
Additional paid-in capital.................................. 1,000 1,537,918(1) (1,000)(5) 68,004,432
1,104(6)
------ ---------- ---------- -----------
TOTAL STOCKHOLDERS' EQUITY.................................. $1,000 1,540,728 66,469,000 $68,010,728
====== ========== ========== ===========
</TABLE>
- ---------------
(1) Reflects 95% of the book value of CMG Funding Corp. as of March 31, 1998
($1,539,021) resulting from the CMG Funding Corp. stockholders' contribution
of 95% of their capital stock of CMG Funding Corp. in exchange for shares of
RealTrust Asset Corporation Capital Stock. RealTrust's investment will be
reflected at cost (which is determined to be 95% of the net book value of
CMG Funding Corp.). Even though RealTrust will generally have no right to
control the affairs of CMG Funding Corp. because the preferred stock owned
in CMG Funding Corp. is nonvoting, management believes that RealTrust has
the ability to exert significant influence over CMG Funding Corp. and,
therefore, the investment in CMG Funding Corp. will be accounted for on the
equity method. Some of the factors considered in determining the use of the
equity method of accounting were: (a) RealTrust will have the ability to
exercise significant influence over CMG Funding Corp. through management,
(b) substantially all of the economic benefit in CMG Funding Corp. will flow
to RealTrust, (c) CMG Funding Corp. will perform it's activities primarily
for RealTrust, (d) RealTrust and CMG Funding Corp. will have common board of
director members and officers, (e) the views of RealTrust's management
influence the operations of CMG Funding Corp., and (f) RealTrust will be
able to obtain the financial information from CMG Funding Corp. that is
needed to apply the equity method of accounting to its investment in CMG
Funding Corp.
(2) Reflects the estimated net proceeds ($68,650,000) from the offering assuming
no exercise of the Underwriters' over-allotment option at an assumed public
offering price of $15.00 per Unit.
(3) Reflects the redemption of ContiFinancial Corporation's 410,581 shares of
Class B Redeemable Preferred Stock plus dividends accrued since January 1,
1998 at the rate of 18% per annum. See "Conflicts of Interest and Related
Party Transactions -- ContiFinancial Corporation."
(4) Reflects the repayment of the $2,000,000 working capital credit facility
with ContiFinancial Corporation plus $25,000 in accrued interest and
repayment of the $850,000 owed to Capstone Investments, Inc. See "Conflicts
of Interest and Related Party Transactions." All amounts necessary to repay
the obligations to ContiFinancial Corporation and Capstone Investments, Inc.
are advanced to the Taxable Subsidiary and reflected as a receivable
therefrom.
(5) Reflects the redemption of the original 66 shares of RealTrust at the close
of the Offering, which were issued solely for the organization of RealTrust.
(6) Reflects the conversion of Class A Convertible Preferred Stock on a
one-for-one basis into Common Stock. RealTrust Common Stock is reverse split
at a ratio of approximately .54 shares for 1 prior to the closing of the
Offering.
42
<PAGE> 49
REALTRUST ASSET CORPORATION
PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997(1)
------------
<S> <C>
Equity in net loss of CMG Funding Corp. .................... $(1,598,789)
-----------
Net loss.................................................... $(1,598,789)
===========
Loss per share:(2)
Basic..................................................... $ (1.23)
-----------
Diluted................................................... $ (1.23)
-----------
</TABLE>
- ---------------
(1) Pro forma net loss represents 95% of CMG Funding Corp.'s net loss for the
year ended December 31, 1997 ($1,774,311), reduced by interest expense on
subordinated debt ($91,375), which debt was converted to Common Stock
during 1997.
(2) Shares used in the calculation of loss per share reflect shares issued in
the Formation Transactions of RealTrust (1,295,807 shares) and for this
calculation are assumed to have been outstanding for the entire year of
1997.
43
<PAGE> 50
SELECTED FINANCIAL DATA OF REALTRUST ASSET CORPORATION
AND CMG FUNDING CORP.
REALTRUST ASSET CORPORATION
RealTrust was organized and capitalized on April 1, 1998, with $1,000.
Operations have not commenced as of the date of this Prospectus. The balance
sheet of RealTrust, which has been audited by KPMG Peat Marwick, LLP,
independent auditors, and the report thereon, are included elsewhere in this
Prospectus. RealTrust is not acquiring any of the operating assets of CMG
Funding Corp. However, RealTrust will acquire, in the Formation Transactions,
all of the preferred stock of CMG Funding Corp.
CMG FUNDING CORP.
The selected financial data presented below as of December 31, 1997 and
1996, and for the year ended December 31, 1997, and the period February 7, 1996
(date of inception) to December 31, 1996, respectively, are derived from the
financial statements of CMG Funding Corp., which financial statements have been
audited by KPMG Peat Marwick LLP, independent auditors, and the report thereon,
are included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 7, 1996
YEAR ENDED (DATE OF INCEPTION) TO
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues:
Interest................................................ $ 3,756,870 $ 621,601
Gain-on-sale of mortgage loans, net..................... 5,967,647 446,771
Mortgage servicing fees................................. 38,826 --
Other................................................... 269,248 92,063
----------- -----------
Total revenues.................................. 10,032,591 1,160,435
----------- -----------
Expenses:
Salaries and Employee Benefits.......................... 4,474,357 390,018
General Operating....................................... 4,313,236 1,285,156
Interest................................................ 2,965,685 731,519
Other................................................... 53,624 59,608
----------- -----------
Total expenses.................................. 11,806,902 2,466,301
----------- -----------
Net loss................................................ $(1,774,311) $(1,305,866)
=========== ===========
BALANCE SHEET DATA:
Cash and cash equivalents................................. 708,962 272,308
Mortgage loans held for sale.............................. 54,451,067 24,147,713
Other assets.............................................. 3,707,274 938,031
----------- -----------
Total assets.................................... 58,867,303 25,358,052
=========== ===========
Warehouse and revolving working capital lines of credit... 55,603,021 23,996,471
Other liabilities......................................... 1,802,051 1,227,450
Total liabilities............................... 57,405,072 25,223,921
Stockholders' equity...................................... 1,462,231 134,131
----------- -----------
Total liabilities and stockholders' equity...... $58,867,303 $25,358,052
=========== ===========
</TABLE>
44
<PAGE> 51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
As further discussed in other sections of this Prospectus, RealTrust is a
Maryland corporation formed on April 1, 1998 and has not conducted any
operations to date. As a result of the Formation Transaction, RealTrust will own
100% of the non-voting preferred stock of CMG Funding Corp. which entitles
RealTrust to receive 95% of any dividends paid by CMG Funding Corp. RealTrust
accounts for its ownership of CMG Funding Corp. using the equity method. The
following discussion of financial condition and results of operations relates to
the operations of CMG Funding Corp.
CMG Funding Corp. has operated as a specialty finance company primarily
engaged in originating, purchasing, selling and servicing Prime Mortgage Loans
and Subprime Mortgage Loans. CMG Funding Corp. funded its first Mortgage Loans
in April, 1996. Prior to the closing of the Offering, the Company generated
revenue from the following activities: (i) Mortgage Loan origination fees, (ii)
cash gains from the sale of Mortgage Loans, (iii) servicing income, and (iv)
interest income from Mortgage Loans prior to their sale. The Company has
generated profits since August, 1997; however, prior to such time, the Company's
monthly expenses exceeded monthly revenue. Such expenses were primarily to
support rapid expansion of its wholesale and retail branch network, and included
salaries and benefits, general operating expenses and debt service, among other
expenses. Included in these expense categories are the cost of certain computer
and other equipment, the purchase and creation of software systems and customary
office costs which were expensed in the current period.
After the closing of the Offering, the business focus of the Company will
change from generating income solely from mortgage banking activities to
generating income from the net interest income earned on a portfolio of Mortgage
Assets. In undertaking this new business focus, the Company has five principal
strategies: (i) to continue to increase Mortgage Loan originations through high
levels of service to independent brokers and borrowers in its wholesale and
retail channels, (ii) to expand correspondent mortgage lending activities, (iii)
to convert from selling its entire Mortgage Loan production to building a
portfolio of Subprime Mortgage Loans, (iv) to sell certain Mortgage Loans for
cash gains (see "Business -- Industry Developments"), and (v) to elect to be
taxed as a REIT under the Code beginning with the tax year ending December 31,
1998.
Until December, 2001, CMG Funding Corp. is required to sell certain
Mortgage Loans to ContiFinancial Corporation. See "Conflicts of Interest and
Related Party Transactions -- ContiFinancial Corporation." All such sales are
sold servicing released in cash transactions. Since ContiFinancial Corporation
acquires the Mortgage Loans with all servicing rights, CMG Funding Corp. does
not pay any servicing fees; all such fees are paid out of the interest collected
on the Mortgage Loans by the owner thereof. RealTrust estimates that the amount
of Mortgage Loans to be sold to ContiFinancial Corporation will not materially
impair its ability to acquire a portfolio of Subprime Mortgage Loans because the
Taxable Subsidiary will sell up to 75% of its fixed-rate Subprime Mortgage Loans
to ContiFinancial Corporation, consistent with past practices. See "Risk
Factors -- Presidents's 1999 Budget Plan, If Enacted, Could Adversely Affect
Results of Operations." There can be no assurance that the Company's strategies
can be successfully implemented or that such strategies will result in improved
revenues and earnings.
CERTAIN ACCOUNTING POLICIES AND PROCEDURES
TAXABLE INCOME AND GAAP INCOME
Income calculated for tax purposes ("taxable income") differs from income
calculated according to generally accepted accounting principles ("GAAP income")
for various reasons. Income from interest earned in Mortgage Loans differs for
purposes of taxable income and GAAP income because each uses a different method
to calculate the rate of amortization of the premium or discount when Mortgage
Assets are acquired at a price above or below the stated principal amount of the
Mortgage Loans. Credit losses differ for purposes of tax and GAAP methods of
accounting because GAAP requires the Company to take credit provisions in order
to build a credit allowance whereas only actual credit losses are deducted in
calculating taxable income.
45
<PAGE> 52
General and administrative expenses differ due to differing treatment of
leasehold amortization and other items. However, interest expense is calculated
in the same manner for GAAP and tax purposes.
These distinctions are important to the Company's stockholders since
distributions are based on taxable income. The Company generally will not pay
Federal taxes so long as it meets the REIT provisions of the Code and
distributes dividends to stockholders in an amount equal to its taxable income.
See "Federal Income Tax Consequences -- Qualification as a REIT."
TAXABLE INCOME AND DIVIDENDS
RealTrust intends to declare and pay distributions equal to its taxable
income over time. In general, the Company expects to declare a quarterly
distributions per share of Capital Stock which would result in the distribution
of most or all of the taxable income earned in that quarter. See "Dividend
Policy and Distributions" and "Risk Factors -- Operation of a New Enterprise
Involves Uncertainty -- Limited Operating History of the Company Creates
Uncertainty About Future Results" and "Dividend Policy and Distributions."
RESULTS OF OPERATIONS
For the year ended December 31, 1997, the net loss of CMG Funding Corp. was
$(1,774,311) as compared to $(1,305,866) for the period from February 7, 1996
(date of inception) to December 31, 1996. For the year ended December 31, 1997,
revenues were $10,032,591 as compared to $1,160,435 for the period from February
7, 1996 (date of inception) to December 31, 1996. For the year ended December
31, 1997, net gain-on-sale of mortgage loans was $5,967,647 as compared to
$446,771 for the period from February 7, 1996 (date of inception) to December
31, 1996. For the year ended December 31, 1997, interest income was $3,756,870
as compared to $621,601 for the period from February 7, 1996 (date of inception)
to December 31, 1996. Revenues, net gain-on-sale of mortgage loans and interest
income all increased as a result of increased Mortgage Loan production with an
emphasis on higher profit margin Subprime Mortgage Loans as compared to Prime
Mortgage Loans.
For the year ended December 31, 1997, salaries and employee benefits
expenses were $4,474,357 as compared to $390,018 for the period from February 7,
1996 (date of inception) to December 31, 1996. For the year ended December 31,
1997, general operating expenses were $4,313,236 as compared to $1,285,156 for
the period from February 7, 1996 (date of inception) to December 31, 1996.
Salaries and benefits and general operating expenses increased as a result of
opening branches outside the Mountain West region and the accompanying corporate
support staff.
For the year ended December 31, 1997, interest expense was $2,965,685 as
compared to $731,519 for the period from February 7, 1996 (date of inception) to
December 31, 1996. Interest expense increased as a result of increased warehouse
lines of credit and working capital borrowings required as a result of increased
Mortgage Loan production.
As of December 31, 1997, mortgage loans held for sale were valued at
$54,451,067 as compared to $24,147,713 as of December 31, 1996. Mortgage loans
held for sale increased as a result of increased production.
LIQUIDITY AND CAPITAL RESOURCES
Prior to July 31, 1997, CMG Funding Corp.'s principal need for capital
resulted from the expansion of its wholesale and retail branches and the need to
fund originations of Mortgage Loans. Such capital was provided by contributions
from the Founders and from the sale of preferred stock and subordinated debt to
ContiFinancial Corporation. CMG Funding Corp. has a limited amount of cash on
hand to fund operations. CMG Funding Corp. requires access to short-term
warehouse and credit facilities to fund the acquisition of Mortgage Loans. Sales
of Mortgage Loans provide cash to support the needs of CMG Funding Corp. pending
closing of this Offering. As of March 31, 1998, CMG Funding Corp. had borrowed
approximately $40.3 million under its warehouse facility and $2.0 million under
its working capital facility with Con-
46
<PAGE> 53
tiFinancial Corporation. As of December 31, 1997, ContiFinancial Corporation had
converted $2.0 million of the working capital facility into preferred stock.
CMG Funding Corp. has financed, and until the closing of the Offering CMG
Funding Corp. will finance, the origination and acquisition of Mortgage Loans in
its mortgage lending operations through warehouse facilities and reverse
repurchase facilities from several banks and financial institutions. At March
31, 1998, CMG Funding Corp. had committed warehouse facilities and reverse
repurchase facilities of $150.0 million from ContiFinancial Corporation ($50.0
million) and Nomura Asset Capital Corporation ($100.0 million). Such warehouse
and reverse repurchase facilities expire on January 1, 1999 and June 30, 1998,
respectively, and are currently at various interest rates ranging from London
Inter-Bank Offered Rate ("LIBOR") plus 1.1% to LIBOR plus 3.25%, depending on
the nature of the Mortgage Loans collateralizing the applicable borrowing. Both
agreements contain customary and usual negative covenants.
RealTrust is dependent upon the closing of the Offering for the capital
necessary to fund the acquisition of, and long-term investment in, its Mortgage
Asset portfolio. RealTrust will also require additional warehouse and reverse
repurchase facilities and will need to arrange structured debt financing.
Management believes that such facilities are readily available from various
counterparties and has entered into negotiations for such facilities. No
commitments have been received to date. The Company will require additional
capital offerings to continue the proposed growth of the Mortgage Asset
portfolio. Additional capital may not be available on terms satisfactory to
management or at all. If so, the Company would be limited in achieving asset
growth beyond the Mortgage Assets acquired with the net proceeds of the
Offering. See "Risk Factors -- Operation of a New Enterprise Involves
Uncertainty -- Failure to Raise Additional Capital May Adversely Affect Future
Growth and Results of Operations."
Neither RealTrust nor CMG Funding Corp. has made any commitments for
material capital expenditures and has no long-term debt obligations, except the
obligations (i) to repay ContiFinancial Corporation's working capital facility
before January 1, 1999, (ii) to redeem ContiFinancial Corporation's Class B
Preferred Stock and (iii) to repay Capstone's Convertible Secured Promissory
Note. See "Conflicts of Interest and Related Party Transactions." All of such
long-term obligations are expected to be repaid with the net proceeds of the
Offering.
INFLATION
The financial statements and notes thereto presented herein have been
prepared in accordance with GAAP, which require the measurements of financial
position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased costs of the
Company's operations. Unlike industrial companies, nearly all of the assets and
liabilities of the Company's operations are monetary in nature. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. Inflation affects the Company's
operations, however, primarily through its effect on interest rates, which
normally increase during periods of high inflation and decrease during periods
of low inflation. During periods of increasing interest rates, demand for
Mortgage Loans and a borrower's ability to qualify for mortgage financing in a
transaction may be adversely affected.
YEAR 2000 COMPLIANCE
The Company will rely upon a significant number of computer software
programs and operating systems in conducting its operations, including software
purchased from third-party vendors and internally developed programs. To the
extent that these software applications contain source code that is unable to
correctly interpret the upcoming calendar year "2000," some level of
modification or even possible replacement of such source code or applications
will be necessary. The Company has received written confirmation from its
primary software vendors that their applications are Year 2000 compliant or will
be before December 31, 1998. Additionally, the Company is creating or revising
all internally developed software to be Year 2000 compliant. Given the
information known at this time, it is currently not anticipated that these "Year
2000"
47
<PAGE> 54
costs will have any material adverse impact on the Company's business, financial
condition or results of operations.
The Company is, however, dependent on vendor compliance to some extent, for
example third party services. The Company is requiring its systems and software
vendors to represent that the services and products provided are, or will be,
Year 2000 compliant, and contemplate a program of testing compliance. Although
no assurances can be provided regarding compliance by third-party vendors, the
Company does not expect that noncompliance by any such vendors will have a
material adverse effect on the Company's operations. In the event of
noncompliance by any such vendor, the Company believes that alternative vendors
will be available to the Company.
48
<PAGE> 55
BUSINESS
GENERAL
RealTrust Asset Corporation, a Maryland corporation formed on April 1, 1998
("RealTrust" or, with its subsidiaries, the "Company"), is a specialty finance
company engaged in the business of originating, purchasing, selling and
servicing mortgage loans secured (i) primarily by first mortgages on
single-family residences ("First Lien Mortgage Loans") and (ii) to a much lesser
extent by second lien Mortgage Loans ("Second Lien Mortgage Loans"; collectively
with First Lien Mortgage Loans, "Mortgage Loans"). In addition, RealTrust will
own and manage a portfolio composed primarily of First Lien Mortgage Loans that
do not conform to one or more of the underwriting criteria of Federal Home Loan
Mortgage Corporation ("FHLMC") and Federal National Mortgage Association
("FNMA"). Such Mortgage Loans are referred to as "Subprime Mortgage Loans."
RealTrust expects to acquire Subprime Mortgage Loans primarily from (the Taxable
Subsidiary).
RealTrust intends to build a portfolio of primarily Subprime Mortgage Loans
and securities backed by Mortgage Loans ("Mortgage Securities" and, with
Mortgage Loans, "Mortgage Assets") financed with structured debt instruments and
reverse repurchase agreements. The portfolio is expected to generate net
interest income, which, upon election to be taxed as a real estate investment
trust ("REIT"), will not be taxed at the corporate level. RealTrust is now and
intends to remain self-advised and self-managed.
The Taxable Subsidiary has operated a mortgage lending business since
April, 1996 and currently originates Mortgage Loans through 12 wholesale and two
retail branch offices. The Taxable Subsidiary's mortgage lending operations
originate and purchase fixed and adjustable-rate ("ARMs") Subprime Mortgage
Loans, as well as Mortgage Loans that conform to FHLMC or FNMA underwriting
criteria ("Prime Mortgage Loans"). In addition, the Taxable Subsidiary has built
a correspondent lending operation that began purchasing Subprime Mortgage Loans
in the fourth quarter of 1997. The Taxable Subsidiary will sell its Prime
Mortgage Loans and selected Subprime Mortgage Loans to generate current income
and cash flow to fund partially the Company's mortgage lending operations. See
"Business -- Industry Developments" and "Risk Factors -- President's 1999 Budget
Plan, If Enacted, Would Adversely Affect Results of Operations." For the fiscal
quarter ended March 31, 1998, the Taxable Subsidiary had originated or purchased
$60.5 million of Subprime Mortgage Loans, including $2.8 million of Subprime
Mortgage Loans purchased through its correspondent operations, and originated
$91.6 million of Prime Mortgage Loans. RealTrust owns 100% of the preferred
stock (representing 95% of the economic interest) of the Taxable Subsidiary but
does not control its operations. See "Structure and Formation Transactions."
To date, the Taxable Subsidiary has sold all of its Subprime Mortgage Loan
production in whole loan sales for cash. From September 1, 1996 to March 31,
1997, the Taxable Subsidiary sold approximately $150.5 million of Subprime
Mortgage Loans, or approximately 54% of all Subprime Mortgage Loan sales, to
ContiFinancial Corporation (with its affiliates ContiMortgage Corporation,
ContiTrade Services L.L.C., and ContiFinancial Services Corporation,
"ContiFinancial Corporation"). Subsequent to the closing of the Offering, the
Taxable Subsidiary will shift from selling all of its Subprime Mortgage Loan
production to building a portfolio of Subprime Mortgage Loans owned by RealTrust
and financed with structured debt. See "Business -- Industry Developments" and
"Risk Factors -- Operation of a New Enterprise Involves Uncertainty."
RealTrust will elect to be taxed as a REIT under the Internal Revenue Code
of 1986, as amended (the "Code"), beginning with the tax year ending December
31, 1998. Upon such election, RealTrust will generally not be subject to federal
income tax to the extent that it distributes its earnings to its stockholders
and maintains its qualification as a REIT. The Taxable Subsidiary has been and
will continue to be taxed as a "C" corporation and, therefore, subject to tax on
any earnings for 1997.
The Company's principal business objectives are to increase earnings per
share, to increase cash available for distribution to stockholders and to
enhance stockholder value. The Company intends to accomplish these goals
primarily by capitalizing on the relatively high yields available from investing
in Subprime Mortgage
49
<PAGE> 56
Loans compared to Prime Mortgage Loans, and managing the risks of such
investments. The Company intends to derive income from two principal business
activities as follows:
(i) the management of an investment portfolio of Mortgage Assets
which, similar to banks and savings institutions, will generate net
interest income based upon the difference between the interest earned on
its Mortgage Assets and the interest paid on its borrowings used to acquire
the Mortgage Assets; and
(ii) the operation of the Taxable Subsidiary's mortgage origination
business which will generate income from its mortgage lending activities
and will supply adjustable-rate Subprime Mortgage Loans for long-term
investment through the proposed REIT structure which avoids Federal income
tax at the corporate level.
The Company's business structure benefits its stockholders because the
Company intends to build an investment portfolio and generate income which is
expected to be predominantly a function of the size of the investment portfolio
and the interest differential between its Mortgage Assets and borrowings as
opposed to a function of Mortgage Loan production volume. As a result, if the
market environment for Mortgage Loan originations becomes less attractive, the
Company's management believes it will have greater flexibility to reduce its
Mortgage Loan production while experiencing less volatility in quarterly
earnings relative to competitors who do not have investment portfolio earnings.
COMPETITIVE ADVANTAGES
EXPERIENCED MANAGEMENT TEAM
The Company's two primary executive officers, John D. Fry and Terry L.
Mott, collectively have extensive experience in building and operating mortgage
banking operations in a variety of environments, including building Mortgage
Loan production and management teams, and creating and implementing policies,
budgets and controls. Mr. Fry, CMB, formed the Company in February, 1996 and has
been the President, Chief Executive Officer and Chairman of the Board since
inception. Mr. Mott has been the Executive Vice President of the Company
primarily responsible for Mortgage Loan production and a Director since
inception. Mr. Fry began his mortgage banking career in 1966. From 1984 to 1989,
Mr. Fry was the Vice President and Western Division Manager of Goldome Realty
Credit Corp., located in Buffalo, New York. From 1989 to 1994, served as the
Senior Vice President of Wholesale Lending of ComUnity Lending, Inc., in San
Jose, California. Mr. Mott began his career in mortgage banking in 1977. From
1980 to 1988, Mr. Mott was the regional Vice President at Fleet Mortgage Corp.
where he developed and managed the retail and wholesale production for the
western United States. From 1988 to 1994, Mr. Mott was the Executive Vice
President and served on the executive committee for Medallion Mortgage Company.
Mr. Mott left AccuBanc Mortgage, the successor to Medallion Mortgage Company, in
December, 1995 to form the Company with Mr. Fry.
In contemplation of the Offering and the proposed business strategy of the
Company, the Company has hired additional executive management team members,
including John P. McMurray and Steven K. Passey. Mr. McMurray joined the Company
in February, 1998, as the Executive Vice President of Secondary Marketing and
Asset Liability Management. Prior to joining the Company, Mr. McMurray was the
President of Keystroke Financial, Inc., a start-up internet mortgage origination
company. From 1995 to 1996, Mr. McMurray was the Executive Vice President and
Director, Risk Management and Capital Markets for Crestar Mortgage Corporation
where he was responsible for interest rate and credit risk management, as well
as hedging, securitization and loan/securities trading activities. From 1982 to
1995, Mr. McMurray served in various management positions with BancPlus Mortgage
Corp., most recently serving as the Senior Vice President, Capital Markets. Mr.
McMurray is a Chartered Financial Analyst and a Certified Public Accountant. Mr.
McMurray received a Master of Science degree in Real Estate from Massachusetts
Institute of Technology, a Masters of Business Administration degree from the
University of Texas, San Antonio and a Bachelor of Science degree from Trinity
University. Mr. Passey joined the Company in October, 1997 as the Senior Vice
President and Chief Financial Officer. Prior to joining the Company, Mr. Passey
was in the financial services area at KPMG Peat Marwick LLP for eight years,
most recently as a manager responsible
50
<PAGE> 57
for accounting and audit work for financial companies. Mr. Passey is a Certified
Public Accountant and received a Bachelor of Science degree in accounting from
the University of Utah.
HIGHER MARGIN SUBPRIME MORTGAGE LOANS
The Company believes that its strategy of continuing to shift its
production operations from the origination of Prime Mortgage Loans to the
origination and purchase of Subprime Mortgage Loans, coupled with its intent to
focus its Mortgage Asset portfolio on Subprime Mortgage Loans will allow the
Company to generate higher earnings and dividends on a risk-adjusted basis than
if the Company originated and invested in Prime Mortgage Loans. Subprime
Mortgage Loans are generally secured by substantial equity in the underlying
property, but are made to borrowers who have impaired or limited credit profiles
or higher debt-to-income ratios than traditional mortgage lenders allow.
Subprime Mortgage Loan borrowers also include individuals who, due to
self-employment or other circumstances, have difficulty verifying their income,
and may be individuals who prefer the prompt and personalized service provided
by the Company. These types of borrowers are generally willing to pay higher
origination fees and interest rates than those charged by conventional lending
sources. One important consideration in underwriting Subprime Mortgage Loans is
the nature and value of the collateral securing the Mortgage Loans. The Company
believes that the amount of equity required in the real estate securing the
Mortgage Loans, together with the fact that a substantial majority of the
Mortgage Loans originated or purchased by the Company are secured by borrowers'
primary residences, reduces the risks inherent in Subprime lending. See "Risk
Factors -- Investments in Subprime Mortgage Loans Involves Greater Risk of
Loss." Management believes that the potentially higher yields and prudent
underwriting standards required on the Company's Subprime Mortgage Loans will
combine to generate more attractive risk-adjusted returns than can be earned
through originating, purchasing and investing in Prime Mortgage Loans. However,
Subprime Mortgage Loans are generally associated with higher risks of
delinquency and foreclosure, and are more likely to result in losses due to
underwriting guidelines which permit an LTV ratio of up to 90%. See "Risk
Factors -- Investments in Subprime Mortgage Loans Involve Greater Risk of Loss."
STRUCTURED DEBT INSTRUMENTS
The Company intends to finance adjustable-rate Subprime Mortgage Loans held
in its investment portfolio through structured debt instruments, where the
emphasis is on earning net interest income over time. This leverage strategy
allows the Company to take full advantage of its REIT status. Moreover, the
Company's Mortgage Asset investment portfolio which will be financed with
structured debt instruments will allow it to produce income not subject to
Federal income tax at the corporate level. Thus, distributions to stockholders
will be generated from net interest income, rather than through fully taxable
gain-on-sale income in REMIC transactions. The accounting for gain-on-sale REMIC
transactions presents as current income the present value of expected future
cash flows from the Mortgage Loans sold. Actual income is subject to revision if
actual losses, interest rates and prepayment experience differ from the assumed
levels.
ADVANTAGES OF REIT TAX STATUS
As a REIT, the Company will generally pass through earnings to stockholders
without Federal income tax at the corporate level. Thus, the Company expects
higher net earnings available to holders of Capital Stock than traditional
mortgage lending institutions which are subject to Federal income tax.
CORPORATE GOVERNANCE WHICH LIMITS POTENTIAL CONFLICTS OF INTEREST
RealTrust and the Taxable Subsidiary will be a vertically integrated
organization, which is self-advised and self-managed. The Company is structured
to minimize the potential conflicts of interest between the mortgage lending
operation and the Mortgage Asset portfolio management operation. Such conflicts
can arise in REITs where the incentives and interests of management are
dependent on the size of the Mortgage Loan portfolio rather than on return on
equity or stockholder returns. Such conflicts are common in entities which are
externally advised and which have management contracts or structures where
management's compensa-
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<PAGE> 58
tion is not directly related to the Company's performance or return to
stockholders. The Company's primary management incentive programs are dependent
on return on equity (the incentive bonus plan, one-half of which is paid in
Common Stock of the Company and the other half of which is paid in cash) and
stock price appreciation (stock option plans). See "Management -- Executive
Compensation." However, the Company will be subject to certain potential
conflicts of interest because the voting control of the Taxable Subsidiary is
held by the stockholders of the Taxable Subsidiary prior to this Offering,
excluding ContiFinancial Corporation (the "Founders") and transactions with
ContiFinancial Corporation. See "Risk Factors -- Conflicts Of Interest May
Result in Decisions That Do Not Fully Reflect the Stockholders' Best Interest."
In an effort to mitigate the foregoing potential conflicts of interest, the
Company has implemented policies and procedures which require, among other
things, that each decision that implicates a potential conflict of interest must
be approved by a majority of the Independent Directors. However, there can be no
assurance that the Company's policies or procedures will be successful in
eliminating the influence of such conflicts and, thus, the Company may take
courses of action which fail to fully represent the best interests of all
stockholders of the Company.
EXEMPTION FROM STATE AND FEDERAL BANKING REGULATION
Management believes that the proposed REIT structure provides a more
attractive vehicle for investing in Mortgage Loans than is provided by the
structure generally used by regulated financial institutions, because the
Company will not be subject to most of the federal and state banking regulations
imposed upon federally-insured financial institutions and, therefore, will not
incur the related costs of deposit insurance and compliance. As a REIT, the
Company will be subject to numerous other restrictions regarding the nature of
its assets, income and operations, and the risks of failure to comply with the
REIT requirements of the Code. See "Risk Factors -- Failure to Maintain REIT
Status Would Have Adverse Tax Consequences" and "Federal Income Tax
Consideration -- Termination or Revocation of REIT Status." However, the Company
will not maintain the costly branch banking networks required by banks and
savings institutions to obtain deposit bases, their primary source of capital.
Although banks and savings institutions generally pay lower interest rates on
their deposit bases than the Company will pay for its borrowings, the costs of
federal deposit insurance and of operating and maintaining such branch networks
are substantial. The Company, therefore, believes that its operating costs will
be lower than regulated financial institutions of comparable asset size, and, as
a result, that the Company has the potential to earn higher net returns on its
Mortgage Loan portfolio.
LOAN SALES FOR CASH GAINS
The Company's wholesale, retail and correspondent channels originate and
purchase Prime and Subprime, fixed- and adjustable-rate Mortgage Loans. The
Company plans to build its Mortgage Asset portfolio primarily by retaining
selected Subprime Mortgage Loans originated and purchased by the Taxable
Subsidiary. The remaining Mortgage Loans will be sold for cash gains to various
mortgage investors. See "Business -- Industry Developments." The Company expects
to sell all of the Prime Mortgage Loans and certain of the Subprime Mortgage
Loans and Second Lien Mortgage Loans originated through its wholesale and retail
channels. The Company intends to sell its entire economic interest in these
Mortgage Loans and does not intend to hold residual interests. The sale of these
Mortgage Loans is expected to generate substantial current income and cash flow
to fund, in part, the mortgage lending operations. Such sales are accomplished
through the Taxable Subsidiary. See "Risk Factors -- President's 1999 Budget
Plan, If Enacted, Would Adversely Affect Results of Operations" and
"-- Operation of a New Enterprise Involves Uncertainty."
OVERVIEW OF SUBPRIME MORTGAGE MARKET
According to Inside Mortgage Finance Publications, Inc., for the years 1995
through 1997, the residential Mortgage Loan market generated annual Mortgage
Loan volume in excess of $630.0 billion per year. The majority of these
originations (approximately 80% to 90%) were Prime Mortgage Loans. The remaining
balance of 10% to 20% (approximately $85.0 to $150.0 billion) of the
originations were Subprime Mortgage Loans.
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<PAGE> 59
Based on its experience originating Subprime Mortgage Loans, the Company
believes there is strong national demand by borrowers for Subprime Mortgage
Loans. Across the country, many borrowers have suffered dislocation and
temporary unemployment, resulting in negative entries on their credit reports.
Erratic market and economic conditions and other factors have resulted in high
ratios of debts to assets and high levels of credit card and other installment
debt for these individuals. In addition, more borrowers are choosing to become
self-employed. The Company believes these circumstances create an attractive
market for Subprime Mortgage Loans.
One of the significant differences between the Prime Mortgage Loan and the
Subprime Mortgage Loan markets has been the comparative dependence upon the
overall level of interest rates. Generally, the Subprime Mortgage Loan market's
historical performance has been less sensitive to interest rate changes. This is
evident by the growth in Subprime Mortgage Loan originations from 1993 through
1995. While the Prime Mortgage Loan market experienced a decline in originations
of more than 40% during that period, due primarily to an increase in interest
rates, Mortgage Loan originations in the Subprime Mortgage Loan market continued
to grow at an annual rate of 10% to 15% over the same three-year period.
According to Inside Mortgage Finance Publications, Inc., the estimated size
of the Subprime Mortgage Loan originations in 1997 was approximately $124.5
billion. Historically, the Subprime Mortgage Loan market has been a highly
fragmented niche market dominated by local brokers with direct ties to investors
who owned and serviced this relatively higher margin, riskier product. Although
there have recently been several new entrants into the Subprime Mortgage Loan
business, the Company believes the Subprime Mortgage Loan market is still highly
fragmented, with no single competitor having more than a 5.6% market share by
volume for the year-ended December 31, 1997. The growth and profitability of the
Subprime Mortgage Loan market, the demise of numerous depository financial
institutions in the late 1980s which had served this market, and reduced profits
and Mortgage Loan volume at traditional financial institutions have together
drawn new participants and capital to the Subprime Mortgage Loan market. The
Subprime Mortgage Loan market requires more business judgment from underwriters
in evaluating borrowers with previous credit problems. Subprime Mortgage Loan
lending is also generally a lower volume/higher profit margin business rather
than the generally higher volume/lower profit margin Prime Mortgage Loan
business to which traditional mortgage bankers have become accustomed. Subprime
Mortgage Loan lending is also more capital intensive than the Prime Mortgage
Loan market due to the fact that the securitization function requires a higher
level of credit enhancement which must be provided by the issuer in the form of
over-collateralization or subordination.
Based on its recent experience in the Subprime Mortgage Loan market, the
Company believes that the Subprime Mortgage Loan market will continue to grow
and to generate relatively attractive risk-adjusted returns over the long term
when compared to Prime Mortgage Loans, due in part to the following reasons: (i)
growth in the number of existing homeowners with negative entries on their
credit reports; (ii) growth in the number of immigrants with limited credit
histories who are in the prime home buying ages of 25 to 34; (iii) growth in the
number of self-employed individuals who have sources of income which are
inconsistent and difficult to document; (iv) growth in consumer debt levels
which are causing many borrowers to have higher debt/income ratios; and (v)
growth in consumer bankruptcy filings, which cause borrowers to be classified as
Subprime Mortgage Loan borrowers.
INDUSTRY DEVELOPMENTS
The President's tax proposals contained in the 1999 Budget Plan released by
the Treasury Department on February 2, 1998 (the "1999 Budget Plan") include
several provisions that could adversely affect REITs. The 1999 Budget Plan has
been submitted to the Ways and Means Committee of the U.S. House of
Representatives (the "Ways and Means Committee") for review, which held its
first hearing on February 25, 1998, but has not taken any action to date. See
"Risk Factors -- President's 1999 Budget Plan, If Enacted, Would Adversely
Affect Results of Operations."
Several industry and trade organizations representing REITs and mortgage
bankers, including the National Association of Real Estate Investment Trusts and
The Mortgage Bankers Association have
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<PAGE> 60
expressed their opposition to those provisions of the 1999 Budget Plan which
affect REITs. However, despite such opposition, the 1999 Budget Plan may be
adopted as proposed.
In summary, the 1999 Budget Plan proposes to prohibit a REIT from owning,
by vote or value, more than 10% of the capital stock of any corporation. Such
proposal is intended to prevent REITs from conducting through a taxable
subsidiary any business which would be prohibited by the REIT itself. If
adopted, such proposal would require the Company to change the nature of its
ownership in the Taxable Subsidiary and the manner in which it conducts its
business.
If adopted, the 1999 Budget Plan would require that RealTrust either (i)
acquire all of the capital stock of the Taxable Subsidiary and convert it into a
Qualified REIT Subsidiary, or (ii) divest itself of the preferred stock of the
Taxable Subsidiary. To convert the Taxable Subsidiary into a Qualified REIT
Subsidiary would require the Taxable Subsidiary to comply with all of the income
and assets tests for a REIT. While the active origination of Mortgage Loans in
itself does not violate any of the income or assets tests for maintaining REIT
status, the Service could attempt to treat the income from frequent sales of
Mortgage Loans as subject to the 100% tax on income from prohibited
transactions. Rather than pay the prohibited transaction tax, the Company would
likely curtail production of the Mortgage Loans it does not intend to retain in
its investment portfolio. See "Risk Factors -- President's 1999 Budget Plan, If
Enacted, Would Adversely Affect Results of Operations."
MORTGAGE LENDING BUSINESS
The Company originated its first Mortgage Loans in April, 1996. Since its
inception, the Company's Mortgage Loan origination volume has increased
significantly. The following table describes the Company's Mortgage Loan
production volume by quarter since the third quarter of 1996:
QUARTERLY MORTGAGE LOAN PRODUCTION
(dollars in thousands)
<TABLE>
<CAPTION>
WHOLESALE RETAIL CORRESPONDENT TOTAL
------------------ ------------------ ------------- ------------------
QUARTER ENDED PRIME SUBPRIME PRIME SUBPRIME SUBPRIME PRIME SUBPRIME
------------- ------- -------- ------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
March 31, 1998.................................. $59,331 $56,564 $32,223 $1,170 $ 2,778 $91,555 $ 60,512
December 31, 1997............................... 46,008 68,480 34,628 3,816 63,132 80,636 135,428(1)
September 30, 1997.............................. 41,313 59,226 32,614 5,502 0 73,927 64,728
June 30, 1997................................... 25,716 27,439 26,811 4,784 0 52,527 32,223
March 31, 1997.................................. 33,513 12,456 19,913 2,068 0 53,426 14,524
December 31, 1996............................... 43,277 14,687 22,055 1,918 0 65,332 16,605
September 30, 1996.............................. 46,806 5,500 14,374 941 0 61,180 6,441
</TABLE>
- ---------------
(1) Includes $63.1 million of Subprime Mortgage Loans originated through the
correspondent channel, which production channel is expected to be fully
reactivated only after closing of the Offering.
The Company has demonstrated its ability to successfully expand its
mortgage lending operations while implementing policies and controls. The
Company's accomplishments to date include:
- Operating a wholesale channel which, as of March 31, 1998, consisted of
12 branch offices in 11 states that originated $146.6 million of Prime
Mortgage Loans and $167.6 million of Subprime Mortgage Loans for the
year ended December 31, 1997 ($59.3 million and $56.6 million,
respectively, for the quarter ended March 31, 1998);
- Developing and staffing a correspondent channel which produced $63.1
million of Subprime Mortgage Loans for the fourth quarter of 1997 and
$2.8 million of Subprime Mortgage Loans in the first quarter of 1998;
- Operating a retail channel which, as of March 31, 1998, consisted of two
branch offices (Salt Lake City, Utah and Las Vegas, Nevada) that
originated $114.0 million of Prime Mortgage Loans and
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<PAGE> 61
$16.2 million of Subprime Mortgage Loans for the year ended December 31,
1997 ($32.2 million and $1.2 million, respectively, for the quarter
ended March 31, 1998);
- Becoming licensed to conduct mortgage lending in 27 states;
- Preparing policies and procedures for underwriting, selling and
brokering Mortgage Loans, quality control, and asset management;
- Obtaining $150.0 million in warehouse financing facilities from
ContiFinancial Corporation and Nomura Asset Capital Corporation;
- Establishing Mortgage Loan sales relationships with Mortgage Loan
investors;
- Creating its management information system to monitor and analyze
operations and financial performance; and
- Establishing a servicing relationship as the Company builds its own
servicing infrastructure.
MARKETING AND PRODUCTION STRATEGY
GENERAL
The Company acquires or will acquire Mortgage Loans from four sources: (i)
its wholesale channel, through which Mortgage Loans are acquired from a network
of independent wholesale brokers, (ii) its correspondent channel, through which
closed Mortgage Loans are purchased from other lenders, (iii) its retail
channel, through which direct originations are obtained from its retail
branches, and (iv) to a lesser extent, its bulk acquisitions of Mortgage Loans
from other mortgage banks and financial institutions.
WHOLESALE CHANNEL
The wholesale channel, which originates Mortgage Loans through independent
loan brokers, accounted for $115.9 million, or 76.2%, of the Company's Mortgage
Loan production during the first quarter of 1998. As of March 31, 1998, the
wholesale channel originated Mortgage Loans through 12 branch offices located in
Boca Raton, Denver, Green Bay, Honolulu, Kansas City, Las Vegas, Newport Beach,
Phoenix, Portland, Sacramento, Salt Lake City and Spokane. Such offices are
owned by the Company and are staffed with Company employees, generally between
two and 15 loan officers, zero to five underwriters and two to 20 support
personnel.
Wholesale originations of Mortgage Loans involve a network of unaffiliated
mortgage brokers that will offer the Company's Mortgage Loan products. Such
mortgage brokers are generally unable or unwilling to acquire and hold Mortgage
Loans. Typically, either brokers do not have the capital necessary to obtain
warehousing facilities or they prefer or require the cash generated from
Mortgage Loan sales to sustain operations. The Company generally acquires
Mortgage Loans in the wholesale channel at a lower cost than acquisitions of
Mortgage Loans either through bulk purchases or purchases of securities in the
secondary mortgage market. During the 12 months preceding March 31, 1998, the
Company has purchased Mortgage Loans from more than 600 mortgage brokers and
banks on a non-exclusive basis.
The Company provides prompt, consistent service, which includes (i) a quick
response time in the Mortgage Loan purchase process as a result of decentralized
underwriting, (ii) direct and frequent contact with brokers through a trained
sales force, (iii) competitive pricing, and (iv) a variety of pricing programs
and Mortgage Loan products.
One of the most important factor in attracting and retaining Mortgage Loan
originations from independent brokers is an efficient Mortgage Loan processing
system. The Company staffs each wholesale branch with an experienced
underwriter. By locating underwriters in branch offices, the Company avoids
delays resulting from the need to ship the Mortgage Loan applications to a
central processing site, as is frequently the case with the Company's
competitors. The Company can generally underwrite and approve wholesale Mortgage
Loan purchases within 24 hours after receipt of a completed file.
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<PAGE> 62
The Company trains its loan officers, account executives and branch
managers in its Mortgage Loan products and processes. Such personnel then
maintain regular contact with independent brokers through scheduled sales visits
and telephone calls. Regular and frequent contact with high-volume producers
results in greater broker loyalty and more consistent production.
The Company has a pricing model that takes into account changing market
conditions and is designed to allow the Company to purchase Mortgage Loans at
competitive prices that maintain adequate profit margins. After its election of
REIT status, the Company anticipates that it will offer more competitive pricing
relative to tax-paying competitors as a result of the elimination of Federal
income tax at the corporate level.
The following table sets forth selected information relating to the
Company's wholesale Mortgage Loan originations during the periods shown:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
----------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1998 1997 1997 1997 1997 1996 1996
--------- ------------ ------------- -------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
SUBPRIME:
Principal balance (in
thousands)......... $56,564 $68,480 $59,226 $27,439 $12,456 $14,687 $ 5,500
Average principal
balance per
Mortgage Loan (in
thousands)......... $ 100 $ 104 $ 111 $ 100 $ 100 $ 96 $ 98
Principal Balance:
Fixed-rate (in
thousands)...... $13,255 $18,079 $23,421 $10,677 $ 6,124 $ 8,162 $ 2,124
ARMs (in
thousands)...... $43,309 $50,401 $35,805 $16,762 $ 6,332 $ 6,525 $ 3,376
Combined weighted
average initial
loan-to-value
ratio.............. 79.67% 80.41% 79.24% 77.26% 79.13% 78.19% 79.03%
Percent of First Lien
Mortgage Loans..... 98.89% 99.11% 97.65% 97.24% 92.95% 94.04% 96.31%
Percent of Mortgage
Loans with prepay
protection......... 85.33% 93.07% 91.37% 79.24% 46.16% 37.18% 37.98%
Property securing
Mortgage Loans:
Owner occupied..... 91.48% 95.34% 96.55% 91.04% 99.36% 93.17% 97.51%
Non-owner
occupied........ 8.52% 4.66% 3.45% 8.96% 0.64% 6.83% 2.49%
PRIME:
Principal Balance (in
thousands)......... $59,331 $46,008 $41,313 $25,716 $33,513 $43,277 $46,806
</TABLE>
The Company initially intends to increase wholesale Mortgage Loan
production through expanded marketing efforts by existing branches. Such
marketing efforts are intended to obtain greater percentages of production by
independent brokers who already sell to the Company. The Company intends to
continue to increase the percentage of Subprime Mortgage Loans originated
through its wholesale channel. The Company also intends to identify new areas of
the United States within which to establish wholesale branches, if such areas
are generating significant Subprime Mortgage Loan production.
CORRESPONDENT LENDING
In addition to the wholesale and retail operations, the Company has formed
a correspondent lending channel which is specifically directed at the
acquisition of Subprime Mortgage Loans. The correspondent
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<PAGE> 63
lending channel acquires closed Subprime Mortgage Loans through a national
network of approved Mortgage Loan originators ("Correspondents") that fund and
close each Subprime Mortgage Loan using their own funds and, subsequently, sell
the Mortgage Loans to the Company.
Correspondent Lending Objective. The goal of the correspondent lending
channel is to expand Subprime Mortgage Loan production while maintaining the
comprehensive quality control approach employed by the wholesale and retail
channels of the Company. Correspondents will originate Subprime Mortgage Loans
to underwriting guidelines prepared or approved by the credit risk personnel of
the Company. In addition, the correspondent lending channel provides approved
Correspondents with the Company's operational guidelines to control pricing,
delivery and funding of Subprime Mortgage Loans into the program.
The correspondent lending channel will purchase Subprime Mortgage Loans
from mortgage bankers, commercial bankers and savings institutions on a
servicing released basis. Each Correspondent will maintain certain eligibility
criteria such as net worth requirements, an unqualified auditor opinion from a
nationally recognized or Company-approved accounting firm, mortgage origination
experience, quality control procedures and warehouse line capability, among
other requirements. Also, Correspondents make certain representations and
warranties with respect to, among other things, the Subprime Mortgage Loans, the
financial condition of the borrowers, the adequacy of disclosure, first payment
default and premium recapture.
Sales and delivery of Subprime Mortgage Loans to the correspondent lending
channel will be conducted in two ways: (i) on a best efforts, loan-by-loan flow
basis and (ii) bulk purchases. For flow delivery, daily pricing is provided by
the secondary marketing department of the Company and the Correspondent may lock
in Mortgage Loan purchase prices through the toll free commitment desk. Subprime
Mortgage Loans identified for purchase by the Company are either re-underwritten
by the Company or by independent contractors engaged by the Company, or subject
to a post-purchase quality control audit to assure guideline and documentation
conformity. This flow method of acquisition is a major target for the Company
primarily because of the lower cost of acquisition. Alternatively, the Company
intends to acquire Subprime Mortgage Loans from these and other Correspondents
in bulk purchases that range from $1.0 million to $50.0 million in principal
amount. Depending on Mortgage Loan and pool characteristics, such as weighted
average coupon ("WAC"), weighted average loan-to-value ("WLTV"), weighted
average maturity ("WAM"), prepayment penalties and pool size, the premiums paid
for bulk purchase can range between 50 to 200 basis points above those paid on a
flow basis. Despite the higher cost, bulk acquisitions enable economies-of-scale
and may provide the Company with market arbitrage opportunities.
Initial Correspondent Platform. In October, 1997, the Company entered into
a letter agreement with Nomura Asset Capital Corporation ("Nomura") to acquire
from Nomura Subprime Mortgage Loans and certain non-binding Correspondent
relationships between Nomura and several Correspondents through which Nomura has
actively purchased Subprime Mortgage Loans since 1994. Through October, 1997,
Nomura has purchased over $1.75 billion of Subprime Mortgage Loans through its
Subprime Mortgage Loan conduit operations. The letter agreement required the
Company to purchase certain Subprime Mortgage Loans directly from Nomura, which
Subprime Mortgage Loans the Company acquired during the fourth quarter of 1997.
The letter agreement also required Nomura to introduce the Company to certain of
the Correspondents currently selling Subprime Mortgage Loans to Nomura. Such
relationships are not contractually binding on the Correspondents, who remain
free to sell to others. However, the Company commenced purchasing Subprime
Mortgage Loans from many of such Correspondents in 1997. The Company acquired
$2.8 million of Subprime Mortgage Loans through such Correspondents during the
first quarter of 1998.
To the extent that the Company purchases more than $90.0 million of
Subprime Mortgage Loans from such correspondents before June 30, 1998, the
Company has agreed to pay Nomura a fee equal to 25 basis points of the principal
amount of such purchases. The Company does not expect to acquire any additional
Mortgage Loans from such correspondents until after June 30, 1998 and,
therefore, no additional fees will be paid to Nomura under this letter
agreement. In connection therewith, Nomura also provides to the Company a $100.0
million reverse repurchase facility for a period of one year. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The Company has also agreed to
allow Nomura to participate as co-underwriter in any public offering of
securities
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<PAGE> 64
backed by fixed-rate Subprime Mortgage Loans financed through such facility
during the term of the financing facility.
The Company views the assumption of the Nomura correspondent relationships
and subsequent pipeline as a platform to build and develop the correspondent
production necessary to implement the Company's Mortgage Asset portfolio
strategy. The Company intends to expand the correspondent lending channel by
developing relationships with additional correspondents who can accumulate and
sell pools of Mortgage Loans in sizes ranging from $500,000 to $5.0 million. The
Company believes that such relationships can provide attractive Subprime
Mortgage Loans at prices that meet the Company's business plan objectives.
However, Given the capital intensive nature of correspondent lending, the
Company will not fully utilize its correspondent lending operations until after
the closing of this Offering.
The following table sets forth selected information relating to the
Company's correspondent Mortgage Loan originations during the period shown:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
-------------------------
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
SUBPRIME:
Principal balance (in thousands)..................... $ 2,778 $63,132
Average principal balance per Mortgage Loan (in
thousands)......................................... $ 139 $ 114
Principal Balance:
Fixed-rate (in thousands).......................... $ 589 $20,259
ARMs (in thousands)................................ $ 2,189 $42,873
Combined weighted average initial LTV ratio.......... 81.53% 76.78%
Percent of First Lien Mortgage Loans................. 100.00% 96.30%
Percent of Mortgage Loans with prepay protection..... 90.41% 22.80%
Property securing Mortgage Loans:
Owner occupied..................................... 92.07% 96.04%
Non-owner occupied................................. 7.93% 3.96%
PRIME:
Principal balance (in thousands)..................... $ 0 $ 0
</TABLE>
The Company is preparing to manage the increased Subprime Mortgage Loan
volume that is anticipated to be generated by the correspondent lending channel
upon the closing of the Offering. The Company has entered into contractual
relationships with industry-recognized vendors who will provide operational
services to support the additional Mortgage Loan production. The Company will
contract with a third-party due diligence underwriter and a bonded custodian for
the review of legal documentation. The Company will also contract with a
third-party servicer to service the increased volume of Mortgage Loans expected
to be acquired through the correspondent channel.
RETAIL CHANNEL
The retail channel, which originates primarily Prime Mortgage Loans through
the direct solicitation of borrowers, accounted for $33.4 million, or 22.0%, of
the Company's Mortgage Loan production during the first quarter of 1998. As of
March 31, 1998, the retail channel originated Mortgage Loans through branch
offices located in Salt Lake City, Las Vegas and Phoenix. Such offices are
staffed with five to 10 loan officers, one underwriter and five to seven support
personnel. The retail channel includes traditional marketing activities
conducted by retail loan officers, who seek to identify potential borrowers
through referral sources and individual sales efforts, as well as high-volume
targeted direct mail and telephone solicitation. By creating a direct
relationship with the borrower, retail lending generally creates a more
sustainable Mortgage Loan origination franchise and provides the Company with
greater control over the lending process. For Mortgage Loans originated in the
retail channel, the Company also receives the origination fees paid by the
borrower which offset the higher costs of retail lending and may contribute to
increased profitability. In addition, the
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<PAGE> 65
Company believes it is able to maintain the highest quality control over
Mortgage Loans originated through its retail branches.
The following table sets forth selected information relating to the
Company's retail Mortgage Loan originations during the periods shown:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
----------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1998 1997 1997 1997 1997 1996 1996
--------- ------------ ------------- -------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
SUBPRIME:
Principal balance (in
thousands)......... $ 1,170 $ 3,816 $ 5,502 $ 4,784 $ 2,068 $ 1,918 $ 941
Average principal
balance per
Mortgage Loan (in
thousands)......... $ 117 $ 89 $ 79 $ 71 $ 52 $ 68 $ 157
Principal Balance:
Fixed-rate (in
thousands)...... $ 122 $ 1,496 $ 2,490 $ 2,134 $ 1,447 $ 1,232 $ 434
ARMs (in
thousands)...... $ 1,048 $ 2,320 $ 3,012 $ 2,650 $ 621 $ 686 $ 507
Combined weighted
average initial
LTV................ 70.46% 75.88% 74.44% 73.40% 73.17% 75.16% 73.75%
Percent of First Lien
Mortgage Loans..... 89.59% 82.39% 79.02% 74.34% 62.66% 80.01% 89.58%
Percent of Mortgage
Loans with prepay
protection......... 30.05% 57.53% 64.09% 64.72% 30.05% 22.29% 10.12%
Property securing
Mortgage Loans:
Owner occupied..... 87.78% 95.34% 89.42% 98.44% 100.00% 100.00% 100.00%
Non-owner
occupied........ 12.22% 4.78% 10.58% 1.56% 0.00% 0.00% 0.00%
PRIME:
Principal Balance (in
thousands)......... $32,223 $34,628 $32,614 $26,811 $19,913 $22,055 $14,374
</TABLE>
The Company believes that targeted direct mail and telephone campaigns
offer opportunities to increase Subprime Mortgage Loan originations within the
Company's existing retail branch offices. The Company intends to staff each
retail office with a minimum of two Subprime Mortgage Loan officers who will
utilize direct mail and telephone solicitation methods to generate Subprime
Mortgage Loans. The Company intends to focus on growing production within its
existing retail branch offices utilizing such origination methods rather than
opening new retail branch offices in the immediate future.
BULK PURCHASES
The Company may initially acquire a portion of its Mortgage Asset portfolio
through bulk acquisitions due to the fact that this channel generally allows the
Company the opportunity to invest the net proceeds of the Offering more quickly
than the other channels. Bulk purchases of Mortgage Loan pools ranging from $2.0
million to $50.0 million may be acquired from large originators or from mortgage
conduits. Bulk acquisitions of Mortgage Loans will be conducted by the same
personnel that manage the correspondent channel. Although similar in process,
the bulk acquisition process differs from the correspondent channel in that
Correspondents have generally established regular selling relationships with the
Company and may even have Company underwriting personnel on the Correspondent's
premises. Bulk sellers have no such continuing relationship. This method of
acquiring Mortgage Loans provides the lowest profit margin to the Company.
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<PAGE> 66
During periods in which access to growth capital is limited, the Company will
tend to reduce its bulk purchases of Mortgage Loans in order to allow for
greater wholesale, retail and correspondent volume to be acquired. Through March
31, 1998, the Company has made two bulk acquisitions in an aggregate amount of
$69.1 million.
MORTGAGE LOAN PRODUCTS
The Company offers a broad variety of Mortgage Loan products through its
wholesale, retail and correspondent channels. Such products include both
Subprime Mortgage Loans for long-term investment by the Company and Prime
Mortgage Loans held for sale to investors. The Company's Mortgage Loan products
currently include:
- Six month LIBOR indexed ARMs;
- Two and three year LIBOR indexed ARMs;
- One, three, five and seven year CMT indexed ARMs;
- 15, 20 and 30 year fixed-rate First and Second Lien Mortgage Loans;
- 30 year amortizing balloon Mortgage Loans; and
- Jumbo fixed-rate and adjustable-rate Mortgage Loans.
PRICING OF MORTGAGE LOANS
The Company will set purchase prices for the Mortgage Loans it acquires
from its mortgage lending operations based on prevailing market conditions.
Different prices will be established for the various types of Mortgage Loans,
commitment periods and types of commitments (mandatory or best efforts). The
Company's standard pricing is based on the anticipated price it will receive
upon sale or financing of the Mortgage Loans, the anticipated interest spread
realized during the accumulation period, the targeted profit margin and the
anticipated issuance, credit enhancement and ongoing administrative costs
associated with such sale or financing. Alternatively, such pricing may be based
on the anticipated cost of financing such Mortgage Loans to maturity plus the
anticipated associated costs. The Company is able to acquire Subprime Mortgage
Loans at attractive prices due to the high level of service delivered to
Mortgage Loan brokers, borrowers and Correspondents.
Following the issuance of a specific pricing commitment, the Company will
be subject to the risk of interest rate fluctuations and will enter into hedging
transactions to diminish such risk. Hedging transactions may include mandatory
or optional forward sales of Mortgage Loans or Mortgage Securities, mandatory or
optional sales of futures and other financial futures transactions. The nature
and quantity of hedging transactions will be determined by the management of the
Company based on various factors, including market conditions and the expected
volume of Mortgage Loan purchases. See "-- Interest Rate Risk Management" and
"Risk Factors -- Interest Rate Fluctuations May Adversely Affect Operations and
Net Interest Income -- The Company Has No Specific Hedging Policies and Failure
to Appropriately Hedge May Adversely Affect Results of Operations" and
"-- Hedging Transactions Limit Gains and May Increase Exposure to Losses."
STATE LICENSES
The Company has applied for and is licensed to conduct mortgage banking
operations in 27 states (including certain states which do not have formal
licensing requirements or in which the Company is exempt from registration):
Arizona, California, Colorado, Florida, Georgia, Hawaii, Idaho, Indiana, Iowa,
Kentucky, Minnesota, Missouri, Montana, Nebraska, Nevada, New Mexico, North
Carolina, Ohio, Oklahoma, Oregon, South Carolina, South Dakota (wholesale only),
Texas, Utah, Washington, Wisconsin and Wyoming. Registration is pending in
Illinois, Michigan, Tennessee and Virginia.
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UNDERWRITING AND QUALITY CONTROL STRATEGIES
UNDERWRITING GUIDELINES
The Company has created a comprehensive underwriting manual for use by its
Correspondents as well as its internal staff. Generally, the underwriting
standards have been prepared in accordance with the financing requirements of
the rating agencies under the guidance of the Chief Credit Officer. The
Company's quality assurance guidelines provide for various tests of the Mortgage
Loans to be performed both before and after purchase.
The Company underwrites all Mortgage Loans originated through its retail
and wholesale channels with a staff of in-house underwriters. The Company staffs
each office with a senior underwriter with a minimum of five years experience.
In larger offices, the Company may hire junior underwriters with more limited
experience to work directly with the senior underwriters. Upon being hired by
the Company, the underwriter undergoes an intensive three day training of the
Company's underwriting policies and procedures at the Company's headquarters in
Salt Lake City. After the underwriter is trained to the satisfaction of the
Chief Credit Officer, the new underwriter is then placed at a retail or
wholesale office. New underwriters are subject to a 30-day probation, during
which their work is more closely scrutinized by the Company.
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<PAGE> 68
The following is a general guideline of the eligibility criteria expected
to be adopted by the Company after the closing of the Offering:
UNDERWRITING GUIDELINES (1)
FIRST LIEN MORTGAGE LOANS
<TABLE>
<CAPTION>
A+ RISK (2) A RISK A- RISK B RISK C RISK C- RISK
---------------- ---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Existing mortgage No 30-day late Maximum one Maximum two Maximum three Maximum four Maximum of two
history............ payments within 30-day late 30-day late 30-day late 30-day and two 90-day late
last 12 months; payment and no payments and no payments and one 60-day late payments and one
one 30-day late 60-day late 60-day late 60-day late payments and 120-day late
payment in last payments within payments within payment within maximum of one payment, there
24 months; must last 12 months; last 12 months; last 12 months; 90-day late may be a current
be current at must be current not required to not required to payment within notice of
application at application be current at be current at last 12 months; default; not
time. time. application application not required to required to be
time. time. be current at current at
application application
time. time.
Other credit(3)...... No open No open Minor derogatory Prior defaults Significant Significant
collections collection items allowed; acceptable; not prior defaults defaults
accounts or accounts or not more than more than $1,500 acceptable; acceptable; open
charge-offs charge-offs. $500 in open in open generally, not charge-offs or
within last 12 Generally must collection collection more than $2,500 collection
months. be paid through accounts or accounts or in open amounts may
funding not charge-offs open charge-offs open collection remain open
exceeding $300. after funding. after funding. accounts or after funding.
charge-offs open
after funding.
Bankruptcy filings... Generally, no Chapter 7 must Chapter 7 must Generally, no Generally, no Bankruptcy,
bankruptcy or have been have been bankruptcy or bankruptcy or notice of sale
notice of discharged at discharged at notice of notice of filings, notice
default filings least two years least two years default filings default filings of default
in last three prior; Chapter prior; Chapter in last two in last 18 filing or
years. 13 must have 13 must have years. Chapter months. One year foreclosure
been discharged been discharged 13 allowed at seasoning for permitted on a
at least one at least one least one year Chapter 13 with case by case
year prior. year prior. prior with reestablished basis.
reestablished credit. Generally, one
credit. year seasoning
for Chapter 7
and notices of
default. No
seasoning for
Chapter 13 paid
at funding.
</TABLE>
<TABLE>
<CAPTION>
A+ RISK (2) A RISK A- RISK B RISK C RISK C- RISK
---------------- ---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Debt service to
income ratio....... 45% 50% 50% or less 50% or less 55% or less 60% or less
Maximum loan-
to-value ratio: (4)
Owner occupied:
single family...... 95% 90% 90% 85% 80% 70%
Owner occupied:
condo/two-to-four
unit............... 90% 90% 90% 85% 80% 70%
Non-owner
occupied........... 90% 85% 80% 75% 70% 65%
</TABLE>
- ---------------
(1) The letter grades applied to each risk classification reflect the Company's
internal standards and do not necessarily correspond to the classifications
used by other mortgage lenders. "LTV" means loan-to-value ratio. With
respect to "A" through "C" credit grades, the combined LTV of all Mortgage
Loans secured by any property is permitted to be up to 100%, with the first
lien Mortgage Loan at the percentages indicated.
(2) On A+ product Private Mortgage Insurance ("PMI") is obtained on LTV's above
90% with 30% coverage; and 25% coverage from 85.01 to 90%; no PMI is
required for 85% LTV or less.
(3) Liens, judgments, collections and other garnishments not affecting title are
not considered.
(4) The maximum LTV set forth in the table is for borrowers providing full
documentation. The LTV is reduced five percent for stated and limited
documentation and 10% for non-owner applications.
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<PAGE> 69
The following table sets forth information concerning the Company's
principal balance of fixed-rate and adjustable-rate Mortgage Loan originations
by borrower risk classification for the periods shown:
MORTGAGE LOAN PRODUCTION BY BORROWER RISK CLASSIFICATION
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED PERIOD ENDED
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1996(1)
--------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
PRIME:
Percent of total purchases and origination.... 60.21% 78.63% 51.27% 86.68%
Combined weighted average initial
loan-to-value ratio........................ 77.62% 79.53% 79.28% 79.34%
Weighted average interest rate:
Fixed-rate................................. 7.41% 8.13% 7.97% 8.32%
ARMs....................................... 6.01% 6.74% 6.64% 6.94%
Margin-ARMs................................ 2.76% 2.75% 2.78% 1.00%
SUBPRIME:
"A"-Risk Grade:
Percent of total purchases and origination.... 26.95% 12.71% 29.36% 9.16%
Combined weighted average initial
loan-to-value ratio........................ 80.46% 82.24% 80.12% 78.40%
Weighted average interest rate:
Fixed-rate................................. 10.46% 11.06% 10.54% 10.96%
ARMs....................................... 9.74% 9.62% 9.90% 9.29%
Margin-ARMs................................ 5.90% 5.90% 6.25% 5.52%
"B" Risk Grade:
Percent of total purchases and origination.... 7.35% 6.32% 7.48% 2.95%
Combined weighted average initial
loan-to-value ratio........................ 79.11% 75.14% 75.30% 78.19%
Weighted average interest rate:
Fixed-rate................................. 11.16% 10.95% 11.02% 11.19%
ARMs....................................... 10.36% 9.87% 10.41% 9.74%
Margin-ARMs................................ 6.63% 6.48% 6.67% 6.32%
"C" Risk Grade:
Percent of total purchases and origination.... 3.01% 1.97% 2.73% 0.54%
Combined weighted average initial
loan-to-value ratio........................ 74.48% 72.18% 71.20% 77.31%
Weighted average interest rate:
Fixed-rate................................. 12.32% 12.04% 11.55% 12.12%
ARMs....................................... 11.14% 10.29% 11.14% 10.52%
Margin-ARMs................................ 6.85% 6.37% 6.94% 6.66%
"C"- Risk Grade:
Percent of total purchases and origination.... 0.32% 0.43% 0.57% 0.08%
Combined weighted average initial
loan-to-value ratio........................ 66.24% 59.55% 62.54% 61.62%
Weighted average interest rate:
Fixed-rate................................. 0% 14.53% 13.16% 13.86%
ARMs....................................... 12.28% 13.50% 12.06% n/a
Margin-ARMs................................ 7.18% 8.88% 7.03% n/a
Unclassified (2)................................ 2.16% 0.00% 8.59% 0.59%
</TABLE>
- ---------------
(1) For the period from February, 1996 (inception) to December 31, 1996.
(2) Includes certain Mortgage Loans which the Company sold to third-party
investors without determining the credit classification.
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<PAGE> 70
GEOGRAPHIC DIVERSIFICATION
Although the Company does not have specific policies or targets regarding
geographic diversification of its Mortgage Loans, close attention will be paid
to geographic diversification in managing the Company's credit risk. While there
will initially be some geographic concentration in Mortgage Loans originated
though the correspondent acquisition channel, over time the Company plans to
diversify its credit risk by selecting target markets through both the wholesale
and correspondent channels. The Company believes that one of the best tools for
managing credit risk is to diversify the markets in which the Company originates
and purchases Mortgage Loans.
Currently, the Mortgage Loans originated by the Company are geographically
concentrated in Florida, Utah, Georgia and California. However, as newly
established retail and wholesale branches increase production, geographic
diversification will naturally occur. The following table sets forth aggregate
dollar amounts (in thousands) and the percentage of all Subprime Mortgage Loans
originated or purchased by the Company by state for the periods shown:
GEOGRAPHIC DISTRIBUTION OF SUBPRIME MORTGAGE LOANS
(Dollars in thousands)
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1996(1)
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Arizona..................................................... $ 3,125 $ 948 $ 5,634 $ 260
Percent of total for period............................... 5.16% 6.53% 2.28% 1.13%
California.................................................. 8,493 585 27,970 0
Percent of total for period............................... 14.04 4.03% 11.33% 0.00%
Colorado.................................................... 1,892 2,158 13,695 2,817
Percent of total for period............................... 3.13 14.86% 5.55% 12.22%
Florida..................................................... 19,921 0 56,779 0
Percent of total for period............................... 32.92 0.00% 23.00% 0.00%
Georgia..................................................... 5,704 0 28,794 0
Percent of total for period............................... 9.43 0.00% 11.66% 0.00%
Hawaii...................................................... 1,495 0 4,239 0
Percent of total for period............................... 2.47 0.00% 1.72% 0.00%
Idaho....................................................... 854 317 2,277 460
Percent of total for period............................... 1.41 2.18% 0.92% 2.00%
Illinois.................................................... 144 0 5,750 0
Percent of total for period............................... 0.24 0.00% 2.33% 0.00%
Kansas...................................................... 296 80 1,642 0
Percent of total for period............................... 0.49 0.55% 0.67% 0.00%
Massachusetts............................................... 0 0 2,213 0
Percent of total for period............................... 0 0.00% 0.90% 0.00%
Montana..................................................... 0 145 1,003 279
Percent of total for period............................... 0 1.00% 0.41% 1.21%
New York.................................................... 0 0 12,393 0
Percent of total for period............................... 0 0.00% 5.02% 0.00
Nevada...................................................... 1,735 791 8,904 759
Percent of total for period............................... 2.87 5.45% 3.61% 3.29%
Oregon...................................................... 1,968 358 7,041 80
Percent of total for period............................... 3.25 2.46% 2.85% 0.35%
Utah........................................................ 10,773 8,639 44,244 17,584
Percent of total for period............................... 17.80 59.48% 17.92% 76.30%
Virginia.................................................... 458 0 2,159 0
Percent of total for period............................... 0.76 0.00% 0.87% 0.00%
Washington.................................................. 1,146 308 5,946 709
Percent of total for period............................... 1.89 2.12% 2.41% 3.08%
Wisconsin................................................... 910 0 4,713 0
Percent of total for period............................... 1.50 0.00% 1.91% 0.00%
Other States Combined (10 states)........................... 1,596 195 11,507 98
Percent of total for period............................... 2.64 1.34% 4.66% 0.43%
------- ------- -------- -------
Total............................................... $60,512 $14,524 $246,904 $23,046
======= ======= ======== =======
</TABLE>
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<PAGE> 71
COLLATERAL APPRAISAL
The Company's underwriting standards are also intended to assess the value
of the mortgaged property and to evaluate the adequacy of such property as
collateral for the Mortgage Loan. All of the Mortgage Loans originated by the
Company's wholesale and retail channels, and purchased by the Company through
Correspondents will be appraised by qualified independent appraisers. Such
appraisers inspect and appraise the subject property and verify that such
property is in acceptable condition. Following each appraisal, the appraiser
prepares a report which includes a market value analysis based on recent sales
of comparable homes in the area, and when deemed appropriate, replacement cost
analysis based on the current cost of constructing a similar home. The Company
intends to use only Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA") licensed appraisers as part of its approval process. All
appraisals are required to conform to the Uniform Standards of Professional
Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal
Foundation and must be on forms acceptable to FNMA and FHLMC. It is anticipated
that substantially all Mortgage Loans purchased through Correspondents will be
subject to a second full appraisal or appraisal review prior to purchase by the
Company. The Company has a formal review process for all appraisers, verifies
licenses annually and conducts new appraisals under its Quality Control Program.
QUALITY CONTROL PROGRAM
The Company has an extensive, systemized quality control and audit plan
currently in place. Each month, the Company randomly selects 10% to 15% of all
Mortgage Loans, including 10% from each branch and product type (with at least
one per month from each) to review. Representations and information from each
Mortgage Loan are verified against a checklist of over 60 items. Among such
verifications are completeness of the Mortgage Loan documents, additional
scrutiny of the borrower's credit report, employment and salary re-verifications
(or tax return scrutiny if the borrower is self-employed), closer scrutiny of
the appraisal, general review of the legal and closing documents, verification
of the owner occupancy status (if applicable) and a re-evaluation of the
creditworthiness of the borrower. Each discrepancy is given a grade based on its
severity, from inadvertent, non-impairing errors to a guideline violation
requiring immediate action against the borrower and the broker. Additionally,
10% of all Mortgage Loans selected for review each month are further selected
for closer scrutiny, including a new appraisal and a new credit report ordered
from different agencies. To date, all quality control has been performed by the
Company itself; however, it may outsource some or all of these functions in the
future. The Company will not, however, outsource any pre-closing quality
control.
CORRESPONDENT ELIGIBILITY REQUIREMENTS
Closed Mortgage Loans purchased by the Company will be originated by
various mortgage bankers and other mortgage lenders. Correspondents are required
to meet certain performance requirements established by the Company before they
are eligible to participate in the Company's Correspondent program and must
submit to periodic reviews by the Company to ensure continued compliance with
these requirements. The Company's current criteria for Correspondent
participation generally include a tangible net worth of at least $400,000. In
addition, Correspondents are required to have comprehensive loan origination
quality control procedures and must be approved and in good standing with HUD,
among other criteria. Each Correspondent is expected to enter into an agreement
that provides for recourse by the Company against the Correspondent in the event
of any material breach of a representation or warranty made by the Correspondent
with respect to Mortgage Loans sold to the Company or any fraud or
misrepresentation during the Mortgage Loan origination process. There is no
assurance that such requirements will be applicable in the future.
FINANCING LOANS HELD FOR SALE AND INVESTMENT PRIOR TO STRUCTURED DEBT FINANCING
The Company will finance its Mortgage Loan originations and purchases
through interim financing facilities such as bank warehouse credit lines and
reverse repurchase agreements. As of March 31, 1998, the Company had committed
warehouse lines and reverse repurchase facilities in place totaling $150.0
million with Nomura Asset Capital Corporation and ContiFinancial Corporation. A
reverse repurchase agreement is a borrowing device evidenced by an agreement to
sell securities or other assets to a third-party and a simultaneous agreement to
repurchase them at a specified future date and price, with the price
differential
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<PAGE> 72
constituting interest on the borrowing. The Company is currently in negotiations
with dealer firms for additional reverse repurchase facilities to fund
production prior to long-term financing. However, no such facility is in place.
The Company's Subprime Mortgage Loan lending operation will be a capital
intensive business. Depending on the type of Mortgage Loan product originated,
the production channel and the financing source, the amount of capital required
as a percentage of the balance of Mortgage Loans originated may range from two
percent to eight percent. See "-- Capital and Liquidity Management -- Capital
Allocation Guidelines." For illustration purposes only, a hypothetical monthly
Mortgage Loan volume of $25.0 million would equate to a capital requirement of
$500,000 to $1.75 million per month, respectively and a hypothetical monthly
volume of $50.0 million would equate to $1.0 to $3.5 million per month,
respectively. Due to the capital intensive nature of this business, the
Company's Subprime Mortgage Loan lending will be operated through the Taxable
Subsidiary. Operating though the Taxable Subsidiary would give the Company the
flexibility to sell its Mortgage Loan production as whole loans or in the form
of pass-through Mortgage Securities in the event it encountered restrictions in
accessing the capital markets in order to fund its Subprime Mortgage Loan
lending operation. See "Business -- Industry Developments" and "Risk
Factors -- President's 1999 Budget Plan, If Enacted, Would Adversely Affect
Results of Operations." The Company intends to raise the required capital in
order to implement its preferred strategy of realizing the income from
adjustable Subprime Mortgage Loans through net interest income. The Company
intends to sell certain Mortgage Loans, which are expected to be Prime and
fixed-rate Subprime Mortgage Loans.
LOAN SALES
The Company, through its Taxable Subsidiary, has historically followed a
strategy of selling for cash gains all of its Mortgage Loan originations and
purchases through Mortgage Loan sales in which the Company disposes of its
entire economic interest in the Mortgage Loans (including servicing rights) for
a cash price that represents a premium over the principal balance of the
Mortgage Loans sold. See "Business -- Industry Developments" and "-- President's
1999 Budget Plan, If Enacted, Would Adversely Affect Results of Operations." For
the fiscal year ended December 31, 1997, the Company sold $477.1 million of
Mortgage Loans through whole Mortgage Loan sales transactions. The Company did
not sell any Mortgage Loans through securitization during this period; however,
substantially all of the Mortgage Loans sold during this period were ultimately
securitized by the purchasers thereof.
The Company plans to build its Mortgage Asset investment portfolio by
retaining Subprime Mortgage Loans originated and purchased by its mortgage
operations. Prime Mortgage Loans, certain Subprime Mortgage Loans and Second
Lien Mortgage Loans originated and purchased by the Taxable Subsidiary, will,
however, be sold for cash gains to various mortgage investors. The sale of these
Mortgage Loans is expected to generate current income and cash flow to fund in
part the mortgage lending operations.
The Company seeks to maximize its revenue on whole Mortgage Loan sales by
closely monitoring institutional purchasers' requirements and focusing on
originating or purchasing the types of Mortgage Loans that meet those
requirements and for which institutional purchasers tend to pay higher premiums.
Whole Mortgage Loan sales are made on a non-recourse basis pursuant to a
purchase agreement containing customary representations and warranties by the
Company based upon the underwriting criteria applied by the Company and the
origination process. The Company, therefore, may be required to repurchase or
substitute Mortgage Loans in the event of a breach of its representations and
warranties. In addition, the Company sometimes commits to repurchase or
substitute a Mortgage Loan if a payment default occurs within the first month
following the date the Mortgage Loan is funded, unless other arrangements are
made between the Company and the purchaser. The Company is also required in some
cases to repurchase or substitute a Mortgage Loan if the Mortgage Loan
documentation is alleged to contain fraudulent misrepresentations made by the
borrower.
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<PAGE> 73
INFORMATION MANAGEMENT SYSTEMS
The Company has established, and continues to enhance, information
gathering and reporting systems to monitor and analyze virtually every aspect of
the mortgage lending business. The Company employs a combination of commercially
available and internally developed software to process and track each Mortgage
Loan in the Company's system from application to closing and sale.
Management reviews Mortgage Loan production data on a daily basis. The
Company's systems provide management with detailed reports on all material
aspects of the business, including Mortgage Loan processing, underwriting,
funding, secondary marketing and accounting. Such reports include Mortgage Loan
production to date (i) by branch, (ii) by loan type, (iii) by geographic
location of the property, (iv) by pre-payment penalty, and (v) by LTV.
The Management Information Systems Department is structured into two teams:
Hardware/Software Support and Development. The Hardware/Software Support team
has built the client server network operating on a Windows NT platform. The
backbone of the Company information system is a wide area network ("WAN")
employing high speed lines to each of its retail and wholesale branch offices,
with the exception of the Hawaii branch which connects to the WAN via the
internet. In addition, construction of a Company intranet site is underway. The
intranet site is expected to permit video-teleconferencing between all Company
sites, enabling face-to-face Company meetings and on-going procedural training,
and will enable the Company's underwriting and other manual guidelines to be
available on-line, with instantaneous updates as management refines or changes
any provision.
The development team has focused on building a Microsoft-standard network
of software solutions. The Company's accounting system, Accuity, built by State
of the Art Software, allows management to generate a vast number of reports
focusing on: (i) costs of origination or acquisition of Mortgage Loans; (ii)
pricing and timing of secondary sales by investor, loan type and other factors;
(iii) funding and usage of warehouse lines; and (iv) monthly and year-to-date
accounting statements. The integration of the management information system is
ongoing and is expected to link all of the Mortgage Loan production and
processing to both treasury and secondary marketing functions, permitting
management to plan and better monitor Mortgage Loan fundings and subsequent
sales. The Company believes that the integration of its information and
accounting systems will offer efficiency and information advantages over those
of certain of its competitors.
The Company is dedicated to building and maintaining an integrated, leading
edge information environment. The Company has been selected by several software
providers as a beta-site for several advancements in their current software
systems. Both Interlinq, the manufacturer of MortgageWare (the Company's loan
processing, underwriting and funding software) and State of the Art Software
have requested the Company's participation in an advisory capacity for current
and future development of certain of their products. One innovation which is
currently in testing will enable management to determine the status of any
Mortgage Loan in any branch in virtually real time.
The fundamental integration of the Company's information systems will
enable the asset-liability manager to monitor and report on all Mortgage Loans
by asset class, age and credit rating, to relate such positions to the Company's
hedge positions at any given time, permitting management to instantaneously
determine a net value of assets and hedges. Sophisticated analytics including
option-adjusted spreads, price sensitivity, time-basis change, residual cash
flow analysis, and simulations will be performed on an independent software
model, utilizing the Company's asset and hedging position data.
The Company maintains a secure computing environment. The file server is
located in a locked central room. All external data lines are monitored for
intrusive activity and internal access if granted by administrator security
clearance only. A routine onsite/offsite backup procedure is maintained to
enable rapid recovery in the event of a catastrophic event. Accounting records
are protected on a period-by-period basis, and are entered on write-once,
read-only compact discs which are stored in a protected off-site location.
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<PAGE> 74
MORTGAGE INVESTMENT PORTFOLIO
The Company will acquire and manage a portfolio of Mortgage Assets,
primarily comprised of Subprime Mortgage Loans originated and acquired by the
Taxable Subsidiary and financed with structured debt instruments. As with a bank
or savings and loan association, the Company's Mortgage Asset portfolio is
expected to generate net income to the extent that the yield on its Mortgage
Assets exceeds the overall cost of its borrowings. The Company will attempt to
construct a portfolio which will provide a relatively consistent level of net
interest income through a variety of interest rate environments. The Company
will acquire and manage this portfolio of Mortgage Assets to maximize net
interest income within prescribed risk constraints. See "Risk
Factors -- Interest Rate Fluctuations May Adversely Affect Operations and Net
Interest Income."
The Company's strategy will be to earn a relatively attractive
risk-adjusted return on equity by originating and purchasing Subprime Mortgage
Loans for investment in the Mortgage Loan portfolio. Management's expectation is
that the highest long-term risk adjusted return on equity will be earned through
investing its capital in the residual class of long-term financings of Subprime
whole Mortgage Loans originated through its Mortgage Loan acquisition channels.
The Company will not acquire residuals and has not and generally will not
acquire first loss subordinated bonds rated below BBB, or Mortgage Securities
rated below B. The Company could indirectly retain the subordinate class from
Mortgage Loans securitized by the Taxable Subsidiary. The Company may acquire
IOs or POs to assist in the hedging of prepayment or other risks. In addition,
as discussed above, the Company may create a variety of different types of
assets, including the types mentioned in this paragraph, through the normal
process of CMO financing of the Company's own Mortgage Assets. In no event will
the Company (exclusive of its Taxable Subsidiaries) acquire or retain any REMIC
residual interest that may give rise to excess inclusion income as defined under
Section 860E of the Code. Generally, excess inclusion income may be recognized
by the holder of a REMIC residual (or a residual from a taxable mortgage pool)
to the extent income from the residual exceed 120% of the long-term applicable
federal interest rate. Excess inclusion income may be taxed as unrelated
business taxable income to certain tax-exempt entities. Excess inclusion income
realized by the Taxable Subsidiary is not passed through to stockholders of the
Company. See "Risk Factors -- Interest Rate Fluctuations May Adversely Affect
Operations and Net Interest Income -- Hedging Transactions Limit Gains and May
Increase Exposure to Losses" and "Federal Income Tax Considerations -- Taxation
of Tax-Exempt Entities."
The Company will review each Mortgage Asset to be acquired to assess its
expected return, credit and liquidity risk, financing costs, the quality of the
issuer and the expected prepayment rate. The Company has developed a financial
model to evaluate each potential Mortgage Asset's impact upon the Mortgage Loan
portfolio as a whole. The Company will regularly monitor its purchases of
Mortgage Assets and the income from such Mortgage Assets, including income from
its hedging strategies, so as to ensure at all times that it maintains
RealTrust's qualification as a REIT and RealTrust's exempt status under the
Investment Company Act of 1940, as amended (the "Investment Company Act"). The
Company has engaged qualified accountants and tax experts to assist it in
developing appropriate accounting systems and testing procedures, and to conduct
quarterly compliance reviews designed to assist RealTrust in assuring compliance
with the REIT provisions of the Code and to ensure RealTrust's exempt status
under the Investment Company Act. See "Federal Income Tax
Considerations -- Qualification as a REIT" and "Risk Factors -- Failure to
Qualify for Exemption from Investment Company Act May Adversely Affect the
Company."
TYPES OF MORTGAGE ASSETS
The Company's Mortgage Assets will be comprised of Mortgage Loans and
Mortgage Securities.
Mortgage Loans. The Company expects to retain primarily Subprime Mortgage
Loans, all of which are secured by first mortgages or deeds of trust on
single-family (one-to-four-units) residences. A substantial portion of the
Subprime Mortgage Loans originated and purchased by the Company are expected to
meet the long-term investment requirements of the Company. Those Mortgage Loans
which the Company does not intend to hold to maturity will be offered for sale
by the Taxable Subsidiary to various investors, including national private
mortgage conduit programs in the secondary mortgage market. See
"Business -- Industry
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Developments" and Risk Factors -- President's 1999 Budget Plan, If Enacted,
Would Adversely Affect Results of Operations."
Subprime single-family Mortgage Loans are single family Mortgage Loans that
do not qualify in one or more respects for purchase by FNMA or FHLMC. The
Company expects that a majority of the Subprime Mortgage Loans it purchases will
be Subprime because generally they vary in certain other respects from the
requirements of such programs including the requirements relating to
creditworthiness of the borrowers or they have original principal balances which
exceed the requirements for FHLMC or FNMA programs.
The Company may invest a small portion of its assets in Prime Mortgage
Loans, including FHA Loans or VA Loans, which qualify for inclusion in a pool of
Mortgage Loans guaranteed by GNMA. Under current regulations, the maximum
principal balance allowed on conforming Mortgage Loans ranges from $227,150
($321,900 for Mortgage Loans secured by properties located in either Alaska or
Hawaii) for one-unit to $436,600 ($618,675 for Mortgage Loans secured by
properties located in either Alaska or Hawaii) for four-unit residential loans.
The Company may also retain Subprime Mortgage Loans.
The Company expects to hold primarily ARMs. The interest rate on an ARM is
typically tied to an index (such as LIBOR or the interest rate on United States
Treasury Bills), and is adjustable periodically at various intervals, typically
from one month to one year. Such Mortgage Loans are typically subject to
lifetime interest rate caps and periodic interest rate and/or payment caps. The
Company anticipates that the majority of the Mortgage Loans will have lifetime
interest rate caps of six percent over the initial Mortgage Loan interest rate,
although some Mortgage Loans may have lifetime interest rate caps of as high as
seven percent or as low as five percent over such initial rate. The Company
expects the Mortgage Loans to have periodic interest rate caps of either one
percent every six months or two percent per year. Lifetime and periodic interest
rate caps are a function of market and competitive factors and are, therefore,
subject to change from the levels anticipated herein. A portion of the Subprime
Mortgage Loans may be fixed-rate Mortgage Loans.
The Company may obtain credit enhancements such as mortgage pool or special
hazard insurance for its Mortgage Loans, in addition to private mortgage
insurance when specified by its underwriting criteria. Accordingly, during the
time it holds Mortgage Loans, the Company will be subject to risks of borrower
defaults, fraud and bankruptcies and special hazard losses that are not covered
by standard hazard insurance (such as those occurring from earthquakes or
floods). In the event of a default on any Mortgage Loan held by the Company, the
Company will bear the risk of loss of principal to the extent of any deficiency
between (i) the net proceeds from liquidation of the mortgage collateral and any
related insurance or guarantee and (ii) the principal amount of the Mortgage
Loan.
Mortgage Securities. The Company plans to purchase Mortgage Securities in
the capital markets. These Mortgage Securities generally have a higher level of
liquidity than the Mortgage Loans to be acquired or originated and are expected
to provide a relatively stable flow of interest income with relatively low
levels of credit risk compared to such Mortgage Loans. The Mortgage Securities
to be acquired by the Company will be backed by a pool of ARMs. These Mortgage
Securities entitle the holder to receive a pass-through of principal and
interest payments on the underlying pool of Mortgage Loans and will be
guaranteed by the Federal government sponsored agencies or issued by certain
private institutions. Mortgage Securities issued by private institutions are
usually, but not always, rated by one of the major rating services. The Company
may, from time to time, invest in Mortgage Securities that are not investment
grade. See "Risk Factors -- Investments in High LTV Mortgage Loans and
Subordinated Mortgage Securities Involve Greater Risk of Loss." The Company may
also acquire IOs and POs in conjunction with its hedging activities. The Company
does not intend to invest in any unregistered Mortgage Securities.
RETAINED INTERESTS IN STRUCTURED DEBT INSTRUMENTS
The Company intends to hold for long-term investment Subprime Mortgage
Loans produced by its mortgage lending operation and to finance such Subprime
Mortgage Loans with long-term financings through the issuance of CMOs. Under
this approach, for accounting purposes, the Mortgage Loans collateralizing any
CMO remain on the balance sheet as assets and the debt obligations (i.e., CMOs)
appear as liabilities. The Company's retained interest under this approach is
reflected by the excess of the assets over the related
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liabilities on the balance sheet. The resulting stream of expected "spread"
income will be recognized over time through the proposed tax-advantaged REIT
structure. Other forms of financing may also be employed from time to time under
which a "sale" of interests in the Mortgage Loans will be reflected and gain or
loss reflected for accounting purposes at the time of sale. Under this form,
only the net retained interest in the securitized Mortgage Loans will remain on
the balance sheet. Such sales will be made through the Taxable Subsidiaries. See
"-- Interest Rate Risk Management."
The Company expects that its retained interests in its long-term financing,
regardless of the form used, will be subordinated to the classes of securities
issued to investors in such securitizations with respect to losses of principal
and interest on the underlying Mortgage Loans. Accordingly, any such losses
incurred on the underlying Mortgage Loans will be applied first to reduce the
remaining amount of the Company's retained interest, until reduced to zero.
Thereafter, any further losses would be borne by the investors or the insurers
in such securitizations rather than the Company.
The Company may also use financing as a tool to transfer some of the
interest rate risk of the Mortgage Loan collateral to the CMO bondholder and
credit risk to monoline bond insurers. Financing structures may include
floating-rate debt classes with life caps. The life cap structured in the bond
class pays down with the collateral, reducing the basis risk inherent in other
hedging strategies. The Company may pay a monoline bond insurer a monthly fee to
assume a portion of the credit risk in a pool of Mortgage Loans. The monoline
insurer would also require the issuer to retain a portion of the credit risk and
over-collateralize a particular pool of Mortgage Loans. The Company will
structure its financing so as to avoid the attribution of any excess inclusion
income to the Company's stockholders. See "Federal Income Tax
Considerations -- Taxation of the Company's Stockholders."
Proceeds from such financing will be available to support new Mortgage Loan
originations. The Company's CMOs are expected to reduce the Company's interest
rate risk on assets held for long-term investment. CMOs are permanent financing
and are not subject to a margin call if a rapid increase in rates would reduce
the value of the underlying mortgages. The Company plans to finance the retained
interests in its CMOs through a combination of equity and secured debt
financings, including reverse repurchase agreements.
Neither the Amended and Restated Articles of Incorporation nor the Bylaws
of the Company impose any limitations on the Company's ability to incur
borrowings, either secured or unsecured. See "Risk Factors -- Borrowing to
Finance Investment Portfolio May Adversely Affect Results of Operations."
CAPITAL AND LIQUIDITY MANAGEMENT
CAPITAL ALLOCATION GUIDELINES
The Company's goal is to maintain a balance between the under-utilization
of leverage, which may diminish returns to stockholders, and over-utilization of
leverage, which could limit the Company's funding alternatives during adverse
market conditions. Therefore, the Company has adopted Capital Allocation
Guidelines (the "CAG"). The Board will review the actual amount of leverage on a
quarterly basis for purposes of ensuring that the Company is in compliance with
the CAG. The CAG are intended to keep the Company leveraged as follows: (i) by
matching the amount of leverage with the current perceived risk of the Company's
assets, and (ii) by retaining excess capital to provide for market conditions
that may substantially alter or increase the market's general assessment of
perceived risk for those Mortgage Assets.
The primary factors influencing the Company's liquidity under circumstances
of adverse market conditions are increases in interest rates and increases in
the general market perception of credit risk associated with residential
Mortgage Loans. Interest rate increases reduce the market value of the Company's
Mortgage Assets and, therefore, reduce the quantity of financing that is
dependent on market values. Any increase in the credit risk as perceived by
rating agencies tends to increase the quantity of over-collateralization
required by rating agencies to award various investment grade ratings to the
senior classes of structured financings such as CMOs. Increased
over-collateralization requirements reduce the quantity of total financing
prospectively available to the Company because the excess collateral implied by
the rate of over-collateralization required on the CMO must be financed by the
Company's equity rather than by the CMO.
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To estimate the quantity of capital required for such adverse
circumstances, management has simulated capital requirements under adverse
conditions whereby interest rates increased instantaneously by 200 basis points
and foreclosure frequencies increased by over 77% above those currently
estimated as required to support a AAA rating on the senior class of CMOs issued
by the Company. To estimate the amount of capital required to support assets
financed by repurchase agreements, management used an option-adjusted pricing
framework and a sophisticated mortgage prepayment and pricing model. To estimate
the amount of potential over-collateralization for CMOs, the Company employed a
general rule that determines the amount of over-collateralization based on the
potential loss severity per Mortgage Loan and the rate of foreclosure frequency.
In general, over-collateralization equals potential loss severity times
foreclosure frequency. Applying this general rule to future CMOs, the 4.5% rate
of over-collateralization equates to a potential loss severity of 40% with a
foreclosure frequency of 11.25% (i.e., 40% X 11.25% = 4.5%). The CAG are to be
structured to allow for a substantial increase in the foreclosure frequency to
20% providing the capability to continue CMO issuance under circumstances of a
required eight percent over-collateralization (i.e., 40% X 20% = 8%).
The following table depicts CAG requirements by asset/liability combination
under currently expected financing requirements and under adverse market
conditions.
CAPITAL ALLOCATION GUIDELINES
<TABLE>
<CAPTION>
(A) (B)
INCREMENT (C) = A+B
REQUIRED BY TOTAL
REQUIRED ADVERSE CAG
ASSET/LIABILITY COMBINATION EQUITY(1) MARKET(2) REQUIRED(3)
--------------------------- --------- ----------- -----------
<S> <C> <C> <C>
Subprime Mortgage Loans Financed by CMOs.................... 4.50% 3.50% 8.00%
Subprime Mortgage Loans Financed by Reverse Repurchase
Agreements................................................ 5.00% 3.78% 8.78%
Mortgage Securities Financed by Reverse Repurchase
Agreements................................................ 3.00% 4.99% 7.99%
</TABLE>
- ---------------
(1) "Required equity" is the expected amount of equity required by a typical
financing alternative for the types of Mortgage Assets held by the Company.
There is some variation in the equity requirements from time to time, and
across the spectrum of specific negotiated terms. From the lender or debt
investor's perspective, the required equity represents an incremental value
secured by the financing agreement to which the lender or debt investor may
immediately recognize through collateral liquidation to cover liquidation
costs on the collateral should the debt obligor be unable to perform under
the terms of the financing agreement.
(2) "Increment Required by Adverse Market" is the amount of excess capital
retained by the Company for each type of asset/liability combination in the
CAG for purposes of sustaining liquidity and funding alternatives during
adverse market conditions. The stress test conditions are a 200 basis point
increase in interest rates and an increase in foreclosure frequencies to
20%.
(3) "Total CAG Required" is the sum of the amount of equity required in various
forms of financing alternatives and the increment required to sustain these
resources under adverse conditions.
Implementation of the CAG. The Company will implement the CAG under a
two-dimensional framework that considers the net market value of the Mortgage
Asset portfolio equity and the potential total over-collateralization in terms
of Mortgage Loan principal balance that may be required under adverse
conditions. By sustaining the net excess market value required by the CAG, the
Company will possess the ongoing capacity to finance its Mortgage Assets. By
tracking requirements for structured financings, the Company will maintain an
updated expectation for the required equity component of prospective
transactions.
Portfolio Financed with Reverse Repurchase Agreements. Each quarter the
Company marks to market its Mortgage Securities carried as available-for-sale.
This process is accomplished by obtaining market quotes from third parties,
including dealers that make markets in Mortgage Assets similar in nature to the
Company's and from mortgage banking concerns currently engaged in the business
of originating Mortgage Assets similar to those held by the Company. Market
values are then computed for the Company's assets using those market quotes
along with the Company's internally established assumptions related to
prepayments, losses, discount
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rates, and interest rate volatility. The market value for all financing used by
the Company, net of the market value of hedges in place as of the valuation
date, is then deducted from the current market value of the Mortgage Assets. The
remainder, which is the theoretical market value of equity, is then compared to
the weighted average amount required by the CAG as of the date of market
valuation and actual required equity as established by the financing agreements
then in place. If the theoretical market value of equity is less than required
by the CAG, management of the Company must prepare a plan for presentation and
approval by the Board of Directors to bring capital to the required level.
Portfolio Financed with CMOs. Each quarter the Company will solicit updates
on the required over-collateralization from dealers and rating agencies for the
various types of Mortgage Assets the Company holds and produces. Should the
required equity increase substantially, the Company will evaluate at that time
the necessity for increasing the total capital allocation required for the
Company's net asset/liability position in light of the historical performance of
transactions in place to date and other financing vehicles then available to the
Company.
SERVICING ACTIVITIES
Mortgage servicing represents the contractual right to receive a portion of
the interest payments (typically 25 to 50 basis points) of a Mortgage Loan in
exchange for the performance of certain services, including collection,
foreclosure, recordkeeping, disbursement of principal and interest to the
investor and payment of taxes and insurance. Mortgage Loan servicing also
includes the loss mitigation activities of contacting delinquent borrowers and
supervising foreclosures and property disposition in the event of unremediated
defaults. The Company will acquire Subprime Mortgage Loans with the servicing
rights retained.
Until the Company develops internal servicing capabilities, the Company
will rely upon third-party servicers. The Company has entered into a
subservicing agreement with Advanta pursuant to which Advanta will provide
subservicing for the Company while management focuses on Mortgage Loan
production, Mortgage Loan processing, asset/liability management, administrative
operations and securitization. The Company is also in discussions with other
third-party servicers and intends to select the servicer offering the most
favorable terms.
Third party servicing will allow the Company to take advantage of the
experience of the servicer's staff, computer and customer service systems and
collection procedure. Eventually, the Company intends to develop its own
servicing capability in order to oversee the performance of its Mortgage Loans
more directly and to manage the servicing relationship with its borrowers. The
timing of this action will be based on the completion of construction of the
personnel and computer systems necessary to properly manage a servicing
department capable of servicing over $1.0 billion in Subprime Mortgage Loans.
While management expects that the income from its servicing activities will
exceed its cost of servicing, the primary reason for servicing Mortgage Loans on
which the Company has credit risk exposure is as a loss mitigation strategy.
EARLY INTERVENTION, ASSET MANAGEMENT, AGGRESSIVE COLLECTION AND LOSS
MITIGATION TECHNIQUES
The Company intends to emphasize the use of early intervention, asset
management, aggressive collection and loss mitigation techniques in its
servicing process to minimize losses on its whole loans and to preserve the
value of its residual interest in its CMO financings. The collections policy for
Subprime Mortgage Loans will be designed (i) to curtail payment problems by
establishing early customer contact to communicate payment expectations and by
maintaining frequent customer contact to emphasize the priority of Mortgage Loan
repayment and (ii) to identify payment problems sufficiently early to permit the
Company to quickly address delinquency problems and, when necessary, to act to
preserve equity in a pre-foreclosure property.
With respect to Subprime Mortgage Loans, the Company will implement strict
servicing procedures. All mortgage payments are due on the first day of the
month. Late payment fees will accrue on the earliest day permitted by state law.
The late payment fees on Subprime Mortgage Loans will be the maximum allowable
under applicable state law. The subservicer will assign a counselor to each
borrower immediately upon closing
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of each Subprime Mortgage Loan who will alert the borrowers of the Company's
strict enforcement procedures and legal remedies available upon nonpayment. The
subservicer will generally mail payment coupons as a monthly reminder to
borrowers, enforce the late period and file notice of default by the end of the
grace period. See "-- Overview of Subprime Mortgage Market."
ADVANTA SERVICING AGREEMENT
Although the Company may select another servicer after the closing of the
Offering, the Company had as of March 31, 1998 a servicing agreement with
Advanta (the "Advanta Servicing Agreement"). As of March 31, 1998, Advanta did
not service a material number or principal amount of Mortgage Loans (five
Mortgage Loans with an aggregate principal balance of $0.4 million). Under the
Advanta Servicing Agreement, the Company is obligated to pay Advanta a monthly
servicing fee on the declining principal balance of each Mortgage Loan serviced
and a set-up fee for each Mortgage Loan delivered to Advanta for servicing.
Advanta is required to pay all expenses related to the performance of its duties
under the Advanta Servicing 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 borrower, 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.
Advanta is entitled to retain any late payment charge 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. Under the Advanta
Servicing Agreement, Advanta is generally required to remit all principal and
interest scheduled to be collected from borrowers during the prior monthly
reporting period generally no later than the eighteenth day of each month.
Under the Advanta Servicing Agreement, if the Company terminates such
agreement without cause or transfers the servicing of any amount of the Mortgage
Loans serviced by Advanta to another servicer, the Company must pay Advanta
certain penalties, fees and costs, including a termination fee of $100 per
Mortgage Loan. Depending on the size of the Company's Mortgage Loan portfolio
serviced by Advanta, at any point in time, the termination or transfer penalties
that the Company will be obligated to pay Advanta may be substantial. As of
March 31, 1998, the termination fee pursuant to the Advanta Servicing Agreement
would have been immaterial and the Company does not anticipate that such
termination fee will, now or in the future, deter the Company from selecting
another servicer.
INTEREST RATE RISK MANAGEMENT
The Company is subject to interest rate risk to the extent that the
interest rates on the Company's liabilities (i.e., reverse repurchase agreements
and CMOs) reprice more frequently, or on a different basis, than the interest
rates on the Company's Mortgage Assets. To mitigate this risk, the Company will
follow a strict interest rate risk management program managed by the Company's
Asset/Liability Manager, who has extensive experience in mortgage banking and
interest rate risk management for other financial institutions prior to his
employment with the Company. The Company's interest rate risk management program
will be formulated with the intent to mitigate the potential adverse effects
resulting from interest rate adjustment limitations on its Mortgage Assets and
the differences between the interest rate adjustment indices and interest rate
adjustment periods of its Mortgage Assets and related borrowings.
The Company's interest rate risk management program will encompass a number
of procedures. First, the Company will structure the liabilities of the Company
to have interest rate indices and adjustment periods
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that, on an aggregate basis, correspond as closely as practicable to the
interest rate adjustment indices and interest rate adjustment periods of the
Mortgage Assets. In addition, the Company intends to structure its borrowing
agreements to have a range of different maturities (although substantially all
will have maturities of less than one year). As a result, the Company expects to
be able to adjust the average maturity of its borrowings on an ongoing basis by
changing the mix of maturities as borrowings come due and are renewed. In this
way, the Company will attempt to minimize any differences between interest rate
adjustment periods of Mortgage Assets and related borrowings.
The Company intends to use interest rate caps, interest rate swaps and
similar instruments to attempt to limit, fix or partially offset changes in
interest rates associated with its borrowings and changes in the value of its
Mortgage Assets. In a typical interest rate cap agreement, the cap purchaser
makes an initial lump sum cash payment to the cap seller in exchange for the
seller's promise to make cash payments to the purchaser on fixed dates during
the contract term if prevailing interest rates exceed the rate specified in the
contract. In this way, the Company intends generally to hedge as much of the
interest rate risk arising from lifetime rate caps on its Mortgage Assets and
from periodic rate and/or payment caps as the Company determines is in the best
interests of the stockholders of the Company, given the cost of such hedging
transactions and the need to maintain RealTrust's status as a REIT. See "Federal
Income Tax Considerations -- Qualification as a REIT -- Sources of Income." The
Company may also, to the extent consistent with its compliance with the REIT
provisions of the Code, buy and sell financial futures contracts, options and
trade forward contracts as a hedge against future interest rate changes;
however, the Company will not acquire such instruments unless the Company is
exempt from the registration requirements of the Commodities Exchange Act or
otherwise complies with the provisions of that Act.
The Company also considers its use of CMOs as a component of its interest
rate management strategy. CMOs address two of the problems caused by rapid
changes (primarily increases) in interest rates, margin calls and the potential
for negative interest spread on a Mortgage Loan. A rapid increase in interest
rates may cause the value of the Company's collateral used to secure reverse
repurchase agreements to decline, thereby forcing a "margin call" in which the
Company would be required to pledge additional collateral in order to support
the reverse repurchase agreement. When the Company is fully leveraged, all of
its assets may be encumbered as part of different financing arrangements, and
the only response to a margin call will be to sell Mortgage Assets. Selling
Mortgage Assets during periods of rapidly increasing interest rates may result
in the Company receiving a lower purchase price than may otherwise be received.
CMOs do not allow the investor the right to exercise a margin call, and in
periods of rapidly rising rates, the financing remains in place.
Another risk of rapidly rising interest rates is that the lifetime caps on
the Mortgage Loans are exceeded by the level of short-term rates (or the cost of
reverse repurchase agreements). To protect against this risk, the Company may
imbed an interest rate cap into the CMO structure which will approximately match
the interest rate cap on the underlying pool of Mortgage Assets. This structure
is not available to be imbedded within the Company's warehouse or reverse
repurchase agreements. While the purchase of a separate cap is available through
financial market intermediaries, the use of imbedding the cap in the CMO
structure may be preferred due to the fact that the Company is always evenly
matched within the Mortgage Assets of the CMO structure and, as Mortgage Assets
are paid down, the Company always retains a cap over the entire balance of the
Mortgage Assets.
The Company believes that it can implement a cost-effective interest rate
risk management program to provide a level of protection against interest rate
risks. However, an effective hedging strategy is complex, and no hedging
strategy can completely insulate the Company from interest rate risks. Moreover,
as noted above, certain of the Federal income tax requirements limit the
Company's ability to fully hedge its interest rate risks. The Company intends to
monitor carefully, and may have to limit, its hedging strategies to assure that
it does not realize excessive hedging income or hold hedging Mortgage Assets
having excess value in relation to total Mortgage Assets, which would result in
the Company's disqualification as a REIT or, in the case of excess hedging
income, the payment of a penalty tax for failure to satisfy certain REIT income
tests under the Code, provided such failure was for reasonable cause. See
"Federal Income Tax Considerations -- Qualification as a REIT -- Sources of
Income." The Company may elect to conduct a portion of its interest rate risk
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management operations through the Taxable Subsidiary. See "Risk
Factors -- President's 1999 Budget Plan, If Enacted, May Adversely Affect
Results of Operations."
In addition, hedging involves transaction and other costs, and such costs
increase as the level of protection and period covered by the hedging
transaction increases. Hedging transaction costs also increase in periods of
rising or extremely volatile interest rates. See "Risk Factors -- Interest Rate
Fluctuations May Adversely Affect Operations and Net Interest Income -- Hedging
Transactions Limit Gains and May Increase Exposure to Losses." Therefore,
management does not believe it will be cost effective to hedge all of its
adjustable-rate indebtedness and other interest rate risk. Further, certain
losses on hedging activities would be capital losses and would not be deductible
to offset ordinary income. In such a situation, the Company would have incurred
an economic loss of capital that would not be deductible to offset the ordinary
income from which dividends must be paid.
CREDIT RISK MANAGEMENT
To limit its risk both of default and of loss on the sale of foreclosed
property, the Company has instituted the following policies as part of its
overall credit policy. These policies are currently being followed in the
origination of Mortgage Loans.
Underwriting Policies. Initially, all Mortgage Loans submitted by
correspondents and brokers will be fully underwritten or re-underwritten by
the Company. All Mortgage Loans will be subject to a detailed review of the
underwriting decision prior to purchase.
LTV Limitations. The Company has determined maximum LTV ratios that
will be accepted depending upon the credit rating and other risk factors
assigned to the Mortgage Loans. (See "Business -- Underwriting and Quality
Control Strategies.") These LTV ratios are expected to provide significant
protection to the Company in the event of foreclosure, as well as provide
the borrower with a strong incentive to protect the Mortgage Loan from
being foreclosed.
Appraisal Review Requirements. The Company intends to generally
require a review appraisal for each Mortgage Loan prior to purchase. The
Company intends to use only FIRREA qualified appraisals and must be on
forms acceptable to FNMA and/or FHLMC as part of its approval process.
Additionally, appraisals for Mortgage Loans being considered at the 90% LTV
ratio and those Mortgage Loans randomly selected as part of quality control
will be reviewed by designated underwriters. The Company intends to use
only FIRREA qualified appraisers as part of its approval process. All
appraisals are required by the Company to conform to the Uniform Standards
of Professional Appraisal Practice adopted by the Appraisal Standards Board
of the Appraisal Foundation and must be on forms acceptable to FNMA and
FHLMC.
Repurchase Requirements. Mortgage Loans will be acquired through
Correspondents who have entered into an agreement requiring repurchase of
Mortgage Loans found to breach any of a comprehensive list of
representations and warranties included in the applicable correspondent
agreement. Such warranties include failure by the borrower to make the
first payment, fraud in any of the Mortgage Loan documents, and errors in
the processing or underwriting of the Mortgage Loan.
Selection and Approval of Correspondents. Correspondents are subject
to a thorough analysis, including checking of references and review of
financial statements, before submission to an executive committee of the
Company for approval. The Company will generally require its Correspondents
to maintain a minimum net worth of $400,000 in order to ensure their
ability to meet repurchase requirements.
Pre-purchase Quality Assurance Program. The Company will continue to
implement the thorough quality assurance procedures currently in use, which
generally include verifications of Mortgage Assets and employment and
obtaining an independent credit report prior to the purchase of the
Mortgage Loans. The post-purchase quality control is administered by one
full-time employee and one contract person focusing on quality control and
assurance, who are under the oversight of the Chief Executive Officer. The
Company intends to increase this staff as required by the level of
origination volume.
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The Company will establish Mortgage Loan loss allowances on the balance
sheet in advance of anticipated losses. Such allowances are expected to be
sufficient to absorb losses from the sale of foreclosed properties, as well as
operating expenses related to delinquencies and foreclosures and carrying costs
of Mortgage Loans in default. Management believes that actual losses will not be
commensurate with the delinquency rates, however, due to two factors: (i)
Subprime Mortgage Loan borrowers tend to be late on payments from time to time
without going to foreclosure, thus inflating the delinquency rates, and (ii) the
lower LTV ratios tend to result in reduced losses on the sale of foreclosed real
estate. Management believes its allowance for Mortgage Loan loss policies should
result in adequate coverage for losses while maintaining net yields, although
actual experience may be more or less than management's allowance.
MORTGAGE LOAN PREPAYMENTS
Mortgage Loans are generally paid in full prior to the maturity date of the
note which is typically 30 years from the date of the note. Prepayment rates are
affected by several factors, the most important of which is the change in
prevailing interest rates. Mortgage Loans will typically be prepaid more rapidly
in periods of declining interest rates as borrowers refinance to reduce monthly
payments. In periods of increasing interest rates, Mortgage Loan prepayment
rates will generally decline. Another factor which affects prepayment rates,
although to a less significant degree, is the level of home sales activity,
which generally increases when home prices are rising. Prepayment rates may also
be affected by changes in the borrower's credit rating or circumstances
following origination. Borrowers with improving credit may elect to prepay the
Mortgage Loans to take advantage of the lower rates associated with their higher
credit grades, even in periods of stable or rising interest rates. Conversely,
borrowers with deteriorating credit may be unable to take advantage of declining
interest rates as a result of their deteriorating credit.
Prepayments affect the Company in several ways. First, the amortization of
premiums or discounts related to the acquisition of the Mortgage Loans will be
affected by the speed of prepayment. Amortization of such premiums or discounts
is accounted for by the interest method by which the expense or income
recognition occurs on the basis of a fixed yield over the expected life of the
Mortgage Loan. The amortization of this premium or discount is included in the
interest income recognized each period. This method requires the use of
assumptions as to the timing of prepayments. Significant deviations in the
actual prepayment rate from the assumed rate may cause the Company to recognize
greater amortization expense for the period, and thereby reduce net interest
income. The Company's financial expectations assume a certain level of
prepayments. Actual prepayment speeds may accelerate to the point that the
return on equity earned from a given Mortgage Loan acquisition is less than
expected, and could even become negative. Second, prepayment of Mortgage Loans
will require that Mortgage Loans be acquired to replace those that have been
prepaid. The Mortgage Loans acquired may be at low introductory rates (i.e.,
"teaser rates") which may negatively impact the Company's earnings until the
rates on these Mortgage Loans reprice to the full margin over the respective
index (the "fully indexed" rate). Third, hedging instruments may have been
purchased to protect against interest rate changes related to Mortgage Loans
which may have prepaid more rapidly than anticipated, resulting in excess
coverage. Conversely, if the Mortgage Loans prepay more slowly than anticipated,
the Company may have less hedging coverage than planned, and may have to acquire
additional coverage. The Company's use of the CMO financing structure may have
these types of hedging instruments imbedded within them, and be structured in
order to better match the hedge and the Mortgage Loans. See "Risk Factors --
Interest Rate Fluctuations May Adversely Affect Operations and Net Interest
Income -- Hedging Transactions Limit Gains and May Increase Exposure to Losses."
As an additional hedge against the risk of rapid prepayments, the Company
will offer ARM programs which carry a prepayment penalty. The borrower will be
required to pay a significantly higher starting interest rate and margin to
eliminate the prepayment penalty. Prepayment penalties are subject to market and
competitive factors and may, therefore, be subject to reduction or elimination.
State laws may also restrict the Company's ability to collect prepayment
penalties. As an additional protection against the negative financial impact of
Mortgage Loan prepayments, the Company intends to adopt as soon as practicable
after the closing of the Offering policies and guidelines for its servicing
operations that will attempt to focus on borrowers that have an incentive to
refinance. The Company expects to implement a program to recapture those
Mortgage
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Loans by soliciting these borrowers directly rather than losing them to another
mortgage lender. The negative impact of the amortization of the premium on these
Mortgage Loans is expected to be somewhat mitigated by the fact that the
refinancing of these Mortgage Loans will be at a price at or near par.
FUTURE CHANGES IN OPERATING, INVESTMENT AND ACCOUNTING POLICIES
The Board of Directors has established the investment, accounting and
operating policies and strategies set forth in this Prospectus. The Board of
Directors has the power to modify or waive such policies and strategies, such as
the mortgage investment policies, the leverage policies and the counterparty
credit policies, without the consent of stockholders, to the extent that the
Board Directors determine that such modification or waiver is in the best
interests of stockholders. However, if such modification or waiver relates to
the relationship of, or any transaction between, the Company and ContiFinancial
Corporation or any other Affiliated Person (as such term is defined in the
Glossary), the approval of a majority of the Independent Directors is also
required. Among other factors, developments in the market which affect the
operating policies and strategies mentioned herein or which change the Company's
assessment of the market may cause the Board of Directors to revise the
Company's policies and strategies.
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[ORGANIZATIONAL CHART]
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their positions are
as follows:
<TABLE>
<CAPTION>
NAME POSITIONS CLASS OF DIRECTOR
---- --------- ------------------
<S> <C> <C>
John D. Fry, CMB Chairman of the Board and Chief Executive Officer III
Terry L. Mott Executive Vice President and Director II
John P. McMurray, Executive Vice President of Secondary Marketing
CFA, CPA and Asset Liability Management
Steven K. Passey, Senior Vice President and Chief Financial Officer
CPA
Carter E. Jones Independent Director II
Jeff K. Thredgold* Independent Director I
Daniel W. Campbell* Independent Director I
</TABLE>
- ---------------
* To be appointed upon the closing of the Offering.
Information regarding the business background and experience of the
Company's directors and executive officers follows:
JOHN D. FRY, CMB, age 59, has been the President, Chief Executive Officer
and Chairman of the Board of the Company since inception in February, 1996.
During 1995, Mr. Fry commenced preparations for the organization of the Company.
From 1989 to 1994, Mr. Fry commenced the Subprime Mortgage Loan operations of
ComUnity Lending, Inc., a mortgage bank located in San Jose, California. From
1984 to 1989, Mr. Fry was Vice President and Western Division Manager of Goldome
Realty Credit Corp., a thrift in Buffalo, New York. Mr. Fry received the
"Certified Mortgage Banker" (CMB) designation from the Mortgage Bankers
Association of America in 1990 and his Bachelor of Science degree in Real Estate
Finance and Economics from Brigham Young University.
TERRY L. MOTT, age 48, is the Executive Vice President of the Company and
serves on the Board of Directors. Mr. Mott joined Mr. Fry in December, 1995, to
form the Company. From 1988 to 1995, Mr. Mott was an Executive Vice President of
Medallion Mortgage Company. Upon the sale of Medallion Mortgage Company to
AccuBanc Mortgage in 1994, Mr. Mott became an Executive Vice President at
AccuBanc Mortgage, where he supervised both retail and wholesale branches. From
1980 to 1988, Mr. Mott was employed with Fleet Mortgage Corp. where he developed
and managed the retail and wholesale production for the western United States.
Mr. Mott began his career in mortgage banking in 1977.
JOHN P. MCMURRAY, CFA, CPA, age 40, joined the Company in February, 1998,
as the Executive Vice President of Secondary Marketing and Asset Liability
Management. Prior to joining the Company, Mr. McMurray was the President of
Keystroke Financial, Inc., a start-up internet mortgage origination company.
From 1995 to 1996, Mr. McMurray was the Executive Vice President and Director,
Risk Management and Capital Markets for Crestar Mortgage Corporation where he
was responsible for interest rate and credit risk management, as well as
hedging, securitization and loan/securities trading activities. From 1982 to
1995, Mr. McMurray served in various management positions with BancPlus Mortgage
Corp., most recently serving as the Senior Vice President, Capital Markets. Mr.
McMurray is a Chartered Financial Analyst (CFA) and a Certified Public
Accountant (CPA). He received a Master of Science degree in real estate from
Massachusetts Institute of Technology, a Masters of Business Administration
degree from the University of Texas, San Antonio and a Bachelor of Science
degree from Trinity University.
STEVEN K. PASSEY, CPA, age 36, is the Senior Vice President and the Chief
Financial Officer of the Company. Mr. Passey joined the Company in October,
1997, after eight years with KPMG Peat Marwick LLP ("KPMG"). As a manager at
KPMG, Mr. Passey's responsibilities included managing audits within the
financial services area, including the mortgage banking industry. Mr. Passey
received his Bachelor of Science degree in Accounting from the University of
Utah and is a Certified Public Accountant (CPA).
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CARTER E. JONES, age 55, is an Independent Director of the Company. Since
1990, Mr. Jones has been a Senior Vice President of EVEREN Securities, Inc.,
where he specializes in management of client assets. Mr. Jones has previously
served as a member of the Board of Directors and operating committee for EVEREN
Securities, Inc. From 1987 to 1990, Mr. Jones was Executive Vice President,
Chief Operating Officer and a member of the Board of Directors and the Executive
Committee for Boettcher & Company in Denver.
JEFF K. THREDGOLD, age 46, will become an Independent Director upon the
closing of the Offering. Mr. Thredgold is the President and Chief Executive
Officer of Thredgold Economic Associates, LLC, and Economic Consulting and
Professional Speaking Company based in Salt Lake City, Utah. Mr. Thredgold's
career includes 23 years with KeyCorp, one of the nation's largest financial
services companies, with assets of nearly $70 billion, where he served as the
Senior Vice President and Chief Economist. Mr. Thredgold appears regularly on
CNBC-TV and CNN, and is quoted frequently in The Wall Street Journal, USA Today,
Investor's Business Daily, Fortune and Business Week. Mr. Thredgold is also a
monthly contributor for the national publication, Blue Chip Financial Forecasts
and writes a weekly economic and financial newsletter entitled The Tea Leaf.
DANIEL W. CAMPBELL , age 43, will become an Independent Director upon the
closing of the Offering. Mr. Campbell is currently a Managing General Partner of
EsNet, Ltd., a limited partnership engaged in the business of owning, leasing,
managing and developing commercial properties and investing in companies with
high growth potential. From 1992 to 1994, Mr. Campbell was the Senior Vice
President and Chief Financial Officer of WordPerfect Corporation. From 1979 to
1992, Mr. Campbell was an Associate and then Partner at Price Waterhouse, where
he serviced the worldwide accounting and consulting needs of multi-national
Fortune 500 companies.
KEY EMPLOYEES
WAYNE A. MOLL, age 50, is Senior Vice President and Chief Credit Officer.
Mr. Moll has a diverse career experience in loan operations, credit management,
business development, underwriting, lending, loan sales, quality control,
appraising and personnel management. His background includes 30 years in the
lending industry, most recently as the Senior Vice President of Fairfield
Mortgage from 1995 through 1996. He was employed as the Vice President and
Regional Manager at Colonial Bancorp from 1994 to 1995, and as the Vice
President and Chief Underwriter at Medallion Mortgage Company from 1990 to 1994.
VICTOR R. CALANDRA, age 38, is the Senior Vice President in charge of
Correspondent lending. Mr. Calandra has over 12 years experience in the mortgage
banking business. Mr. Calandra was formerly a Vice President for Nomura
Securities International ("Nomura") in the fixed income and structured finance
department. At Nomura, Mr. Calandra established nationwide correspondent
relationships with sellers to Nomura's conduit and was responsible for the
marketing and sale of securities and whole loans acquired through Nomura's home
equity loan conduit.
PATRICK W. CROGHAN, age 38, is the Senior Vice President, Wholesale
Production for the eastern United States. His responsibilities include
recruiting, expanding and supervising wholesale branch operations for both Prime
and Subprime Mortgage Loan origination. Mr. Croghan has over 10 years of
experience in mortgage banking, all of which has been in loan production. Prior
to joining the Company, he was a Regional Vice President for AccuBanc Mortgage
and Medallion Mortgage.
KENT G. BILLS , age 32, is the Senior Vice President, Wholesale Production
for the western United States and the Secretary of the Company. Mr. Bills was
previously a Vice President with Security National Mortgage Corporation from
1995 through 1996. Prior to joining Security National Mortgage Corporation, he
was a Vice President at ComUnity Lending, Inc. in charge of the Company's
wholesale lending operations from 1989 through 1995.
WILLIAM J. REED, age 49, is the Senior Vice President, Information Systems.
Mr. Reed's primary responsibilities include managing the MIS department,
including software and hardware support for the Company's WAN and the
development of a company-wide integrated software network. Mr. Reed was
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previously Senior Product Analyst at Interlinq Software, where he was the lead
designer for the MortgageWare Secondary Marketing System. Prior to that he was
the Vice President, Secondary Marketing at Commercial Center Bank, where he
established their correspondent purchase program, and the Executive Vice
President at Government Mortgage Corporation, where he established their
secondary marketing department. Mr. Reed has more than 14 years experience in
mortgage and mortgage-related industries.
SHAUNA L. REIMANN, age 42, is the Senior Vice President in charge of Retail
Lending. Ms. Reimann has over 20 years of experience in all facets of loan
production and operations, including processing, shipping, warehousing,
underwriting, correspondent lenders and retail originations. She was elected
President of the Utah Mortgage Bankers Association in 1993 and has served on the
Board of Governors for seven years. Prior to joining the Company, she served as
Regional Vice President, Retail Production for AccuBanc and Medallion Mortgage
Companies.
TERMS OF DIRECTORS AND OFFICERS
After the Offering, the Company's Board of Directors will consist of five
persons (as such number may be changed by the Board of Directors from time to
time by resolution) and is divided into three classes, designated Class I, Class
II and Class III, with each class to be as nearly equal in number of directors
as possible. Mr. Fry is a Class III Director, Mr. Mott and Mr. Jones are Class
II Directors. Upon closing of this Offering, Mr. Thredgold and Mr. Campbell will
serve as Class I Directors. Class I, Class II and Class III directors will stand
for reelection at the annual meetings of stockholders held in 1999, 2000 and
2001, respectively. At each annual meeting, the successors to the class of
directors whose term expires at that time are to be elected to hold office for a
term of three years, and until their respective successors are elected and
qualified, so that the term of one class of directors expires at each such
annual meeting. The Company intends to maintain the composition of the Board of
Directors so that there will be no more than seven directors, with a majority of
Independent Directors at all times after the closing of the Offering, each of
whom shall serve on the Audit and/or Compensation Committees. In the case of any
vacancy on the Board of Directors, including a vacancy created by an increase in
the number of directors, the vacancy may be filled by election of the Board of
Directors or the stockholders, with the director so elected to serve until the
next annual meeting of stockholders (if elected by the Board of Directors) or
for the remainder of the term of the director being replaced (if elected by the
stockholders). Any newly-created directorships or decreases in directorships are
to be assigned by the Board of Directors so as to make all classes as nearly
equal in number as possible. Directors may be removed only for cause and then
only by vote of a majority of the combined voting power of stockholders entitled
to vote in the election for directors.
The Amended and Restated Articles of Incorporation may be amended by the
vote of a majority of the combined voting power of stockholders, provided that
amendments to the article dealing with directors may only be amended if it is
advised by at least two-thirds of the Board of Directors and approved by vote of
at least two-thirds of the combined voting power of stockholders. The effect of
the foregoing and other provisions in the Company's Amended and Restated
Articles of Incorporation, which restrict stock ownership to 9.8% in value of
the aggregate of the outstanding shares of Capital Stock or in excess of 9.8% of
the aggregate of the outstanding shares of the Company's Common Stock, as well
as the control share and business acquisitions statutes under Maryland law, may
discourage takeover attempts and make attempts by stockholders to change
management more difficult. Prospective investors are encouraged to review the
Amended and Restated Articles of Incorporation and Bylaws in their entirety. See
"Description of Capital Stock -- Repurchase of Shares and Restrictions on
Transfer," "-- Control Share Acquisitions" and "-- Business Acquisitions
Statutes."
The Bylaws of the Company provide that, except in the case of a vacancy, a
majority of the members of the Board of Directors will at all times be
Independent Directors. Independent Directors are defined as directors who are
not officers or employees of the Company or any affiliate or subsidiary of the
Company. Vacancies occurring on the Board of Directors among the Independent
Directors may be filled by a vote of a majority of the remaining directors,
including a majority of the remaining Independent Directors. Officers are
elected annually and serve at the discretion of the Board of Directors. There
are no family relationships between the executive officers or directors.
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COMMITTEES OF THE BOARD
AUDIT COMMITTEE.
The Company has established an Audit Committee composed of three
Independent Directors. The Audit Committee will make recommendations concerning
the engagement of independent auditors, review with the independent auditors the
plans and results of the audit engagement, approve professional services
provided by the independent auditors, review the independence of the independent
auditors, consider the range of audit and non-audit fees and review the adequacy
of the Company's internal accounting controls.
COMPENSATION COMMITTEE.
The Company has established a Compensation Committee composed of two
Independent Directors and John Fry, Chairman of the Board. The Compensation
Committee will determine the compensation of the Company's executive officers.
OTHER COMMITTEES.
The Board of Directors may establish other committees as deemed necessary
or appropriate from time to time, including, but not limited to, an Executive
Committee of the Board of Directors.
COMPENSATION OF DIRECTORS
The Company pays Independent Directors of the Company $10,000 per year plus
$500 for each meeting attended in person. Independent Directors of the Company
also receive automatic stock options pursuant to the Company's Stock Option
Plan. See "-- Executive Compensation -- 1998 Stock Option Plan -- Automatic
Grants to Independent Directors." In addition, each Independent Director will be
granted options to purchase 5,000 shares of Common Stock at the Price to Public
upon the closing of the Offering. In addition, each Independent Director will
receive options to purchase 2,500 shares of Common Stock at the fair market
value of the Common Stock on the day after each annual meeting of stockholders.
All directors receive reimbursement of reasonable out-of-pocket expenses
incurred in connection with meetings of the Board of Directors. No Director who
is an employee of the Company will receive separate compensation for services
rendered as a Director.
COMPENSATION COMMITTEE INTERLOCKS
No interlocking relationship exists between the Company's Board of
Directors or officers responsible for compensation decisions and the board of
directors or compensation committee of any other company, nor has any such
interlocking relationship existed in the past.
EXECUTIVE COMPENSATION
The objective of the Compensation Committee in constructing the
compensation packages of the Company is to align the interests of management as
closely as possible with those of the stockholders. This is accomplished by
basing a large percentage of senior management's compensation on the
profitability of the Company (measured by return on stockholders' equity or
"ROE") and the Common Stock price.
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BASE COMPENSATION
The base compensation packages for Messrs. Fry, Mott, McMurray and Passey
for 1996 and 1997 has been and for 1998 will be as follows pursuant to the terms
of their employment agreements (described below), unless subsequently amended by
the Compensation Committee:
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------------------------------------
ALL OTHER
AWARDS PAYOUTS COMPENSATION
ANNUAL COMPENSATION(1) --------------------------- ------- ------------
----------------------------------------- SECURITIES
OTHER ANNUAL RESTRICTED UNDERLYING LTIP
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(2) COMPENSATION STOCK AWARDS OPTIONS/SARS PAYOUTS
--------------------------- ---- -------- -------- ------------ ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John D. Fry.................... 1996 $ 32,500 $ -0- $ -0- $-0- $ -0- $-0- $ -0-
Chairman of the Board and 1997 $172,500 $ -0- $ -0- -0- -0- -0- -0-
Chief Executive Officer 1998 $250,000 $ (3) $ -0- -0- 126,874 -0- 12,000(4)
Terry L. Mott.................. 1996 $ 16,000 $ -0- $ -0- -0- -0- -0- -0-
Executive Vice President and 1997 $138,997 $107,834 $ -0- -0- -0- -0- -0-
Director 1998 $200,000 $ (5) $ -0- -0- 39,537 -0- -0-
John P. McMurray............... 1996 $ -0- $ -0- $ -0- -0- -0- -0- -0-
Executive Vice President of 1997 $ -0- $ -0- $ -0- -0- -0- -0- -0-
Secondary Marketing and 1998 $200,000 $ 40,000(6) $ -0- -0- 30,000 -0- -0-
Asset Liability Management
Steven K. Passey............... 1996 $ -0- $ -0- $ -0- -0- -0- -0- -0-
Senior Vice President and 1997 $ 22,195 $ -0- $ -0- -0- 5,399 -0- -0-
Chief Financial Officer 1998 $120,000 $ (7) $ -0- -0- 5,000 -0- -0-
</TABLE>
- ---------------
(1) The base compensation packages for 1998 and thereafter will be as presented
for the three- or five-year term of their employment agreements (described
below), unless subsequently amended by the Compensation Committee.
(2) For the fiscal year ended December 31, 1997. For 1998 and beyond, subject to
the Bonus Incentive Plan.
(3) Pursuant to his employment agreement, Mr. Fry will receive 33% of the annual
bonus payable under the Bonus Incentive Compensation Plan (the "Annual
Bonus").
(4) Representing a monthly car allowance of $1,000.
(5) Pursuant to his employment agreement, Mr. Mott will receive 20% of the
Annual Bonus.
(6) For 1998, payable upon closing of the Offering. For 1999 and thereafter, Mr.
McMurray will receive 20% of the Annual Bonus.
(7) Pursuant to his employment agreement, Mr. Passey will receive 7% of the
Annual Bonus.
BONUS INCENTIVE COMPENSATION PLAN
Upon closing of the Offering, a Bonus Incentive Compensation Plan will be
established for certain executive and key officers of the Company and its
subsidiaries. The annual bonus pursuant to the Bonus Incentive Compensation Plan
(the "Annual Bonus") will be paid one-half in cash and one-half in shares of
Common Stock, annually, following receipt of the audit for the related fiscal
year. This program will award bonuses annually to those officers out of a total
pool determined by stockholder ROE as follows:
<TABLE>
<CAPTION>
ROE(1) IN EXCESS OF BASE RATE(2) BY: ANNUAL BONUS AS PERCENT OF AVERAGE NET WORTH(3) OUTSTANDING
- ------------------------------------ -----------------------------------------------------------
<S> <C>
Zero or less 0%
Greater than 0% but less than 6% 10% * (Actual ROE - Base Rate)
Greater than 6% (10% * 6%) + 15% * (Actual
ROE - (Base Rate + 6%))
</TABLE>
- ---------------
(1) "ROE" is determined for the fiscal year by averaging the monthly ratios
calculated each month by dividing (i) the Company's monthly Net Income
(adjusted to an annual rate) by (ii) its Average Net Worth for such month.
For such calculations, the "Net Income" of the Company means the net income
or net loss of the Company determined according to GAAP, after deducting any
dividends paid or
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payable with respect to preferred stock and before giving effect to the
bonus incentive compensation or any valuation allowance adjustment to
stockholders' equity. The definition "ROE" is used only for purposes of
calculating the bonus incentive compensation payable pursuant to the Bonus
Incentive Compensation Plan, and is not related to the actual distributions
received by stockholders. The bonus payments will be made before any income
distributions are made to stockholders.
(2) "Base Rate" is the average for each month of the 10-Year U.S. Treasury Rate,
plus 4%.
(3) "Average Net Worth" for any month means the arithmetic average of the sum of
(i) the net proceeds from all offerings of equity securities by the Company
since formation including exercise of warrants and stock options and
pursuant to the DRP (but excluding any offerings of preferred stock
subsequent to the Offering), after deducting any underwriting discounts and
commissions and other expenses and costs relating to the Offering, plus (ii)
the Company's retained earnings (without taking into account any losses
incurred in prior fiscal years, after deducting any amounts reflecting
taxable income to be distributed as dividends and without giving effect to
any valuation allowance adjustment to stockholders' equity) computed by
taking the daily average of such values during such period.
Of the amount so determined, one-half will be deemed contributed to the
total pool in cash and the other half deemed contributed to the total pool in
the form of shares of Common Stock, with the number of shares to be calculated
based on the average price per share during the preceding year. Pursuant to
their respective employment agreements, the Company has agreed to pay to Messrs.
Fry, Mott, McMurray and Passey an aggregate of 70% of the Annual Bonus. See
"-- Executive Compensation -- Base Compensation." The remaining Annual Bonus
will be distributed as determined by the Board of Directors or the Compensation
Committee.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Fry, Mott,
McMurray and Passey. The employment agreements with Mr. Fry and Mr. Mott provide
for a five-year term through December, 2002, and the employment agreements with
Mr. McMurray and Mr. Passey provide for a three-year term through December,
2000. Each of the employment agreements will be automatically extended for an
additional year at the end of the initial term and each annual renewal, unless
either party provides a prescribed prior written notice to the contrary. Each
employment agreement provides for the annual base salary set forth in the
compensation table above and for participation by the subject officer in the
Bonus Incentive Compensation Plan. Each employment agreement provides for the
subject officer to receive his annual base salary and bonus compensation to the
date of the termination of employment by reason of death, disability or
resignation and to receive base compensation to the date of the termination of
employment by reason of a termination of employment for cause, as defined in the
agreement. The employment agreements of Messrs. Fry, Mott and McMurray also
provide for Messrs. Fry, Mott and McMurray to receive, if Messrs. Fry, Mott and
McMurray are terminated without cause after a "Change in Control" of the Company
as such term is defined in the agreement, an amount, 50% payable immediately and
50% payable in monthly installments over the succeeding 12 months, equal to
three times their respective combined maximum base salary and actual bonus
compensation for the preceding year, subject in each case to a maximum amount of
one percent of the Company's book equity value (exclusive of valuation
adjustments) but in no case less than three times their respective base
compensation. In addition, all outstanding options granted to the subject
officer under the 1998 Stock Option Plan shall immediately vest. "Change of
Control" for purposes of the agreements would include a merger or consolidation
of the Company, a sale of all or substantially all of the assets of the Company,
changes in the identity of a majority of the members of the Board of Directors
of the Company (other than due to the death, disability or age of a director) or
acquisitions of more than 25% of the combined voting power of the Company's
capital stock, subject to certain limitations. If the Company terminates any
officer's employment without cause, or, with respect to Mr. Fry, if he resigns
for "good reason," the officer receives a severance amount. The severance
amount, which varies from six-months' base salary to one-year's full base and
bonus compensation, is payable immediately, subject in each case to a maximum
amount of one percent of the Company's book value (exclusive of valuation
adjustments). If the officer resigns for any other
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reason, there is no severance payment. Each of the officers is prohibited from
competing with the Company for a period of two years following any termination
of employment, except upon termination by the Company without cause.
1996 STOCK OPTION PLAN
The Board of Directors adopted CMG Funding Corp.'s 1996 Stock Option Plan
(the "1996 Stock Option Plan") pursuant to which options to purchase an
aggregate of 226,905 shares of CMG Funding Corp.'s common stock (prior to the
reverse stock split described below) can be granted to officers, directors and
employees, and to consultants, vendors, customers and others expected to provide
significant services to CMG Funding Corp. or its subsidiaries. Upon closing of
the Offering, the Company will adopt CMG Funding Corp.'s 1996 Stock Option Plan
and will convert such options into options to purchase Company Common Stock. If
an option granted under the 1996 Stock Option Plan expires or terminates, the
shares subject to any unexercised portion of that option will again become
available for the issuance of further options under the applicable plan. Options
may be granted under the 1996 Stock Option Plan which are intended to qualify as
"incentive stock options" under Section 422 of the Code ("ISOs") or,
alternatively, as stock options which will not so qualify ("NQSOs"). The plans
will terminate on December 16, 2006, and no more options may be granted under
the 1996 Stock Option Plan once it has been terminated. The Board or a committee
designated by the Board is empowered to determine the terms and conditions of
each option granted under the 1996 Stock Option Plan. However, the exercise
price of an ISO cannot be less than the fair market value of the Common Stock on
the date of grant (110% if granted to an employee who owns 10% or more of the
Common Stock), and the exercise price of an NQSO option cannot be less than 85%
of the fair market value on the date of grant. No option can have a term in
excess of ten years (five years if granted to an employee owning 10% or more of
the Common Stock), and no ISO can be granted to anyone other than a full-time
employee of the Company or its subsidiaries. As of the date hereof, options to
purchase 79,500 shares of CMG Funding Corp. common stock at an exercise price of
$3.96 per share have been granted under the 1996 Stock Option Plan. Such options
will be reverse split and converted into options to purchase 42,925 shares of
Company Common Stock upon the closing of the Offering at an exercise price of
$7.33 per share. In addition, options to purchase 30,000 shares (post-split) at
an exercise price of $15.00 per share have been granted under the 1996 Stock
Option Plan.
1998 STOCK OPTION PLAN
General. The Company's 1998 Stock Option Plan (the "1998 Stock Option
Plan") provides for the grant of ISOs and NQSOs.
Purpose. The 1998 Stock Option Plan is intended to provide a means of
performance-based compensation in order to attract and retain qualified
personnel and to afford additional incentive to others to increase their efforts
in providing significant services to the Company.
Administration. The 1998 Stock Option Plan will be administered by the
Compensation Committee, which shall be comprised of the two Independent
Directors and John D. Fry. Independent Directors are eligible to receive only
NQSOs pursuant to automatic grants of stock options discussed below.
Options and Awards. Stock options granted under the 1998 Stock Option Plan
will become exercisable in accordance with the terms of grant made by the
Compensation Committee. Awards will be subject to the terms and restrictions of
the awards made by the Compensation Committee. Stock option and award recipients
shall enter into a written stock option agreement with the Company. The
Compensation Committee has discretionary authority to select participants from
among eligible persons and to determine at the time a stock option or award is
granted when and in what increments shares covered by the stock option or award
may be purchased or will vest and, in the case of options, whether it is
intended to be an ISO or a NQSO provided, however, that certain restrictions
applicable to ISOs are mandatory, including a requirement that ISOs not be
issued for less than 100% of the then fair market value of the Common Stock
(110% in the case of a grantee who holds more than 10% of the outstanding Common
Stock) and a maximum term of 10 years (five years in the case of a grantee who
holds more than 10% of the outstanding Common Stock). Fair market
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<PAGE> 92
value means as of any given date, with respect to any stock option or award
granted, at the discretion of the Board of Directors or the Compensation
Committee, (i) the closing sale price of the Common Stock on such date as
reported in the Western Edition of the Wall Street Journal or (ii) the average
of the closing price of the Common Stock on each day of which it was traded over
a period of up to 20 trading days immediately prior to such date, or (iii) if
the Common Stock is not publicly traded (e.g., prior to an initial public
offering), the fair market value of the Common Stock as otherwise determined by
the Board of Directors or the Compensation Committee in the good faith exercise
of its discretion.
Vesting of Options and Awards. The Stock Options granted under the 1998
Stock Option Plan shall vest on the following terms. For each annual period over
a five-year period that the Company delivers a total return (stock price
appreciation, warrant value, appreciation and dividends) to investors in the
Offering equal to or exceeding 20%, one-third of the stock options will vest,
until all such stock options have vested. Alternatively, if at any time prior to
the end of the five-year period the total return to investors equals or exceeds
100%, all of the stock options will vest.
For purposes of calculating the returns to such investors, the term "fiscal
period" will refer to each of five periods, the first commencing with the last
closing of the Offering and ending on December 31, 1999, and each succeeding
fiscal period extending for 12 months and ending on each December 31. The term
"return" for each fiscal period will mean the sum of (on a per share of Capital
Stock basis) (a) all cash dividends paid during (or declared with respect to)
such fiscal period per share of Common Stock, (b) any increase or decrease in
the price per share of Common Stock during such fiscal period, measured by using
the price per share of Capital Stock to investors in the Offering, and using the
average public trading price during the last 90 days of each succeeding fiscal
period for such succeeding periods, and (c) any increase or decrease in the
price per Warrant during such fiscal period, determined in the same manner as in
(b) above. For purposes of the fiscal period 20% return test, the total return
for a given period will be equal to the sum of (a), (b) and (c) will all be
measured from the beginning of the first fiscal period. The amount of that
"return" will then be measured as a percentage of the investors' investment in
the Units (on a per share of Capital Stock basis) without regard to timing of
receipt of dividends or timing of increases in per share or per Warrant prices.
Automatic grants of stock options to the Independent Directors vest 25% on
the anniversary date in the year following the date of the grant and 25% on each
anniversary date thereafter.
Eligible Persons. Officers and directors and employees of the Company and
other persons expected to provide significant services to the Company are
eligible to participate in the 1998 Stock Option Plan. ISOs may be granted to
the officers and key employees of the Company. NQSOs may be granted to the
directors, officers, key employees, agents and consultants of the Company or any
of its subsidiaries.
Under current law, ISOs may not be granted to any director of the Company
who is not an employee, or to directors, officers and other employees of
entities unrelated to the Company. No options may be granted under the 1998
Stock Option Plan to any person who, assuming exercise of all options held by
such person, would own or be deemed to own more than 25% of the outstanding
shares of equity stock of the Company.
Shares Subject to the Plan. Subject to anti-dilution provisions for stock
splits, stock dividends and similar events, the 1998 Stock Option Plan
authorizes the grant of stock options to purchase an aggregate of up to 456,667
shares of the Company's Common Stock. If an option granted under the 1998 Stock
Option Plan expires or terminates, the shares subject to any unexercised portion
of such Stock Option will again become available for the issuance of further
stock options under the 1998 Stock Option Plan. The maximum number of shares
covered by the 1998 Stock Option Plan will increase (from and after such time as
the number of outstanding shares of Common Stock exceeds the number of shares
outstanding after this Offering) to 10% of the Company's total outstanding
shares at any time.
Term of the Plan. Unless previously terminated by the Board of Directors,
the 1998 Stock Option Plan will terminate on April 1, 2008, and no options may
be granted under the 1998 Stock Option Plan thereafter, but existing options
remain in effect until the options are exercised or terminated by their terms.
Term of Options. Each stock option must terminate no more than ten years
from the date it is granted (or five years in the case of ISOs granted to an
employee who is deemed to own an excess of 10% of the
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<PAGE> 93
combined voting power of the Company's outstanding equity stock). Stock options
may be granted on terms providing for exercise either in whole or in part at any
time or times during their restrictive terms, or only in specified percentages
at stated time periods or intervals during the term of the stock option.
Option Exercise. The exercise price of any stock option granted under the
1998 Stock Option Plan is payable in full in cash, or its equivalent as
determined by the Compensation Committee. The Company may make loans available
to option holders to exercise stock options evidenced by a promissory note
executed by the option holder and secured by a pledge of Common Stock with fair
value at least equal to the principal of the promissory note unless otherwise
determined by the Compensation Committee.
Automatic Grants to Independent Directors. Each Independent Director of the
Company is automatically granted NQSOs to purchase 5,000 shares of Common Stock
upon becoming a director of the Company, and is also automatically granted NQSOs
to purchase 2,500 shares of Common Stock the day after each annual meeting of
stockholders upon re-election to or continuation on the Board. Such automatic
grants of stock options vest 25% on the anniversary date in the year following
the date of the grant and 25% on each anniversary date thereafter. The exercise
price for such automatic grants of stock options is the fair market value of the
Common Stock on the date of grant, and is required to be paid in cash.
Amendment and Termination of Stock Option Plan. The Board of Directors may,
without affecting any outstanding stock options, from time to time revise or
amend the 1998 Stock Option Plan, and may suspend or discontinue it at any time.
However, no such revision or amendment may, without stockholder approval,
increase the number of shares subject to the 1998 Stock Option Plan, modify the
class of participants eligible to receive options granted under the 1998 Stock
Option Plan or extend the maximum option term under the 1998 Stock Option Plan.
Outstanding Options. Under the Company's 1998 Stock Option Plan, options to
acquire 407,569 shares will be granted upon closing of this Offering. Of these
stock options, 15,000 will be granted to the three Independent Directors and
will vest 25% on the closing of this Offering and 25% on each anniversary of
such date thereafter. All stock options granted to employees and directors upon
closing of this Offering are exercisable at the Price to Public. The 1998 Stock
Option Plan provides that, in connection with any reorganization, merger,
consolidation, recapitalization, stock split or similar transaction, the
Compensation Committee shall appropriately adjust the number of shares of Common
Stock subject to outstanding Stock Options and the total number of shares for
which stock options may be granted under the Plan.
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<PAGE> 94
STOCK OPTION GRANTS
The following table sets forth information concerning all stock options
granted during 1997 and to date in 1998 to each member of the Board of Directors
and Executive Officers.
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT
ASSUMED ANNUAL RATES OF
STOCK
APPRECIATION FOR
PERCENT OF TOTAL OPTIONS EXERCISE PLAN OPTION TERM
GRANTED TO EMPLOYEES OR BASE PICE ---------------------------
NAME GRANT DURING THE YEAR(1) ($/SHARE) DATE 5% ($) 10% ($)
---- ------- ------------------------ ------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
John D. Fry.......... 126,874 36.4% $ (2) 04/01/98 $1,196,856 $3,033,067
Terry L. Mott........ 39,537 11.4% $ (2) 04/01/98 $ 372,969 $ 945,177
John P. McMurray..... 30,000* 8.6% $15.00 04/01/98 $ 283,003 $ 717,184
Steven K. Passey..... 5,399* 1.6% $ 7.33 10/27/97 $ 24,888 $ 63,072
5,000 1.4% $ (2) 04/01/98 $ 47,167 $ 119,531
Carter E. Jones...... 5,000 1.4% $ (2) 04/01/98 $ 47,167 $ 119,531
Jeff K. Thredgold.... 5,000 1.4% $ (2) 04/01/98 $ 47,167 $ 119,531
Daniel W. Campbell... 5,000 1.4% $ (2) 04/01/98 $ 47,167 $ 119,531
</TABLE>
- ---------------
* Granted under the 1996 Stock Option Plan.
(1) Calculation of the percentages excludes Stock Options to purchase 126,667
shares of the Company's Common Stock granted to ContiFinancial Corporation
in April, 1998.
(2) Exercise price equals the Price to Public.
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<PAGE> 95
STRUCTURE AND FORMATION TRANSACTIONS
The following discussion is qualified in its entirety by the description of
the potential effects of the 1999 Budget Plan set forth above under
"Business -- Industry Developments."
STRUCTURE OF THE COMPANY
Initially, the Company will conduct its operations through at least two
entities, (i) RealTrust Asset Corporation, a newly-formed Maryland corporation
that will elect REIT status (for purposes of this discussion, sometimes referred
to as "RealTrust"), and (ii) CMG Funding Corp., a Delaware corporation, that
will not elect REIT status (for purposes of this discussion, sometimes referred
to as the "Taxable Subsidiary"). See "Business -- Industry Developments." The
structure is designed primarily to permit RealTrust to acquire the ownership of
95% of the economic interest of the Taxable Subsidiary (including the right to
95% of all dividend distributions) while qualifying for REIT status. See
"Federal Income Tax Considerations -- Qualification as a REIT -- Nature of
Assets."
REALTRUST ASSET CORPORATION
RealTrust Asset Corporation will acquire a portfolio of Mortgage Assets
using the net proceeds of the Offering and the net proceeds of borrowings and
structured debt vehicles. It is anticipated that RealTrust's assets will consist
primarily of Mortgage Assets and the preferred stock of the Taxable Subsidiary.
On April 15, 1998, the Founders contributed shares of CMG Funding Corp.
preferred stock and common stock for shares of Capital Stock of RealTrust, while
retaining a portion of their shares of the Taxable Subsidiary common stock. The
shares of the Taxable Subsidiary capital stock held by RealTrust were then
recapitalized into shares of non-voting preferred stock, such that RealTrust
owned all of the non-voting preferred stock of the Taxable Subsidiary
representing 95% of the economic interest. The shares of voting common stock of
the Taxable Subsidiary retained by the Founders represent five percent of the
economic interest. RealTrust will not control the Taxable Subsidiary.
Accordingly, the purchase of Units in the Offering will not own an interest in
any entity that control the Taxable Subsidiary. See "Risk Factors -- Conflicts
of Interest May Result in Decisions That Do Not Fully Reflect the Stockholders'
Best Interests -- Investors Will Have No Voting Control of the Taxable
Subsidiary."
RealTrust will conduct the investment portfolio operations of the Company.
Specifically, RealTrust will determine which Mortgage Loans will be held for
long-term investment, will establish underwriting guidelines for the Mortgage
Loans, will arrange financing for the investment portfolio (including the
issuance of structured debt offerings), will administer the capital allocation
guidelines and other risk management policies, and will supervise the servicing
operations of third-party servicers.
For 1998 and thereafter, RealTrust intends to qualify and elect to be taxed
as a REIT. As a REIT, RealTrust generally will not be taxed on its earnings to
the extent that such earnings are distributed as dividends to its stockholders.
See "Dividend Policy and Distributions" and "Federal Income Tax
Considerations -- Taxation of the Company."
RealTrust owns all of the preferred stock of the Taxable Subsidiary,
representing 95% of the economic interest thereof, but will generally have no
right to control the affairs of the Taxable Subsidiary (other than to approve
certain fundamental transactions such as mergers, consolidations, sales of all
or substantially all of the assets, and voluntary liquidation) because the
preferred stock is non-voting. Instead, the Founders and ContiFinancial
Corporation, as the holders of all of the common stock of the Taxable
Subsidiary, control the operations and affairs of the Taxable Subsidiary. See
"Risk Factors -- Conflicts of Interest May Result in Decisions That Do Not Fully
Reflect the Stockholders' Best Interests -- Conflicts of Interest with and
Dependence Upon ContiFinancial Corporation May Not Be in the Stockholders' Best
Interests." This ownership structure is required because, as a REIT, RealTrust
generally may not own more than 10% of the voting securities of any other
issuer. See "Federal Income Tax Considerations -- Qualification as a REIT --
Nature of Assets" and "Risk Factors -- President's 1999 Budget Plan, If Enacted,
Would Adversely Affect
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<PAGE> 96
Results of Operations." Accordingly, the purchasers of the Units in the Offering
will not own an interest in any entity that controls the Taxable Subsidiary.
THE TAXABLE SUBSIDIARY
The Taxable Subsidiary is taxable as a "C" corporation. The Taxable
Subsidiary will not be making a REIT election. The Taxable Subsidiary will
perform those tasks and engage in those lines of business that would result in a
loss of REIT status or the imposition of taxation if RealTrust were to engage in
them. In particular, the Taxable Subsidiary will originate, sell and service
Mortgage Loans and will serve as a source of Mortgage Loans for RealTrust. See
"Risk Factors -- President's 1999 Budget Plan, If Enacted, Would Adversely
Affect Results of Operations."
The Taxable Subsidiary will conduct the mortgage lending operations of the
Company. The Taxable Subsidiary will establish and maintain the wholesale,
retail and correspondent channels of production, will perform all underwriting
and quality control processes, will sell all Mortgage Loans that RealTrust does
not desire to hold for long-term investment (either through whole loan sales or
securitizations) and will maintain all necessary state mortgage lending
licenses.
The Taxable Subsidiary will make dividend distributions to the extent
consistent with RealTrust's qualification as a REIT. For purposes of receiving
dividends, there is no difference between a share of the preferred stock of the
Taxable Subsidiary and a share of the common stock of the Taxable Subsidiary so
that the preferred stock of the Taxable Subsidiary will have no dividend rate or
preference over the common stock of the Taxable Subsidiary. Instead, dividend
distributions by the Taxable Subsidiary will be made in the same amount per
share of the preferred stock and common stock of the Taxable Subsidiary.
FORMATION TRANSACTIONS AND POST-CLOSING TRANSACTIONS
FORMATION TRANSACTIONS
Immediately prior to or upon the closing of this Offering, the following
transactions (the "Formation Transactions") will be consummated:
- As of April 15, 1998, the stockholders of the Taxable Subsidiary have
contributed 95% of their capital stock of the Taxable Subsidiary to
RealTrust in exchange for shares of RealTrust Capital Stock;
- The capital stock of the Taxable Subsidiary will be recapitalized such
that RealTrust will own non-voting preferred stock representing 95% of
the economic interest of the Taxable Subsidiary and the Founders and
ContiFinancial Corporation will own common stock representing five
percent of the economic interest of the Taxable Subsidiary (reflecting
their respective percentage ownership of the Taxable Subsidiary's entire
capital stock);
- The outstanding shares of preferred stock of RealTrust, owned by
ContiFinancial Corporation, John Fry and Terry Mott, and all of the
shares of Common Stock of RealTrust held by the Founders and
ContiFinancial Corporation will be converted into an aggregate of
1,295,807 shares of Common Stock of RealTrust, par value $.001 per share
(the "Common Stock"); except the 410,581 shares of Class B Redeemable
Preferred Stock owned by ContiFinancial Corporation which will be
redeemed after the closing of the Offering (see "Conflicts of Interest
and Related Party Transactions -- ContiFinancial Corporation" and "Use
of Proceeds");
- The Company will amend its Articles of Incorporation to adopt provisions
necessary for qualification as a REIT;
- The Company will sell 5,000,000 Units in this Offering (assuming no
exercise of the Underwriters' over-allotment option); and
- The Company will grant the Representative's Warrants.
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<PAGE> 97
POST-CLOSING TRANSACTIONS
Following the closing of the Offering, the following transactions will be
consummated (the "Post-Closing Transactions"):
- The Company will elect to be taxed as a REIT;
- The Company will conduct certain aspects of its mortgage lending
operations through the Taxable Subsidiary. The Company will own all of
the shares of non-voting preferred stock of the Taxable Subsidiary,
which shares shall represent 95% of the economic interest of the Taxable
Subsidiary. See "Risk Factors -- President's 1999 Budget Plan, If
Enacted, Would Adversely Affect Results of Operations";
- The Founders will own all of the voting common stock of the Taxable
Subsidiary, which shares shall represent five percent of the economic
interest of the Taxable Subsidiary;
- The Company will redeem the 410,581 shares of Class B Redeemable
Preferred Stock held by ContiFinancial Corporation for $2,000,000, plus
dividends accrued since January 1, 1998, at the rate of 18% per annum;
and
- In addition to the options to purchase 72,925 shares of Common Stock
granted to officers, directors and employees under the 1996 Stock Option
Plan, the Company will also grant to officers, directors and employees
(including ContiFinancial Corporation) options to purchase an aggregate
of 407,569 shares of Common Stock under the 1998 Stock Option Plan.
CONSEQUENCES OF FORMATION TRANSACTIONS AND POST-CLOSING TRANSACTIONS
The consummation of the Formation Transactions and the Post-Closing
Transactions will have the following consequences:
- The purchasers of Units in the Offering will own 79.4% of the
outstanding shares of Common Stock (assuming no exercise of the
Warrants, the Representative's Warrants, the over-allotment option or
outstanding stock options) and will own all of the Warrants, except the
Representative's Warrants;
- The Founders and ContiFinancial Corporation will collectively own 20.6%
of the outstanding shares of Common Stock outstanding (assuming no
exercise of the Warrants, the Representative's Warrants, the
over-allotment option or outstanding stock options);
- In addition to options granted to officers, directors and employees of
the Company to purchase 72,526 shares of Common Stock at exercise prices
ranging from $7.33 to $15.00, officers, directors and employees of the
Company and ContiFinancial Corporation will be granted options to
purchase an aggregate of 407,569 shares of Common Stock, subject to
certain vesting provisions, at an exercise price equal to the Price to
Public;
- The Company will own all of the non-voting preferred stock of the
Taxable Subsidiary, which shares will represent 95% of the economic
interest of the Taxable Subsidiary; and
- The Founders and ContiFinancial Corporation will own all of the voting
shares of common stock of the Taxable Subsidiary, which stock will
represent five percent of the economic value and voting control of the
Taxable Subsidiary.
CONFLICTS OF INTEREST AND RELATED PARTY TRANSACTIONS
CONTIFINANCIAL CORPORATION
The Taxable Subsidiary has entered into the following transactions with
ContiFinancial Corporation:
Stock Ownership. Immediately prior to the closing of the Offering,
ContiFinancial Corporation will own 546,883 shares of Common Stock, 252,117
shares of Class A Convertible Preferred Stock and 410,581 shares of Class B
Redeemable Preferred Stock, which in the aggregate represents approximately
43.0% of the outstanding shares of Capital Stock (approximately 42.0% on a fully
diluted basis). Immediately prior to the closing of this Offering, each share of
Class A Convertible Preferred Stock, including those owned by
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<PAGE> 98
ContiFinancial Corporation, will be converted into one share of Common Stock.
All of the outstanding shares of Common Stock will be reverse split into an
aggregate of 1,295,807 shares of Common Stock. As a result, immediately prior to
the closing of the Offering, ContiFinancial Corporation will own 431,418 shares
of Common Stock, representing 33.3% of the outstanding shares (32.4% on a fully
diluted basis). Upon closing of the Offering, the Company intends to redeem the
Class B Redeemable Preferred.
The redemption price for all shares of the Class B Redeemable Preferred
Stock equals the original purchase price of $2,000,000, plus dividends accrued
from January 1, 1998 at the rate of 18% per annum, for a total redemption price
of $2,180,000, assuming redemption occurs on June 30, 1998. The Class B
Redeemable Preferred Stock is also entitled to a liquidation preference of
$2,000,000 plus accrued dividends. The Class B Redeemable Preferred Stock is not
convertible into Common Stock.
Agreements to Sell Mortgage Loans. Upon the closing of the Offering until
December 31, 2001, the Taxable Subsidiary has agreed to sell to ContiFinancial
Corporation not less than 75% of the fixed rate Subprime Mortgage Loans
originated or acquired by the Taxable Subsidiary in each month. The purchase
price for such Subprime Mortgage Loans shall be the fair market value for such
Mortgage Loans as determined by the best published rate sheet at ContiMortgage
Corporation, an affiliate of ContiFinancial Corporation. In any month, the
Taxable Subsidiary may substitute adjustable-rate Subprime Mortgage Loans for up
to 50% of the amount required to be offered for sale to ContiFinancial
Corporation. To the extent that the Taxable Subsidiary offers to sell less than
75% of the monthly fixed rate Subprime Mortgage Loan production, the Taxable
Subsidiary has agreed to pay ContiFinancial Corporation a fee equal to 40 basis
points multiplied by the amount of the principal shortfall.
Warehouse, Standby and Working Capital Financing Agreements. The Taxable
Subsidiary currently has a warehouse facility with ContiFinancial Corporation in
the principal amount of $50.0 million and a working capital facility in the
maximum principal amount of $2.0 million. As of March 31, 1998, the Company had
outstanding borrowings under such lines of $40.3 million and $2.0 million,
respectively. The Company anticipates that, immediately after the closing of
this Offering, the Company will repay all amounts borrowed under the working
capital facility. See "Use of Proceeds." The Taxable Subsidiary may continue to
finance the acquisition of Mortgage Loans under the warehouse facility. Although
the Company anticipates that it will be able to obtain financing on terms more
favorable than those provided by the warehouse facility after the closing of the
Offering, the Company believes that the warehouse facility is currently on terms
not less favorable to the Company than those available from independent third
parties in arm's-length transactions.
Warrants to Purchase Capital Stock. The Taxable Subsidiary has granted to
ContiFinancial Corporation two warrants to purchase shares of common stock. If
the amount of principal and interest due under the working capital facility is
not repaid in full by January 1, 1999, the first warrant allows ContiFinancial
Corporation to purchase, for a nominal amount, shares of common stock
representing up to five percent of the outstanding shares (on a fully diluted
basis) of the Taxable Subsidiary. If the Company repays in full the working
capital facility, the warrant is not exercisable and automatically terminates.
The Company anticipates that the working capital facility will be repaid upon
closing of this Offering from the net proceeds thereof. See "Use of Proceeds."
The Taxable Subsidiary has also granted ContiFinancial Corporation a
warrant to purchase, for a nominal amount, shares of common stock representing
one percent of the outstanding shares (on a fully diluted basis) for each
quarter ending prior to the closing of the Offering in which the Taxable
Subsidiary does not attain at least 90% of its pre-tax net income target. Such
warrant automatically expires and may not be exercised by ContiFinancial
Corporation after the closing of this Offering. The Taxable Subsidiary has
established the pre-tax net income targets.
Structured Debt Placement Agent/Underwriter. Until December 2001, the
Company has appointed ContiFinancial Corporation as its exclusive placement
agent for structured debt offerings and other securitizations and has agreed to
pay to ContiFinancial Corporation a fee of 25 basis points of the principal
amount of any such structured debt public offering and 50 basis points of the
gross proceeds of any such structured debt private offering. These fees are
payable to ContiFinancial Corporation for financial advisory services to be
rendered pursuant to an Investment Banking Services Agreement and will not be
reduced by any fees payable
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<PAGE> 99
or paid to others, including the underwriters, the placement agent or to other
agents or advisors, if any, in connection with any structured debt offering.
Such combined fees may exceed those available from a single third party. See
"Risk Factors -- Conflicts of Interest, May Result in Decisions That Do Not
Fully Reflect the Stockholders' Best Interest."
CAPSTONE INVESTMENTS, INC.
In March, 1998, the Taxable Subsidiary borrowed $850,000 from Capstone
Investments, Inc., a Nevada corporation, the sole shareholders of which are
David and Sarah Ferradino, who are Founders. The loan is evidenced by a
Convertible Secured Promissory Note (the "Note") bearing simple interest at 9%
per annum and maturing upon the earlier of the following to occur: (i) January
1, 1999, or (ii) the completion of the Offering. The Note is secured by a pledge
of Company Common Stock by certain of the Founders. Upon completion of this
Offering, Capstone Investments, Inc. will have the option to convert all or any
portion of the Note into a number of Units offered in the Offering. The number
of Units will be determined by dividing the amount to be converted by the Price
to Public. The Company also has granted Capstone warrants to purchase 50,000
shares of the Company's Common Stock. The warrants have an exercise price equal
to the Price to Public and expire three years from their grant date. The Company
believes that the terms of the Note and warrants are no less favorable to the
Company than those available from an independent third party in an arm's-length
transaction.
CONTROL OF TAXABLE SUBSIDIARY
Although RealTrust will be entitled to 95% of the economic benefits of the
Taxable Subsidiary, it will not own any voting securities. All voting securities
will be owned by the Founders and ContiFinancial Corporation. As a result, the
Founders and ContiFinancial Corporation can conduct the affairs of the Taxable
Subsidiary in a manner that may not be in the best interests of the stockholders
of RealTrust. See "Risk Factors -- Conflicts of Interest May Result in Decisions
That Do Not Fully Reflect the Stockholders' Best Interests."
FORMATION TRANSACTIONS
The Formation Transactions that will occur on or prior to the closing of
the Offering will benefit the Founders of the Company. The Post-Closing
Transactions will occur on or after the closing of the Offering. See "Structure
and Formation Transactions."
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of Messrs.
Fry, Mott, McMurray and Passey. Such employment agreements will provide for an
initial term of five years for Messrs. Fry and Mott and three years for Messrs.
McMurray and Passey, among other benefits. See "Management -- Executive
Compensation -- Employment Agreements." During the term of the employment
agreements, each of such employees has agreed not to compete with the Company.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of April 1, 1998, adjusted to give
effect to the Formation Transactions, of: (i) each of the Company's directors
and executive officers, (ii) each person who beneficially owns more than five
percent of the outstanding shares of Capital Stock, and (iii) all directors and
officers of the Company as a group. Unless otherwise indicated, the address of
each named beneficial owner is the same as that of the Company's principal
executive office located at 2855 East Cottonwood Parkway, Suite 500, Salt Lake
City, Utah 84121.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES OF COMMON
NUMBER OF SHARES STOCK BENEFICIALLY OWNED
OF COMMON STOCK ---------------------------------------
NAME BENEFICIALLY OWNED(1) BEFORE OFFERING AFTER OFFERING(1)(2)
---- --------------------- --------------- --------------------
<S> <C> <C> <C>
ContiFinancial Corporation(3)........ 431,418 33.3% 6.9%
257 Park Avenue
New York, NY 10007
John D. Fry.......................... 392,798 30.3% 6.2%
Terry L. Mott........................ 122,406 9.4% 1.9%
John P. McMurray(4).................. 30,000 2.3% *
Steven K. Passey(5).................. 5,399 * *
All executive officers and directors
as a group (4 persons)............. 520,603 40.2% 8.3%
</TABLE>
- ---------------
* Less than one percent.
(1) Unless otherwise noted, the Company believes that each person named in the
table has sole voting and investment power with respect to all Common Stock
owned by it. A person is deemed to be the beneficial owner of securities
that can be acquired by such person within 60 days from the date of this
Prospectus upon the exercise of warrants or options. Each beneficial owner's
percentage ownership is determined by assuming that options or warrants that
are held by such person (but not those held by any other person) and which
are exercisable within 60 days from the date of this Prospectus have been
exercised. None of the outstanding options to acquire Common Stock of the
Company are exercisable within 60 days of this Prospectus.
(2) Assuming no exercise of outstanding Warrants or the Representative's
Warrants.
(3) Excludes 410,581 shares of Class B Redeemable Preferred Stock which the
Company intends to redeem upon the closing of this Offering. See "Conflicts
of Interest and Related Party Transactions -- ContiFinancial Corporation."
(4) Includes options to purchase 30,000 shares of Common Stock exercisable at
$15.00 per share granted under the 1996 Stock Option Plan which are
immediately exercisable.
(5) Includes options to purchase 5,399 shares of Common Stock exercisable at
$7.33 per share granted under the 1996 Stock Option Plan which are
immediately exercisable.
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the closing of the Offering, the authorized capital stock of the
Company will consist of 100,000,000 shares of Common Stock, of which 6,295,807
will be outstanding and 5,000,000 shares of preferred stock, none of which will
be outstanding.
HISTORICAL CAPITAL STRUCTURE
Prior to the closing of this Offering and the consummation of the Formation
Transactions (see "Structure and Formation Transactions"), the Company was
authorized to issue 4,484,508 shares of Common Stock, of which 1,546,983 were
outstanding, 1,263,472 shares of Class A Convertible Preferred Stock, of which
852,891
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were outstanding and 410,581 shares of Class B Redeemable Preferred Stock, all
of which were outstanding. In addition, the Company had granted options to
purchase 79,500 shares of Common Stock at an exercise price of $3.96 per share
and options to purchase 30,000 shares at an exercise of $15.00 per share. As a
result of the Formation Transactions, the outstanding shares of Class A
Convertible Preferred Stock will be converted on a one-for-one basis into shares
of Common Stock and such shares of Class A Convertible Preferred Stock will be
cancelled. The total number of outstanding shares of Common Stock, including the
options granted under the 1996 Stock Option Plan, at such time will be
2,469,374. The Common Stock will then be reverse split at a ratio of
approximately .54 shares for 1 immediately prior to the closing. As a result of
such split, the number of shares owned by the Founders, including shares
issuable upon exercise of the options granted under the 1996 Stock Option Plan
but excluding the Class B Redeemable Preferred Stock, after this Offering will
be 1,368,732 shares. Immediately after the closing, the Class B Redeemable
Preferred Stock will be redeemed for $2,000,000, plus accrued dividends.
The following summary of the respective rights of the Common Stock and the
preferred stock is qualified in its entirety by reference to the Company's
Amended and Restated Articles of Incorporation.
COMMON STOCK
VOTING
Each holder of Common Stock is entitled to one vote for each share of
record on each matter submitted to a vote of holders of Capital Stock of the
Company. The Company's Amended and Restated Articles of Incorporation do not
provide for cumulative voting and, accordingly, the holders of a majority of the
outstanding shares of Capital Stock have the power to elect all directors to be
elected each year.
Annual meetings of the stockholders of the Company will be held, and
special meetings may be called by any member of the Board of Directors, by the
President or generally by stockholders holding at least 20% of the outstanding
shares of Capital Stock entitled to be voted at the meeting. The Amended and
Restated Articles of Incorporation of the Company may be amended in accordance
with Maryland law, subject to certain limitations set forth in the Amended and
Restated Articles of Incorporation.
DIVIDENDS; LIQUIDATION; OTHER RIGHTS
The holders of shares of Common Stock are entitled to receive dividends
when, as, and if declared by the Board of Directors out of funds legally
available therefor. In the event of liquidation, dissolution or winding up of
the Company, the holders of Common Stock will share ratably in all assets of the
Company remaining after the payment of liabilities and after payment of the
liquidation preference of any shares or series of preferred stock that may be
issued. There are no preemptive or other subscription rights, conversion rights
or redemption or sinking fund provisions with respect to shares of Common Stock.
PREFERRED STOCK
The Company's Board of Directors is authorized by the charter to fix or
alter the rights, preferences, privileges and restrictions of any series of
preferred stock, including the dividend rights, original issue price, conversion
rights, voting rights, terms of redemption, liquidation preferences and sinking
fund terms thereof, and the number of shares of such series subsequent to the
issuance of shares of such series (but not below the number of shares
outstanding). As the terms of the preferred stock can be fixed by the Board of
Directors without shareholder action, the Board of Directors may issue preferred
stock with terms calculated to defeat a proposed takeover of the Company or to
make the removal of management more difficult. The Board of Directors, without
shareholder approval, could issue preferred stock with dividend, voting,
conversion and other rights which could adversely affect the rights of the
holders of Common Stock. The Company's Board of Directors currently has no plans
to issue shares of preferred stock in the Company. See "Risk Factors -- Issuance
of Preferred Stock May Adversely Affect the Value of Common Stock."
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WARRANTS AND OPTIONS
Under the 1996 Stock Option Plan, the Company has granted options to
purchase an aggregate of 79,500 shares at an exercise price of $3.96 per share.
As a result of the reverse stock split described in "Structure and Formation
Transactions," such options will be converted into options to purchase a total
of 42,925 shares of Common Stock at an exercise price of $7.33 per share. In
addition, the Company has granted options to purchase 30,000 shares (post-split)
of Common Stock at an exercise price of $15.00 per share. All of such options
are immediately exercisable.
Under the 1998 Stock Option Plan, the Company will issue options to
purchase a total of 407,569 shares of Common Stock at a price equal to the Price
to Public. None of such options are currently exercisable, and are subject to
the vesting provisions set forth in the Company's 1998 Stock Option Plan. See
"Management -- Executive Compensation -- 1998 Stock Option Plan."
Each Unit consists of one share of Common Stock and one Warrant. Prior to
automatic separation of the related Warrant, the Units will be represented by
the Common Stock, which will bear an endorsement representing beneficial
ownership of the related Warrants on deposit with the Warrant Agent (as defined
below) as custodian for the registered holders of the Common Stock. Prior to
automatic separation, transfer of a share of Common Stock to which the related
Warrant has not been exercised will also constitute transfer of a holder's
beneficial interest in the related Warrant. The Warrants to be issued to the
Representative will be evidenced by a Warrant Certificate at the time initially
issued. The Warrants are exercisable beginning six months following the closing
of this Offering and will remain exercisable until 5:00 p.m. Eastern Time on the
third anniversary of the date the Warrants first become exercisable (the
"Expiration Date"), at an exercise price equal to the Price to Public per share.
At 5:00 p.m. Eastern Time on the Expiration Date the Warrants will become wholly
void and of no value.
The Warrants will be issued pursuant to a warrant agreement (the "Warrant
Agreement") dated as of the date of this Prospectus between the Company and the
warrant agent (the "Warrant Agent"). The Company's stock transfer agent,
American Securities Transfer & Trust Incorporated, will initially act as Warrant
Agent. The following summary of certain provisions of the Warrant Agreement does
not purport to be complete and is qualified in its entirety by reference to the
Warrant Agreement including the definitions therein of certain terms used below.
A copy of the proposed form of Warrant Agreement is available from the Company
upon request and is filed as an exhibit to the Registration Statement of which
this Prospectus is a part. See "Additional Information.".
Each Warrant, when exercised, will entitle the holder thereof to receive
one share (subject to certain adjustments) of Common Stock at an exercise price
equal to the Price to Public (the "Exercise Price").
Initial delivery of the Securities from the Company to the Underwriters is
expected to occur through the book-entry facilities of The Depository Trust
Company ("DTC"). See "-- Book Entry Issuance" below. Thereafter, a beneficial
owner of such book-entry Securities (a "Beneficial Owner") will be entitled to
receive physical delivery of certificates representing its Securities only in
accordance with procedures established among DTC and its Direct and Indirect
Participants (as defined below), and in accordance with procedures, if any,
established between the Beneficial Owner and the Direct or Indirect Participant
through which the Beneficial Owner holds an interest in the Securities.
The Warrants, held in certificated form, may be exercised by surrendering
to the Warrant Agent the definitive Warrant Certificate evidencing such
Warrants, with the accompanying form of election to purchase properly completed
and executed, together with payment of the exercise price which initially equals
the Price to Public, subject to adjustment (the "Exercise Price").
Warrants held in book-entry form may be exercised only in accordance with
procedures established among DTC and its Direct and Indirect Participants.
Pursuant thereto, a Beneficial Owner wishing to exercise a Warrant shall give
notice, through its Participant, to the Warrant Agent, and shall effect delivery
of the Warrant by causing the Direct Participant to transfer the Participant's
interest in the Warrant, on DTC's records, to the Warrant Agent. The requirement
for physical delivery of the Warrant Certificate in connection with the exercise
thereof will be deemed satisfied when the ownership rights in the Warrant are
transferred by
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Direct Participants on DTC's records and followed by a book-entry credit of the
tendered Warrant to the Warrant Agent's account.
Payment of the Exercise Price may be made (a) in the form of cash or by
certified or official bank check payable to the order of the Company, or (b) by
surrendering additional Warrants or shares of Common Stock for cancellation to
the extent the Company may lawfully accept shares of Common Stock, with the
value of such shares of Common Stock for such purpose to equal the average
trading price of the Common Stock during the 10 trading days preceding the date
surrendered and the value of the Warrants to equal the difference between the
value of a share of Common Stock and the Exercise Price, or (c) pursuant to such
other payment procedures as may be established by the Warrant Agent from time to
time in accordance with the Warrant Agreement. Upon surrender of the Warrant
Certificate and payment of the Exercise Price and any other applicable amounts,
the Warrant Agent will deliver or cause to be delivered, to or upon the written
order of such holder or its DTC Participant, stock certificates or DTC
book-entry positions representing the number of whole shares of Common Stock or
other securities or property to which such holder is entitled. If less than all
of the Warrants evidenced by a Warrant Certificate are to be exercised, a new
Warrant Certificate will be issued for the remaining number of Warrants.
Both (a) the initial sale of the Warrants, and (b) the issuance of the
underlying shares of Common Stock upon exercise of the Warrants, have been
registered by the Company under the Securities Act of 1933, as amended, pursuant
to the Registration Statement of which this Prospectus is a part. The Company
has applied to have the Warrants approved for listing on the American Stock
Exchange. If a market for the Warrants develops, a Warrant holder may choose to
sell the Warrants instead of exercising them. There can be no assurance that the
American Stock Exchange, or any other market, will list the Warrants or that a
market for the Warrants will develop or continue.
No fractional shares of Common Stock will be issued upon exercise of the
Warrants. The holders of the Warrants have no right to vote on matters submitted
to the stockholders of the Company and have no right to receive dividends. The
holders of the Warrants not yet exercised are not entitled to share in the
assets of the Company in the event of liquidation, dissolution or the winding up
of the affairs of the Company.
Additionally, in March, 1998, the Company granted warrants to purchase
50,000 shares of Common Stock to Capstone Investments, Inc. ("Capstone"), in
connection with Capstone's $850,000 loan to the Company. See "Use of Proceeds"
and "Conflicts of Interest and Related Party Transactions -- Capstone
Investments, Inc."
The Company has also agreed to issue, to the Representative, Warrants to
purchase shares of Common Stock equal to three percent of the Units sold in this
Offering at an exercise price equal to the Price to Public.
ADJUSTMENTS
The Exercise Price of the Warrants will be appropriately adjusted if the
Company (i) pays a dividend or makes a distribution on its Common Stock in
shares of its Common Stock; (ii) subdivides its outstanding shares of Common
Stock into a greater number of shares, (iii) combines its outstanding shares of
Common Stock into a smaller number of shares, (iv) issues by reclassification of
its Common Stock any shares of its Capital Stock, or (v) issues shares of
Capital Stock at a price below the greater of (a) the Price to Public or (b)
fair market value, provided that this clause (v) shall not apply to firm
underwriting offerings.
In case of certain consolidations or mergers of the Company, or the
liquidation of the Company or the sale of all or substantially all of the assets
of the Company to another corporation, each Warrant will thereafter be deemed
exercised for the right to receive the kind and amount of shares of stock or
other securities or property to which such holder would have been entitled as a
result of such consolidation, merger or sale had the Warrants been exercised
immediately prior thereto, less the Exercise Price.
BOOK-ENTRY ISSUANCE -- THE DEPOSITORY TRUST COMPANY
The Depository Trust Company will act as securities depository for a
portion of the Securities. One or more fully registered Common Stock
certificates representing such Securities will be registered in the name of
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DTC or its nominee. Upon the detachment of the related Warrants, one or more
Warrant Certificates will be issued in the name of DTC or its nominee.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations, and certain other organization ("Direct Participants"). DTC is
owned by a number of its Direct Participants and by the New York Stock Exchange,
the American Stock Exchange, Inc., and the National Association of Securities
Dealers, Inc. Access to the DTC system is also available to others such as
securities brokers and dealers, banks and trust companies that clear through or
maintain a custodial relationship with a Direct Participant, either directly or
indirectly ("Indirect Participants"). The rules applicable to DTC and its
Participants are on file with the Securities and Exchange Commission.
Upon issuance of a Warrant Certificate in the name of DTC or its nominee,
DTC will credit on its book-entry registration and transfer system the number of
Warrants represented by such Warrant Certificate to the accounts of institutions
that have accounts with DTC. Ownership of beneficial interests in such a Warrant
Certificate will be limited to Participants or persons that may hold interests
through Participants. The ownership interest of each actual purchaser of such
Warrant ("Beneficial Owner") is in turn to be recorded on the Direct and
Indirect Participants' records. Beneficial Owners will not receive written
confirmation from DTC of their purchases, but Beneficial Owners are expected to
receive written confirmations providing details of the transactions, as well as
periodic statements of their holdings, from the Direct or Indirect Participants
through which the Beneficial Owners purchased Warrants. Transfers of ownership
interests in the Warrants are to be accomplished by entries made on the books of
Participants acting on behalf of Beneficial Owners.
DTC has no knowledge of the actual Beneficial Owners of such Warrants;
DTC's records reflect only the identity of the Direct Participants to whose
accounts such Warrants are credited, which may or may not be the Beneficial
Owners. The Participants will remain responsible for keeping account of their
holdings on behalf of their customers. So long as DTC, or its nominee, is the
owner of such Warrant Certificate, DTC or such nominee, as the case may be, will
be considered the sole owner and holder of record of the Warrants represented by
such Warrant Certificate for all purposes.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Company believes to be reliable but the
Company takes no responsibility for the accuracy of such information. In
addition, the Company has no responsibility for the performance by DTC or its
Participants of their respective obligations as described hereunder or under the
rules and procedures governing their respective operations.
REPURCHASE OF SHARES AND RESTRICTION ON TRANSFER
Two of the requirements for qualification for the tax benefits accorded by
the REIT provisions of the Code are that for all taxable years of the REIT after
the first taxable year for which its REIT election is made (1) during the last
half of each such taxable year not more than 50% in value of the outstanding
shares may be owned directly or indirectly by five or fewer individuals (the
"50%/5 stockholder test") and (2) there must be at least 100 stockholders on 335
days of each such taxable year of 12 months and during a proportionate part
during any such shorter taxable year.
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In order that the Company may meet these requirements at all times, the
Amended and Restated Articles of Incorporation prohibit any person from
acquiring or holding, directly or indirectly, shares of Capital Stock in excess
of 9.8% in value of the aggregate of the outstanding shares of Capital Stock or
in excess of 9.8% (in value or in number of shares, whichever is more
restrictive) of the aggregate of the outstanding shares of Common Stock of the
Company. For this purpose, the term "ownership" is defined in accordance with
the REIT provisions of the Code and the constructive ownership provisions of
Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code.
For purposes of the 50%/5 stockholder test, the constructive ownership
provisions applicable under Section 544 of the Code attribute ownership of
securities owned by a corporation, partnership, estate or trust proportionately
to its stockholders, partners or beneficiaries, attribute ownership of
securities owned by family members and partners to other members of the same
family, treat securities with respect to which a person has an option to
purchase as actually owned by that person, and set forth rules as to when
securities constructively owned by a person are considered to be actually owned
for the application of such attribution provisions (i.e., "reattribution").
Thus, for purposes of determining whether a person holds shares of Capital Stock
in violation of the ownership limitations set forth in the Amended and Restated
Articles of Incorporation, many types of entities may own directly more than the
9.8% limit because such entities' shares are attributed to its individual
stockholders. On the other hand, a person will be treated as owning not only
shares of Capital Stock actually or beneficially owned, but also any shares of
Capital Stock attributed to such person under the attribution rules described
above. Accordingly, under certain circumstances, shares of Capital Stock owned
by a person who individually owns less than 9.8% of the shares outstanding may
nevertheless be in violation of the ownership limitations set forth in the
Amended and Restated Articles of Incorporation. Ownership of shares of the
Company's Capital Stock through such attribution is generally referred to as
constructive ownership. The 100 stockholder test is determined by actual, and
not constructive, ownership.
Notwithstanding any of the foregoing ownership limits, no holder may own or
acquire, either directly or constructively under the applicable attribution
rules of the Code, any shares of any class of the Company's Capital Stock if
such ownership or acquisition (i) would cause more than 50% in value of the
Company's outstanding stock to be owned, either directly or constructively under
the applicable attribution rules of the Code, by five or fewer individuals (as
defined in the Code to include certain tax-exempt entities, other than, in
general, qualified domestic pension funds), (ii) would result in the Company's
Capital Stock being beneficially owned by less than 100 persons (determined
without reference to any rules of attribution), or (iii) would otherwise result
in the Company failing to qualify as a REIT.
The Board of Directors may, subject to the receipt of certain
representations and a ruling from the Service or an opinion of counsel
satisfactory to it, waive the ownership restrictions with respect to a holder if
such waiver will not jeopardize the Company's status as a REIT. In addition,
under the Amended and Restated Articles of Incorporation, certain parties will
not be subject to the stock ownership limit in the event such parties (i)
deliver to the Company either a ruling from the Service or an opinion from
counsel satisfactory to the Company that such ownership will result in no
individual (as defined in the Code) beneficially or constructively owning in
excess of 9.8% of the outstanding common stock and (ii) represent to the Company
that it does not and will not own more than a 9.8% interest in any tenant of the
Company.
If any stockholder purports to transfer Capital Stock to a person and
either the transfer would result in the Company failing to qualify as a REIT or
such transfer would cause the transferee to hold capital stock in excess of an
applicable ownership restriction, the purported transfer shall be null and void,
the intended transferee will acquire no rights or economic interest in the
capital stock and the stockholder will be deemed to have transferred the capital
stock to the Company in exchange for Excess Stock of the same class or classes
as were purportedly transferred, which Excess Stock will be deemed to be held by
the Company as trustee of a trust for the exclusive benefit of the person or
persons to whom the shares can be transferred without violating the ownership
restrictions. In addition, if any person owns, either directly or constructively
under the applicable attribution rules of the Code, shares of Capital Stock in
excess of an applicable ownership restriction, such person will be deemed to
have exchanged the shares of Capital Stock that cause the applicable ownership
restriction to be exceeded for an equal number of shares of Excess Stock of the
appropriate class, which will be deemed to be held by the Company as trustee of
a trust for the exclusive
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benefit of the person or persons to whom the shares can be transferred without
violating the ownership restrictions. A person who holds or transfers shares
such that shares of capital stock shall have been deemed to be exchanged for
Excess Stock will not be entitled to vote the Excess Stock and will not be
entitled to receive any dividends or distributions (any dividend or distribution
paid on shares of capital stock prior to the discovery by the Company that such
shares have been exchanged for Excess Shares shall be repaid to the Company upon
demand, and any dividend or distribution declared but unpaid shall be
rescinded). Such person shall have the right to designate a transferee of such
Excess Stock so long as consideration received for designating such transferee
does not exceed a price (the "Limitation Price") that is equal to the lesser of
(i) in the case of a deemed exchange for Excess Stock resulting from a transfer,
the price paid for such shares in the transfer or, in the case of a deemed
exchange for Excess Stock resulting from some other event, the fair market value
on the date of the deemed exchange, of the shares deemed exchanged, or (ii) the
fair market value of the shares for which such Excess Stock will be deemed to be
exchanged on the date of the designation of the transferee (or, in the case of a
purchase by the Company, on the date the Company accepts the offer to sell). The
shares of Excess Stock so transferred will automatically be deemed reexchanged
for the appropriate shares of capital stock. In addition, the Company will have
the right to purchase the Excess Stock for a period of 90 days at a price equal
to the Limitation Price.
If the foregoing transfer restrictions are determined to be void or invalid
by virtue of any legal decisions, statute, rule or regulation, then the intended
transferee of any Excess Stock may be deemed, at the option of the Company, to
have acted as an agent on behalf of the Company in acquiring such Excess Stock
and to hold such Excess Stock on behalf of the Company.
The Amended & Restated Articles of Incorporation further provide that if
any transfer of shares of Capital Stock occurs which, if effective, would result
in any person beneficially or constructively owning shares of Capital Stock in
excess or in violation of the above transfer or ownership limitations, then that
number of shares of Capital Stock the beneficial or constructive ownership of
which otherwise would cause such person to violate such limitations (rounded to
the nearest whole shares) shall be automatically transferred to a trustee (the
"Trustee") as trustee of a trust (the "Trust") for the exclusive benefit of one
or more charitable beneficiaries (the "Charitable Beneficiary"), and the
intended transferee shall not acquire any rights in such shares. Shares held by
the Trustee shall be issued and outstanding shares of Capital Stock. The
intended transferee shall not benefit economically from ownership of any shares
held in the Trust, shall have no rights to dividends, and shall not possess any
rights to vote or other rights attributable to the shares held in the Trust. The
Trustee shall have all voting rights and rights to dividends or other
distributions with respect to shares held in the Trust, which rights shall be
exercised for the exclusive benefit of the Charitable Beneficiary. Any dividend
or other distribution paid to the intended transferee prior to the discovery by
the Company that shares of Common Stock have been transferred to the Trustee
shall be paid with respect to such shares to the Trustee by the intended
transferee upon demand and any dividend or other distribution authorized but
unpaid shall be paid when due to the Trustee. The Board of Directors may, in
their discretion, waive these requirements on owning shares in excess of the
ownership limitations.
Within 20 days of receiving notice from the Company that shares of Capital
Stock have been transferred to the Trust, the Trustee shall sell the shares held
in the Trust to a person, designated by the Trustee, whose ownership of the
shares will not violate the ownership limitations set forth in the Charter. Upon
such sale, the interest of the Charitable Beneficiary in the shares sold shall
terminate and the Trustee shall distribute the net proceeds of the sale to the
intended transferee and to the Charitable Beneficiary as follows. The intended
transferee shall receive the lesser of (1) the price paid by the intended
transferee for the shares or, if the intended transferee did not give value for
the shares in connection with the event causing the shares to be held in the
Trust (e.g., in the case of a gift, devise or other such transaction), the
market price (as defined in the Company's Amended and Restated Articles of
Incorporation) of the shares on the day of the event causing the shares to be
held in the Trust and (2) the price per share received by the Trustee from the
sale or other disposition of the shares held in the Trust. Any net sales
proceeds in excess of the amount payable to the intended transferee shall be
immediately paid to the Charitable Beneficiary. In addition, shares of Capital
Stock transferred to the Trustee shall be deemed to have been offered for sale
to the Company, or its designee, at a price per share equal to the lesser of (i)
the price per share in the transaction that resulted in such transfer
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to the Trust (or, in the case of a devise or gift, the Market Price at the time
of such devise or gift) and (ii) the Market Price on the date the Company, or
its designee, accepts such offer. The Company shall have the right to accept
such offer until the Trustee has sold shares held in the Trust. Upon such a sale
to the Company, the interest of the Charitable Beneficiary in the shares sold
shall terminate and the Trustee shall distribute the net proceeds of the sale to
the intended transferee.
All certificates representing shares of Capital Stock will bear a legend
referring to the restrictions described above.
Every owner of more than five percent (or such lower percentage as required
by the Code or the regulations promulgated thereunder) of all classes or series
of the Company's stock, within 30 days after the end of each taxable year, is
required to give written notice to the Company stating the name and address of
such owner, the number of shares of each class and series of stock of the
Company beneficially owned and a description of the manner in which such shares
are held. Each such owner shall provide to the Company such additional
information as the Company may request in order to determine the effect, if any,
of such beneficial ownership on the Company's status as a REIT and to ensure
compliance with the ownership limitations.
Subject to certain limitations, the Board of Directors may increase or
decrease the ownership limitations. In addition, to the extent consistent with
the REIT provisions of the Code, the Board of Directors may waive the ownership
limitations for and at the request of certain purchasers in this Offering or
subsequent purchasers.
The provisions described above may inhibit market activity and the
resulting opportunity for the holders of the Company's Capital Stock and
Warrants to receive a premium for their shares or Warrants that might otherwise
exist in the absence of such provisions. Such provisions also may make the
Company an unsuitable investment vehicle for any person seeking to obtain
ownership of more than 9.8% of the outstanding shares of Capital Stock.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Maryland GCL permits the charter of a Maryland corporation to include a
provision limiting the liability of its directors and officers to the
corporation and its stockholder for money damages, except to the extent that (i)
it is proved that the person actually received an improper benefit or profit in
money, property or services, or (ii) a judgment or other final adjudication
adverse to the person is entered in a proceeding based on a finding that the
person's action, or failure to act, was the result of active and deliberate
dishonesty and was material to the cause of action adjudicated in the
proceeding. The Company's Amended and Restated Articles of Incorporation contain
such a provision, which eliminates the liability of a director or officer to the
Company or its stockholders for money damages to the fullest extent permitted by
Maryland law.
Additionally, the Company's Amended and Restated Articles of Incorporation
provide for indemnification of its officers and directors to the fullest extent
permitted by the Maryland General Corporation Law (the "Maryland GCL"). The
Maryland GCL also permits the Company to indemnify and advance expenses to any
person who served a predecessor of the Company in any of the capacities
described above and to any employee or agent of the Company or a predecessor of
the Company.
Unless the corporation's charter provides otherwise, the Maryland GCL
requires a corporation to indemnify a director or officer who has been
successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The Maryland
GCL permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason their service in those or other
capacities unless it is established that (a) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (1) was
committed in bad faith or (2) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. However, a Maryland corporation may not indemnify for
an adverse judgment in a
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suit by or in the right of the corporation. In addition, the Maryland GCL
requires the Company, as a condition to advancing expenses, to obtain (a) a
written affirmation by the director or officer of his good faith belief that he
has met the standard of conduct necessary for indemnification by the Company as
authorized by the bylaws and (b) a written undertaking by or on his behalf to
repay the amount paid or reimbursed by the Company if it shall ultimately be
determined that the standard of conduct was not met. A corporation may not
indemnify a director unless the proposed indemnification has been authorized for
a specific proceeding pursuant to a determination by the board of directors,
special counsel (as may be appointed for such purpose) or the stockholders that
indemnification is permissible because the director satisfied the requisite
standard of conduct. Unless otherwise provided by a corporation's charter,
bylaws or board resolution consistent with law, a corporation may not indemnify
an officer or any other person unless the proposed indemnification has been
authorized for a specific proceeding pursuant to a determination by the board of
directors, special counsel (as may be appointed for such purpose) or the
stockholders that indemnification is permissible because the officer or such
other person satisfied the requisite standard of conduct. The Company expects to
enter into indemnification agreements with its officers and directors which will
provide for the indemnification of such officers and directors to the fullest
extent permitted under Maryland law.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed 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.
CONTROL SHARE ACQUISITIONS
The Maryland GCL provides that "control shares" of a Maryland corporation
acquired in a "control share acquisition"have no voting rights except to the
extent approved by a vote of two-thirds of the votes entitled to be cast on the
matter, excluding shares of stock owned by the acquiror or by officers or
directors who are employees of the corporation. "Control shares" are voting
shares of stock which, if aggregated with all other shares of stock owned by
such a person, would entitle the acquiror to exercise voting power in electing
directors within one of the following ranges of voting power: (i) one-fifth or
more but less than one third, (ii) one-third or more but less than a majority,
or (iii) a majority or more of all voting power. "Control shares" do not include
shares of stock the acquiring person is then entitled to vote as a result of
having owned stockholder approval. A "control share acquisition" means, subject
to certain exceptions, the acquisition of, ownership of, or the power to direct
the exercise of voting power with respect to, control shares.
A person who has made or proposes to make a "control share acquisition,"
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the Board of Directors to call a special meeting of
stockholders to be held within 50 days of demand to consider the voting rights
of the shares. If no request for a meeting is made, the corporation may itself
present the question at any stockholders' meeting. If voting rights are not
approved at the meeting or if the acquiring person does not deliver an acquiring
person statement as permitted by the statute, then, subject to certain
conditions and limitations, the corporation may redeem any or all of the
"control shares" (except those for which voting rights have previously been
approved) for fair value determined, without regard to absence of voting rights,
as of the date of the last control share acquisition or of any meeting of
stockholders at which the voting rights of such shares are considered and not
approved. If voting rights for "control shares" are approved at a stockholders
meeting and the acquiror becomes entitled to vote a majority of the shares
entitled to vote, all other stockholders may exercise appraisal rights. The fair
value of the stock, as determined for purposes of such appraisal rights, may not
be less than the highest price per share paid in the control share acquisition,
and certain limitations and restrictions otherwise applicable to the exercise of
dissenters rights do not apply in the context of "control share acquisitions."
The "control share acquisition" statute does not apply to stock acquired in
a merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by a provision of the
articles of incorporation or bylaws of the corporation adopted prior to the
acquisition of the shares. The Company has adopted a provision in its Bylaws
that exempts the Company's shares of Capital Stock from application of the
control share acquisition statute. No assurance can be given, however, that such
Bylaw provision may not be removed at any time by amendment of the Bylaws.
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BUSINESS ACQUISITIONS STATUTES
Under the Maryland GCL, certain "business combinations" (including a
merger, consolidation, share exchange, or, in certain circumstances, an asset
transfer or issuance or reclassification of equity securities) between a
Maryland corporation and any person who beneficially owns ten percent or more of
the voting power of the corporations shares or an affiliate of the corporation
which, at any time within the two-year period prior to the date in question, was
the beneficial owner of 10% or more of the voting power of the then-outstanding
voting stock of the corporation (an "Interested Stockholder") or an affiliate
thereof are prohibited for five years after the most recent date on which the
Interested Stockholder became an Interested Stockholder. Thereafter, any such
business combination must be recommended by the board of directors of such
corporation and approved by the affirmative vote of at least (a) 80% of the
votes entitled to be cast by holders of outstanding voting shares of the
corporation and (b) two-thirds of the votes entitled to be cast by holders of
outstanding voting shares of the corporation other than shares held by the
Interested Stockholder with whom the business combination is to be effected,
unless, among other things, the corporation's stockholders receive a minimum
price (as defined in the Maryland GCL) for their shares and the consideration is
received in cash or in the same form as previously paid by the Interested
Stockholder for its shares. These provisions of Maryland law do not apply,
however, to business combinations that are approved or exempted by the board of
directors of the corporation prior to the time that the Interested Stockholder
becomes an Interested Stockholder. No assurance can be given that such provision
will not be amended or eliminated at any point in the future with respect to
business combinations not involving a purchaser of Units.
TRANSFER AGENT AND REGISTRAR
American Securities Transfer & Trust Incorporated will initially act as
transfer agent and registrar with respect to the Common Stock.
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SHARES ELIGIBLE FOR FUTURE SALE
GENERAL
Upon the closing of the Offering, the Company will have outstanding
6,295,807 shares of Common Stock (assuming the over-allotment option is not
exercised), 5,000,000 shares of Common Stock reserved for the Warrants
(5,750,000 shares if the over-allotment option is exercised) and 150,000 shares
of Common Stock (172,500 shares if the over-allotment option is exercised)
reserved for the Representative's Warrants. The Units issued in this Offering
will be freely tradable immediately after this Offering, and the Warrants and
Common Stock issued in this Offering will be freely tradable six months after
this Offering, in each case by persons other than "affiliates" of the Company
without restriction under the Securities Act, subject to the limitations on
ownership set forth in the charter. See "Description of Securities." The Common
Stock to be owned by the Founders and ContiFinancial Corporation (collectively,
the "Restricted Stock"), will be "restricted securities" within the meaning of
Rule 144 promulgated under the Securities Act ("Rule 144") and may not be sold
except pursuant to registration under the Securities Act or pursuant to an
exemption from registration, including exemptions contained in Rule 144. As
described below under "Registration Rights," the Company has granted certain
holders registration rights with respect to their Common Stock. See
"-- Registration Rights."
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of acquisition of Restricted Stock from the Company
or any "affiliate" of the Company, as that term is defined under the Securities
Act, the acquirer or subsequent holder thereof is entitled to sell within any
three-month period a number of shares of Common Stock that does not exceed the
greater of one percent of the then outstanding Common Stock or the average
weekly trading volume of the Common Stock during the four calendar weeks
preceding the date on which notice of the sale is filed with the Commission.
Sales under Rule 144 are also subject to certain manner of sale provisions,
public information requirements and notice requirements. After one year has
elapsed since the date of acquisition of Restricted Stock from the Company or
from any "affiliate" of the Company, and the acquirer or subsequent holder
thereof is deemed not to have been an "affiliate" of the Company at any time
during the 90 days preceding a sale, such person would be entitled to sell such
shares in the public market under Rule 144(k) without regard to the volume
limitation, manner of sale, public information or notice requirements.
Prior to the date of this Prospectus, there has been no public market for
the Units. Trading of the Units on the American Stock Exchange is expected to
commence effective upon the closing of this Offering. Sales of substantial
amounts of Common Stock or Warrants (including shares issued upon the exercise
of stock options), or the perception that such sales occur, could adversely
affect prevailing market prices of the Units, the Common Stock and Warrants. See
"Risk Factors -- Failure to Develop a Trading Market May Result in Depressed
Common Stock Price."
The Company has reserved for issuance an aggregate of 72,925 shares of
Common Stock to be issued upon exercise of the stock options granted under the
1996 Stock Option Plan. All of such options have vested and are immediately
exercisable. The Company has reserved for issuance an aggregate of 456,667
shares of Common Stock to be issued pursuant to the exercise of Stock Options to
be granted under the 1998 Stock Option Plan. All stock options granted pursuant
to the 1998 Stock Option Plan will be contingent, with vesting based upon the
financial performance of the Company and such other criteria as the Compensation
Committee determines to be appropriate. See "Management -- Executive
Compensation -- 1998 Stock Option Plan."
For a description of certain restrictions on transfers of Common Stock held
by the Founders, see "Underwriting."
REGISTRATION RIGHTS
Pursuant to a registration rights agreement, the Company has granted the
Founders (except for ContiFinancial Corporation) certain additional registration
rights. Under such agreement, the Founders may request, on any two occasions on
or after one year after the closing of the Offering, that the Company file a
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shelf registration on Form S-3 with respect to the number of registrable shares
requested by the Founders, with the Company paying all registration expenses in
connection with the first such shelf registration and the Founders paying all
registration expenses for the second such shelf registration. In addition, in
the event the Company proposes to register any of its Securities under the
Securities Act, whether for its own account or otherwise, the Founders are
entitled to notice of such registration and are entitled to include their
registrable shares, subject to certain conditions and limitations.
Pursuant to a registration rights agreement, the Company has granted
ContiFinancial Corporation certain registration rights. Under such agreement,
ContiFinancial Corporation may request, on any three occasions after the
Offering that the Company register such shares as ContiFinancial Corporation may
request, provided that such shares amount to at least five percent of the
Company's Common Stock then outstanding and that such request comes at least one
year after the effective date of a registration statement filed by the Company
covering a firm commitment underwritten public offering in which ContiFinancial
Corporation shall have been entitled to join. In addition, in the event the
Company proposes to register any of its Securities under the Securities Act,
whether for its own account or otherwise, ContiFinancial Corporation shall be
entitled to notice of such registration shall be entitled to include their
registrable shares, subject to certain conditions and limitations.
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FEDERAL INCOME TAX CONSIDERATIONS
THE FOLLOWING DISCUSSION SUMMARIZES THE MATERIAL FEDERAL INCOME TAX
CONSIDERATIONS THAT MAY BE RELEVANT TO A PROSPECTIVE PURCHASER OF UNITS. THIS
DISCUSSION IS BASED ON CURRENT LAW. THE FOLLOWING DISCUSSION IS NOT EXHAUSTIVE
OF ALL POSSIBLE TAX CONSIDERATIONS. IT DOES NOT GIVE A DETAILED DISCUSSION OF
ANY STATE, LOCAL OR FOREIGN TAX CONSIDERATIONS, NOR DOES IT DISCUSS ALL OF THE
ASPECTS OF FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO A PROSPECTIVE
INVESTOR IN LIGHT OF SUCH INVESTOR'S PARTICULAR CIRCUMSTANCES OR TO CERTAIN
TYPES OF INVESTORS (INCLUDING INSURANCE COMPANIES, CERTAIN TAX-EXEMPT ENTITIES,
FINANCIAL INSTITUTIONS, BROKER/DEALERS, FOREIGN CORPORATIONS AND PERSONS WHO ARE
NOT CITIZENS OR RESIDENTS OF THE UNITED STATES) SUBJECT TO SPECIAL TREATMENT
UNDER FEDERAL INCOME TAX LAWS.
EACH PROSPECTIVE PURCHASER OF UNITS IS URGED TO CONSULT WITH HIS OR HER OWN
TAX ADVISOR REGARDING THE SPECIFIC CONSEQUENCES TO HIM OR HER OF THE PURCHASE,
OWNERSHIP AND SALE OF UNITS, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND
OTHER TAX CONSIDERATIONS OF SUCH PURCHASE, OWNERSHIP AND SALE AND THE POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
GENERAL
The Code provides special tax treatment for organizations that qualify and
elect to be taxed as REITs. The discussion below summarizes the material
provisions applicable to the Company as a REIT for federal income tax purposes
and to its stockholders in connection with their ownership of shares of stock of
the Company. However, it is impractical to set forth in this Prospectus all
aspects of federal, state, local and foreign tax law that may have tax
consequences with respect to an investor's purchase of Units. The discussion of
various aspects of federal taxation contained herein is based on the Code,
administrative regulations, judicial decisions, administrative rulings and
practice, all of which are subject to change. In brief, if certain detailed
conditions imposed by the Code are met, entities that invest primarily in real
estate assets, including Mortgage Loans, and that otherwise would be taxed as
corporations, with certain limited exceptions, are not taxed at the corporate
level on their taxable income that is currently distributed to their
stockholders. This treatment eliminates most of the "double taxation" (at the
corporate level and then again at the stockholder level when the income is
distributed) that typically results from the use of corporate investment
vehicles. A qualifying REIT, however, may be subject to certain excise and other
taxes, as well as normal corporate tax, on Taxable Income that is not currently
distributed to its stockholders. See "-- Taxation of the Company."
The Company intends to elect to be taxed as a REIT under the Code
commencing with its taxable year ending December 31, 1998.
OPINION OF COUNSEL
Jeffers, Wilson, Shaff & Falk, LLP, counsel to the Company ("Counsel"), has
advised the Company in connection with the Offering of Units and the Company's
election to be taxed as a REIT. Based on existing law and certain factual
representations made to Counsel by the Company and assuming that the Company
operates in the manner described in this Prospectus, in the opinion of Counsel,
commencing with the Company's taxable year ending December 31, 1998, RealTrust
has been organized in conformity with the requirements for qualification as a
REIT under the Code and the Company's proposed method of operation described in
this Prospectus and as represented by the Company to Counsel will enable
RealTrust to qualify as a REIT. The Company's organization and proposed method
of operation described in this Prospectus is the same in all material respects
as represented to Counsel. However, whether RealTrust will in fact so qualify
will depend on actual operating results and compliance with the various tests
for qualification as a REIT relating to its income, assets, distributions,
ownership and certain administrative matters, the results of which may not be
reviewed by Counsel. Moreover, certain aspects of RealTrust's method of
operations have not been considered
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by the courts or the Service. There can be no assurance that the courts or the
Service will agree with this opinion. In addition, qualification as a REIT
depends on future transactions and events that cannot be known at this time.
Accordingly, Counsel is unable to opine whether RealTrust will in fact qualify
as a REIT under the Code in all events. In the opinion of Counsel, the section
of the Prospectus entitled "Federal Income Tax Considerations" identifies and
fairly summarizes the federal income tax considerations that are likely to be
material to a holder of the Units and to the extent such summaries involve
matters of law, such statements of law are correct under the Code. Counsel's
opinions are based on various assumptions and on the factual representations of
RealTrust concerning its business and assets. Accordingly, no assurance can be
given that the actual results of RealTrust's operation for any one taxable year
will satisfy such requirements. See "-- Termination or Revocation of REIT
Status."
The opinions of Counsel are based upon existing law including the Internal
Revenue Code of 1986, as amended, existing Treasury Regulations, Revenue
Rulings, Revenue Procedures, proposed regulations and case law, all of which is
subject to change either prospectively or retroactively. Moreover, relevant laws
or other legal authorities may change in a manner that could adversely affect
RealTrust or its stockholders.
In the event that RealTrust does not qualify as a REIT in any year, it will
be subject to federal income tax as a domestic corporation and its stockholders
will be taxed in the same manner as stockholders of ordinary corporations. To
the extent that RealTrust would, as a consequence, be subject to potentially
significant tax liabilities, the amount of earnings and cash available for
distribution to its stockholders would be reduced. See "-- Termination or
Revocation of REIT Status."
QUALIFICATION AS A REIT
To qualify for tax treatment as a REIT under the Code, the Company must
meet certain tests which are described immediately below.
OWNERSHIP OF STOCK
The Company's shares of stock must be transferable and, for all taxable
years after the first taxable year for which a REIT election is made, must be
held by a minimum of 100 persons for at least 335 days of a 12 month year (or a
proportionate part of a short tax year), and at all times during the second half
of each taxable year, no more than 50% in value of the shares of any class of
the stock of the Company may be owned directly or indirectly by five or fewer
individuals. In determining whether the Company's shares are held by five or
fewer individuals, the attribution rules of Section 544 of the Code (as modified
by the REIT provisions of the Code) apply. For a description of these
attribution rules, see "Description of Capital Stock." Failure of the Company to
comply with such test may be waived if the failure was unintentional and the
Company otherwise complied with the requirements for monitoring stockholders.
See "-- Recordkeeping Requirement." The Company's Amended and Restated Articles
of Incorporation impose certain transfer restrictions to avoid more than 50% by
value of any class of the Company's stock being held by five or fewer
individuals (directly or constructively) at any time during the last half of any
taxable year. Such transfer restrictions will not cause the stock not to be
treated as "transferable" for purposes of qualification as a REIT. The Company
intends to satisfy both the 100 stockholder and 50%/5 stockholder individual
ownership limitations described above for as long as it seeks qualification as a
REIT. See "Description of Capital Stock." Even if the Company were to
inadvertently violate one of the stock ownership tests, the Company would not
lose its status as a REIT for tax purposes provided the Company exercised
reasonable diligence in attempting to comply with these requirements. The
Company uses the calendar year as its taxable year for income tax purposes.
NATURE OF ASSETS
On the last day of each calendar quarter at least 75% of the value of the
Company's assets must consist of Qualified REIT Assets, government securities,
cash and cash items (the "75% of assets test"). The Company expects that
substantially all of its assets, other than the preferred stock of the Company's
Taxable Subsidiary, will be "Qualified REIT Assets" or "Qualified Hedges."
Qualified REIT Assets include interests in real
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property, interests in Mortgage Loans secured by real property and interests in
REMICs. Qualified Hedges are discussed under "-- Sources of Income -- The 95%
Test" below.
On the last day of each calendar quarter, of the investments in securities
not included in the 75% of assets test, the value of any one issuer's equity and
debt securities may not exceed five percent by value of the Company's total
assets and the Company may not own more than 10% of any one issuer's outstanding
voting securities. See "Business -- Industry Developments." Pursuant to its
compliance guidelines, the Company intends to monitor closely (on not less than
a quarterly basis) the purchase and holding of the Company's assets in order to
comply with the above assets tests. In particular, as of the end of each
calendar quarter the Company intends to limit and diversify its ownership of
securities of any Taxable Subsidiary of the Company, hedging contracts and other
mortgage securities that do not constitute Qualified REIT Assets to less than
25%, in the aggregate, by value of its portfolio, to less than five percent by
value as to any single issuer, including the stock of any Taxable Subsidiary of
the Company, and to less than 10% of the voting stock of any single issuer
(collectively the "25% of assets limits"). If such limits are ever exceeded, the
Company intends to take appropriate remedial action to dispose of such excess
assets within the 30 day period after the end of the calendar quarter, as
permitted under the Code. In order to help maintain compliance with the
requirement that it limit the value of the securities of any issuer to less than
five percent of the value of the Company's assets, the Company expects to obtain
an appraisal report from a qualified independent business appraiser, to ensure
that the value of the assets contributed to the Taxable Subsidiary is less than
five percent of the gross value of the Company's assets.
When purchasing mortgage-related securities, the Company may rely on
opinions of counsel for the issuer or sponsor of such securities given in
connection with the offering of such securities, or statements made in related
offering documents, for purposes of determining whether and to what extent those
securities (and the income therefrom) constitute Qualified REIT Assets (and
income) for purposes of the 75% of assets test (and the source of income tests
discussed below). If the Company invests in a partnership, the Company will be
treated as receiving its share of the income and loss of the partnership and
owning a proportionate share of the assets of the partnership and any income
from the partnership will retain the character that it had in the hands of the
partnership.
SOURCES OF INCOME
The Company must meet two separate income-based tests for each year in
order to qualify as a REIT.
1. The 75% Test. At least 75% of the Company's gross income (the "75% of
income test") for the taxable year must be derived from the following sources
among others: (i) interest (other than interest based in whole or in part on the
income or profits of any person) on obligations secured by mortgages on real
property or on interests in real property, (ii) gains from the sale or other
disposition of interests in real property and real estate mortgages, other than
gain from property held primarily for sale to customers in the ordinary course
of the Company's business ("dealer property"), (iii) income from the operation,
and gain from the sale, of property acquired at or in lieu of a foreclosure of
the mortgage secured by such property or as a result of a default under a lease
of such property ("foreclosure property"), (iv) income received as consideration
for entering into agreements to make loans secured by real property or to
purchase or lease real property (including interests in real property and
interests in mortgages on real property) (for example, commitment fees), (v)
rents from real property, and (vi) income attributable to stock or debt
instruments acquired with the proceeds from the sale of stock or certain debt
obligations ("new capital") of the Company received during the one-year period
beginning on the day such proceeds were received ("qualified temporary
investment income"). The investments that the Company intends to make (as
described under "Business -- Mortgage Investment Portfolio") will give rise
primarily to mortgage interest qualifying under the 75% of income test.
2. The 95% Test. In addition to deriving 75% of its gross income from the
sources listed above, at least an additional 20% of the Company's gross income
for the taxable year must be derived from those sources, or from dividends,
interest or gains from the sale or disposition of stock or other securities that
are not dealer property (the "95% of income test"). Income attributable to
assets other than Qualified REIT Assets, such as
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income from or gain on the disposition of Qualified Hedges, that the Company
holds, dividends on non-REIT stock (including any dividends from the Taxable
Subsidiary), interest on any other obligations not secured by real property, and
gains from the sale or disposition of stock or other securities that are not
Qualified REIT Assets or Qualified Hedges will constitute qualified income for
purposes of the 95% of income test only, and will not be qualified income for
purposes of the 75% of income test. Income from mortgage servicing, loan
guarantee fees (or other contracts under which the Company would earn fees for
performing services) and hedging (other than from Qualified REIT Assets) will
not qualify for either the 95% or 75% of income tests. Income from Qualified
Hedges (including gain on the sale of Qualified Hedges) qualifies for the 95% of
income test. The Code defines a Qualified Hedge as a swap, cap or similar
financial instrument entered into by a REIT to reduce interest rate risks with
respect to debt that the REIT incurred to acquire or carry real estate assets,
such as Mortgage Loans. The Company intends to severely limit its acquisition of
any assets or investments the income from which does not qualify for purposes of
the 95% of income test. Moreover, in order to help ensure compliance with the
95% of income test and the 75% of income test, the Company intends to limit
substantially all of the assets that it acquires (other than the shares of the
preferred stock of any Taxable Subsidiary and Qualified Hedges) to Qualified
REIT Assets. The policy of the Company to maintain REIT status may limit the
type of assets, including hedging contracts, that the Company otherwise might
acquire.
For purposes of determining whether the Company complies with the 75% of
income test and the 95% of income test detailed above, gross income does not
include gross income from "prohibited transactions." A "prohibited transaction"
is one involving a sale of dealer property, other than foreclosure property. Net
income from "prohibited transactions" is subject to a 100% tax. See "-- Taxation
of the Company."
The Company intends to maintain its REIT status by carefully monitoring its
income, including income from hedging transactions, futures contracts and sales
of Mortgage Assets to comply with the 75% of income test and the 95% of income
test. See "-- Taxation of the Company" for a discussion of the potential tax
cost of the Company's selling certain Mortgage Assets on a regular basis. In
order to help insure its compliance with the REIT requirements of the Code, the
Company has adopted guidelines the effect of which will be to limit the
Company's ability to earn certain types of income, including income from
hedging, other than hedging income from Qualified REIT Assets and from Qualified
Hedges. See "Business -- Interest Rate Risk Management."
If the Company fails to satisfy one or both of the 75% or 95% of income
tests for any year, it may face either (a) assuming such failure was for
reasonable cause and not willful neglect, and a schedule is submitted to the
Service setting forth the nature and amount of each item of the Company's gross
income qualifying under the 75% or 95% income tests, a 100% tax on the greater
of the amounts of income by which it failed to comply with the 75% test of
income or the 95% of income test, reduced by estimated related expenses or (b)
loss of REIT status. There can be no assurance that the Company will always be
able to maintain compliance with the gross income tests for REIT qualification
despite the Company's periodic monitoring procedures. Moreover, there is no
assurance that the relief provisions for a failure to satisfy either the 95% or
the 75% of income tests will be available in any particular circumstance.
DISTRIBUTIONS
The Company must distribute to its stockholders on a pro rata basis each
year an amount equal to (i) 95% of its Taxable Income before deduction of
dividends paid and excluding net capital gain, plus (ii) 95% of the excess of
the net income from foreclosure property over the tax imposed on such income by
the Code, less (iii) any "excess noncash income' (the "95% distribution test").
See "Dividend Policy and Distributions." The Company intends to make
distributions to its stockholders in amounts sufficient to meet this 95%
distribution requirement. Such distributions must be made in the taxable year to
which they relate, or during January of the subsequent taxable year when
declared during the last quarter of such taxable year and payable to
shareholders of record on a specified date during such quarter, or, if declared
before the timely filing of the Company's tax return for such year and paid not
later than the first regular dividend payment after such declaration, in the
following taxable year. A nondeductible excise tax, equal to four percent of the
excess of such required distributions over the amounts actually distributed will
be imposed on the Company for each
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calendar year to the extent that the sum of the dividends paid during the year
(or declared during the last quarter of the year and paid during January of the
succeeding year) and any tax imposed on the REIT taxable income or capital gains
of the Company is less than the sum of (i) 85% of the Company's "ordinary
income," (ii) 95% of the Company's capital gain net income, and (iii) income not
distributed in earlier years.
If the Company fails to meet the 95% distribution test as a result of an
adjustment to the Company's tax returns by the Service, the Company by following
certain requirements set forth in the Code, may pay a deficiency dividend within
a specified period which will be permitted as a deduction in the taxable year to
which the adjustment is made. The Company would be liable for interest based on
the amount of the deficiency dividend. A deficiency dividend is not permitted if
the deficiency is due to fraud with intent to evade tax or to a willful failure
to file timely tax returns.
TAXATION OF THE COMPANY
In any year in which the Company qualifies as a REIT, it generally will not
be subject to federal income tax on that portion of its taxable income or net
capital gain which is distributed to its stockholders. The Company will,
however, be subject to tax at normal corporate rates upon any net income or net
capital gain not distributed. The Company intends to distribute substantially
all of its taxable income to its stockholders on a pro rata basis in each year.
See "Dividend Policy and Distributions." If the Company recognizes net income at
a time when its cash receipts from Mortgage Assets are subject to the claims of
creditors, such as counterparties on reverse repurchase agreements, the Company
may be compelled to borrow to distribute dividends and avoid the imposition of
corporate level tax.
In addition, the Company will also be subject to a tax of 100% of net
income from any prohibited transaction and will be subject to a 100% tax on the
greater of the amount by which it fails either the 75% or 95% of income tests,
reduced by approximated expenses, if the failure to satisfy such tests is due to
reasonable cause and not willful neglect and if certain other requirements are
met. The Company may be subject to the alternative minimum tax on certain items
of tax preference.
If the Company acquires any real property as a result of foreclosure, or by
a deed in lieu of foreclosure, the Company may elect to treat such real property
as "foreclosure property." Net income from the sale of foreclosure property is
taxable at the maximum federal corporate rate, currently 35%. Income from
foreclosure property will not be subject to the 100% tax on prohibited
transactions. The Company will determine whether to treat such real property as
foreclosure property on the tax return for the fiscal year in which such
property is acquired.
The Company will finance Mortgage Loans and sell such Mortgage Loans
through one or more Taxable Subsidiaries. However, if the Company itself were to
sell such Mortgage Assets on a regular basis, there is a substantial risk that
they would be deemed "dealer property" and that all of the profits from such
sales would be subject to tax at the rate of 100% as income from prohibited
transactions. The Taxable Subsidiary will not be subject to this 100% tax on
income from prohibited transactions, which is only applicable to REITs, rather,
it will be subject to tax on such income at regular corporate rates. See
"Business -- Industry Developments" for a discussion of the possible effect of a
recent proposal, if enacted, on such proposed activities of the Company.
The Company will also be subject to the nondeductible four percent excise
tax discussed above if it fails to make timely dividend distributions for each
calendar year. See "-- Qualification as a REIT -- Distributions." The Company
intends to declare its fourth regular annual dividend during the final quarter
of the year and to make such dividend distribution no later than thirty-one (31)
days after the end of the year in order to avoid imposition of the excise tax.
Such a distribution would be taxed to the stockholders in the year that the
distribution was declared, not in the year paid. Imposition of the excise tax on
the Company would reduce the amount of cash available for distribution to the
Company's stockholders.
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TAXATION OF TAXABLE SUBSIDIARY
The Company may cause the creation and sale of Mortgage Assets or conduct
certain hedging activities through one or more Taxable Subsidiaries. The Company
and one or more persons or entities will own all of the capital stock of such
Taxable Subsidiary. In order to ensure that the Company will not violate the
prohibition on ownership of more than 10% of the voting stock of a single issuer
and the prohibition on investing more than five percent of the value of its
assets in the stock or securities of a single issuer, the Company will own only
shares of nonvoting preferred stock of the Taxable Subsidiary and will not own
any of the Taxable Subsidiary's common stock. The Company will monitor the value
of its investment in the Taxable Subsidiary on a quarterly basis to limit the
risk of violating any of the tests that comprise the 25% of assets limits. In
addition, the dividends that the Taxable Subsidiary pays to the Company will not
qualify as income from Qualified REIT Assets for purposes of the 75% of income
test, and in all events would have to be limited, along with the Company's other
interest, dividends, gains on the sale of securities, hedging income, and other
income not derived from Qualified REIT Assets to less than 25 percent of the
Company's gross revenues in each year. Before the Company forms any such Taxable
Subsidiary, the Company intends to obtain an opinion of counsel to the effect
that the formation and contemplated operation of such a corporation will not
cause the Company to fail the REIT asset and income tests. See "Qualification as
a REIT -- Nature of Assets" and "Qualification as a REIT -- Sources of Income."
The Taxable Subsidiary will not elect REIT status, will be subject to income
taxation on its net earnings and will generally be able to distribute only its
net after-tax earnings to its stockholders, including the Company, as dividend
distributions. If the Taxable Subsidiary creates a taxable mortgage pool, such
pool itself will constitute a separate taxable subsidiary of the Taxable
Subsidiary. The Taxable Subsidiary would be unable to offset the income derived
from such a taxable mortgage pool with losses derived from any other activities.
TERMINATION OR REVOCATION OF REIT STATUS
The Company's election to be treated as a REIT will be terminated
automatically (i) if the Company fails to meet the requirements described above
or (ii) if the President's 1999 Budget Plan is adopted, as presently proposed.
See "Risk Factors." In that event, the Company will not be eligible again to
elect REIT status until the fifth taxable year which begins after the year for
which the Company's election was terminated unless all of the following relief
provisions apply: (i) the Company did not willfully fail to file a timely return
with respect to the termination taxable year, (ii) inclusion of incorrect
information in such return was not due to fraud with intent to evade tax, and
(iii) the Company establishes that failure to meet requirements was due to
reasonable cause and not willful neglect. The Company may also voluntarily
revoke its election, although it has no intention of doing so, in which event
the Company will be prohibited, without exception, from electing REIT status for
the year to which the revocation relates and the following four taxable years.
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company would be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to stockholders of the Company with
respect to any year in which the Company fails to qualify as a REIT would not be
deductible by the Company nor would they be required to be made. Failure to
qualify as a REIT would result in the Company's reduction of amounts available
for distribution to its stockholders in order to pay the resulting taxes. If,
after forfeiting REIT status, the Company later qualifies and elects to be taxed
as a REIT again, the Company could face significant adverse tax consequences.
TAXATION OF THE COMPANY'S STOCKHOLDERS
GENERAL
For any taxable year in which the Company is treated as a REIT for federal
income tax purposes, amounts distributed by the Company to its stockholders out
of current or accumulated earnings and profits will be includible by the
stockholders as ordinary income for federal income tax purposes unless properly
designated by the Company as capital gain dividends. In the latter case, the
distributions will be taxable to the stockholders as long-term capital gains.
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Additionally, the Company may elect to retain and pay taxes on all or a
portion of its net long-term capital gains for any taxable year, in which case,
the stockholders would include in their income as long-term capital gains their
proportionate share of such undistributed capital gains. The stockholders would
be treated as having paid their proportionate share of any taxes paid by the
Company on any undistributed capital gains, which proportionate amounts would be
credited or refunded to the stockholders.
Distributions of the Company will not be eligible for the dividends
received deduction for corporations. Stockholders may not deduct any net
operating losses or capital losses of the Company.
Any loss on the sale or exchange of shares of the stock of the Company held
by a stockholder for six months or less will be treated as a long-term capital
loss to the extent of any capital gain dividend received, or undistributed
capital gains treated as received, on the stock held by such stockholders.
If the Company makes distributions to its stockholders in excess of its
current and accumulated earnings and profits, those distributions will be
considered first a tax-free return of capital, reducing the tax basis of a
stockholder's shares until the tax basis is zero. Such distributions in excess
of the tax basis will be taxable as gain realized from the sale of the Company's
shares.
The Company (exclusive of its Taxable Subsidiary) does not expect to
acquire or retain residual interests issued by REMICs. Such residual interests,
if acquired by a REIT, would generate excess inclusion income. Excess inclusion
income cannot be offset by net operating losses of a stockholder. If the
stockholder is a Tax-Exempt Entity, the excess inclusion income is fully taxable
as UBTI. If allocated to a foreign stockholder, the excess inclusion income is
subject to Federal income tax withholding without reduction pursuant to any
otherwise applicable tax treaty. Excess inclusion income realized by a Taxable
Subsidiary is not passed through to stockholders of the Company. Potential
investors, and in particular Tax Exempt Entities, are urged to consult with
their tax advisors concerning this issue.
The Company intends to finance the acquisition of Mortgage Assets by
entering into reverse repurchase agreements, which are essentially loans secured
by the Company's Mortgage Assets. The Company expects to enter into master
repurchase agreements with secured lenders known as "counterparties." Typically,
such master repurchase agreements have cross-collateralization provisions that
afford the counterparty the right to foreclose on the Mortgage Assets pledged as
collateral. If the Service were to successfully take the position that the
cross-collateralization provisions of the master repurchase agreements result in
the Company having issued debt instruments (the reverse repurchase agreements)
with differing maturity dates secured by a pool of Mortgage Loans, a portion of
the Company's income could be characterized as "excess inclusion income."
Counsel has advised the Company that it is more likely than not that the
cross-collateralization provisions of the master repurchase agreements will not
cause the Company to realize excess inclusion income. Nevertheless, in the
absence of any definitive authority on this issue, Counsel cannot give complete
assurance.
The Company will notify stockholders after the close of the Company's
taxable year as to the portions of the distributions which constitute ordinary
income, return of capital and capital gain. Dividends and distributions declared
in the last quarter of any year payable to stockholders of record on a specified
date in such month will be deemed to have been received by the stockholders and
paid by the Company on December 31 of the record year, provided that such
dividends are paid before February 1 of the following year.
WARRANTS
Upon the exercise of a Warrant, a holder will not recognize gain or loss
and will have a tax basis in the Common Stock received equal to the tax basis in
such holder's Warrant plus the exercise price thereof. The holding period for
the Common Stock purchased pursuant to the exercise of a Warrant will begin on
the day following the date of exercise and will not include the period that the
holder held the Warrant.
Upon a sale or other disposition of a Warrant, a holder will recognize
capital gain or loss in an amount equal to the difference between the amount
realized and the holder's tax basis in the Warrant. Such a gain or loss will be
long-term if the holding period is more than one year. In the event that a
Warrant lapses unexercised, a holder will recognize a capital loss in an amount
equal to his tax basis in the Warrant. Such loss will be long-term if the
Warrant has been held for more than one year.
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ADJUSTMENTS TO EXERCISE PRICE OF THE WARRANTS
Adjustments in the Exercise Price (or the failure to make such adjustments)
pursuant to the anti-dilution provisions of the Warrants or otherwise may result
in constructive distributions to the holder of Warrants that could, under
certain circumstances, be taxable to them as dividends pursuant to Section 305
of the Code. If such a constructive distribution were to occur, a holder of
Warrants could be required to recognize ordinary income for tax purposes without
receiving a corresponding distribution of cash.
TAXATION OF TAX-EXEMPT ENTITIES
In general, a Tax-Exempt Entity that is a stockholder of the Company is not
subject to tax on distributions. The Service has ruled that amounts distributed
by a REIT to an exempt employees' pension trust do not constitute UBTI and thus
should be nontaxable to such a Tax-Exempt Entity. Based on that ruling, but
subject to the discussion of excess inclusion income set forth under the heading
"Taxation of the Company's Stockholders," Counsel is of the opinion that
indebtedness incurred by the Company in connection with the acquisition of real
estate assets such as Mortgage Loans will not cause dividends of the Company
paid to a stockholder that is a Tax-Exempt Entity to be UBTI, provided that the
Tax-Exempt Entity has not financed the acquisition of its stock with
"acquisition indebtedness" within the meaning of the Code. Under certain
conditions, if a tax-exempt employee pension or profit sharing trust were to
acquire more than 10% of the Company's stock, a portion of the dividends on such
stock could be treated as UBTI.
For social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts, and qualified group legal services plans exempt
from federal income taxation under Code Sections 501(c)(7), (c)(9), (c)(17) and
(c)(20), respectively, income from an investment in the Company, including gain
realized on the sale of such an investment, will constitute UBTI unless the
organization is able to properly deduct amounts set aside or placed in reserve
for certain purposes so as to offset the UBTI generated by its investment in the
Company. Such entities should review Code Section 512(a)(3) and should consult
their own tax advisors concerning these "set aside" and reserve requirements.
FOREIGN INVESTORS
The preceding discussion does not address the federal income tax
consequences to foreign investors (non-resident aliens and foreign corporations
as defined in the Code) of an investment in the Company. In general, foreign
investors will be subject to special withholding tax requirements on income and
capital gains distributions attributable to their ownership of the Company's
stock. Foreign investors in the Company should consult their own tax advisors
concerning the federal income tax consequences to them of a purchase of shares
of the Company's stock including the federal income tax treatment of
dispositions of interests in, and the receipt of distributions from, REITs by
foreign investors. In addition, federal income taxes must be withheld on certain
distributions by a REIT to foreign investors unless reduced or eliminated by an
income tax treaty between the United States and the foreign investor's country.
A foreign investor eligible for reduction or elimination of withholding must
file an appropriate form with the Company in order to claim such treatment.
RECORDKEEPING REQUIREMENT
A REIT is required to maintain records regarding the actual and
constructive ownership of its shares, and other information, and within 30 days
after the end of its taxable year, to demand statements from persons owning
above a specified level of the REIT's shares (e.g., if the Company has over 200
but fewer than 2,000 stockholders of record, from persons holding one percent or
more of the Company's outstanding shares of stock and if the Company has 200 or
fewer stockholders of record, from persons holding 1/2% or more of the stock)
regarding their ownership of shares. The Company must maintain, as part of the
Company's records, a list of those persons failing or refusing to comply with
this demand. Stockholders who fail or refuse to comply with the demand must
submit a statement with their tax returns setting forth their actual stock
ownership and other information. The Company intends to maintain the records and
demand statements as required by these regulations.
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BACKUP WITHHOLDING
The Code imposes a modified form of "backup withholding" for payments of
interest and dividends. This withholding applies only if a stockholder, among
other things, (i) fails to furnish the Company with a properly certified
taxpayer identification number, (ii) furnishes the Company with an incorrect
taxpayer identification number, (iii) fails properly to report interest or
dividends from any source, or (iv) under certain circumstances fails to provide
the Company or the stockholder's securities broker with a certified statements,
under penalty of perjury, that he or she is not subject to backup withholding.
The backup withholding rate is 31% of "reportable payments," which include
the Company's dividends. Stockholders should consult their tax advisors as to
the procedure for insuring that Company distributions to them will not be
subject to backup withholding.
The Company will report to its stockholders and the Service the amount of
dividends paid during each calendar year and the amount of tax withheld, if any.
RECENT LEGISLATIVE PROPOSALS
The President's 1999 Budget Plan, as presented to Congress on February 2,
1998, contains several provisions which affect REITs. One such provision, if
enacted, could have a potential adverse effect on the way that the Company
intends to operate its mortgage conduit operations. That provision would
prohibit the ownership by a REIT of more than 10% the stock of another
corporation, by vote or value. The rules currently in place for qualification as
a REIT limit (i) a REIT to owning less than 10% of the outstanding voting
securities of another corporation and (ii) the value of a REIT's ownership of
the securities of any one issuer to less than five percent of the value of the
REIT's assets. (See " -- Nature of Assets" above). By limiting a REIT's
ownership of the securities of another corporation to 10% of the value of the
issuing corporation, the proposal, if enacted, could cause the Company to have
to divest itself of most of the preferred stock of the Taxable Subsidiary that
the Company currently owns. In such an event the Company would not receive the
dividends that the Company expects to earn from the Taxable Subsidiary, which
could have a material adverse effect on the Company's net profits after such
divestiture. If that proposal is enacted in substantially the form proposed, the
Company would originate and acquire only those Mortgage Loans that it intends to
retain for investment. See "Business -- Industry Developments" for a more
detailed discussion of the budget proposal.
STATE AND LOCAL TAXES
State and local tax laws may not correspond to the federal income tax
principles discussed in this section. Accordingly, prospective stockholders
should consult their tax advisers concerning the state and local tax
consequences of an investment in the Company's stock.
ERISA CONSIDERATIONS
In considering an investment in the Common Stock of the Company, a
fiduciary of a profit-sharing, pension stock bonus plan, or individual
retirement account, including a plan for self-employed individuals and their
employees or any other employee benefit plan subject to prohibited transaction
provisions of the Code or the fiduciary responsibility provisions of ERISA (an
"ERISA Plan") should consider (a) whether the ownership of Common Stock is in
accordance with the documents and instruments governing such ERISA Plan, (b)
whether the ownership of Common Stock is consistent with the fiduciary's
responsibilities and satisfies the requirements of Part 4 of Subtitle B of Title
I of ERISA (where applicable) and, in particular, the diversification, prudence
and liquidity requirements of Section 404 of ERISA, (c) ERISA's prohibitions in
improper delegation of control over, or responsibility for, "plan assets" and
ERISA's imposition of co-fiduciary liability on a fiduciary who participates in,
permits (by action or inaction) the occurrence of, or fails to remedy a known
breach of duty by another fiduciary, and (d) the need to value the assets of the
ERISA Plan annually.
In regard to the "plan assets" issue noted in clause (c) above, Counsel is
of the opinion that, effective as of the date of the closing of this Offering
and the listing of the shares of Common Stock on the American
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Stock Exchange, and based on certain representations of the Company, the Common
Stock should qualify as a "publicly-offered security," and, therefore, the
acquisition of such Common Stock by ERISA Plans should not cause the Company's
assets to be treated as assets of such investing ERISA Plans for purposes of the
fiduciary responsibility provisions of ERISA or the prohibited transaction
provisions of the Code. Fiduciaries of ERISA Plans and IRA's should consult with
and rely upon their own advisors in evaluating the consequences under the
fiduciary provisions of ERISA and the Code of an investment in Common Stock in
light of their own circumstances.
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UNDERWRITING
Under the terms of and subject to the conditions contained in the
underwriting agreement (the "Underwriting Agreement") between the Company and
the Underwriters named below (the "Underwriters"), for whom Stifel, Nicolaus &
Company, Incorporated is acting as representative (the "Representative"), the
Underwriters have severally agreed to purchase from the Company and the Company
has agreed to sell to the Underwriters severally the respective number of Units
set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF UNITS
TO BE
UNDERWRITER PURCHASED
----------- ---------------
<S> <C>
Stifel, Nicolaus & Company, Incorporated....................
EVEREN Securities, Inc......................................
Total............................................. 5,000,000
=========
</TABLE>
In the Underwriting Agreement, the Underwriters have severally agreed,
subject to the terms and conditions set forth therein, to purchase all of the
Units being sold pursuant to the Underwriting Agreement (other than those
covered by the over-allotment option described below). In the event of a default
by any Underwriter, the Underwriting Agreement provides that, in certain
circumstances, the purchase commitments of the nondefaulting Underwriters may be
increased or the Underwriting Agreement may be terminated.
The Company has been advised by the Representative that the Underwriters
propose to offer the Units in part to the public at the Price to Public set
forth on the cover page of this Prospectus, and in part to certain securities
dealers (who may include Underwriters) at such price less a concession not in
excess of $ per Unit, and that the Underwriters and such dealers may reallow
to certain dealers, a discount not in excess of $ per Unit. After
commencement of the public offering, the Price to Public, concessions to
selected dealers and the discount to other dealers may be changed by the
Representatives.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase, at the Price
to Public less the underwriting discount set forth on the cover page of this
Prospectus, up to 750,000 additional Units. The Underwriters may exercise such
option only to cover over-allotments, if any, made in connection with the
Offering of the Units offered hereby. To the extent the Underwriters exercise
such option, each of the Underwriters will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such option Units
as it was obligated to purchase pursuant to the Underwriting Agreement.
The Company and certain of its affiliates have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Federal securities laws, or to contribute to payments which the Underwriters may
be required to make in respect thereof. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to officers,
directors or persons controlling the Company, the Company has been informed that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
The Company, the Founders and ContiFinancial Corporation have agreed with
the Underwriters that, for a period of one year following the closing of the
Offering, they will not offer, sell, contract to sell or otherwise
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dispose of any shares of Common Stock or rights to acquire such shares without
the prior written consent of the Representatives. See "Shares Eligible For
Future Sale."
The Company has agreed to grant to the Representative warrants to purchase
150,000 (172,500 if the over-allotment option is exercised) shares of Common
Stock at an exercise price equal to the Price to Public of the Units (the
"Representative's Warrants"). The Representative's Warrants are exercisable for
a period of three years beginning six months after the initial closing of the
Offering. The Representative's Warrants and, if exercised, the underlying
securities, may not be sold, transferred, assigned, pledged or hypothecated for
a period of one year following the date of this Prospectus except to any officer
or partner of a Representative or by operation of law. The Representative's
Warrants contain anti-dilution provisions providing for appropriate adjustment
upon the occurrence of certain events. See "Description of Capital Stock."
The Representative and EVEREN Securities, Inc. (the "Lead Underwriters")
have informed the Company that it does not expect the Underwriters to confirm
sales of Units offered by this Prospectus to any accounts over which they
exercise discretionary authority.
The Company intends to apply for listing of the Units, the Warrants and the
Common Stock on the American Stock Exchange. See "Summary -- The Offering."
Prior to the closing of the Offering, there has been no public market for
the Units. Accordingly, the Price to Public for the Units has been determined by
negotiations between the Company and the Representative. Among the factors which
were considered in determining the Price to Public were the Company's future
prospects, the experience of its management, the economic condition of the
financial services industry in general, the general condition of the equity
securities market, the demand for similar securities of companies considered
comparable to the Company and other relevant factors.
The Price to Public set forth on the cover page of this Prospectus should
not be considered an indication of the actual value of the Units. Such price is
subject to change as a result of market conditions and other factors and no
assurance can be given that the Units can be resold at the Price to Public of
the Units after the closing of this Offering.
Until the distribution of the Units is completed, rules of the Commission
may limit the ability of the Underwriters and certain selling group members to
bid for and purchase the Units. As an exception to these rules, the Lead
Underwriters are permitted to engage in certain transactions that stabilize the
prices of the Units. Such transactions consist of bids or purchases for the
purpose of pegging, fixing or maintaining the price of such securities. If the
Underwriters create a short position in the Units in connection with this
Offering, i.e., if they sell a greater number of Units than is set forth in the
cover page of this Prospectus, then the Lead Underwriters may reduce that short
position by purchasing Units in the open market. The Lead Underwriters may also
elect to reduce any short position by exercising all or part of the
over-allotment option described herein. The Lead Underwriters may also impose a
penalty bid on certain Underwriters and selling group members. This means that
if the Lead Underwriters purchase Units in the open market to reduce the
Underwriters' short position or to stabilize the price of the Units, it may
reclaim the amount of the selling concession from the Underwriters and selling
group members who sold those securities as part of the Offering. In general,
purchases of a security for the purpose of stabilization or to reduce a short
position could cause the price of the security to be higher than it might be in
the absence of such purchases. The imposition of a penalty bid might also have
an effect on the price of a security to the extent that it were to discourage
resales of the security. These transactions may be effected on the American
Stock Exchange or otherwise. Neither the Company nor any of the Underwriters
makes any representation or prediction as to the direction or magnitude of any
effect that the transactions described above may have on the prices of the
Units. In addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions, or
that such transactions, once commenced, will not be discontinued without notice.
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LEGAL MATTERS
The validity of the Securities offered hereby and certain tax matters will
be passed on by Jeffers, Wilson, Shaff & Falk, LLP, Irvine, California.
Christopher A. Wilson, Esq. and Michael E. Shaff, Esq., partners of Jeffers,
Wilson, Shaff & Falk, LLP, have been granted options to purchase 2,700 and 1,080
shares of Common Stock, respectively. Certain legal matters will be passed upon
for the Underwriters by O'Melveny & Myers LLP, San Francisco, California.
EXPERTS
The balance sheet of RealTrust Asset Corporation as of April 1, 1998 and
financial statements of CMG Funding Corp. (formerly Continental Mortgage Group,
L.C.) as of December 31, 1997 and 1996, and for the year ended December 31, 1997
and the period from February 7, 1996 (date of inception) to December 31, 1996,
have been included herein and in the registration statement in reliance upon the
reports of KPMG Peat Marwick LLP, independent certified public accountants
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, Washington, D.C. 20549, a
Registration Statement (the "Registration Statement") under the Securities Act
of 1933, as amended (the "Securities Act"), with respect to the Units offered
hereby. Copies of the Registration Statement and the exhibits thereto are on
file at the offices of the Commission in Washington, D.C. and may be obtained at
rates prescribed by the Commission upon request to the Commission and inspected,
without charge, at the offices of the Commission. Prior to the Offering, the
Company has not been required to file reports under the Exchange Act. However,
following the closing of this Offering, the Company will be required to file
reports and other information with the Commission pursuant to the Exchange Act.
Such reports and other information can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices at Northwestern
Atrium Center, 500 West Madison Street (Suite 1400), Chicago, Illinois 60661 and
7 World Trade Center, New York, New York 10048. Copies of such material can also
be obtained from the Commission at prescribed rates through its Public Reference
Section at 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
maintains a Web site that contains reports, proxy, information statements and
other information regarding registrants that file electronically with the
Commission. The Web site is located at http://www.sec.gov. Statements contained
in this Prospectus as to the contents of any contract or any contract or other
document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respect by such reference.
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GLOSSARY
As used in this Prospectus, the capitalized and other terms listed below
have the meanings indicated.
"Affiliated Person" means of any entity: (i) any person directly or
indirectly owning, controlling, or holding with the power to vote, five percent
or more of the outstanding securities of such entity; (ii) any person five
percent or more of whose outstanding voting securities are directly or
indirectly owned, controlled, or held with power to vote, by such entity; (iii)
any person directly or indirectly controlling, controlled by, or under common
control with, such entity; or (iv) any officer, director or employee of such
entity or any person set forth in (i), (ii) or (iii) above. Any person who owns
beneficially, either directly or through one or more controlled companies, more
than twenty-five percent (25%) of the voting securities of any entity shall be
presumed to control such entity. Any person who does not so own more than
twenty-five percent (25%) of the voting securities of any entity shall be
presumed not to control such entity. A natural person shall be presumed not to
be a controlled entity.
"Agency" means FNMA, FHLMC or GNMA.
"Agency Certificates" means pass-through certificates guaranteed by FNMA,
FHLMC or GNMA.
"ARM" means a Mortgage Loan (including any Mortgage Loan underlying a
Mortgage Security) that features adjustments of the underlying interest rate at
predetermined times based on an agreed margin to an established index. An ARM is
usually subject to periodic interest rate and/or payment caps and a lifetime
interest rate cap.
"Beneficial Owner" means any actual purchaser of a Warrant.
"CAG" means Capital Allocation Guidelines.
"Capital Stock" means the shares of capital stock issuable by the Company
under its Amended and Restated Articles of Incorporation, and includes Common
Stock and preferred stock.
"Capstone" means Capstone Investments, Inc., a Nevada corporation.
"Charitable Beneficiary" means one or more charitable beneficiaries for the
exclusive benefit of which Capital Stock is transferred, where absent such
transfer the intended transferee of such Capital Stock would beneficially or
constructively own more than a 9.8% interest in any tenant of the Company.
"CMO" or "Collateralized Mortgage Obligations" means adjustable or
short-term fixed-rate debt obligations (bonds) that are collateralized by
Mortgage Loans and issued by private institutions or issued or guaranteed by
GNMA, FNMA or FHLMC.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commitments" means commitments issued by the Company which will obligate
the Company to purchase Mortgage Assets from the holders of the commitment for a
specified period of time, in a specified aggregate principal amount and at a
specified price.
"Common Stock" means one share of the Company common stock, par value
$.001.
"Company" means RealTrust Asset Corporation, a Maryland corporation, and
includes any subsidiaries thereof when the context otherwise requires.
"ContiFinancial Corporation" means ContiFinancial Corporation and each of
its affiliates, including ContiMortgage Corporation, ContiTrade Services L.L.C.,
and ContiFinancial Services Corporation.
"Direct Participant" means Participants which are securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations.
"DRP" means a Dividend Reinvestment Plan the Company intends to adopt
following this Offering.
"DTC" means the Depository Trust Company.
"ERISA" means the Employee Retirement Income Security Act of 1974.
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"ERISA Plan" or "Plan" means a pension, profit-sharing, retirement or other
employee benefit plan which is subject to ERISA.
"excess inclusion income" means income recognized by the holder of a REMIC
residual (or a residual from a taxable mortgage pool) which exceeds 120% of the
long-term applicable federal interest rate.
"Excess Shares" means the number of shares of Capital Stock of the Company
held by any person or group of persons in excess of 9.8% of the outstanding
shares.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exercise Price" means the price equal to the Price to Public.
"Expiration Date" means the date and time after which the Warrants are no
longer exercisable or 5:00 p.m. Eastern Time on the third anniversary of the
date the Warrants first become exercisable.
"FHA" means the United States Federal Housing Administration.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"First Lien Mortgage Loans" means Mortgage Loans secured by first mortgages
or deeds of trust.
"FNMA" means the Federal National Mortgage Association.
"Formation Transaction" means the transactions and actions to be taken by
the Company prior to this Offering.
"Founders" means the stockholders of the Taxable Subsidiary prior to this
Offering, excluding ContiFinancial Corporation. The Founders are John D. Fry,
Terry L. Mott, William J. Reed, Shauna L. Reimann, Patrick W. Craghan, David and
Sara Ferradino, Kent G. Bills and Brenda Colson.
"GAAP" means generally accepted accounting principles.
"GNMA" means the Government National Mortgage Association.
"HUD" means the Department of Housing and Urban Development.
"Independent Directors" means a director of the Company who is not an
officer or employee of the Company or any affiliate or subsidiary of the
Company.
"Indirect Participants" means Participants which are securities brokers and
dealers, banks and trust companies that clear through or maintain a custodial
relationship with a Direct Participant, either directly or indirectly.
"Investment Company Act" means the Investment Company Act of 1940, as
amended.
"IOs" means interest only Mortgage Securities.
"IRAs" means Individual Retirement Accounts.
"ISOs" means qualified incentive stock options granted under the Stock
Option Plan which meet the requirements of Section 422 of the Code.
"Keogh Plans" means H.R. 10 Plans.
"LIBOR" means London Inter-Bank Offered Rate.
"Limitation Price" means the price for which any holder of Excess Stock may
designate a transferee of such Excess Stock, which price is equal to the lesser
of (i) in the case of a deemed exchange for Excess Stock resulting from a
transfer, the price paid for such shares in the transfer or, in the case of a
deemed exchange for Excess Stock resulting from some other event, the fair
market value on the date of the deemed exchange, of the shares deemed exchanged,
or (ii) the fair market value of the shares for which such Excess Stock will be
deemed to be exchanged on the date of the designation of the transferee (or, in
the case of a purchase by the Company, on the date the Company accepts the offer
to sell).
120
<PAGE> 127
"LTV" means loan-to-value ratio which is the percentage obtained by
dividing the principal amount of a loan by the lower of the sales price or
appraised value of the mortgaged property when the loan is originated.
"Maryland GCL" means the Maryland General Corporation Law as in effect on
the date hereof, or as subsequently amended and revised.
"Mortgage Assets" means (i) Mortgage Loans and (ii) Mortgage Securities.
"Mortgage Loans" means mortgage loans which are secured by mortgages or
deeds of trust on single-family (one to four unit) residences, and includes
Subprime Mortgage Loans and Prime Mortgage Loans.
"Mortgage Securities" means CMOs and securities (or interests therein)
which are Qualified REIT Assets evidencing undivided ownership interests in a
pool of Mortgage Loans, the holders of which receive a "pass-through" of the
principal and interest paid in connection with the underlying Mortgage Loans in
accordance with the holders' respective, undivided interests in the pool.
"Ownership Limit" means 9.8% of the outstanding shares of each class of
stock, as may be increased or reduced by the Board of Directors of the Company.
"Participants" means participants in the DTC.
"POs" means principal only Mortgage Securities.
"Post-closing Transactions" means the transaction and actions to be taken
by the Company subsequent to this Offering.
"Prime Mortgage Loans" means Mortgage Loans that either comply with
requirements for inclusion in credit support programs sponsored by FHLMC or FNMA
or are FHA or VA Loans, all of which are secured by first mortgages or deeds of
trust on single-family (one to four units) residences.
"Qualified Hedge" means a hedging contract that has each of the following
attributes: (a) a financial instrument; (b) entered into by the Company to hedge
any variable rate indebtedness of the Company incurred or to be incurred to
acquire or carry real estate assets; (c) the Company will not treat as a
Qualified Hedge any hedging instrument acquired to hedge an asset of the
Company; and (d) the Company will only treat as a Qualified Hedge a hedging
instrument acquired to hedge a variable rate indebtedness secured by a variable
rate asset that itself is subject to periodic or lifetime interest rate caps, or
a variable rate indebtedness that is subject to a different interest rate index
from that of the Company's asset securing such variable rate indebtedness.
"Qualified REIT Assets" means pass-through certificates, Mortgage Loans,
Agency Certificates and other assets of the type described in Code Section
856(c)(5)(B).
"Qualified REIT Subsidiary" means a corporation whose stock is entirely
owned by the REIT. The income and assets of a Qualified REIT Subsidiary are
treated as those of the Company for tax purposes.
"Qualifying Interests" means "mortgages and other liens on and interests in
real estate," as defined in Section 3(c)(5)(C) under the Investment Company Act.
"RealTrust" means RealTrust Asset Corporation, a newly formed Maryland
corporation.
"REIT" means Real Estate Investment Trust as defined under Section 856 of
the Code.
"REMIC" means Real Estate Mortgage Investment Conduit as defined under
Section 860D of the Code.
"Representative" means Stifel, Nicolaus & Company, Incorporated.
"Representative's Warrants" means the Warrants to purchase 150,000 shares
of Common Stock (172,500 shares if the over-allotment option is exercised)
granted to the Representative.
"Reverse Repurchase Agreement" means a borrowing device evidenced by an
agreement to sell securities or other assets to a third-party and a simultaneous
agreement to repurchase them at a specified future date and price, the price
difference constituting the interest on the borrowing.
121
<PAGE> 128
"Second Lien Mortgage Loans" means Mortgage Loans secured by second
mortgages or deeds of trust.
"Securities Act" means the Securities Act of 1933, as amended.
"Strategic Alliance" means the certain strategic alliance between the
Company and ContiFinancial Corporation.
"Subordinated Mortgage Securities" means a class of Mortgage Securities
that is subordinated to one or more of classes of Mortgage Securities, all of
which classes share the same collateral.
"Subprime Mortgage Loans" means Mortgage Loans that do not conform to one
or more underwriting criteria of FHLMC and FNMA (other than the mortgage loan
limits) for participation in one or more of such agencies' mortgage loan
programs, and may also exceed the maximum loan limits
"Tax-Exempt Entity" means a qualified pension, profit-sharing or other
employee retirement benefit plan, Keogh Plans, bank commingled trust funds for
such plans, IRAs and other similar entities intended to be exempt from Federal
income taxation.
"Taxable Income" means for any year the taxable income of the Company for
such year (excluding any net income derived either from property held primarily
for sale to customers or from foreclosure property) subject to certain
adjustments provided in Section 857 of the Code.
"Taxable Subsidiary" means CMG Funding Corp., a Delaware corporation.
"UBTI" means "unrelated trade or business income" as defined in Section 512
of the Code.
"Unit" means one share of Common Stock and one Warrant.
"Warrant" means a warrant to purchase one share of Common Stock at the
Price to Public, and included in the Unit.
"Warrant Agent" means the warrant agent named in the Warrant Agreement,
which initially shall be the American Securities Transfer & Trust Incorporated.
"Warrant Agreement" means the warrant agreement pursuant to which the
Warrants will be issued.
"Warrant Share" means a Warrant to purchase one share of Common Stock.
122
<PAGE> 129
TABLE OF CONTENTS TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REALTRUST ASSET CORPORATION
Independent Auditors' Report................................ F-2
Balance Sheet as of April 1, 1998......................... F-3
Note to Balance Sheet..................................... F-4
CMG FUNDING CORP.
Independent Auditors' Report................................ F-5
Financial Statements as of December 31, 1997 and 1996 and
for the year ended December 31, 1997 and the period from
February 7, 1996 (date of inception) to December 31, 1996:
Balance Sheets............................................ F-6
Statements of Operations.................................. F-7
Statements of Stockholders' Equity........................ F-8
Statements of Cash Flows.................................. F-9
Notes to Financial Statements............................. F-10
</TABLE>
F-1
<PAGE> 130
INDEPENDENT AUDITORS' REPORT
To The Board of Directors
RealTrust Asset Corporation
We have audited the accompanying balance sheet of RealTrust Asset
Corporation as of April 1, 1998 (date of inception). This financial statement is
the responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit of a balance sheet includes examining, on a test basis,
evidence supporting the amounts and disclosures in the balance sheet. An audit
of a balance sheet also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
balance sheet presentation. We believe that our audit of the balance sheet
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of RealTrust Asset Corporation as of
April 1, 1998, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Salt Lake City, Utah
May 4, 1998
F-2
<PAGE> 131
REALTRUST ASSET CORPORATION
BALANCE SHEET
APRIL 1, 1998
ASSETS
<TABLE>
<S> <C>
Cash........................................................ $1,000
======
STOCKHOLDERS' EQUITY
Class A Convertible Preferred Stock, par value $.001;
1,263,472 shares authorized;
no shares issued and outstanding.......................... $ --
Class B Redeemable Preferred Stock, par value $.001; 410,581
shares authorized;
no shares issued and outstanding.......................... --
Common Stock, par value $.001; 2,810,455 shares authorized;
66 shares issued and outstanding.......................... --
Additional paid-in capital.................................. 1,000
------
$1,000
======
</TABLE>
See accompanying note to balance sheet at F-4.
F-3
<PAGE> 132
REALTRUST ASSET CORPORATION
NOTE TO BALANCE SHEET
APRIL 1, 1998
BUSINESS DESCRIPTION
RealTrust Asset Corporation (the "Company") was incorporated in the state
of Maryland on April 1, 1998. The Company's business activities will consist of
(i) investing in Mortgage Loans acquired from CMG Funding Corp. and independent
mortgage brokers and banks; (ii) investing in Mortgage Securities, and (iii)
owning preferred stock investment in CMG Funding Corp., which it will account
for on the equity basis of accounting. The Company will operate in a manner that
permits it to elect, and intends to elect, REIT status for Federal income tax
purposes. The Company intends to distribute at least 95% or more of its taxable
income to its holders of Common Stock on a quarterly basis each year so as to
comply with the REIT provisions of the Internal Revenue Code.
In connection with its formation, the Company has filed a registration
statement for the sale of 5,000,000 units. Each unit consists of one share of
Common Stock, par value $.001 per share, and one Common Stock Purchase Warrant.
There has been no public market for the Units and the Company has not yet
commenced operations. Upon the closing of the Offering of the Units, the Company
will use substantially all of the net proceeds of the Offering to provide
funding for investing in Mortgage Loans and Mortgage Securities.
F-4
<PAGE> 133
INDEPENDENT AUDITORS' REPORT
The Board of Directors
CMG Funding Corp.:
We have audited the accompanying balance sheets of CMG Funding Corp.
(formerly Continental Mortgage Group, L.C.) as of December 31, 1997 and 1996,
and the related statements of operations, stockholders' equity, and cash flows
for the year ended December 31, 1997 and the period from February 7, 1996 (date
of inception) to December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CMG Funding Corp. as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the year ended December 31, 1997 and the period from February 7, 1996 (date
of inception) to December 31, 1996, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Salt Lake City, Utah
March 10, 1998
F-5
<PAGE> 134
CMG FUNDING CORP.
(FORMERLY CONTINENTAL MORTGAGE GROUP L.C.)
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash and cash equivalents................................... $ 708,962 272,308
Mortgage loans held for sale................................ 54,451,067 24,147,713
Receivables................................................. 1,379,878 120,731
Furniture, fixtures, and equipment, net..................... 1,325,969 500,570
Other real estate owned..................................... -- 147,740
Deposits.................................................... 86,549 56,762
Restricted cash............................................. 56,478 90,009
Organization costs, net of accumulated amortization of
$6,824 at December 31, 1997 and $2,573 at December 31,
1996...................................................... 38,669 16,105
Prepaid expense............................................. 500,174 6,114
Other assets................................................ 319,557 --
----------- -----------
$58,867,303 25,358,052
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 377,110 207,442
Accrued interest and other liabilities...................... 796,376 536,026
Warehouse and revolving working capital lines of credit..... 55,603,021 23,996,471
Notes payable............................................... 188,690 250,000
Obligations under capital leases............................ 366,687 233,982
Dividends payable........................................... 73,188 --
----------- -----------
Total liabilities................................. 57,405,072 25,223,921
Stockholders' equity:
Class A convertible preferred stock, $.001 par value.
1,268,950 shares authorized, 1,263,472 issued, and
outstanding............................................ 1,263 --
Common stock, $.001 par value. 2,609,407 shares
authorized, 1,546,983 issued, and outstanding.......... 1,547 --
Additional paid-in capital.................................. 2,953,493 --
Members' capital.......................................... -- 1,439,997
Accumulated deficit....................................... (1,494,072) (1,305,866)
----------- -----------
Total stockholders' equity........................ 1,462,231 134,131
----------- -----------
$58,867,303 25,358,052
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 135
CMG FUNDING CORP.
(FORMERLY CONTINENTAL MORTGAGE GROUP L.C.)
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 AND PERIOD FROM FEBRUARY 7, 1996
(DATE OF INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Interest.................................................. $ 3,756,870 621,601
Gain-on-sale of mortgage loans, net....................... 5,967,647 446,771
Mortgage servicing fees................................... 38,826 --
Other..................................................... 269,248 92,063
----------- -----------
10,032,591 1,160,435
----------- -----------
Expenses:
Salaries and employee benefits............................ 4,474,357 390,018
General operating......................................... 4,313,236 1,285,156
Interest.................................................. 2,965,685 731,519
Other..................................................... 53,624 59,608
----------- -----------
11,806,902 2,466,301
----------- -----------
Net loss.......................................... $(1,774,311) (1,305,866)
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE> 136
CMG FUNDING CORP.
(FORMERLY CONTINENTAL MORTGAGE GROUP L.C.)
STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997 AND PERIOD FROM FEBRUARY 7, 1996
(DATE OF INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
CLASS A
CONVERTIBLE ADDITIONAL TOTAL
PREFERRED COMMON PAID-IN MEMBERS' ACCUMULATED STOCKHOLDERS'
STOCK STOCK CAPITAL CAPITAL DEFICIT EQUITY
----------- ------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at February 7, 1996
(date of inception)....... $ -- -- -- -- -- --
Members' capital
contribution.............. -- -- -- 1,562,664 -- 1,562,664
Members' withdrawals........ -- -- -- (122,667) -- (122,667)
Net loss.................... -- -- -- -- (1,305,866) (1,305,866)
------ ----- ---------- ---------- ----------- -----------
Balances at December
31,1996................... -- -- -- 1,439,997 (1,305,866) 134,131
Transfer of Continental
Mortgage Group L.C.
accumulated deficit at
March 7, 1997 (see note
1)........................ -- -- (1,833,694) -- 1,833,694 --
Conversions of members'
capital to Class A
convertible preferred
stock (600,774 shares) and
common stock (1,000,100
shares)................... 601 1,000 1,438,396 (1,439,997) -- --
Issuance of Class A
convertible preferred
stock (252,117 shares).... 252 -- 499,748 -- -- 500,000
Conversion of subordinated
debt to common stock
(546,883 shares).......... -- 547 849,453 -- -- 850,000
Conversion of $2,000,000
revolving working capital
line of credit to Class A
convertible preferred
stock (410,581 shares).... 410 -- 1,999,590 -- -- 2,000,000
Cumulative dividend -- Class
A convertible preferred
stock..................... -- -- -- -- (247,589) (247,589)
Net loss.................... -- -- -- -- (1,774,311) (1,774,311)
------ ----- ---------- ---------- ----------- -----------
Balances at December 31,
1997...................... $1,263 1,547 2,953,493 -- (1,494,072) 1,462,231
====== ===== ========== ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE> 137
CMG FUNDING CORP.
(FORMERLY CONTINENTAL MORTGAGE GROUP L.C.)
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997 AND PERIOD FROM FEBRUARY 7, 1996
(DATE OF INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (1,774,311) $ (1,305,866)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 248,395 54,283
Proceeds from mortgage loans held for sale.............. 462,824,615 148,300,974
Increase in mortgage loans held for sale................ (487,160,322) (172,174,656)
Gain on sales of mortgage loans, net.................... (5,967,647) (446,771)
Write-down of other real estate owned................... -- 25,000
Gain on sale of other real estate owned................. (8,874) --
Proceeds from warehouse and revolving working capital
lines of credit, net.................................. 33,606,550 23,996,471
Changes in operating assets and liabilities:
Increase in receivables.............................. (1,259,147) (120,731)
Increase in deposits................................. (29,787) (56,762)
Decrease (increase) in restricted cash............... 33,531 (90,009)
Increase in organization costs....................... (42,310) (18,678)
Increase in prepaid expense.......................... (494,060) (6,114)
Increase in other assets............................. (319,557) --
Increase in accounts payable......................... 169,668 207,442
Increase in accrued interest and other liabilities... 260,350 536,026
------------- -------------
Net cash provided by (used in) operating
activities...................................... 87,094 (1,099,391)
------------- -------------
Cash flows from investing activities:
Purchase of furniture, fixtures, and equipment............ (784,762) (256,858)
Proceeds from sale of land held for investment............ -- 177,734
Proceeds from sale of other real estate owned............. 156,614 --
------------- -------------
Net cash used in investing activities.............. (628,148) (79,124)
------------- -------------
Cash flows from financing activities:
Proceeds from notes payable............................... 200,000 250,000
Payments on notes payable................................. (261,310) (65,000)
Payments on obligations under capital leases.............. (136,581) (48,726)
Proceeds from subordinated debt........................... 850,000 --
Proceeds from issuance of preferred stock................. 500,000 --
Members' capital contributions, net of withdrawals........ -- 1,314,549
Dividends paid............................................ (174,401) --
------------- -------------
Net cash provided by financing activities.......... 977,708 1,450,823
------------- -------------
Net increase in cash and cash equivalents................... 436,654 272,308
Cash and cash equivalents at the beginning of period........ 272,308 --
------------- -------------
Cash and cash equivalents at end of period.................. $ 708,962 $ 272,308
============= =============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Interest paid............................................... $ 2,599,437 599,020
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES
Transfer from mortgage loans held for sale to other real
estate owned.............................................. $ -- 172,740
Land contributed by member, net of note payable in amount of
$65,000................................................... -- 112,734
Office machinery and equipment contributed by member........ -- 12,714
Capital lease obligations incurred for furniture, fixture,
and equipment............................................. 269,286 282,708
Conversion of members capital to preferred, common stock,
and additional paid-in capital............................ 1,439,997 --
Conversion of subordinated debt to common stock and
additional paid-in capital................................ 850,000 --
Conversion of revolving working capital line of credit to
Class A convertible preferred stock and additional paid-in
capital................................................... 2,000,000 --
Dividends payable on cumulative Class A convertible
preferred stock........................................... 73,188 --
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE> 138
CMG FUNDING CORP.
(FORMERLY CONTINENTAL MORTGAGE GROUP L.C.)
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997 AND PERIOD FROM FEBRUARY 7, 1996
(DATE OF INCEPTION) TO DECEMBER 31, 1996
(1) DESCRIPTION OF BUSINESS
CMG Funding Corp. (the Company) was incorporated on December 12, 1996,
under the laws of the State of Delaware and began operations on March 7, 1997.
Prior to this, the Company was organized on February 7, 1996, in the State of
Utah as a limited liability company and operated as Continental Mortgage Group.
The Company is engaged in mortgage banking activities located throughout the
United States.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Financial Statement Presentation
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the period. Actual results could differ from those
estimates.
(b) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and highly liquid
investments with original maturities of three months or less. The carrying
amount of cash equivalents approximates their value.
The Company has cash in a financial institution which is insured by the
Federal Deposit Insurance Corporation (FDIC) up to $100,000 per institution. As
of December 31, 1997, the Company had amounts on deposit with the financial
institution in excess of FDIC limits. The Company limits its risk by placing its
cash in a high quality financial institution.
At December 31, 1997 and 1996, restricted cash includes $56,478 and
$90,009, respectively, representing cash restricted for the purpose of warehouse
loan fundings.
(c) Mortgage Loans Held for Sale
Mortgage loans held for sale are valued at the lower of cost or estimated
market value as determined by outstanding commitments from investors or current
investor yield requirements calculated on a loan-by-loan basis. Mortgage loans
held for sale include loan premiums of $1,322,339 and $242,553 at December 31,
1997 and 1996, respectively.
The Company has limited its exposure to credit losses on its mortgage loans
held for sale by performing an in-depth due diligence on every loan originated
and purchased. The due diligence encompasses the borrowers credit, the
enforceability of the documents, and the value of the mortgage property. The
Company has not experienced any credit losses to date.
(d) Loan Origination Fees and Related Costs
Loan origination fees and certain direct loan origination costs are
deferred, and the net fee or cost is recognized in income using the interest
method over the contractual life of the loans, adjusted for estimated
prepayments based on the Company's historical prepayment experience. The net
deferred loan fee or cost is used in calculating the Company's gain or loss when
the related loans are sold to investors.
F-10
<PAGE> 139
CMG FUNDING CORP.
(FORMERLY CONTINENTAL MORTGAGE GROUP L.C.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997 AND PERIOD FROM FEBRUARY 7, 1996
(DATE OF INCEPTION) TO DECEMBER 31, 1996
(e) Furniture, Fixtures, and Equipment
Furniture, fixtures, and equipment are stated at cost. Depreciation and
amortization are computed using the straight-line method based on the estimated
useful lives of the related assets. Useful lives range from five to seven years,
with the exception of leasehold improvements which are amortized over the lease
term or estimated useful life, whichever is less. Software is amortized over a
three-year life.
Furniture and equipment under capital lease is stated at the present value
of minimum lease payments at the inception of the lease. Depreciation under
capital leases is computed using the straight-line method over the estimated
useful life of the underlying asset.
(f) Organization Costs
Organization costs associated with the organization of the Company are
amortized on a straight-line basis over five years.
(g) Gain/Loss on Sale of Mortgage Loans
When loans are sold, a gain or loss is recognized to the extent that the
sales proceeds exceed or are less than the net book value of the loans. Net
deferred loan fees or costs are included in calculating gains and losses from
sales on loans.
(h) Mortgage Servicing Fees
Mortgage servicing fees represent the fees earned for servicing mortgage
loans under servicing agreements with the Federal National Mortgage Association
(FNMA). The fees are based on a fixed amount per loan and are recorded as income
when received.
(i) Income Taxes
Prior to March 7, 1997, the Company was a limited liability company (LLC)
under the provisions of the Internal Revenue Code. As a result, the Company paid
no federal or state income taxes, and the elements of income or loss were
includable in the individual members' income tax returns.
Upon the merger of CMG Funding Corp. into Continental Mortgage Group LLC,
with CMG Funding, a "C" Corporation, the survivor, the Company became subject to
income taxes which are recognized using the asset and liability method. Under
the asset and liability method, deferred tax assets and deferred tax liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and deferred tax 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 deferred tax liabilities of a change in tax
rates is recognized in operations in the period that includes the enactment
date.
(j) Recent Accounting Pronouncements
On March 7, 1997, the Company adopted Statement of Financial Accounting
Standards (Statement) 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 the grant. Alternatively, Statement No.
123 also allows entities to continue to apply the provisions of APB Opinion No.
25 and provide pro forma
F-11
<PAGE> 140
CMG FUNDING CORP.
(FORMERLY CONTINENTAL MORTGAGE GROUP L.C.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997 AND PERIOD FROM FEBRUARY 7, 1996
(DATE OF INCEPTION) TO DECEMBER 31, 1996
earnings (loss) and pro forma earnings (loss) per share disclosure for employee
stock option grants made in 1995 and future years as if the fair-value-based
method defined in Statement No. 123 had been applied. The Company has elected to
apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of Statement No. 123.
Statement No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, as amended by Statement No. 127, is
effective for all transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, except for
secured borrowings and collateral, repurchase agreements, dollar rolls,
securities lending, and similar transactions, which transfers will be effective
for transactions occurring after December 31, 1996. This statement provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. Under the financial-components approach, after a transfer of
financial assets, an entity recognizes all financial and servicing assets it
controls and liabilities it has incurred and derecognizes financial assets it no
longer controls and liabilities that have been extinguished. Many of these
assets and liabilities are components of financial assets that existed prior to
the transfer. If a transfer does not meet the criteria for a sale, the transfer
is accounted for as a secured borrowing with a pledge of collateral.
(k) 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 (deficit) as follows as of December
31:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Current assets............................................. $57,040,081 24,636,875
Current liabilities........................................ 55,227,715 24,901,914
----------- ----------
Net working capital (deficit).............................. $ 1,812,366 (265,039)
=========== ==========
</TABLE>
(l) Reclassification
Certain balances in 1996 have been reclassified to conform to the 1997
presentation
(3) RECEIVABLES
Receivables as of December 31, 1997 and 1996, consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Mortgage payments........................................... $ 831,547 40,721
Accrued interest............................................ 463,720 71,616
Investor bonus.............................................. 79,134 --
Other receivables........................................... 5,477 8,394
---------- ----------
$1,379,878 120,731
========== ==========
</TABLE>
F-12
<PAGE> 141
CMG FUNDING CORP.
(FORMERLY CONTINENTAL MORTGAGE GROUP L.C.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997 AND PERIOD FROM FEBRUARY 7, 1996
(DATE OF INCEPTION) TO DECEMBER 31, 1996
(4) FURNITURE, FIXTURES, AND EQUIPMENT
Furniture, fixtures, and equipment at December 31, 1997 and 1996, consist
of the following:
<TABLE>
<CAPTION>
USEFUL LIVES 1997 1996
------------ ----------- -------
<S> <C> <C> <C>
Furniture and fixtures............................ 7 years $ 323,105 146,836
Office machinery and equipment.................... 5 - 7 years 438,544 112,989
Computers......................................... 5 years 514,957 186,591
Software.......................................... 3 years 265,912 92,396
Leasehold improvements............................ 2 - 5 years 63,809 13,468
----------- -------
1,606,327 552,280
Less accumulated depreciation and amortization.... 280,358 51,710
----------- -------
$ 1,325,969 500,570
=========== =======
</TABLE>
(5) WAREHOUSE AND REVOLVING WORKING CAPITAL LINES OF CREDIT
The Company had the following lines of credit for the periods ending
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
2,000,000 revolving working capital line of credit with a
finance company, maturing in January of 1999, with
interest on outstanding balance accruing at LIBOR plus
4.5% to 8.5%, secured by general assets (note 15)......... $ 1,785,225 200,000
7,000,000 warehousing line of credit with a finance company,
maturing in June of 1997, with interest on outstanding
balance accruing at the bank's prime rate plus 0.25%,
payable monthly, secured by loans and servicing rights in
loans warehoused.......................................... -- 6,888,713
12,000,000 warehousing line of credit with a financial
institution, matures in July of 1997, with interest
accruing on outstanding balance ranging from LIBOR plus
2.15% to 2.75%, payable monthly, secured by loans
warehoused and associated servicing rights................ -- 10,248,546
4,000,000 warehousing line of credit with a financial
institution, maturing in April of 1997, with interest on
outstanding balance accruing at the bank's prime rate plus
0.50%, payable monthly, secured by loans warehoused and
associated servicing rights............................... -- 2,590,759
50,000,000 warehousing line of credit with a finance
company, maturing in January of 1999, with interest on
outstanding balance accruing at LIBOR plus 2.25%, payable
monthly, secured by loans warehoused and associated
servicing rights (note 15)................................ 31,692,828 4,068,453
10,000,000 warehousing line of credit with a financial
institution, maturing in May of 1998, with interest
accruing on outstanding balance ranging from LIBOR plus 2%
to 3%, payable monthly, secured by loans warehoused and
associated servicing rights............................... 57,362 --
100,000,000 reverse repurchase agreement with a finance
company, maturing in October of 1998, with interest on
outstanding balance ranging from LIBOR plus 1.10% to
3.25%..................................................... 22,067,606 --
----------- ----------
Total warehouse and revolving working capital
lines of credit................................. $55,603,021 23,996,471
=========== ==========
</TABLE>
F-13
<PAGE> 142
CMG FUNDING CORP.
(FORMERLY CONTINENTAL MORTGAGE GROUP L.C.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997 AND PERIOD FROM FEBRUARY 7, 1996
(DATE OF INCEPTION) TO DECEMBER 31, 1996
The average interest rates pertaining to outstanding short-term borrowings
at December 31, 1997 and 1996, was 7.91 percent and 8.38 percent, respectively.
Effective November 24, 1997, the $2 million revolving line of credit was
renewed and amended to provide $4 million of revolving credit, maturing August
1, 1998. In connection therewith the Company issued a common stock warrant to
the finance company (note 15). The terms of the warrant provided that it could
only be exercised if the Company did not repay in full, the outstanding balance
on the line of credit. If exercised, the warrant entitled the finance company to
purchase for one dollar a number of shares equivalent to a maximum of 13 percent
of the Company's equity on a fully-diluted basis.
Effective December 31, 1997, the finance company converted $2 million of
the $4 million revolving line of credit for 410,581 shares of Class A
convertible preferred stock. Further, the revolving line of credit was renewed
and amended to provide a $2 million revolving credit, maturing January 1, 1999.
In connection with the above noted conversion, the Company granted to the
finance company two warrants to purchase shares of common stock. The first
warrant allows the finance company to purchase, for a nominal amount, up to five
percent of the Company's outstanding common shares (on a fully-diluted basis) if
all principal and interest due under the revolving line of credit is not repaid
on or prior to January 1, 1999. This warrant, if it becomes exercisable, will
remain exercisable for a period of ten years. The second warrant entitles the
finance company to purchase, for a nominal amount, one percent of the Company's
outstanding stock (on a fully-diluted basis) for each calendar quarter during
1998 in which, the Company fails to attain at least 90 percent of a pretax
income target described in the agreement. Entitlements under this warrant may be
exercised prior to the earlier of repayment or January 1, 1999.
Additionally, the warrant issued to the finance company in November 1997
was canceled upon the granting of the two warrants described above.
The Company's warehousing and revolving working capital line of credit
agreements referred to above contain both financial and nonfinancial covenants.
As of December 31, 1997, the Company, with the exception of the $10 million
warehouse line of credit, was in compliance with all covenants under the credit
agreements.
(6) NOTES PAYABLE
Notes payable consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Note payable to a related party, unsecured, with interest on
outstanding balance accruing at 12.0%, paid quarterly,
principal due on December 31, 2000........................ $150,000 --
Note payable to a financial institution, maturing March
2000, with interest on outstanding balance accruing at
11.5%, payable monthly, secured by furniture and
equipment................................................. 38,690 --
Note payable to a financial institution, at a fixed rate of
10.25%, due February 1997................................. -- 250,000
-------- --------
$188,690 250,000
======== ========
</TABLE>
(7) SUBORDINATED DEBT
On December 17, 1996, the Company entered into a subordinated debt
agreement with a finance company that permitted the Company to borrow $850,000
at 15 percent interest if certain origination volumes
F-14
<PAGE> 143
CMG FUNDING CORP.
(FORMERLY CONTINENTAL MORTGAGE GROUP L.C.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997 AND PERIOD FROM FEBRUARY 7, 1996
(DATE OF INCEPTION) TO DECEMBER 31, 1996
were met as described in the agreement; otherwise, the interest rate was 18
percent. The subordinated debt was originally convertible into 429,293 shares of
convertible preferred stock, at the option of the finance company, for a
conversion price of $1.98 per share.
Effective, November 24, 1997, the Company and the finance company modified
the agreement providing for a conversion privilege to common stock. In
accordance with such modifications, the finance company exercised its conversion
privilege by converting the subordinated debt into 546,883 shares of common
stock.
(8) CAPITAL STOCK
The Company's convertible preferred stock entitles the stockholder to
receive a dividend at the annual rate of 18 percent of the original issue price,
of $1.98 per share. The dividends are cumulative and are payable quarterly, in
arrears on the last day of each quarter end. The dividends accrue whether or not
the Company has earnings, funds are legally available for payment, and dividends
are declared. In addition, each share is convertible to common stock at any time
subsequent to issuance, at the option of the stockholder, as determined by
dividing the original issue price by the conversion price defined in the
Certification of Incorporation of the Company.
During December 1996, the Company adopted a stock option plan (the Plan),
which provides for grants of incentive and nonqualified stock options. Under
this Plan, the Company has granted nonqualified stock options to officers,
directors, and other key individuals providing significant services to the
Company. The number of shares, terms, and exercise periods are determined by the
Board of Directors on an option-by-option basis. All options granted have a
ten-year exercise period and vest over a three-year period. An aggregate of
226,905 shares have been authorized for issuance under this plan. None of the
options outstanding as of December 31, 1997 are exercisable.
A summary of the activity for the year ended December 31, 1997 under this
Plan follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
------ ----------------
<S> <C> <C>
Outstanding at beginning of period.......................... -- $ --
Granted..................................................... 97,000 3.96
------ -----
Outstanding at end of period................................ 97,000 $3.96
====== =====
Weighted-average:
Fair value of options granted during the period........... $ 0.68
Remaining contractual life................................ 8.96years
</TABLE>
The Company accounts for the Plan according to APB 25, under which
compensation cost will be recognized over the expected life of the options for
the difference between the exercise price and the related fair value. Inasmuch
as the Company's Board of Directors and management believes, the exercise price
to reflect the fair value of the options at date of grant, no compensation cost
was recorded for the year ended December 31, 1997. Had compensation cost for the
Plan been determined consistent with Statement No. 123, the Company's December
31, 1997 net loss would have been increased as follows:
<TABLE>
<S> <C>
Net loss:
As reported............................................... $1,774,311
Pro forma................................................. 1,786,661
</TABLE>
F-15
<PAGE> 144
CMG FUNDING CORP.
(FORMERLY CONTINENTAL MORTGAGE GROUP L.C.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997 AND PERIOD FROM FEBRUARY 7, 1996
(DATE OF INCEPTION) TO DECEMBER 31, 1996
The effect that calculating compensation cost for stock-based compensation
under Statement No. 123 has on the pro forma net loss as presented above may not
be representative of the effects on reported net earnings or losses for future
years.
The fair value of each option grant is estimated on the date of grant using
an option pricing model with the following weighted-average assumptions: risk
free interest rate of six percent; expected dividend yields of zero percent; and
expected lives of three years.
Subsequent to December 31, 1997, the Company canceled 27,500 options to
employees and a director to acquire shares of common stock at an exercise price
of $3.96.
(9) LOAN SERVICING
For the year ended December 31, 1997, the Company was servicing
approximately eight loans, owned by investors, aggregating $993,384. In
connection with its loan administration activities, the Company makes certain
payments of property taxes, insurance premiums, and guaranteed payments in
advance of collecting them from specific mortgagors.
(10) EMPLOYEE BENEFIT PLANS
The Company has a qualified 401(k) retirement plan for all employees who
have completed three months of service and have attained the age of 21.
Participants are able to contribute, on a pre-tax basis, up to 15 percent of
their earnings to the plan. Employer matching contributions are discretionary,
to be set prior to the end of the plan year, computed quarterly, and allocated
based on the ratio of the participants' compensation to total participants'
compensation.
(11) INCOME TAXES
As discussed in note 2, the Company became subject to income taxes
following the merger on March 7, 1997. There is no income tax subsequent to that
date due to operating losses. The difference between the expected tax benefit
and the actual benefit is primarily attributable to the effect of net operating
losses being offset by the Company's valuation allowance.
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1997, are presented below:
<TABLE>
<S> <C>
Deferred tax asset:
Net operating loss carryforwards.......................... $472,150
Mark to market adjustment................................. 8,750
Other..................................................... 4,000
--------
Total gross deferred tax assets................... 484,900
Deferred tax liabilities -- furniture, fixtures, and
equipment due to differences in depreciation.............. 40,000
--------
Net deferred tax asset before valuation allowance........... 444,900
Less valuation allowance.................................... 444,900
--------
Net deferred tax asset............................ $ --
========
</TABLE>
Subsequently recognized tax benefits relating to the valuation allowance
for deferred tax assets will be allocated as an income tax benefit to be
reported in the statements of operations. At December 31, 1997, the
F-16
<PAGE> 145
CMG FUNDING CORP.
(FORMERLY CONTINENTAL MORTGAGE GROUP L.C.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997 AND PERIOD FROM FEBRUARY 7, 1996
(DATE OF INCEPTION) TO DECEMBER 31, 1996
Company had tax net operating losses approximately of $1,269,000, which can be
carried forward to reduce federal income taxes.
(12) LEASES
The Company is obligated under operating leases for furniture, equipment,
and office space. In addition, the Company leases certain office equipment under
agreements that are recorded as capital leases. Future minimum lease payments
under noncancelable operating leases (with initial or remaining lease terms in
excess of one year) and minimum capital lease payments as of December 31, 1997,
are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ----------
<S> <C> <C>
Period ending December 31:
1998...................................................... $216,835 $ 763,387
1999...................................................... 160,310 705,032
2000...................................................... 48,544 627,884
2001...................................................... 5,701 595,820
2002...................................................... 2,315 155,272
-------- ----------
Total minimum lease payments...................... 433,705 $2,847,395
==========
Less amount representing interest........................... 67,018
--------
Present value of net minimum lease payments....... $366,687
========
</TABLE>
Furniture and equipment held under capital leases and the related
accumulated amortization at December 31, 1997, is as follows:
<TABLE>
<S> <C>
Furniture and fixtures...................................... $111,114
Office machinery and equipment.............................. 363,416
Computers................................................... 68,093
--------
542,623
Less accumulated amortization............................... 109,586
--------
$433,037
========
</TABLE>
Rental expense under operating leases was $648,314 and $277,377 for the
year ending December 31, 1997 and the period from February 7, 1996 (date of
inception) to December 31, 1996, respectively.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made using amounts that have been determined using available
market information and appropriate valuation methodologies. However,
considerable judgment is 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 the different market assumptions or estimation
methodologies could have a material impact on the estimated fair value amounts.
F-17
<PAGE> 146
CMG FUNDING CORP.
(FORMERLY CONTINENTAL MORTGAGE GROUP L.C.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997 AND PERIOD FROM FEBRUARY 7, 1996
(DATE OF INCEPTION) TO DECEMBER 31, 1996
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------ -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents..................... $ 708,962 708,962 272,308 272,308
Mortgage loans held for sale.................. 54,451,067 56,127,600 24,147,713 24,402,600
Receivables................................... 1,379,878 1,379,878 120,731 120,731
Deposits...................................... 86,549 86,549 56,762 56,762
Restricted cash............................... 56,478 56,478 90,009 90,009
Financial liabilities:
Accounts payable.............................. $ 377,110 377,110 207,442 207,442
Accrued interest and other liabilities........ 796,376 796,376 536,026 536,026
Warehouse and revolving working capital lines
of credit.................................. 55,603,021 55,603,021 23,996,471 23,996,471
Notes payable................................. 188,690 188,690 250,000 250,000
</TABLE>
The carrying amounts reported in the balance sheets for cash and cash
equivalents, receivables, deposits, restricted cash, accounts payable, accrued
interest, and other liabilities approximate fair value because of the immediate
or short-term maturity of these financial instruments. The fair value of
mortgage loans held for sale is estimated based on quoted marked prices from
dealers and brokers for similar types of mortgage loans. The warehouse and
revolving working capital lines of credit are variable-rate debt which reprice
with the change in market rates, as such, their carrying amounts are deemed to
approximate fair value.
(14) COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company.
(15) CONCENTRATIONS OF CREDIT RISK
A significant portion of loans originated and purchased, and held for sale
are single family residence mortgage loans.
For the year ended December 31, 1997, mortgage loans purchased and
originated by the Company were geographically concentrated in Utah, Florida,
Georgia, and California. The Company has no other significant concentration of
credit risk. The Company manages its credit risk through diversification of
markets in which the Company originates and purchases mortgage loans.
F-18
<PAGE> 147
CMG FUNDING CORP.
(FORMERLY CONTINENTAL MORTGAGE GROUP L.C.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997 AND PERIOD FROM FEBRUARY 7, 1996
(DATE OF INCEPTION) TO DECEMBER 31, 1996
(16) RELATED PARTY
One of the Company's holders of 662,698 shares Class A convertible
preferred stock and 546,883 shares common stock is a finance company from which
the Company has borrowings as follows as of December 31, 1997 and 1996,
respectively (notes 5 and 7):
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Warehouse line of credit................... $31,692,828 $4,068,453
=========== ==========
Revolving working capital line of credit... $ 1,785,225 $ 200,000
=========== ==========
</TABLE>
The Company is obligated to offer to sell to the finance company 75 percent
of the principal balance of all subprime mortgage loan monthly production by the
Company for 1997 and 1996, 50 percent in 1998, and 25 percent thereafter until
2000. For the periods ended December 31, 1997 and 1996, the Company sold, under
this agreement, loan production in the amounts of $98,042,000 and $16,140,000,
respectively.
F-19
<PAGE> 148
======================================================
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAIN IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 17
The Company........................... 38
Use of Proceeds....................... 38
Dividend Policy and Distributions..... 39
Dividend Reinvestment Plan............ 39
Dilution.............................. 40
Capitalization........................ 44
Selected Financial Data of CMG Funding
Corp. .............................. 45
Management's Discussion and Analysis
of Financial Condition and Results
of
Operations.......................... 46
Business.............................. 49
Management............................ 79
Structure and Formation
Transactions........................ 89
Principal Stockholders................ 94
Description of Capital Stock.......... 94
Shares Eligible for Future Sale....... 104
Federal Income Tax Considerations..... 106
Underwriting.......................... 116
Legal Matters......................... 118
Experts............................... 118
Additional Information................ 118
Glossary.............................. 119
Table of Contents to Financial
Statements.......................... F-1
- --------------------------------------------
UNTIL , 1998, ALL DEALERS
EFFECTING TRANSACTIONS IN THE UNITS, WHETHER
OR NOT PARTICIPATING IN THIS DISTRIBUTION,
MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT 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.
============================================
</TABLE>
======================================================
[LOGO]
5,000,000 UNITS
REALTRUST ASSET
CORPORATION
CONSISTING OF
ONE SHARE OF COMMON STOCK
AND ONE STOCK
PURCHASE WARRANT
------------------------
PROSPECTUS
MAY , 1998
------------------------
STIFEL, NICOLAUS & COMPANY,
INCORPORATED
EVEREN SECURITIES, INC.
======================================================
<PAGE> 149
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee and the American Stock Exchange ("AMEX") filing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE
PAID
------
<S> <C>
SEC Registration Fee........................................ $ 55,094.71
AMEX filing fee............................................. $ 55,000.00
NASD filing fee............................................. $ 8,000.00
Printing and engraving expenses............................. $ 150,000.00
Legal fees and expenses..................................... $ 300,000.00
Accounting fees and expenses................................ $ 300,000.00
Blue Sky fees and expenses.................................. $ 50,000.00
Transfer agent and custodian fee............................ $ 5,000.00
Miscellaneous............................................... $ 181,906.00
-------------
Total............................................. $1,100,000.00
=============
</TABLE>
- ---------------
* To be filed by amendment
All amounts estimated except for Securities and Exchange Commission
registration fee.
ITEM 32. SALES TO SPECIAL PARTIES.
See Item 33 for description of securities of the Company issued to
affiliates of the Company for cash and other consideration.
II-1
<PAGE> 150
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES.
Issuance to CMG Funding Shareholders
On April 15, 1998, the shareholders of the Taxable Subsidiary contributed
certain shares of the Taxable Subsidiary capital stock to RealTrust in exchange
for the issuance of identical classes and number of RealTrust shares. This
issuance was contemplated as part of the Formation Transaction, and is described
in the Prospectus. Set forth below are the names of each stockholder of the
Taxable Subsidiary receiving shares and the number of shares (after giving
effect to the stock split anticipated to occur immediately prior to the
closing).
<TABLE>
<CAPTION>
NO. OF
RECIPIENT RELATIONSHIP TO COMPANY SHARES
--------- ----------------------- -------
<S> <C> <C>
John D. Fry............................. Chairman, Chief Executive Officer & President 392,798
Terry L. Mott........................... Executive Vice President & Director 122,406
Patrick Croghan......................... Vice President 95,409
Shauna Reimann.......................... Vice President 95,409
William Reed............................ Vice President 63,606
David and Sara Ferradino................ None -- accredited investor 56,641
Brenda Colson........................... Employee 19,060
Kent Bills.............................. Secretary 19,060
ContiFinancial Corporation.............. None -- accredited investor 683,535
410,581*
</TABLE>
* Shares of the Company's Class B Preferred Stock, which are expected to be
redeemed after the closing of this Offering.
All of such shares were issued pursuant to exemptions from registration
provided by Section 4(2) and Rule 506 of Regulation D. The sale was made to nine
persons, most of whom are accredited investors either as a result of their
financial status and degree of sophistication or as a result of their position
as an officer or director of the Registrant. The consideration paid in all cases
was the capital stock of the Taxable Subsidiary.
Issuance to Capstone Investments, Inc.
On March 18, 1998, RealTrust issued to Capstone Investments, Inc., a
corporation controlled by stockholders David and Sara Ferradino, a Convertible
Secured Promissory Note in the principal amount of $850,000 and warrants to
purchase 50,000 shares of Registrant's Common Stock at an exercise price equal
to the Price to Public in this offering. The Note is convertible into Units to
be issued in this offering at a conversion price equal to the Price to Public.
The consideration paid was $850,000 of cash, without any discount or
commissions. The issuance was exempt from registration pursuant to the
exemptions provided by Section 4(2) and Rule 505 of Regulation D. The Registrant
believes that the one investor is accredited under Rule 501.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Maryland GCL provides that a Maryland corporation may indemnify any person
who is or was serving at the request of the corporation as a director, officer,
partner, trustee, employee, or agent of another foreign or domestic corporation,
partnership, joint venture, trust or other enterprise or employee benefit plan
("director"), that is made a party to any proceeding by reason of service in
that capacity unless it is established that the act or omission of the director
was material to the matter giving rise to the proceeding and was committed in
bad faith or was the result of active and deliberate dishonesty; or the director
actually received an improper personal benefit in money, property or services;
or, in the case of any criminal proceeding, the director had reasonable cause to
believe that the act or omission was unlawful. Indemnification may be against
judgments, penalties, fines, settlements, and reasonable expenses actually
incurred by the director in connection with the proceeding, but if the
proceeding was won by or in the right of the corporation, indemnification may
not be made in respect of any proceeding in which the director shall be adjudged
to be liable to the corporation. Such
II-2
<PAGE> 151
indemnification may not be made unless authorized for a specific proceeding
after a determination has been made, in a manner prescribed by law, that
indemnification is permissible in the circumstances because the director has met
the applicable standard of conduct. The director must be indemnified for
expenses, however, if he has been successful in the defense of the proceeding or
as otherwise ordered by a court. The law also prescribes the circumstances under
which a corporation may advance expenses to, or obtain insurance or similar
coverage for directors.
The Company's Amended and Restated Articles of Incorporation provide for
indemnification of the officers and directors of the Company and eliminate the
liability of a director or officer to the Company or its stockholders for money
damages to the fullest extent permitted by Maryland law.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not applicable.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
(b) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
** 1.1 Underwriting Agreement with Stifel, Nicolaus & Company,
Incorporated.
** 3.1 Amended and Restated Articles of Incorporation.
* 3.2 Bylaws.
* 4.1 Specimen Stock Certificate for Common Stock of RealTrust
Asset Corporation.
* 4.2 Warrant Agreement.
* 4.3 1996 Stock Option Plan of CMG Funding Corp.
** 4.4 Form of 1996 Stock Option Agreement.
* 4.5 1998 Stock Option Plan of RealTrust Asset Corporation.
** 4.6 Form of 1998 Stock Option Agreement.
** 4.7 Form of Registration Rights Agreement.
* 4.8 Warrant Agreement No. 2 with ContiFinancial Corporation.
* 4.9 Warrant Agreement No. 3 with ContiFinancial Corporation.
* 4.10 Warrant Agreement with Capstone Investments, Inc.
* 4.11 Convertible Secured Note in favor of Capstone Investments,
Inc.
*4.12 Contribution Agreement with stockholders of CMG Funding
Corp. and RealTrust Asset Corporation.
*4.13 Bonus Incentive Plan of RealTrust Asset Corporation.
* 5.1 Opinion of Jeffers, Wilson, Shaff & Falk, LLP regarding
legality of Securities.
* 8.1 Opinion of Jeffers, Wilson, Shaff & Falk, LLP regarding
certain tax matters. (included in Exhibit 5.1)
*10.1 Employment Agreement with John D. Fry.
*10.2 Employment Agreement with Terry L. Mott.
*10.3 Employment Agreement with John P. McMurray.
*10.4 Employment Agreement with Steven K. Passey.
*10.5 Investment Banking Service Agreement with ContiFinancial
Corporation, as amended.
</TABLE>
II-3
<PAGE> 152
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
**10.6 Loan Servicing Agreement with Advanta Mortgage Corp USA for
CMG Funding Corp., as amended.
**10.7 Loan Servicing Agreement with Nomura Asset Capital
Corporation for CMG Funding Corp.
*10.8 Purchase and Sale Agreement between ContiTrade Services LLC
and CMG Funding Corp., as amended.
**10.9 Master Repurchase Agreement Governing Purchase and Sales of
Mortgage Loans with Nomura Asset Capital Corporation.
*10.10 Standby and Working Capital Agreement between ContiTrade
Services LLC and CMG Funding Corp., as amended.
*10.11 Conversion Letter No. 1 from ContiFinancial Corporation.
*10.12 Conversion Letter No. 2 from ContiFinancial Corporation.
*10.13 Registration Rights Agreement with ContiFinancial
Corporation.
*21.1 List of subsidiaries.
*23.1 Consent of Counsel (included in Exhibit (5.1).
*23.2 Consents of independent auditors.
*23.3 Consents of Independent Directors.
24.1 Power of Attorney (included in signature page).
*27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Filed herewith.
** To be filed by amendment.
ITEM 37. UNDERTAKINGS
A. The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date to the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement;
Provided, however, that paragraphs A(1)(i) and A(1)(ii) do not apply
if the information required to be included in a post-effective amendment by
those paragraphs is contained in the periodic reports filed by the
Registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 that are incorporated by reference in the Registration Statement
(2) That, for the purpose of determining liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-4
<PAGE> 153
B. The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at the time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 154
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the undersigned
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-11 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Salt Lake City, Utah, on the 13th day of May, 1998.
REALTRUST ASSET CORPORATION
By: /s/ JOHN D. FRY
------------------------------------
John D. Fry
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John D. Fry and Terry L. Mott, and each of them,
his true and lawful attorneys-in-fact and agent, with full power of substitution
and resubstitution, for him and in his name, and in any and all capacities, to
sign any and all amendments (including post-effective amendments) to the
Registration Statement to which this power of attorney is attached, as well as
any registration statement (or amendment thereto) relating to one or more of the
offerings covered hereby filed pursuant to Rule 462(b) promulgated under the
Securities Act of 1933, as amended, and to file the same and all exhibits to
them and other documents to be filed in connection with them, with the
Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities as Directors and Officers of RealTrust Asset Corporation on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ JOHN D. FRY Chairman, Chief Executive May 13, 1998
- ----------------------------------------------------- Officer and President
John D. Fry
/s/ STEVEN K. PASSEY Chief Financial Officer May 13, 1998
- ----------------------------------------------------- and Treasurer
Steven K. Passey (principal accounting officer)
/s/ TERRY L. MOTT Director May 13, 1998
- -----------------------------------------------------
Terry L. Mott
/s/ CARTER E. JONES Director May 13, 1998
- -----------------------------------------------------
Carter E. Jones
</TABLE>
II-6
<PAGE> 155
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<S> <C> <C>
** 1.1 Underwriting Agreement with Stifel, Nicolaus & Company,
Incorporated.
** 3.1 Amended and Restated Articles of Incorporation.
* 3.2 Bylaws.
* 4.1 Specimen Stock Certificate for Common Stock of RealTrust
Asset Corporation.
* 4.2 Warrant Agreement.
* 4.3 1996 Stock Option Plan of CMG Funding Corp.
** 4.4 Form of 1996 Stock Option Agreement.
* 4.5 1998 Stock Option Plan of RealTrust Asset Corporation.
** 4.6 Form of 1998 Stock Option Agreement.
** 4.7 Form of Registration Rights Agreement.
* 4.8 Warrant Agreement No. 2 with ContiFinancial Corporation.
* 4.9 Warrant Agreement No. 3 with ContiFinancial Corporation.
* 4.10 Warrant Agreement with Capstone Investments, Inc.
** 4.11 Convertible Secured Note in favor of Capstone Investments,
Inc.
*4.12 Contribution Agreement with stockholders of CMG Funding
Corp. and RealTrust Asset Corporation.
*4.13 Bonus Incentive Plan of RealTrust Asset Corporation.
* 5.1 Opinion of Jeffers, Wilson, Shaff & Falk, LLP regarding
legality of Securities.
* 8.1 Opinion of Jeffers, Wilson, Shaff & Falk, LLP regarding
certain tax matters. (included in Exhibit 5.1)
*10.1 Employment Agreement with John D. Fry.
*10.2 Employment Agreement with Terry L. Mott.
*10.3 Employment Agreement with John P. McMurray.
*10.4 Employment Agreement with Steven K. Passey.
*10.5 Investment Banking Service Agreement with ContiFinancial
Corporation, as amended.
**10.6 Loan Servicing Agreement with Advanta Mortgage Corp USA for
CMG Funding Corp., as amended.
**10.7 Loan Servicing Agreement with Nomura Asset Capital
Corporation for CMG Funding Corp.
*10.8 Purchase and Sale Agreement between ContiTrade Services LLC
and CMG Funding Corp., as amended.
**10.9 Master Repurchase Agreement Governing Purchase and Sales of
Mortgage Loans with Nomura Asset Capital Corporation.
*10.10 Standby and Working Capital Agreement between ContiTrade
Services LLC and CMG Funding Corp., as amended.
*10.11 Conversion Letter No. 1 from ContiFinancial Corporation.
*10.12 Conversion Letter No. 2 from ContiFinancial Corporation.
*10.13 Registration Rights Agreement with ContiFinancial
Corporation.
*21.1 List of subsidiaries.
*23.1 Consent of Counsel (included in Exhibit (5.1).
*23.2 Consent of independent auditors.
*23.3 Consents of Independent Directors.
</TABLE>
<PAGE> 156
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<S> <C> <C>
24.1 Power of Attorney (included in signature page).
*27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Filed herewith.
** To be filed by Amendment.
<PAGE> 1
EXHIBIT 3.2
REALTRUST ASSET CORPORATION
BYLAWS
ARTICLE I
OFFICES
Section 1. Principal Office.
The principal office of the Corporation shall be located at such place
or places as the Board of Directors may designate.
Section 2. Registered Office.
The registered office of RealTrust Asset Corporation (the "Corporation")
in the State of Maryland shall be located in the offices of The Corporation
Trust Incorporated, 32 South Street, Baltimore, Maryland and The Corporation
Trust Incorporated shall be the registered agent in charge of such location,
which may be changed from time to time as determined by the registered agent.
Section 3. Additional Offices.
The Corporation may have additional offices at such places as the Board
of Directors may from time to time determine or the business of the Corporation
may require.
ARTICLE II
STOCKHOLDERS
Section 1. Annual Meetings.
The annual meeting of the stockholders for the election of directors and
for the transaction of such other business as may properly come before the
meeting shall be held on such date as the Board of Directors shall each year
fix. Each such annual meeting shall be held at such place, within or without the
State of Maryland, and hour as shall be determined by the Board of Directors.
The day, place and hour of each annual meeting shall be specified in the notice
of such annual meeting. Any annual meeting of stockholders may be adjourned from
time to time and place to place until its business is completed.
1
<PAGE> 2
Section 2. Special Meetings.
(a) Except as otherwise required by law or by this Corporation's
Articles of Incorporation and subject to the rights of the holders of any class
or series of stock having a preference over the common stock as to dividends or
on liquidation, special meetings of the stockholders may be called only by the
Chairman of the Board, the Chief Executive Officer, the Board of Directors
pursuant to a resolution approved by a majority of the entire Board of Directors
or by one or more stockholders holding shares in the aggregate representing not
less than twenty-five percent (25%) of the votes at that meeting. The term
"entire Board of Directors", as used in these Bylaws, means the total number of
directors which the Corporation would have if there were no vacancies.
(b) If a special meeting is called by any person or persons other than
the Board of Directors, the request shall be in writing, specifying the time of
such meeting and the general purpose or purposes for which the meeting is
called, and shall be delivered personally or sent by registered mail or by
telegraphic or other facsimile transmission to the Chairman of the Board, any
Executive Vice President or the Secretary of the Corporation. The officer
receiving the request shall cause notice to be promptly given to the
stockholders entitled to vote, in accordance with the provisions of Sections 4
and 5 of this Article II, that a meeting will be held at the time requested by
the person or persons calling the meeting, not less than thirty-five (35) nor
more than sixty (60) days after the receipt of the request. If the notice is not
given within twenty (20) days after receipt of the request, the person or
persons requesting the meeting may give the notice. Nothing contained in this
subparagraph (b) of this Section 3 shall be construed as limiting, fixing of
affecting the time when a meeting of stockholders called by action of the Board
of Directors may be held.
Section 3. Nominations and Proposals by Stockholders.
(a) Annual Meetings of Stockholders.
(1) Nominations of persons for election to the Board of Directors
and the proposal of business to be considered by the stockholders may be made at
an annual meeting of stockholders (i) pursuant to the Corporation's notice of
meeting, (ii) by or at the direction of the Board of Directors or (iii) by any
stockholder of the Corporation who was a stockholder of record both at the time
of giving of notice provided for in this Section 3(a) and at the time of the
annual meeting, who is entitled to vote at the meeting and who complied with the
notice procedures set forth in this Section 3(a).
(2) For nominations or other business to be properly brought
before an annual meeting by a stockholder pursuant to clause (iii) of paragraph
(a)(1) of this Section 3, the stockholder must have given timely notice thereof
in writing to the Chairman or Secretary of the Corporation and such other
business must otherwise be a proper matter for action by stockholders. To be
timely, a stockholder's notice shall be delivered to the Chairman or Secretary
at the
2
<PAGE> 3
principal executive offices of the Corporation not later than the close of
business on the 60th day nor earlier than the close of business on the 90th day
prior to the first anniversary of the preceding year's annual meeting; provided,
however, that in the event that the date of the annual meeting is advanced by
more than 30 days or delayed by more than 60 days from such anniversary date or
if the Corporation has not previously held an annual meeting, notice by the
stockholder to be timely must be so delivered not earlier than the close of
business on the 90th day prior to such annual meeting and not later than the
close of business on the later of the 60th day prior to such annual meeting or
the tenth day following the day on which public announcement of the date of such
meeting is first made by the Corporation. In no event shall the public
announcement of a postponement or adjournment of an annual meeting to a later
date or time commence a new time period for the giving of a stockholder's notice
as described above. Such stockholder's notice shall set forth (i) as to each
person whom the stockholder proposes to nominate for election or reelection as a
director all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors in an election
contest, or is otherwise required, in each case pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including
such person's written consent to being named in the proxy statement as a nominee
and to serving as a director if elected); (ii) as to any other business that the
stockholder proposes to bring before the meeting, a brief description of the
business desired to be brought before the meeting, the reasons for conducting
such business at the meeting and any material interest in such business of such
stockholder and of the beneficial owner, if any, on whose behalf the proposal is
made; and (iii) as to the stockholder giving the notice and the beneficial
owner, if any, on whose behalf the nomination or proposal is made, (x) the name
and address of such stockholder, as they appear on the Corporation's books, and
of such beneficial owner and (y) the number of shares of each class of stock of
the Corporation which are owned beneficially and of record by such stockholder
and such beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph
(a)(2) of this Section 3 to the contrary, in the event that the number of
directors to be elected to the Board of Directors is increased and there is no
public announcement by the Corporation naming all of the nominees for director
or specifying the size of the increased Board of Directors at least 70 days
prior to the first anniversary of the preceding year's annual meeting, a
stockholder's notice required by this Section 3(a) shall also be considered
timely, but only with respect to nominees for any new positions created by such
increase, if it shall be delivered to the Chairman or Secretary at the principal
executive offices of the Corporation not later than the close of business on the
tenth day following the day on which such public announcement is first made by
the Corporation.
(b) Special Meetings of Stockholders. Only such business shall be
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the Corporation's notice of meeting. Nominations of
persons for election to the Board of Directors may be made at a special meeting
of stockholders at which directors are to be elected (i) pursuant to the
Corporation's notice of meeting, (ii) by or at the direction of the Board of
Directors or (iii) provided that the Board of Directors has determined that
directors shall be elected at such special
3
<PAGE> 4
meeting, by any stockholder of the Corporation who is a stockholder of record
both at the time of giving of notice provided for in this Section 3(b) and at
the time of the special meeting, who is entitled to vote at the meeting and who
complied with the notice procedures set forth in this Section 3(b). In the event
the Corporation calls a special meeting of stockholders for the purpose of
electing one or more directors to the Board of Directors, any such stockholder
may nominate a person or persons (as the case may be) for election to such
position as specified in the Corporation's notice of meeting, if the
stockholder's notice containing the information required by paragraph (a)(2) of
this Section 3 shall be delivered to the Chairman or Secretary at the principal
executive offices of the Corporation not earlier than the close of business on
the 90th day prior to such special meeting and not later than the close of
business on the later of the 60th day prior to such special meeting or the tenth
day following the day on which public announcement is first made of the date of
the special meeting and of the nominees proposed by the Board of Directors to be
elected at such meeting. In no event shall the public announcement of a
postponement or adjournment of a special meeting to a later date or time
commence a new time period for the giving of a stockholder's notice as described
above.
(c) General.
(1) Only such persons who are nominated in accordance with the
procedures set forth in this Section 3 shall be eligible to serve as directors
and only such business shall be conducted at a meeting of stockholders as shall
have been brought before the meeting in accordance with the procedures set forth
in this Section 3. The chairman of the meeting shall have the power and duty to
determine whether a nomination or any business proposed to be brought before the
meeting was made or proposed, as the case may be, in accordance with the
procedures set forth in this Section 3 and, if any proposed nomination or
business is not in compliance with this Section 3, to declare that such
nomination or proposal shall be disregarded.
(2) For purposes of this Section 3, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable news service or in a document publicly filed by
the Corporation with the Securities and Exchange Commission pursuant to Section
13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section 3, a
stockholder shall also comply with all applicable requirements of state law and
of the Exchange Act and the rules and regulations thereunder with respect to the
matters set forth in this Section 3. Nothing in this Section 3 shall be deemed
to affect any rights of stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act.
Section 4. Stockholder Action; How Taken.
Any action required or permitted to be taken by the stockholders of the
Corporation must be effected at a duly called annual or special meeting of such
stockholders and may not be effected by any consent in writing by such
stockholders; provided, however, that any action required or
4
<PAGE> 5
permitted to be taken at any annual or special meeting of stockholders of the
Corporation may be taken without a meeting, without prior notice, and without a
vote, if the following are filed with the records of stockholders meetings: (i)
A unanimous written consent which sets forth the action and is signed by each
stockholder entitled to vote on the matter; and (ii) A written waiver of any
right to dissent signed by each stockholder entitled to notice of the meeting
but not entitled to vote at such meeting. Any action taken pursuant to such
consent shall be effective as of the date of the last signature thereon needed
to make it effective unless otherwise provided in the consent. All counterparts
of such consent necessary to make it effective shall be filed with the minutes
of proceedings of the stockholders. If the action that is consented to is such
as would have required the filing of a certificate under any provisions of the
Maryland General Corporation Law (the "MGCL") if such action had been voted upon
by stockholders at a meeting, the certificate filed shall state, in lieu of any
statement concerning a vote of stockholders, that written consent has been given
in accordance with the provisions of the MGCL, and that written notice has been
given as provided in that section.
Section 5. Notice of Meeting.
Written notice stating the place, date and hour of the meeting and, in
case of a special meeting or in such case as notice of the purpose is required
by the MGCL, the purpose or purposes for which the meeting is called, except as
set forth in subparagraph (b) of Section 3, shall be given not less than ten
(10) nor more than ninety (90) days before the date of the meeting, except as
otherwise required by statute or the Articles of Incorporation to each
stockholder of record entitled to vote at such meeting and to each such other
stockholder entitled to notice of the meeting, in the following manner: (i) by
personally delivering such notice to such stockholder; (ii) by mailing such
notice to such stockholder at his address as it appears on the records of the
Corporation; or (iii) by leaving such notice at such stockholder's residence or
usual place of business. If mailed, such notice shall be deemed to be given when
deposited in the United States mail, postage prepaid, addressed to the
stockholder at his address as it appears on the stock records of the
Corporation. If given personally or otherwise than by mail, such notice shall be
deemed to be given when either handed to the stockholder or delivered to the
stockholder's address as it appears on the stock records of the Corporation.
Section 6. Waiver.
Whenever notice of the time, place, or purpose of a stockholders'
meeting is required by the MGCL or this Corporation's Articles of Incorporation
or Bylaws, each such person who is entitled to such notice shall be deemed to
have waived notice if either of the following conditions are satisfied: (i)
either before or after the meeting such person signs a written waiver of notice
which is thereafter filed with the records of stockholders meeting in this
Corporation's book of minutes; or, (ii) such person is present at the meeting in
person or by proxy. Unless otherwise required by law, a written waiver of notice
need not specify the business to be transacted or the purpose of any such
meeting.
5
<PAGE> 6
Section 7. Voting List.
The Secretary shall prepare and make available, at least ten days before
every meeting of stockholders, a complete list of the stockholders entitled to
vote at the meeting, arranged in alphabetical order and showing the address and
the number of shares registered in the name of each stockholder. Such list shall
be open to the examination of any stockholder for any purpose germane to the
meeting, during ordinary business hours, for a period of at least ten days prior
to the meeting, either at a place within the city where the meeting is to be
held, which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall be
produced and kept at the place of the meeting during the whole time thereof and
may be inspected by any stockholder who is present.
Section 8. Quorum; Voting.
Except as otherwise required by law, the Articles of Incorporation or
these Bylaws, the holders of not less than a majority of the shares entitled to
vote at any meeting of the stockholders, present in person or by proxy, shall
constitute a quorum, and the act of the majority of such quorum shall be deemed
the act of the stockholders. If a quorum shall fail to attend any meeting, the
Chairman of the meeting may adjourn the meeting from time to time, without
notice if the time and place are announced at the meeting, until a quorum shall
be present. At such adjourned meeting at which a quorum is present, any business
may be transacted which might have been transacted at the original meeting. If
the adjournment is for more than one hundred twenty (120) days after the
original record date or if after the adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting and to each such other
stockholder entitled to notice of the meeting.
If a notice of any adjourned special meeting of stockholders is sent to
all stockholders entitled to vote thereat, stating that it will be held with
those present constituting a quorum, then, except as otherwise required by law,
those present at such adjourned meeting shall constitute a quorum, and all
matters shall be determined by a majority of votes cast at such meeting.
Section 9. Voting By Certain Stockholders.
Shares of stock of the Corporation registered in the name of a
corporation, partnership, trust or other entity, if entitled to be voted, may be
voted by the president or a vice president, a general partner or trustee
thereof, as the case may be, or a proxy appointed by any of the foregoing
individuals, unless some other person who has been appointed to vote such stock
pursuant to a bylaw or a resolution of the governing body of such corporation or
other entity or agreement of the partners of a partnership presents a certified
copy of such bylaw, resolution or agreement, in which case such person may vote
such stock. Any director or other fiduciary may vote stock registered in his
name as such fiduciary, either in person or by proxy.
6
<PAGE> 7
Shares of stock of the Corporation directly or indirectly owned by it
shall not be voted at any meeting and shall not be counted in determining the
total number of outstanding shares entitled to be voted at any given time,
unless they are held by it in a fiduciary capacity, in which case they may be
voted and shall be counted in determining the total number of outstanding shares
at any given time.
The Board of Directors may adopt by resolution a procedure by which a
stockholder may certify in writing to the Corporation that any shares of stock
registered in the name of the stockholder are held for the account of a
specified person other than the stockholder. The resolution shall set forth the
class of stockholders who may make the certification, the purpose for which the
certification may be made, the form of certification and the information to be
contained in it; if the certification is with respect to a record date or
closing of the stock transfer books, the time after the record date or closing
of the stock transfer books within which the certification must be received by
the Corporation; and any other provisions with respect to the procedure which
the Board of Directors considers necessary or desirable. On receipt of such
certification, the person specified in the certification shall be regarded as,
for the purposes set forth in the certification, the stockholder of record of
the specified stock in place of the stockholder who makes the certification.
Notwithstanding any other provision of the Articles of Incorporation of
the Corporation or these Bylaws, Title 3, Subtitle 7 of the Corporations and
Associations Article of the Annotated Code of Maryland (or any successor
statute) shall not apply to any acquisition by any person of shares of stock of
the Corporation. This section may be repealed, in whole or in part, at any time,
whether before or after an acquisition of control shares and, upon such repeal,
may, to the extent provided by any successor bylaw, apply to any prior or
subsequent control share acquisition.
Section 10. Record Date.
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting, or at any adjournment of a meeting, of
stockholders; or entitled to express consent to corporate action in writing
without a meeting; or entitled to receive payment of any dividend or other
distribution or allotment of any rights; or entitled to exercise any rights in
respect of any change, conversion, or exchange of stock; or for the purpose of
any other lawful action; the Board of Directors may fix, in advance, a record
date, or direct that the transfer books of the Corporation be closed for a
stated period for the purpose of making a determination with respect to
stockholders; provided that, the record date shall not precede the date upon
which the resolution fixing the record date is adopted by the Board of
Directors, and further provided that the Board of Directors may not direct that
the stock transfer books be closed for a period longer than twenty (20) days.
The record date for determining the stockholders entitled to notice of or to
vote at any meeting of the stockholders or any adjournment thereof shall not be
more than ninety (90) nor less than ten (10) days before the date of such
meeting. The record date for determining the stockholders entitled to consent to
corporate action in writing without a meeting shall not be more than ten (10)
days after the date upon which the resolution fixing the record date is adopted
by the
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<PAGE> 8
Board of Directors. The record date for any other action shall not be more than
ninety (90) days prior to such action. If no record date is fixed and if the
transfer books of the Corporation are not closed, (i) the record date for
determining stockholders entitled to notice of or to vote at a meeting of the
stockholders is the later of (a) the thirtieth (30th) day before the meeting, or
(b) the close of business on the day on which notice of the meeting is mailed,
and (ii) the record date for determining stockholders entitled to receive
payments of a dividend or allotment of any rights is the close of business on
the day on which the resolution of the Board of Directors declaring the dividend
or allotment of rights if adopted; provided, however, that the payment or
allotment may not be made more than sixty (60) days after the date on which such
resolution is adopted. A determination of stockholders of record entitled to
notice of or to vote at a meeting of stockholders shall apply to any adjournment
of the meeting; provided, however, that the Board of Directors may fix a new
record date for the adjourned meeting in accordance with the foregoing
parameters.
Section 11. Procedure.
The order of business and all other matters of procedure at every
meeting of the stockholders may be determined by the Chairman of the meeting.
ARTICLE III
DIRECTORS
Section 1. Number, Election, and Terms.
The number of directors shall be fixed from time to time exclusively by
resolutions adopted by the Board of Directors; provided, however, that the
number of directors shall at no time be less than three (3) nor greater than
nine (9), except that whenever the Corporation shall have less than three (3)
stockholders, the number of directors may be less than three (3) but not less
than the number of stockholders, and further provided that no decrease in the
number of directors constituting the Board of Directors shall shorten the term
of any incumbent director.
Section 2. Tenure of Directors.
Commencing upon the Corporation becoming a "reporting company" under the
Exchange Act, the directors shall be divided into three (3) classes known as
"Class I", "Class II" and "Class III", with each class to be as nearly equal in
number of directors as possible. Class I, Class II, and Class III directors will
stand for reelection at the annual meetings of stockholders held in 1999, 2000,
and 2001, respectively. At each successive annual meeting, the successors to the
class of directors whose term shall expire at that time shall be elected to hold
office for a term of three years, so that the term of office of one class of
directors shall expire each year. Each director elected shall hold office until
his successor shall be elected and shall qualify. If the number of directors is
changed, any increase or decrease shall be apportioned among the classes so as
to maintain the number of directors in each class as nearly equal as possible,
and any additional director of any class shall, subject to the Section 3 below,
hold office for a term that shall coincide
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<PAGE> 9
with the remaining term of that class, but in no case shall a decrease in the
number of directors shorten the term of any incumbent director.
Section 3. Newly Created Directorships and Vacancies.
Except as otherwise provided in the Corporation's Articles of
Incorporation and except as provided herein, any vacancies on the Board of
Directors resulting from death, resignation, disqualification, removal or any
other cause, including an increase in the number of directors, may be filled by
a majority of the Board of Directors, even though not constituting a quorum. The
stockholders may elect a successor to fill a vacancy on the Board of Directors
which results from the removal of a director; provided, however, that if the
stockholders of any class or series are entitled separately to elect one or more
directors, a vacancy resulting from the removal of a director elected by such
class or series may only be filled by the stockholders of such class or series,
the Board of Directors, or a majority of the remaining directors, or the sole
remaining director, elected by such class or series. A director elected by the
Board of Directors to fill a vacancy shall serve until the next annual meeting
of stockholders and until his successor is elected and qualifies. A director
elected by the stockholders to fill a vacancy resulting from the removal of a
director shall serve for the remainder of the full term of the removed director.
Section 4. Regular Meetings.
The first meeting of each newly elected Board of Directors elected at
the annual meeting of stockholders shall be held immediately after and at the
same place as, the annual meeting of the stockholders, provided a quorum is
present, and no notice of such meeting shall be necessary in order to legally
constitute the meeting. Regular meetings of the Board of Directors shall be held
at such times and places as the Board of Directors may from time to time
determine.
Section 5. Special Meetings.
Special meetings of the Board of Directors may be called at any time, at
any place and for any purpose by the chairman of the executive committee, the
Chairman of the Board, or the Chief Executive Officer, the President or by any
officer of the Corporation upon the request of a majority of the entire Board of
Directors.
Section 6. Notice of Meetings.
Notice of regular meetings of the Board of Directors need not be given.
Notice of every special meeting of the Board of Directors shall be given
to each director at his usual place of business or at such other address as
shall have been furnished by him for such purpose. Such notice shall be properly
and timely given if it is (a) deposited in the United States mail not later than
the seventh (7th) calendar day preceding the date of the meeting, or (b)
personally delivered, telecopied, telegraphed, or communicated by telephone at
least twenty-four
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<PAGE> 10
(24) hours before the time of the meeting. Such notice need not include a
statement of the business to be transacted at, or the purpose of, any such
meeting.
Section 7. Waiver.
Attendance of a director at a meeting of the Board of Directors shall
constitute a waiver of notice of such meeting. A written waiver of notice signed
by a director or directors entitled to such notice, whether before, at, or after
the time for notice or the time of the meeting, shall be equivalent to the
giving of such notice.
Section 8. Quorum.
Except as may be otherwise provided by law, in this Corporation's
Articles of Incorporation, or in these Bylaws, the presence of a majority of the
entire Board of Directors shall be necessary and sufficient to constitute a
quorum for the transaction of business at any meeting of the Board of Directors,
and the act of a majority of such quorum shall be deemed the act of the Board of
Directors. Less than a quorum may adjourn any meeting of the Board of Directors
from time to time without notice.
Section 9. Chairman of the Board.
The Chairman of the Board shall be appointed by the Board of Directors
and shall have such general powers and duties of supervision and management as
are usually vested in the office of Chairman of the Board. He shall preside at
all meetings of the stockholders and directors at which he may be present and
shall have such other duties, powers and authority as may be prescribed
elsewhere in these Bylaws. The Board of Directors may delegate such other
authority and assign such additional duties to the Chairman of the Board, other
than those conferred by law exclusively upon the Chief Executive Officer or the
President, as it may from time to time determine. The Chairman of the Board
shall hold his position at the pleasure of the Board of Directors and may be
removed at any time by the Board of Directors with or without cause.
Section 10. Participation in Meetings By Telephone.
Members of the Board of Directors, or of any committee thereof, may
participate in a meeting of such Board of Directors or committee by means of
conference telephone or similar communications equipment by means of which all
person participating in the meeting can hear each other and such participation
shall constitute presence in person at such meeting.
Section 11. Powers.
The business, property and affairs of the Corporation shall be managed
by or under the direction of its Board of Directors, which shall have and may
exercise all the powers of the Corporation to do all such lawful acts and things
as are not by law, by the Articles of
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Incorporation, or by these Bylaws, directed or required to be exercised or done
by the stockholders.
Section 12. Compensation of Directors.
Directors shall receive such compensation for their services as shall be
determined by a majority of the entire Board of Directors, provided that
directors who are serving the Corporation as officers or employees and who
receive compensation for their services as such officers or employees shall not
receive any salary or other compensation for their services as directors.
Section 13. Action Without a Meeting.
Unless otherwise restricted by this Corporation's Articles of
Incorporation or Bylaws, any action required or permitted to be taken at any
meeting of the Board of Directors or any committee thereof may be taken without
a meeting if written consent thereto is signed by all members of the Board of
Directors or of such committee, as the case may be, and such written consent is
filed with the minutes of proceedings of the Board of Directors or committee.
Any such consent may be in counterparts and shall be effective on the date of
the last signature thereon unless otherwise provided therein.
Section 14. Loss of Deposits.
No director shall be liable for any loss which may occur by reason of
the failure of the bank, trust company, savings and loan association, or other
institution with whom monies or stock have been deposited.
Section 15. Surety Bonds.
Unless required by law, no director shall be obligated to give any bond
or surety or other security for the performance of any of his duties.
Section 16. Reliance.
Each director, officer, employee and agent of the Corporation shall, in
the performance of his duties with respect to the Corporation, be fully
justified and protected with regard to any act or failure to act in reliance in
good faith upon the books of account or other records of the Corporation, upon
an opinion of counsel or upon reports made to the Corporation by any of its
officers or employees or by the adviser, accountants, appraisers or other
experts or consultants selected by the Board of Directors or officers of the
Corporation, regardless of whether such counsel or expert may also be a
director.
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Section 17. Investment Policies and Restrictions.
The investment policies of the Corporation and the restrictions thereon
shall be established from time to time by the Board of Directors, including a
majority of the Independent Directors; provided, however, that the investment
policies of the Corporation and the limitations thereon shall be at all times in
compliance with the restrictions applicable to real estate investment trusts
pursuant to the Internal Revenue Code of 1986, as it may be amended from time to
time. The Unaffiliated Directors shall review the investment policies of the
Corporation at least annually to determine that the policies then being followed
by the Corporation are in the best interests of its stockholders. Each such
determination and the basis therefor shall be set forth in the minutes of the
Board of Directors.
ARTICLE IV
COMMITTEES
Section 1. Designation of Committees.
The Board of Directors may establish committees for the performance of
delegated or designated functions to the extent permitted by law, each committee
to consist of one or more directors of the Corporation. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of such absent or disqualified
member.
Section 2. Committee Powers and Authority.
The Board of Directors may provide, by resolution or by amendment to
these Bylaws, that a committee may exercise all the power and authority of the
Board of Directors in the management of the business and affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may require it; provided, however, that a committee may not
exercise the power or authority of the Board of Directors in reference to
amending the Articles of Incorporation (except that a committee may, to the
extent authorized in the resolution or resolutions providing for the issuance of
shares of stock adopted by the Board of Directors, fix the designations and any
of the preferences or rights of shares of preferred stock relating to dividends,
redemption, dissolution, any distribution of property or assets of the
Corporation, or the conversation into, or the exchange of shares for, shares of
any other class or classes or any other series of the same or any other class or
classes of stock of the Corporation or fix the number of shares of any series of
stock or authorize the increase or decrease of the shares of any series),
adopting an agreement of merger or consolidation, recommending to the
stockholders the sale, lease, or exchange of all or substantially all of the
Corporation's property and assets, recommending to the stockholders a
dissolution of the Corporation or a revocation of a dissolution, or amending
these Bylaws; and, unless the resolution expressly so provides, no such
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committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock.
Section 3. Committee Procedures.
To the extent the Board of Directors or the committee does not establish
other procedures for the committee, each committee shall be governed by the
procedures established in Article III, Section 3 (except as they relate to an
annual meeting of the Board of Directors) and Article III, Sections 4, 5, 6, 7,
9, and 12 of these Bylaws, as if the committee were the Board of Directors.
ARTICLE V
OFFICERS
Section 1. Number.
The officers of the Corporation shall be appointed or elected by the
Board of Directors. The officers shall be a Chairman of the Board of Directors,
a Chief Executive Officer, a President, a Secretary, and a Treasurer. Any person
may hold two or more offices, other than the Secretary who may not serve as
either President, Chief Executive Officer or Chairman of the Board of Directors,
at the same time.
Section 2. Additional Officers.
The Chief Executive Officer may appoint such other officers, including
but not limited to vice presidents, assistant secretaries and assistant
treasurers, as he shall deem appropriate.
Section 3. Term of Office, Resignation.
All officers, agents and employees of the Corporation shall hold their
respective offices or positions at the pleasure of the Board of Directors and
may be removed at any time by the Board of Directors with or without cause. Any
officer may resign at any time by giving written notice of his resignation to
the Chief Executive Officer, the President or to the Secretary, and acceptance
of such resignation shall not be necessary to make it effective unless the
notice so provides. Any vacancy occurring in any office shall be filled by the
Board of Directors, or by the Chief Executive Officer as so appointed.
Section 4. Duties.
The officers of the Corporation shall perform the duties and exercise
the powers as may be assigned to them from time to time by the Board of
Directors, the Chairman of the Board of Directors, the Chief Executive Officer,
or the President. In the absence of such assignment, the officers shall have the
duties and powers described in Sections 5 through 11 of this Article V.
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Section 5. Chairman of the Board.
The Chairman of the Board of Directors (who may also hold other offices)
shall have such duties as the Board of Directors shall prescribe. In the
Chairman's absence, such duties shall be attended by the Chief Executive
Officer.
Section 6. Chief Executive Officer.
Subject to the direction and control of the Board of Directors, the
Chief Executive Officer shall manage the business of the Corporation, and such
other matters as from time to time assigned to him by the Board of Directors or
prescribed by the Bylaws. The Chief Executive Officer may execute contracts,
deeds and other instruments on behalf of the Corporation. The Chief Executive
Officer shall have full authority on behalf of the Corporation to attend any
meeting, give any waiver, cast any vote, grant any discretionary or directed
proxy to any person, and exercise any other rights of ownership with respect to
any shares of capital stock or other securities held by the Corporation and
issued by any other corporation or with respect to any partnership, trust or
similar interest held by the Corporation.
Section 7. President.
Subject to such supervisory powers as may be given by the Board of
Directors to the Chairman of the Board of Directors and the Chief Executive
Officer, if any, the President shall have general supervision, direction, and
control of the business and the officers of the Corporation, subject to the
discretion of the Board of Directors. He shall have the general powers and
duties of management usually vested in the office of President of a corporation,
and shall have such other powers and duties as may be prescribed by the Board of
Directors, the Chairman of the Board of Directors, and the Chief Executive
Officer or the Bylaws.
Section 8. Chief Operating Officer.
Subject to such supervisory powers, if any, as may be given by the Board
of Directors to the Chairman of the Board of Directors, the Chief Executive
Officer or the President, if there be such officers, the Chief Operating Officer
of the Corporation shall be the general manager of the Corporation and shall,
subject to the control of the Board of Directors, the Chairman of the Board of
Directors, the Chief Executive Officer and the President, have general
supervision, direction, and control of the business and the officers of the
Corporation. In the absence of the Chief Executive Officer or President, or in
the event of their disability, inability or refusal to act, the Chief Operating
Officer shall perform the duties and exercise the power of the Chief Executive
Officer or the President. He shall have the general powers and duties of
management usually vested in the office of Chief Operating Officer of a
corporation, and shall have such other powers and duties as may be prescribed by
the Board of Directors, the Chairman of the Board of Directors, the Chief
Executive Officer and the President or the Bylaws.
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Section 9. Vice President.
Each vice president, if any, shall perform such functions as may be
prescribed by the Board of Directors, the Chief Executive Officer or the
President. Upon the death, disability or absence of the President or the Chief
Operating Officer, the vice president named as Executive Vice President shall
perform the duties and exercise the powers of the President. Each vice president
shall perform such other duties as the Board of Directors, the Chief Executive
Officer, or the President may from time to time prescribe or delegate to him.
Section 10. Secretary.
The Secretary shall give, or cause to be given, notice of all meetings
of the stockholders and, upon the request of a person entitled to call a special
meeting of the Board of Directors, he shall give notice of any such special
meeting. He shall keep the minutes of all meetings of the stockholders, the
Board of Directors, or any committee established by the Board of Directors. The
Secretary shall be responsible for the maintenance of all records of the
Corporation and may attest documents on behalf of the Corporation. The Secretary
shall perform such other duties as the Board of Directors, the Chief Executive
Officer or the President may from time to time prescribe or delegate to him.
Section 11. Treasurer.
The Treasurer shall be responsible for the control of the funds of the
Corporation and the custody of all securities owned by the Corporation. The
Treasurer shall perform such other duties as the Board of Directors, the Chief
Executive Officer or the President may from time to time prescribe or delegate
to him. The Treasurer may also be designated as the "Chief Financial Officer" of
this Corporation from time to time, as determined by the Board of Directors.
Section 12. Compensation.
Officers shall receive such compensation, if any, for their services as
may be authorized or ratified by the Board of Directors. Election or appointment
as an officer shall not of itself create a right to compensation for services
performed as such officer.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES
Section 1. Directors and Officers.
The Corporation shall indemnify to the full extent permitted by, and in
the manner permissible under, the laws of the State of Maryland, any person who
was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit, or proceeding,
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<PAGE> 16
whether criminal, civil, administrative, or investigative, by reason of the fact
that he, is or was a director or officer of the Corporation, or, while a
director or officer of the Corporation, is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, association, or other enterprise, against
reasonable expenses actually incurred (including attorneys' fees), judgments,
penalties, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding. The Corporation may
advance reasonable expenses (including attorneys' fees) to any such person
actually incurred in defending any such action, suit or proceeding upon terms
and conditions, if any, deemed appropriate by the Board of Directors upon
receipt of an undertaking by or on behalf of such director or officer to repay
such amount if it shall ultimately be determined that he is not entitled to be
indemnified by the Corporation as authorized by the laws of the State of
Maryland.
Section 2. Contract.
The foregoing provisions of this Article VI shall be deemed to be a
contract between the Corporation and each director and officer who serves in
such capacity at any time while this bylaw is in effect, and any repeal or
modification thereof shall not affect any rights or obligations then existing
with respect to any state of facts then or theretofore existing or any action,
suit or proceeding theretofore or thereafter brought based in whole or in part
upon any such state of facts.
The foregoing rights of indemnification shall not be deemed exclusive of
any other rights to which any director or officer may be entitled apart from the
provisions of this Article VI.
Section 3. Surviving Corporation.
The Board of Directors may provide by resolution that references to "the
Corporation" in this Article VI shall include, in addition to this Corporation,
all constituent corporations absorbed in a merger with this Corporation so that
any person who was a director or officer of such a constituent corporation or is
or was serving at the request of such constituent corporation as a director,
employee, or agent of another corporation, partnership, joint venture, trust,
association, or other entity shall stand in the same position under the
provisions of this Article VI with respect to this Corporation as he would if he
had served this Corporation in the same capacity or is or was so serving such
other entity at the request of this Corporation, as the case may be.
Section 4. Inurement.
The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article VI shall continue as to a person who has ceased to be
a director or officer and shall inure to the benefit of the heirs, executors,
and administrators of such person.
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Section 5. Employees and Agents.
To the same extent as it may do for a director or officer, the
Corporation may indemnify and advance expenses to a person who is not and was
not a director or officer of the Corporation but who is or was an employee or
agent of the Corporation or who is or was serving at the request of the
Corporation as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, association, or other enterprise.
ARTICLE VII
CAPITAL STOCK
Section 1. Certificates.
Each stockholder of the Corporation shall be entitled to a certificate
or certificates signed by or in the name of the Corporation by any one of the
Chairman of the Board, the Chief Executive Officer, the President, the Chief
Operating Officer or a vice president, and by any one of the Treasurer, an
Assistant Treasurer, the Secretary or an Assistant Secretary, certifying the
number of shares of stock of the Corporation owned by such stockholder;
provided, however, that no stock certificate may be issued until the stock
represented by it is fully paid.
Section 2. Facsimile Signatures.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the Corporation with the same effect as if he, she or it was
such officer, transfer agent or registrar at the date of issue.
Section 3. Registered Stockholders.
The Corporation shall be entitled to treat the holder of record of any
share or shares of stock of the Corporation as the holder in fact thereof and,
accordingly, shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it has actual or other notice thereof, except as provided by law.
Section 4. Cancellation of Certificates.
All certificates surrendered to the Corporation shall be canceled and,
except in the case of lost, stolen or destroyed certificates, no new
certificates shall be issued until the former certificate or certificates for
the same number of shares of the same class of stock have been surrendered and
canceled.
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Section 5. Lost, Stolen or Destroyed Certificates.
The Board of Directors may direct a new certificate or certificates to
be issued in place of any certificate or certificates theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate or certificates
to be lost, stolen or destroyed. In its discretion, and as a condition precedent
to the issuance of any such new certificate or certificates, the Board of
Directors may require that the owner of such lost, stolen or destroyed
certificate or certificates, or such person's legal representative, give the
Corporation and its transfer agent or agents, registrar or registrars a bond in
such form and amount as the Board of Directors may direct as indemnity against
any claim that may be made against the Corporation and the transfer agent or
agents, registrar or registrars on account of the alleged loss, theft or
destruction of any such certificate or the issuance of such new certificate.
Section 6. Transfer of Shares.
Shares of stock shall be transferable on the books of the Corporation by
the holder thereof, in person or by duly authorized attorney, upon the surrender
of the certificate or certificates representing the shares to be transferred,
properly endorsed, with such proof or guarantee of the authenticity of the
signature as the Corporation or its agents may reasonably require.
Section 7. Transfer Agents and Registrars.
The Corporation may have one or more transfer agents and one or more
registrars of its stock, whose respective duties the Board of Directors may,
from time to time, define. No certificate of stock shall be valid until
countersigned by a transfer agent, if the Corporation shall have a transfer
agent, or until registered by the registrar, if the Corporation shall have a
registrar. The duties of transfer agent and registrar may be combined.
ARTICLE VIII
SEAL
The Board of Directors may adopt and provide a seal which shall be
circular in form and shall bear the name of the Corporation and the words "Seal"
and "Maryland," and which, when adopted, shall constitute the corporate seal of
the Corporation.
ARTICLE IX
FISCAL YEAR
The fiscal year of the Corporation shall be the 12 calendar month period
ending December 31 in each year unless otherwise provided by resolution of the
Board of Directors.
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ARTICLE X
AMENDMENTS
Subject to the provisions of the Articles of Incorporation, these Bylaws
may be altered, amended or repealed at any regular meeting of the stockholders
(or at any special meeting thereof duly called for that purpose) by the holders
of two-thirds of the voting power of the outstanding shares of stock entitled to
vote at such meeting on the election of directors; provided that in the notice
of such special meeting, notice of such purpose shall be given. Subject to the
laws of the State of Maryland, the Articles of Incorporation and these Bylaws,
the Board of Directors may, by majority vote of those present at any meeting at
which a quorum is present, amend these Bylaws, or enact such other Bylaws as in
their judgment may be advisable for the regulation of the conduct of the affairs
of the Corporation.
___________________________________
Kent Bills, Secretary
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<PAGE> 1
EXHIBIT 4.1
[FACE OF CERTIFICATE]
[Image of Logo]
RealTrust Asset Corporation
NUMBER
RAC
SHARES
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP 756069 10 0
THIS CERTIFIES THAT
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, PAR VALUE
$.001 PER SHARE, OF
RealTrust Asset Corporation
transferable on the books of the Corporation by the holder hereof
in person or by duly authorized attorney upon surrender of this
Certificate properly endorsed. This Certificate is not valid
until countersigned and registered by the Transfer Agent and
Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Date:
[Signature image of][Steven K. Passey]
Chief Financial Officer
[Image of Seal]
[Signature image of][John D. Fry]
Chief Executive Officer
Countersigned and Registered:
AMERICAN SECURITIES TRANSFER & TRUST, INC.
Transfer Agent
And Registrar
By
Authorized Signature
<PAGE> 2
[BACK OF CERTIFICATE]
RealTrust Asset Corporation
The following abbreviations, when used in the inscription on the
face of this certificate, shall be construed as though they were
written out in full according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with the right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT __________ Custodian _________
(Cust) (Minor)
under Uniform Gifts to Minors
Act_______
(State)
UNIF TRF MIN ACT ______ Custodian _______ (until age ______)
(Cust) (Minor)
________under Uniform Transfers
(Minor)
to Minors Act_______
(State)
Additional abbreviations may also be used though not in the above
list.
FOR VALUE RECEIVED, _______ hereby sell, assign, and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF
ASSIGNEE____________________________________________________________
____________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE
OF ASSIGNEE)
____________________________________________________________________
____________________________________________________________________
Shares of capital stock represented by the within Certificate and
do hereby irrevocably constitute and appoint __________ Attorney,
to transfer the said stock on the books of the within named
Corporation with full power of substitution in the premises.
Dated________________
____________________________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
Signature(s) Guaranteed:
By__________________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKER, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15
<PAGE> 1
EXHIBIT 4.2
- --------------------------------------------------------------------------------
FORM OF WARRANT AGREEMENT
BETWEEN
REALTRUST ASSET CORPORATION
AND
AMERICAN SECURITIES TRANSFER & TRUST
INCORPORATED
DATED AS OF APRIL ___, 1998
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TABLE OF CONTENTS
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Section 1. Appointment of Warrant Agent .............................. 1
Section 2. Limitation on Issue ....................................... 1
Section 3. Date, Denomination and Execution of Warrant Certificates .. 2
Section 4. Issue of Warrant Certificate .............................. 2
Section 5. Split-up, Combination and Exchange of Warrant Certificates 3
Section 6. Mutilated, Destroyed, Lost or Stolen Warrant Certificates . 3
Section 7. Exercise of Warrant Certificates and Exercise Price ....... 3
Section 8. Adjustments of Exercise Price ............................. 6
Section 9. Reorganization, Consolidation, Merger, Sale of Assets ..... 8
Section 10. Fractional Interests ..................................... 9
Section 11. Warrant Certificate Holder Not Deemed a Stockholder ...... 9
Section 12. Rights of Action ......................................... 9
Section 13. Agreement of Warrant Certificate Holders ................. 9
Section 14. Cancellation of Warrant Certificates ..................... 10
Section 15. Concerning the Warrant Agent ............................. 10
Section 16. Merger or Consolidation or Change of Name of Warrant Agent 10
Section 17. Duties of Warrant Agent .................................. 11
Section 18. Change of Warrant Agent .................................. 12
Section 19. Issuance of New Warrant Certificates ..................... 13
Section 20. Notices .................................................. 13
Section 21. Modification of Agreement ................................ 14
Section 22. Successors ............................................... 14
Section 23. Governing Law ............................................ 14
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Section 24. Benefits of This Agreement ............................... 14
Section 25. Descriptive Headings ..................................... 14
Section 26. Counterparts ............................................. 15
EXHIBIT A ............................................................ A-1
EXHIBIT B ............................................................ B-1
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WARRANT AGREEMENT
THIS WARRANT AGREEMENT (this "Agreement"), dated as of April ___, 1998,
is made and entered into by and between REALTRUST ASSET CORPORATION, a Maryland
corporation (the "Company"), and AMERICAN SECURITIES TRANSFER & TRUST
INCORPORATED, as warrant agent (the "Warrant Agent").
WITNESSETH THAT:
WHEREAS this Agreement is made with reference to the following facts:
A. The Company has authorized the issuance of up to 5,750,000 units
("Units") of its securities, each unit consisting of one share of its common
stock, par value $0.001 per share, (the "Common Stock"), and one warrant to
purchase one share of Common Stock (each a "Common Stock Warrant"), entitling
the holders thereof to purchase 5,750,000 additional shares of its Common Stock
as provided in this Agreement, which Common Stock Warrant is to be attached
initially to the shares of Common Stock issued as provided in Paragraph E below;
B. The Company has entered into an underwriting agreement, dated as of
April __, 1998 (the "Underwriting Agreement"), with Stifel, Nicolaus & Company,
Incorporated, as representative (the "Representative") of the several
underwriters named in Schedule 1 to the Underwriting Agreement (the
"Underwriters");
C. The Company has agreed to issue warrants to the Representative (the
"Representative's Warrants"), entitling the Representative to purchase shares of
Common Stock equal to three percent of the Units sold in the Company's initial
public offering (150,000 shares of Common Stock if the Optional Units (as
defined in the Underwriting Agreement) are not purchased or 172,500 shares of
Common Stock if all of the Optional Units are purchased).
D. The Units are to be purchased from the Company by the Underwriters
and thereafter, subject to the terms of the Underwriting Agreement, offered to
the public pursuant to the Registration Statement referred to in Section 7;
E. In accordance with Section 3 of this Agreement, six months after the
issuance of the Units, the Common Stock Warrants will automatically detach from
the shares of Common Stock comprising the Units, and thereafter may be
transferred separately therefrom.
F. In accordance with Section 7 of this Agreement, the Common Stock
Warrants and the Representative's Warrants shall not be exercisable until six
months after issuance.
G. The Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing so to act, in connection with the
issuance, transfer, exchange, replacement and exercise of the Common Stock
Warrants and the Representative's Warrants (collectively, the "Warrants");
NOW, THEREFORE, in consideration of the promises and the mutual
agreements set forth in this Agreement, the parties hereto agree as follows:
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Section 1. Appointment of Warrant Agent. The Company hereby appoints the
Warrant Agent to act as agent for the Company in accordance with the terms and
conditions hereinafter set forth in this Agreement, and the Warrant Agent hereby
accepts such appointment.
Section 2. Limitation on Issue. Subject to Sections 4, 6 and 8 of this
Agreement, the Company may execute and deliver to the Warrant Agent for
countersignature, and the Warrant Agent shall, upon written order of the Company
signed by its President or a Vice President, thereupon countersign and deliver
certificates evidencing the Warrants (the "Warrant Certificates") to the
Company. Such Warrant Certificates shall evidence 5,150,000 Warrants (consisting
of 5,000,000 Common Stock Warrants and 150,000 Representative's Warrants) and,
if the over-allotment option is exercised pursuant to Section 2(c) of the
Underwriting Agreement, such Warrant Certificates shall evidence 5,922,500
Warrants (consisting of 5,750,000 Common Stock Warrants and 172,500
Representative's Warrants.
Section 3. Date, Denomination and Execution of Warrant Certificates. The
Warrant Certificates (and the forms of election to purchase shares and of
assignment to be printed on the reverse thereof) shall be substantially in the
form of Exhibit A hereto, in the case of the Common Stock Warrants, and Exhibit
B hereto, in the case of the Representative's Warrants, and may have such
letters, numbers or other marks of identification or designation and such
legends, summaries or endorsements printed, lithographed or engraved thereon as
the Company may deem appropriate and as are not inconsistent with the provisions
of this Agreement, or as may be required to comply with any law or with any rule
or regulation made pursuant thereto or with any rule or regulation of any stock
exchange on which the Warrants may be listed, or to conform to usage. The
Warrant Certificates (a) upon initial issuance, shall be dated by the Warrant
Agent as of the issue date of the Units or the Representative's Warrants, as
applicable, and (b) upon transfer, exchange or an issuance of Warrants other
than pursuant to the issuance of the Units or the initial issuance of the
Representative's Warrants, as applicable, the Warrants shall be dated as of the
date of issuance thereof. The Warrants shall entitle the holders thereof to
purchase only whole shares of Common Stock at the price per share set forth
therein, subject to adjustments as provided in this Agreement, and to be paid
the value of any fractional shares as provided in Section 10 hereof.
The Warrant Certificates shall be executed on behalf of the Company by
its President or a Vice President, by the Secretary or an Assistant Secretary,
by manual or facsimile signature, and shall have affixed thereto a facsimile of
the Company's seal. The Warrant Certificates shall be mutually countersigned by
the Warrant Agent and shall not be valid for any purpose unless so
countersigned. In the event any officer of the Company who shall have signed any
of the Warrant Certificates shall cease to be such officer of the Company,
whether before or after countersignature by the Warrant Agent and issue and
delivery thereof by the Company, such Warrant Certificates, nevertheless, may be
countersigned by the Warrant Agent, issued and delivered with the same force and
effect as though the person who signed such Warrant Certificate had not ceased
to be such officer of the Company.
The Common Stock Warrants issued on the issue date of the Units shall be
attached to the corresponding shares of Common Stock comprising the Units.
However, on the date six months after the date of issuance of the Units (the
"Detachment Date"), the Common Stock Warrants shall automatically detach from
the Common Stock and thereafter may be transferred separately therefrom.
Section 4. Issue of Warrant Certificate. Subsequent to their original
issuance, no Warrant Certificates shall be issued except (a) Warrant
Certificates based upon transfers thereof in
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accordance with Section 13 of this Agreement, (b) Warrant Certificates issued
upon the partial exercise of any Warrant to evidence the unsubscribed portion of
such Warrant, (c) Warrant Certificates issued upon any combination, split-up or
exchange of Warrant Certificates pursuant to Section 5 of this Agreement, (d)
Warrant Certificates issued in replacement of mutilated, destroyed, lost or
stolen Warrant Certificates pursuant to Section 6 of this Agreement, and (e)
Warrant Certificates to reflect any change in the Exercise Price (as hereinafter
defined) and the number of shares of Common Stock purchasable thereunder and
issued pursuant to Section 19 of this Agreement.
The Warrant Agent shall keep or cause to be kept, at its principal
office, books for registration and transfer of the Warrants issued under this
Agreement. Such registers shall show the names and addresses of the respective
holders of the Warrant Certificates and the numbers of shares of Common Stock
which may be purchased by each issued Warrant.
Section 5. Split-up, Combination and Exchange of Warrant Certificates.
After the Detachment Date or, a Warrant Certificate or Warrant Certificates may
be split-up, combined or exchanged for another Warrant Certificate or Warrant
Certificates entitling the registered holder thereof to purchase a like
aggregate number of shares of Common Stock as the Warrant Certificate or Warrant
Certificates surrendered then entitle him to purchase. Any registered holder of
a Warrant Certificate desiring to split-up, combine or exchange Warrant
Certificates shall make such request in writing delivered to the Warrant Agent,
and shall surrender the Warrant Certificate or Warrant Certificates to be so
split-up, combined or exchanged. Thereupon the Warrant Agent shall countersign
and deliver to the person entitled thereto a Warrant Certificate or Warrant
Certificates, as the case may be, as so requested. The Company may require
payment of a sum sufficient to cover any tax or governmental charge that may be
imposed in connection with any such split-up, combination or exchange of Warrant
Certificates.
Section 6. Mutilated, Destroyed, Lost or Stolen Warrant Certificates.
Upon receipt by the Company and the Warrant Agent of evidence reasonably
satisfactory to them of the loss, theft, destruction or mutilation of any
Warrant Certificate, and, in the event of loss, theft or destruction, of
indemnity or security reasonably satisfactory to them, and reimbursement to them
of all reasonable expenses incidental thereto, and upon surrender and
cancellation of the Warrant Certificate, if mutilated, the Company shall issue
and the Warrant Agent shall countersign and deliver a new Warrant Certificate of
like tenor for the same number of shares of Common Stock. Applicants for such
substitute Warrant Certificates shall comply with such other reasonable
regulations and pay such other reasonable charges as the Company or the Warrant
Agent may prescribe. Any such new Warrant Certificate shall constitute an
original contractual obligation of the Company, whether or not the allegedly
lost, stolen, destroyed or mutilated Warrant Certificate shall be at any time
enforceable by anyone.
Section 7. Exercise of Warrant Certificates and Exercise Price. Each
Warrant Certificate shall, when countersigned by the Warrant Agent, entitle the
holder thereof, subject to the provisions of this Agreement, to purchase from
the Company the number of whole shares of Common Stock stated in such Warrant
Certificate, as such shares are constituted on the date of its exercise. The
registered holder of any Warrant Certificate may exercise the Warrants in whole
at any time, or in part from time to time (but not as to fractional shares of
Common Stock), upon (a) surrender of said Warrant Certificate, with the form of
election to purchase on the reverse side thereof duly executed, to the Warrant
Agent at the principal office of the Warrant Agent in [ ], only after the
opening of business on the Detachment Date and on or prior to the close of
business on [ ], 2001, at
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which time the Warrants shall be and become wholly void and of no value and all
rights of the registered holders thereunder and under this Agreement shall
cease, and (b) payment of the Exercise Price for each share of Common Stock as
to which the Warrants are exercised. No adjustment shall be made for any cash
dividends on any shares of Common Stock issuable on exercise of Warrants.
A Warrant initially shall evidence the right to purchase one share of
Common Stock subject to adjustment as provided in Section 8 of this Agreement.
The Exercise Price for each whole share of Common Stock purchasable pursuant to
the exercise of the Warrants shall be [ ] per whole share in lawful money of the
United States of America, subject to adjustment as provided in Section 8 of this
Agreement. Except as the context otherwise requires, the term "Exercise Price"
as used in this Agreement shall mean the Exercise Price for each whole share of
Common Stock purchasable upon exercise of the Warrants in effect as of any date
and shall reflect all adjustments made in accordance with the provisions of
Section 8 through and at such date. Each Exercise Price shall continue in effect
until further adjusted pursuant to the provisions of said Section 8.
Payment of the Exercise Price may be made (a) in the form of cash or by
certified or official bank check payable to the order of the Company or (ii) by
surrendering additional Warrants or shares of Common Stock for cancellation to
the extent the Company may lawfully accept shares of Common Stock in the
Company. The value per share of such Common Stock used as payment of the
Exercise Price being equal to the current market price per share of Common Stock
determined in accordance with Section 8(e) hereof, and the value of a Warrant
being equal to the difference between such current market price per share of
Common Stock and the Exercise Price.
Upon receipt of a Warrant Certificate, with the form of election to
purchase duly executed, accompanied by payment of the Exercise Price for the
shares to be purchased and an amount equal to any applicable transfer tax, the
Warrant Agent shall thereupon promptly (i) requisition from any transfer agent
of the Common Stock of the Company certificates for the number of whole shares
of Common Stock to be purchased, and (ii) promptly after receipt of such
certificates cause the same to be delivered to or upon the order of the
registered holder of such Warrant Certificate, registered in such name or names
as may be properly designated by such holder.
If a Warrant Certificate is exercised with respect to less than all of
the shares of Common Stock that may be subscribed for by the Warrants evidenced
thereby, a new Warrant Certificate for the unexercised Warrants shall be issued
by the Warrant Agent to the registered holder of such Warrant Certificate or to
his duly authorized assigns.
The Company covenants and agrees that it will cause to be reserved, out
of its authorized and unissued shares of Common Stock, a number of shares of
Common Stock that will be sufficient to permit the exercise in full of all
outstanding Warrants. As a condition precedent to the taking of any action which
would result in the Exercise Price for each share of Common Stock issuable upon
the exercise of Warrants being less than the par value per share of Common
Stock, the Company will take such corporate action as may, in the opinion of its
counsel, be necessary in order that the Company may comply with all of its
obligations under this Agreement with respect to the exercise of the Warrants.
The Company covenants and agrees that all the shares of Common Stock
delivered upon exercise of the Warrants shall, at the time of delivery of the
certificates for such shares (subject to payment of the Exercise Price), be
validly authorized and issued and fully paid and non-assessable
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shares. The Company further covenants and agrees that it will pay when due and
payable any and all federal and state taxes and charges which may be payable in
respect of the issue or delivery of the Warrants or any shares of Common Stock
upon the exercise of the Warrants. The Company shall not, however, be required
to pay any tax which may be payable in respect of any transfer involved in the
transfer or delivery of the Warrants or the issuance or delivery of certificates
for Common Stock in a name other than that of the registered holder of the
Warrant Certificate surrendered for exercise of the Warrants evidenced thereby
or to issue or deliver any certificate for shares of Common Stock upon the
exercise of any Warrant until any such tax shall have been paid (all such tax
being payable by the holder of such Warrant Certificate at the time of
surrender) or until it has been established to the Company's satisfaction that
no such tax is due.
The Company has filed a Registration Statement (File No. 333- ) with the
Securities and Exchange Commission under the Securities Act of 1933, as amended
(the "Securities Act") for the purpose of registering the sale of the Common
Stock, the Warrants and the Common Stock issuable upon exercise of the Warrants.
The Company covenants and agrees that it will take all action which may be
necessary to keep effective the registration under the Securities Act of the
shares of Common Stock issuable upon exercise of the Warrants and that it will
use its best efforts to qualify such Common Stock for sale under the securities
laws of such of the States of the United States as may be necessary to permit
the free exercise of the Warrants in all of the States of the United States in
which the Common Stock and the Warrants included in the Units are qualified, and
to maintain such qualifications during the entire period in which the Warrants
are exercisable; provided, however, that the Company shall not be required in
connection with any such qualification to file a general consent to service of
process or qualify to do business as a foreign corporation of any jurisdiction
where it is not now so subject or qualified.
The Company covenants and agrees that it shall take all action which may
be necessary to cause the shares of Common Stock issuable upon exercise of the
Warrants to be duly listed on the securities exchange in which the other shares
of Common Stock of the Company are listed at the dates of exercise of the
Warrants.
Each person in whose name any certificate for shares of Common Stock is
issued upon the exercise of the Warrants shall for all purposes be deemed to
have become the holder of record of the Common Stock represented thereby on, and
such certificate shall be dated, the date upon which the Warrant Certificate was
duly surrendered and payment of the Exercise Price (and any applicable transfer
taxes) was made, provided, however, that if the date of such surrender and
payment is a date upon which the Common Stock transfer books of the Company are
closed, such person shall be deemed to have become the record holder of such
shares on, and such certificate shall be dated, the next succeeding business day
on which the Common Stock transfer books of the Company are open.
Section 8. Adjustments of Exercise Price. (a) In the event the Company
after the date hereof shall (i) pay a dividend or make a distribution on its
Common Stock in shares of Common Stock of the Company, or (ii) subdivide its
outstanding shares of Common Stock into a greater number of shares, or (iii)
combine its outstanding shares of Common Stock into a smaller number of shares,
or (iv) issue by reclassification of its Common Stock any shares of capital
stock of the Company, or (v) issue shares of capital stock at a price below the
greater of (a) [price to public] or (b) fair market value (provided that this
clause (v) shall not apply to firm underwriting offerings), the exercise right
and the Exercise Price in effect immediately prior to such action shall be
adjusted so that the holder of any Warrant thereafter surrendering such Warrant
for exercise shall be entitled to
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receive the number of shares of capital stock of the Company which he would have
owned immediately following such action had such Warrant been exercised
immediately prior to the record date for such action or to such action, as
appropriate. An adjustment made pursuant to this Section 8(a) shall, in the case
of a subdivision, combination or reclassification become effective retroactively
immediately after the record date thereof. If, as a result of an adjustment made
pursuant to this Section 8(a), the holder of any Warrant thereafter surrendered
for exercise shall become entitled to receive shares of two or more classes of
capital stock of the Company, the Board of Directors of the Company (whose
determination shall be described in a certificate filed with the Warrant Agent)
shall in good faith determine the allocation of the adjusted Exercise Price
between or among shares of such classes of capital stock.
(b) In the event the Company after the date hereof shall distribute to
all the holders of Common Stock any dividend or other distribution (other than a
cash distribution made as a dividend payable out of earnings or out of any
earned surplus legally available for dividends under the laws of the
jurisdiction of incorporation of the Company) or any evidence of indebtedness or
any assets in respect of the Common Stock, or rights to subscribe or purchase
shares of Common Stock at a price per share less than the current market price
per share of Common Stock (as defined in Section 8(e)) at the record date
referenced below, then, and thereafter successively upon each such distribution,
the Exercise Price in effect immediately prior to such distribution shall
forthwith be reduced to a price determined by multiplying the Exercise Price in
effect immediately prior to such distribution by a fraction the numerator of
which shall be the current market price per share of Common Stock (as defined in
Section 8(e)) at the record date referenced below, less then fair market value
(as determined in good faith by the Board of Directors of the Company, whose
determination shall be described in a certificate filed with the Warrant Agent)
of the portion of such evidences of indebtedness or such assets so distributed,
or of such subscription or purchase rights, applicable to one share of Common
Stock and the denominator of which shall be such current market price per share
of Common Stock. An adjustment made pursuant to Section 8(b) shall become
effective retroactively immediately after the record date for the determination
of stockholders entitled to receive such distribution.
(c) After each adjustment of the Exercise Price pursuant to Section 8(a)
and 8(b), the total number of shares of Common Stock or fractional part thereof
purchasable upon the exercise of each Warrant shall be proportionately adjusted
to such number of shares or fractional part thereof as the total Exercise Price
of the number of shares or fractional part thereof purchasable immediately prior
to such adjustment will buy at the adjusted Exercise Price.
(d) The certificate of any independent firm of public accountants of
recognized national standing selected by the Board of Directors of the Company
shall be conclusive evidence of the correctness of any computations under
Sections 8(a) and 8(b).
(e) For the purposes of Sections 7, 8(a) and 8(b) hereof, the current
market price per share of Common Stock as of any date of determination shall be
deemed to be the average of the daily closing prices for the consecutive 10
trading days preceding the day of determination. The closing price for the day
shall be the last reported sale price regular way or, in case no such reported
sale takes place on that day, the average of the reported closing bid and asked
pries regular way, in either case as officially reported by the principal stock
exchange on which the Common Stock is listed or admitted to trading, or, if the
Common Stock is not listed or admitted to trading on any national securities
exchange, the average of closing bid and asked prices as furnished by the
National
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Association of Securities Dealers, Inc., through the National Association of
Securities Dealers, Inc., Automated Quotation System ("NASDAQ") or similar
organization if NASDAQ is no longer reporting such information.
(f) No adjustment of the Exercise Price shall be required under Sections
8(a) and 8(b) hereof if the amount of such adjustment is less than 1%; provided,
however, that any adjustments which by reason of the foregoing are not required
at the time to be made shall be carried forward and taken into account and
included in determining the amount of any subsequent adjustment. If the Company
shall take a record of holders of Common Stock for the purpose of entitling them
to receive any dividend or distribution and thereafter and before the
distribution to stockholders of any such dividend or distribution, legally
abandon its plan to pay or deliver such dividend or distribution, then no
adjustment of the Exercise Price shall be required by reason of the taking of
such record. All calculations under this Section 8 shall be made to the nearest
cent or to the nearest one-hundredth of a share, as the case may be.
(g) Whenever the Exercise Price is adjusted pursuant to this Section 8,
the Company shall promptly file with the Warrant Agent and with each transfer
agent for the Common Stock a certificate signed by the President or a Vice
President and by the Treasurer or an Assistant Treasurer or the Secretary or an
Assistant Secretary of the Company setting forth in reasonable detail the events
requiring the adjustment, the method by which such adjustment was calculated,
and specifying the Exercise Price and the number or kind or class of shares or
other securities or property purchasable upon exercise of the Warrants after
giving effect to such adjustment, and will cause to be mailed, first class,
postage prepaid a summary thereof to the registered holders of the Warrant
Certificates at their last addresses as they appear on the registry books of the
Warrant Agent.
(h) For the purposes of this Section 8, the term "Common Stock" shall
mean (i) the class of stock designated as the common stock, par value $ 0.001
per share, of the Company, as of the date of this Agreement, and (ii) any other
class of stock resulting from successive changes or reclassifications of such
Common Stock consisting solely of changes in par value, or from par value to no
par value, or from no par value to par value. In the event that at any time, as
a result of an adjustment made pursuant to Section 8(a), shares of capital stock
of the Company other than shares of Common Stock are issuable upon exercise of
the Warrants, thereafter the number of such other shares so issuable shall be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Common Stock
contained in this Section 8, and all other provisions of this Agreement with
respect to Common Stock shall apply on like terms to any such other shares.
Subject to the foregoing, and unless the context requires otherwise, all
references to Common Stock in this Agreement and in the Warrant Certificates
shall, in the event of an adjustment pursuant to this Section 8, be deemed to
refer also to any other securities or property then issuable upon exercise of
the Warrants as a result of such adjustments.
Unless and to the extent that the Company shall exercise the option to
issue new warrant certificates as provided in Section 19, irrespective of the
fact that the Warrant Certificates theretofore and thereafter issued shall
continue to express the Exercise Price per share and the number of shares
purchasable thereunder as the Exercise Price per share and the number of shares
purchasable were expressed in the Warrant Certificates when initially issued,
such Warrant Certificates shall be deemed to refer to the Exercise Price and the
number of shares purchasable as adjusted or changed pursuant to this Section 8.
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Section 9. Reorganization, Consolidation, Merger, Sale of Assets. In the
event, after the date of this Agreement, as a result of the Company effecting a
reorganization or as a result of a merger or consolidation of the Company into
or with another corporation, or the sale or other transfer of the Company's
property, assets and business substantially as an entirety to a successor
corporation, the Common Stock is in effect changed, in whole or in part, into a
different kind or class of stock or other securities or property (including
cash), each Warrant will thereafter be deemed exercised for the right to receive
the kind and amount of shares of stock or other securities or property to which
such holder would have been entitled as a result of such consolidation, merger
or sale had the Warrants been exercised immediately prior thereto. The
provisions of this Section 9 shall similarly apply to successive
reorganizations, mergers or consolidations or sales or other transfers.
Section 10. Fractional Interests. The Company shall not be required to
issue fractional shares of Common Stock upon any exercise of Warrants, but in
respect of any final fraction of a share it will make a payment in cash based on
the current market price of the Common Stock as determined by the Warrant Agent
in accordance with Section 8(e) of this Agreement on the business day next
preceding the date the Warrant Certificates are surrendered for exercise.
Section 11. Warrant Certificate Holder Not Deemed a Stockholder. No
holder, as such, of any Warrant Certificate or Warrant shall be entitled to vote
or receive dividends or be deemed the holder of Common Stock or any other
securities of the Company which may at any time be issuable upon the exercise of
such Warrant for any purpose whatever, nor shall anything contained in this
Agreement or in any Warrant Certificate be construed to confer upon the holder
of any Warrant Certificate or Warrants, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors or
upon any matter submitted to stockholders at any meeting thereof, or to give or
withhold consent to any corporate action (whether upon any recapitalization,
issue of stock, reclassification of stock, change of par value or change of
stock to no par value, consolidation, merger, conveyance or otherwise), or to
receive notice of meetings, or to receive dividends or subscription rights, or
otherwise, until such Warrant shall have been exercised in accordance with the
provisions hereof and the receipt of the Exercise Price payable upon such
exercise by the Warrant Agent.
Section 12. Rights of Action. All rights of action in respect to this
Agreement are vested in the respective registered holders of the Warrant
Certificates and any registered holder of any Warrant Certificate, without the
consent of the Warrant Agent or of the holder of any other Warrant Certificate,
may, on his own behalf and for his own benefit, enforce, and may institute and
maintain any suit, action or proceeding against the Company to enforce, or
otherwise in respect of, his right to exercise his Warrant for the purchase of
shares of Common Stock in the manner provided in the Warrant Certificate and in
this Agreement.
Section 13. Agreement of Warrant Certificate Holders. Every holder of a
Warrant Certificate by accepting the same consents and agrees with the Company
and the Warrant Agent and with every other holder of Warrant Certificates that:
(a) the Warrants are transferable only on the registry books of
the Warrant Agent by the registered holder thereof in person or by his
attorney duly authorized in writing, and only if surrendered at the
principal office of the Warrant Agent, duly endorsed, or accompanied by
a proper instrument of transfer satisfactory to the Warrant Agent and
the Company in their sole discretion;
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(b) the Company and the Warrant Agent may deem and treat the
person in whose name the Warrant Certificate is registered as the
absolute owner for all purposes whatever and neither the Company nor the
Warrant Agent shall be affected by any notice to the contrary; and
(c) for a period of one year from [ ], 1998, no holder of a
Warrant Certificate evidencing a Representative's Warrant or any shares
of Common Stock received upon the exercise of such Warrants shall sell,
sign, pledge or hypothecate such Warrant Certificate or such shares of
Common Stock, except (i) transfers to officers of such holder, (ii) if
such holder is a partnership, transfers to partners thereof, or (iii)
transfers by operation of law, provided that the transferees in each
case shall be subject to the transfer restrictions set forth in this
Section 13(c).
Section 14. Cancellation of Warrant Certificates. In the event the
Company shall purchase or acquire upon exercise thereof or otherwise any Warrant
Certificate or Warrant after the issuance thereof, such Warrant Certificate or
Warrant shall thereupon be delivered to the Warrant Agent and be cancelled by it
and retired. The Warrant Agent also shall cancel any Warrant Certificate
delivered to it for exercise of the Warrants evidenced thereby, in whole or in
part, or delivered to it for transfer, redemption, split-up, combination, or
exchange of such Warrants.
Section 15. Concerning the Warrant Agent. The Company agrees to pay to
the Warrant Agent from time to time, on demand of the Warrant Agent, reasonable
compensation for all services rendered by it hereunder and also its reasonable
expenses and counsel fees and other disbursements incurred in the administration
and execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Warrant Agent for, and to
hold it harmless against, any loss, liability or expense arising out of or in
connection with the acceptance and administration of this Agreement, including
the costs and expenses of defending against any claim of liability in connection
with this Agreement, except to the extent such loss liability or expense results
from the gross negligence, willful misconduct or bad faith of the Warrant Agent
as determined by a court of competent jurisdiction.
Section 16. Merger or Consolidation or Change of Name of Warrant Agent.
Any corporation into which the Warrant Agent or any successor Warrant Agent may
be merged or with which it may be consolidated, or any corporation resulting
from any merger or consolidation to which the Warrant Agent or any successor
Warrant Agent shall be a party, or any corporation succeeding to the corporate
trust business of the Warrant Agent or any successor Warrant Agent, shall be the
successor to the Warrant Agent hereunder without the execution or filing of any
paper or any further act on the part of any of the parties hereto, provided that
such corporation would be eligible for appointment as a successor Warrant Agent
under the provisions of Section 17. In the event at the time such successor
Warrant Agent shall succeed to the agency created by this Agreement any of the
Warrant Certificates shall have been countersigned but not delivered, any such
successor Warrant Agent may adopt the countersignature of the predecessor
Warrant Agent and deliver such Warrant Certificates so countersigned; and in the
event at that time any of the Warrant Certificates shall not have been
countersigned, any successor Warrant Agent may countersign such Warrant
Certificates either in the name of the predecessor Warrant Agent or in the name
of the successor Warrant Agent; and in all such cases such Warrant Certificates
shall have the full force provided in the Warrant Certificates and in this
Agreement.
9
<PAGE> 13
In the event at any time the name of the Warrant Agent shall be changed
and at such time any of the Warrant Certificates shall have been countersigned
but not delivered, the Warrant Agent may adopt the countersignature under its
prior name and deliver Warrant Certificates so countersigned; and in the event
at that time any of the Warrant Certificates shall not have been countersigned,
the Warrant Agent may countersign such Warrant Certificates either in its prior
name or in its changed name; and in all such cases such Warrant Certificates
shall have the full force provided in the Warrant Certificates and in this
Agreement.
Section 17. Duties of Warrant Agent. The Warrant Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, and the Company and the holders of the Warrants, by their acceptance
thereof, hereby agree to be bound by such terms and conditions:
(a) The Warrant Agent may consult with legal counsel (who may be
legal counsel for the Company), and the opinion of such counsel shall be
full and complete authorization and protection to the Warrant Agent as
to any action taken or omitted by it in good faith in accordance with
such opinion.
(b) Whenever in the performance of its duties under this
Agreement, the Warrant Agent shall deem it necessary or desirable that
any fact or matter be proved or established by the Company prior to
taking or suffering any action hereunder, such fact or matter (unless
other evidence in respect thereof be herein specifically prescribed) may
be deemed to be conclusively proved and established by a certificate
signed by the President or a Vice President and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary of the
Company and delivered to the Warrant Agent; and such certificate shall
be full authorization to the Warrant Agent for any action taken or
suffered in good faith by it under the provisions of this Agreement in
reliance upon such certificate.
(c) The Warrant Agent shall be liable hereunder only for its own
gross negligence, wilful misconduct or bad faith.
(d) The Warrant Agent shall not be liable for or by reason of any
of the statements of fact or recitals contained in this Agreement or in
the Warrant Certificates (except its countersignature thereof) or be
required to verify the same, but all such statements and recitals are
and shall be deemed to have been made by the Company only.
(e) The Warrant Agent shall not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery
of this Agreement (except the due execution hereof by the Warrant Agent)
or in respect of the validity or execution of any Warrant Certificate
(except its countersignature thereof); nor shall it be responsible for
any breach by the Company of any covenant or condition contained in this
Agreement or in any Warrant Certificate; nor shall it be responsible for
the adjustment of the Exercise Price or the making of any change in the
number of shares of Common Stock required under the provisions of
Section 8 or responsible for the manner, method or amount of any such
change or the ascertaining of the existence of facts that would require
any such adjustment or change (except with respect to the exercise of
Warrant Certificates after actual notice of any adjustment of the
Exercise Price); nor shall it by any act under this Agreement be deemed
to make any representation or warranty as to the authorization or
reservation of any shares of
10
<PAGE> 14
Common Stock to be issued pursuant to this Agreement or any Warrant
Certificate or as to whether any shares of Common Stock will when issued
be validly authorized and issued, fully paid and non-assessable.
(f) The Company agrees that it will perform, execute, acknowledge
and deliver or cause to be performed, executed, acknowledged and
delivered all such further and other acts, instruments and assurances as
may reasonably be required by the Warrant Agent for the carrying out or
performing by the Warrant Agent of the provisions of this Agreement.
(g) The Warrant Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties under this
Agreement from the President or a Vice President or the Secretary or the
Treasurer of the Company, and to apply to such officers for advice or
instructions in connection with its duties, and they shall not be liable
for any action taken or suffered to be taken by them in good faith in
accordance with instructions of any such officer.
Section 18. Change of Warrant Agent. The Warrant Agent may resign and be
discharged from its duties under this Agreement upon thirty (30) days' notice in
writing mailed to the Company by registered or certified mail, and to the
registered holders of the Warrant Certificates by first class mail. The Company
may remove the Warrant Agent or any successor Warrant Agent upon thirty (30)
days' notice in writing, mailed to the Warrant Agent or successor Warrant Agent,
as the case may be, and to each transfer agent of the Common Stock by registered
or certified mail, and to the registered holders of the Warrant Certificates by
first class mail. If the Warrant Agent shall resign or be removed or shall
otherwise become incapable of acting, the Company shall appoint a successor to
the Warrant Agent. If the Company shall fail to make such appointment within a
period of thirty (30) days after such removal or after it has been notified in
writing of such resignation or incapacity by the resigning or incapacitated
Warrant Agent or by the holder of the Warrant Certificate (who shall, with such
notice, submit his Warrant Certificate for inspection by the Company), then the
registered holder of any Warrant Certificate may apply to any court of competent
jurisdiction for the appointment of a new Warrant Agent. Any successor Warrant
Agent, whether appointed by the Company or by such a court, shall be a
corporation organized and doing business under the laws of the United States or
of the State of New York, in good standing, having its principal office in the
City of New York, State of New York, which is authorized under such laws to
exercise corporate trust powers and is subject to supervision or examination by
Federal or state authority and which has at the time of its appointment as
Warrant Agent a combined capital and surplus of at least $100 Million. After
appointment the successor Warrant Agent shall be vested with the same powers,
rights, duties and responsibilities as if it had been originally named as
Warrant Agent without further act or deed; but the predecessor Warrant Agent
shall deliver and transfer to the successor Warrant Agent any property at the
time held by it under this Agreement, and execute and deliver any further
assurance, conveyance, act or deed necessary for the purpose. Not later than the
effective date of any such appointment the Company shall file notice thereof in
writing with the predecessor Warrant Agent and each transfer agent of the Common
Stock, and mail a notice thereof in writing to the registered holders of the
Warrant Certificates. Failure to give any notice provided in this Section 18,
however, or any defect therein, shall not affect the legality or validity of the
resignation or removal of the Warrant Agent or the appointment of successor
Warrant Agent, as the case may be.
Section 19. Issuance of New Warrant Certificates. Notwithstanding any of
the provisions of this Agreement or of the several Warrant Certificates to the
contrary, the Company may, at its
11
<PAGE> 15
option, issue new Warrant Certificates in such form as may be approved by its
Board of Directors to reflect any adjustment or change in the Exercise Price per
share and the number of shares of Common Stock purchasable under the Warrant
Certificates made in accordance with the provisions of this Agreement.
Section 20. Notices. Notice or demand authorized by this Agreement to be
given or made by the Warrant Agent or by the holder of any Warrant Certificate
to or on the Company shall be sufficiently given or made if sent by first class
mail, postage prepaid, addressed (until another address is filed in writing by
the Company with the Warrant Agent) as follows:
RealTrust Asset Corporation
2855 East Cottonwood Parkway
Suite 500
Salt Lake City, Utah 84121
Attention: Mr. John D. Fry
Subject to the provisions of Section 18, any notice or demand authorized by this
Agreement to be given or made by the Company or by the holder of any Warrant
Certificate to or on the Warrant Agent shall be sufficiently given or made if
sent by first-class mail, postage prepaid, addressed (until another address is
filed in writing by the Warrant Agent with the Company) as follows:
American Securities Transfer & Trust Incorporated
[ ]
Section 21. Modification of Agreement. The Warrant Agent may, without
the consent or concurrence of the holders of the Warrants, by supplemental
agreement or otherwise join with the Company in taking any changes or
corrections in this Agreement that they shall have been advised by counsel (who
may be counsel for the Company) (a) are required to cure any ambiguity or to
correct any defective or inconsistent provision or clerical omission or mistake
or manifest error herein contained, (b) add to the covenants and agreements of
the Company in this Agreement further covenants and agreements thereafter to be
observed, or surrender any right or power reserved to or conferred upon the
Company in this Agreement, or (c) do not adversely affect, alter or change the
rights, privileges or immunities of the holders of the Warrants.
Section 22. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Warrant Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 23. Governing Law. This Agreement and each Warrant Certificate
issued hereunder shall be governed by, and construed in accordance with, the
laws of the State of New York.
Section 24. Benefits of This Agreement. Nothing in this Agreement
expressed and nothing that may be implied from any of the provisions hereof is
intended, or shall be construed, to confer upon or give to any person or
corporation other than the Company, the Warrant Agent and the holders of the
Warrants any right, remedy or claim under or by reason of this Agreement or of
any
12
<PAGE> 16
covenant, condition, stipulation, promise or agreement hereof; and all
covenants, conditions, stipulations, promises and agreements in this Agreement
contained shall be for the sole and exclusive benefit of the Company and the
Warrant Agent and their respective successors and of the Holders of the
Warrants.
Section 25. Descriptive Headings. The descriptive headings of the
several Sections of this Agreement are inserted for convenience only and shall
not control or affect the meaning or construction of any of the provisions
hereof.
Section 26. Counterparts. This Agreement may be executed in any number
of counterparts and each such counterpart shall for all purposes be deemed to be
an original, and all such counterparts shall together constitute but one and the
same instrument.
13
<PAGE> 17
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, all as of the day and year first above written.
REALTRUST ASSET CORPORATION, a
Maryland corporation
--------------------------------
Mr. John D. Fry
Chief Executive Officer
AMERICAN SECURITIES TRANSFER & TRUST
INCORPORATED, a ______________ corporation
By:____________________________
Title:__________________________
S-1
<PAGE> 18
EXHIBIT A
(Form of Warrant Certificate for Common Stock Warrants)
No. W- Number of Warrants
One Warrant is required to purchase one share of Common Stock
VOID AFTER [________], 2001
REALTRUST ASSET CORPORATION
WARRANT TO PURCHASE COMMON STOCK
THIS CERTIFIES THAT for value received , or registered assigns is
entitled, subject to the terms and conditions hereinafter set forth, to purchase
from RealTrust Asset Corporation, a corporation incorporated under the laws of
the State of Maryland (the "Company"), shares of fully paid and non-assessable
common stock, $0.001 par value, of the Company (the "Common Stock"), upon
presentation and surrender of this Warrant Certificate with the Form of Election
to Purchase duly executed, at any time after the opening of business on the
Detachment Date (as defined below) and on or prior to the close of business on
[Insert date three years after the date of the Prospectus] at the principal
office of American Securities Transfer & Trust Incorporated, warrant agent of
the Company (the "Warrant Agent"), or its successor as Warrant Agent, in the
City of [New York] and upon payment therefor of the exercise price of $[Insert
initial public offering price] per whole share (the "Exercise Price"). Payment
of the Exercise Price may be made (a) in the form of cash or by certified or
official bank check payable to the order of the Company or (b) by surrendering
additional Warrants or shares of Common Stock for cancellation to the extent the
Company may lawfully accept shares of Common Stock, with the value per share of
such Common Stock for such purpose being equal to current market price per share
of Common Stock determined in accordance with Section 8(e) of the Warrant
Agreement and the value of a Warrant being equal to the difference between such
current market price per share of Common Stock and the Exercise Price.
This Warrant Certificate is subject to all of the terms, provisions and
conditions of that certain warrant agreement dated as of April __, 1998, between
the Company and the Warrant Agent (the "Warrant Agreement"), which Warrant
Agreement is hereby incorporated herein by reference and made a part hereof and
to which reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Warrant Agent, the Company and the holders of the Warrant Certificates.
Capitalized terms used herein without definitions shall have the meanings given
such terms in the Warrant Agreement. Copies of the Warrant Agreement are on file
at the above-mentioned office of the Warrant Agent. Certain terms of the Warrant
Agreement are summarized on the reverse side hereof.
As provided in the Warrant Agreement, the Exercise Price and the number
of shares of Common Stock purchasable upon the exercise of this Warrant
Certificate are, upon the happening of certain events, subject to modification
and adjustment.
The Warrants shall automatically detach from the shares of Common Stock
to which they were attached six months after the date of issuance (the
"Detachment Date"), and thereafter may be transferred separately therefrom.
A-1
<PAGE> 19
This Warrant Certificate shall not be valid or obligatory for any
purpose until countersigned by the Warrant Agent.
Witness the facsimile signatures of the proper officers of the Company
and its corporate seal. Dated as of , 1998.
REALTRUST ASSET CORPORATION, a
Maryland corporation
By_________________________________________
President
and
By.........................................
Secretary
Countersigned:
AMERICAN SECURITIES TRANSFER & TRUST
INCORPORATED, a ___________ corporation
Warrant Agent
By_________________________________________
AUTHORIZED SIGNATURE
A-2
<PAGE> 20
(FORM OF REVERSE SIDE OF WARRANT CERTIFICATE)
The Warrant Agreement provides for adjustments to the Exercise Price set
forth on the facing side of this Warrant Certificate as follows: (a) In the
event the Company after the date hereof shall (i) pay a dividend or make a
distribution on its Common Stock in shares of Common Stock of the Company, or
(ii) subdivide its outstanding shares of Common Stock into a greater number of
shares, or (iii) combine its outstanding shares of Common Stock into a smaller
number of shares, or (iv) issue by reclassification of its shares of Common
Stock any shares of capital stock of the Company, or (v) issue shares of capital
stock at a price below the greater of (a) [price to public] or (b) fair market
value (provided that this clause (v) shall not apply to firm underwriting
offerings), the exercise right and the Exercise Price in effect immediately
prior to such action shall be adjusted so that the holder of any Warrant
thereafter surrendering such Warrant for exercise shall be entitled to receive
the number of shares of capital stock of the Company which he would have owned
immediately following such action had such Warrant been exercised immediately
prior to the record date for such action or to such action, as appropriate. An
adjustment made pursuant to this paragraph (a) shall, in the case of a
subdivision, combination or reclassification become effective retroactively
immediately after the effective date thereof and shall, in case of a dividend or
distribution, become effective retroactively immediately after the record date
thereof. If, as a result of an adjustment made pursuant to this paragraph (a),
the holder of any Warrant thereafter surrendered for exercise shall become
entitled to receive shares of two or more classes of capital stock of the
Company, the Board of Directors of the Company (whose determination shall be
described in a certificate filed with the Warrant Agent) shall in good faith
determine the allocation of the adjusted Exercise Price between or among shares
of such classes of capital stock.
(b) In the event the Company after the date hereof shall distribute to
all the holders of Common Stock any dividend or other distribution (other than a
cash distribution made as a dividend payable out of earnings or out of any
earned surplus legally available for dividends under the laws of the
jurisdiction of incorporation of the Company) or any evidence of indebtedness or
any assets with respect to the Common Stock, or rights to subscribe or purchase
shares of Common Stock at a price per share less then the current market price
per share of Common Stock (as defined in paragraph (e) below) at the record date
referenced below, then, and thereafter successively upon each such distribution,
the Exercise Price in effect immediately prior to such distribution shall
forthwith be reduced to a price determined by multiplying the Exercise Price in
effect immediately prior to such distribution by a fraction the numerator of
which shall be the current market price per share of Common Stock (as defined in
paragraph (e) below) at the record date referenced below, less the then fair
market value (as determined in good faith by the Board of Directors of the
Company, whose determination shall be described in a certificate filed with the
Warrant Agent) of the portion of such evidences of indebtedness or such assets
so distributed, or of such subscription or purchase rights, applicable to one
share of Common Stock and the denominator of which shall be such current market
price per share of Common Stock. An adjustment made pursuant to this paragraph
(b) shall become effective retroactively immediately after the record date for
the determination of stockholders entitled to receive such distribution.
(c) After each adjustment of the Exercise Price pursuant to paragraphs
(a) and (b) above, the total number of shares of Common Stock or fractional part
thereof purchasable upon the exercise of each Warrant shall be proportionately
adjusted to such number of shares or fractional part thereof as the total
Exercise Price of the number of shares or fractional part thereof purchasable
immediately prior to such adjustment will buy at the adjusted Exercise Price.
(d) The certificate of any independent firm of public accountants of
recognized standing selected by the Board of Directors of the Company shall be
conclusive evidence of the correctness of any computation made under paragraphs
(a) and (b) above.
(e) For the purposes of any computation under paragraphs (a) and (b)
above, the current market price per share of Common Stock as of any date of
determination shall be deemed to be the average of the daily
A-3
<PAGE> 21
closing prices for the 10 consecutive trading days preceding the date of
determination. The closing price foreach day shall be the last reported sale
price regular way or, in case no such reported sale takes place on such day, the
average of the reported closing bid and asked prices regular way, in either case
as officially reported by the principal stock exchange on which the Common Stock
is listed or admitted to trading, or, the Common Stock is not listed or admitted
to trading on any national securities exchange, the average of the closing bid
and asked prices as furnished by the National Association of Securities Dealers,
Inc., through NASDAQ or similar organization if NASDAQ is no longer reporting
such information.
(f) No adjustment of the Exercise Price shall be required under
paragraphs (a) and (b) above if the amount of such adjustment is less than 1%;
provided, however, that any adjustments which by reason of the foregoing are not
required at the time to be made shall be carried forward and taken into account
and included in determining the amount of any subsequent adjustment. If the
Company shall take a record of the holders of Common Stock for the purpose of
entitling them to receive any dividend or distribution and shall, thereafter and
before the distribution to stockholders of any such dividend or distribution,
legally abandon its plan to pay or deliver such dividend or distribution, then
no adjustment of the Exercise Price shall be required by reason of the taking of
such record. All calculations under these provisions shall be made to the
nearest cent or to the nearest one-hundredth of a share, as the case may be.
(g) Whenever the Exercise Price is adjusted pursuant to these
provisions, the Company shall promptly file with the Warrant Agent and with each
transfer agent for the Common Stock a certificate signed by the President or a
Vice President and by the Treasurer or an Assistant Treasurer or the Secretary
or an Assistant Secretary of the Company setting forth in reasonable detail the
events requiring the adjustment and the method by which such adjustment was
calculated, and specifying the Exercise Price and the number or kind or class of
shares or other securities or property purchasable upon exercise of the several
Warrants after giving effect to such adjustment, and will cause to be mailed,
first class, postage prepaid, a brief summary thereof to the registered holders
of the Warrant Certificates at their last addresses as they appear on the
registry books of the Warrant Agent.
(h) For the purposes of these provisions, the term "Common Stock" shall
mean (i) the class of stock designated as the common stock, par value $0.001 per
share, of the Company, at the date of the Warrant Agreement or (ii) any other
class of stock resulting from successive changes or reclassifications of such
Common Stock consisting solely of changes in par value, or from par value to no
par value, or from no par value to par value. In the event that at any time, as
a result of an adjustment made pursuant to paragraph (a), shares of capital
stock of the Company other than shares of Common Stock are issuable upon
exercise of the Warrants, thereafter the number of such other shares so issuable
shall be subject to adjustment from time to time in a manner and on terms as
nearly equivalent as practicable to the provisions with respect to the Common
Stock contained in these provisions, and all other provisions of the Warrant
Agreement with respect to Common Stock shall apply on like terms to any such
other shares. Subject to the foregoing, and unless the context requires
otherwise, all references to Common Stock in the Warrant Agreement and in the
Warrant Certificates shall, in the event of an adjustment pursuant to these
provisions, be deemed to refer also to any other securities or property then
issuable upon exercise of the Warrants as a result of such adjustments.
Unless and to the extent that the Company shall exercise the option to
issue new Warrant Certificates as provided in the Warrant Agreement,
irrespective of the fact that the Warrant Certificates theretofore and
thereafter issued shall continue to express the Exercise Price per share and the
number of shares purchasable thereunder as the Exercise Price per share and the
number of shares purchasable were expressed in the Warrant Certificates when
initially issued, such Warrant Certificates shall be deemed to refer to the
Exercise Price and the number of shares purchasable as adjusted or changed
pursuant to these provisions.
This Warrant Certificate, with our without other Warrant Certificates,
upon surrender at the principal office of the Warrant Agent may be exchanged for
another Warrant Certificate or Warrant Certificates entitling
A-4
<PAGE> 22
the holder to purchase a like aggregate number of shares of Common Stock as the
Warrant Certificate or Warrant Certificates surrendered entitled him to
purchase. If this Warrant Certificate shall be exercised in part, the
holderhereof shall be entitled to receive upon surrender hereof, another Warrant
Certificate or Warrant Certificates for the number of shares not purchased upon
such exercise.
No fractional shares will be issued upon the exercise of rights to
purchase hereunder. As to any final fraction of a share which the same holder of
one or more Warrant Certificates, the rights to purchase under which are
exercised in the same transaction, would otherwise be entitled to purchase on
such exercise, the Company shall pay the cash value thereof determined as
provided in the Warrant Agreement.
No holder of this Warrant Certificate shall be entitled to vote or
receive dividends or be deemed the holder of Common Stock or any other
securities of the Company which may at any time be issuable on the exercise
hereof for any purpose, nor shall anything contained in the Warrant Agreement or
herein be construed to confer upon the holder hereof, as such, any of the rights
of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to stockholders at any meeting thereof,
or to give or withhold consent to any corporate action (whether upon any
recapitalization, issue of stock, reclassification of stock, change of par value
or change of stock to no par value, consolidation, merger, conveyance, or
otherwise) or to receive notice of meetings, or to receive dividends or
subscription rights or otherwise, until the Warrants evidenced by this Warrant
Certificate shall have been exercised and the Common Stock purchasable upon the
exercise hereof shall have become deliverable as provided in the Warrant
Agreement.
Every holder of this Warrant Certificate by accepting the same consents
and agrees with the Company, the Warrant Agent, and with every other holder of a
Warrant Certificate that:
(a) this Warrant Certificate is transferable only by the
registered holder hereof in person or by his attorney duly authorized in
writing, and only at the principal office of the Warrant Agent duly
endorsed, or accompanied by a proper instrument of transfer satisfactory
to the Warrant Agent and the Company in their sole discretion; and
(b) the Company and the Warrant Agent may deem and treat the
person in whose name this Warrant Certificate is registered as the
absolute owner for all purposes whatsoever, and neither the Company nor
the Warrant Agent shall be affected by any notice to the contrary.
A-5
<PAGE> 23
[FORM OF]
ELECTION TO PURCHASE
_________________________________
The Warrant Agent
Attention: ______________________
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant(s) for, and to purchase thereunder,
............... shares of the stock provided for therein, and requests that
certificates for such shares and a certified check in payment of any fractional
share interest be issued in the name of and sent to:
- --------------------------------------------------------------------------------
(Please Print Name and Address)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
and, if said number of shares shall not be all the shares purchasable
thereunder, that a new Warrant Certificate for the balance remaining of the
shares purchasable under the within Warrant Certificate be registered in the
name of the undersigned warrantholder or his assignee as below indicated and
delivered to the address stated below.
In payment of the Exercise Price, the undersigned hereby and together
herewith tenders payment in accordance with Section 7 of the Warrant Agreement.
Dated: _________________, 199___
Name of Warrantholder or Assignee: ---------------------------------------------
(Please Print)
Address: -----------------------------------------------------------------
-----------------------------------------------------------------
Signature: -----------------------------------------------------------------
(Note: The above signature must correspond with
the name as written upon the face of
this Warrant Certificate in every
particular, without alteration or
enlargement or any change whatever
unless this Warrant Certificate has been
assigned.)
Signature
Guaranteed: ------------------------
A-6
<PAGE> 24
[FORM OF]
ASSIGNMENT
For value received -----------------------------------------------------
hereby sell, assign, and transfer unto -----------------------------------------
(Please Print Name and Address)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------- of the Warrants represented by the
within Certificate, together with all right, title and interest therein, and do
hereby irrevocably constitute and appoint
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
attorney, to transfer said Warrant(s) on the books of the within-named
Corporation, with full power of substitution in the premises.
Dated: ______________, 199_
Signature
- --------------------------------------------------------------------------------
(Note: The above signature must correspond with
the name as written upon the face of
this Warrant Certificate in every
particular, without alteration or
enlargement or any change whatever
unless this Warrant Certificate has been
assigned.)
Signature
Guaranteed:
------------------------------
A-7
<PAGE> 25
EXHIBIT B
(FORM OF WARRANT CERTIFICATE FOR REPRESENTATIVE'S WARRANTS)
NO. W- NUMBER OF WARRANTS
ONE WARRANT IS REQUIRED TO PURCHASE ONE SHARE OF COMMON STOCK
VOID AFTER [ ], 2001
REALTRUST ASSET CORPORATION
WARRANT TO PURCHASE COMMON STOCK
THIS CERTIFIES THAT for value received , or registered assigns is
entitled, subject to the terms and conditions hereinafter set forth, to purchase
from RealTrust Asset Corporation, a corporation incorporated under the laws of
the State of Maryland (the "Company"), shares of fully paid and non-assessable
common stock, $0.001 par value, of the Company (the "Common Stock"), upon
presentation and surrender of this Warrant Certificate with the Form of Election
to Purchase duly executed, at any time after the opening of business on [ ],
1998, and on or prior to the close of business on [ ], 2001, at the principal
office of American Securities Transfer & Trust Incorporated, warrant agent of
the Company (the "Warrant Agent"), or its successor as Warrant Agent, in the
City of [ ] and upon payment therefor of the exercise price of [$ ] per whole
share (the "Exercise Price"). Payment of the Exercise Price may be made (a) in
the form of cash or by certified or official bank check payable to the order of
the Company or (b) by surrendering additional Warrants or shares of Common Stock
for cancellation to the extent the Company may lawfully accept shares of Common
Stock, with the value per share of such Common Stock for such purpose being
equal to current market price per share of Common Stock determined in accordance
with Section 8(e) of the Warrant Agreement and the value of a Warrant being
equal to the difference between such current market price per share of Common
Stock and the Exercise Price.
This Warrant Certificate is subject to all of the terms, provisions and
conditions of that certain Warrant Agreement, dated as of April __, 1998,
between the Company and the Warrant Agent (the "Warrant Agreement"), which
Warrant Agreement is hereby incorporated herein by reference and made a part
hereof and to which Warrant Agreement reference is hereby made for a full
description of the rights, limitations of rights, obligations, duties and
immunities hereunder of the Warrant Agent, the Company and the holders of the
Warrant Certificates. Capitalized terms used herein without definitions shall
have the meanings given such terms in the Warrant Agreement. Copies of the
Warrant Agreement are on file at the above-mentioned office of the Warrant
Agent. Certain terms of the Warrant Agreement are summarized on the reverse side
hereof.
For a period of one year from March __, 1998, sales, transfers,
assignments, pledges and hypothecations of this Warrant Certificate are
prohibited by the holder hereof, except (i) transfers to officers of such
holder, (ii) if such holder is a partnership transfers to partners thereof, or
(iii) transfers by operation of law; provided the transferees in each case shall
be subject to the transfer restrictions set forth in this paragraph.
B-1
<PAGE> 26
As provided in the Warrant Agreement, the Exercise Price and the number
of shares of Common Stock purchasable upon the exercise of this Warrant
Certificate are, upon the happening of certain events, subject to modification
and adjustment.
This Warrant Certificate shall not be valid or obligatory for any
purpose until countersigned by the Warrant Agent.
Witness the facsimile signatures of the proper officers of the Company
and its corporate seal. Dated as of , 1998.
REALTRUST ASSET CORPORATION, a
Maryland corporation
By_________________________________________
President
and
By_________________________________________
Secretary
Countersigned:
AMERICAN SECURITIES TRANSFER & TRUST
INCORPORATED, a ___________ corporation
Warrant Agent
By_________________________________________
AUTHORIZED SIGNATURE
B-2
<PAGE> 27
(FORM OF REVERSE SIDE OF WARRANT CERTIFICATE)
The Warrant Agreement provides for adjustments to the Exercise Price set
forth on the facing side of this Warrant Certificate as follows: (a) In the
event the Company after the date hereof shall (i) pay a dividend or make a
distribution on its Common Stock in shares of Common Stock of the Company, or
(ii) subdivide its outstanding shares of Common Stock into a greater number of
shares, or (iii) combine its outstanding shares of Common Stock into a smaller
number of shares, or (iv) issue by reclassification of its shares of Common
Stock any shares of capital stock of the Company, or (v) issue shares of capital
stock at a price below the greater of (a) [price to public] or (b) fair market
value (provided that this clause (v) shall not apply to firm underwriting
offerings), the exercise right and the Exercise Price in effect immediately
prior to such action shall be adjusted so that the holder of any Warrant
thereafter surrendering such Warrant for exercise shall be entitled to receive
the number of shares of capital stock of the Company which he would have owned
immediately following such action had such Warrant been exercised immediately
prior to the record date for such action or to such action, as appropriate. An
adjustment made pursuant to this paragraph (a) shall, in the case of a
subdivision, combination or reclassification become effective retroactively
immediately after the effective date thereof and shall, in case of a dividend or
distribution, become effective retroactively immediately after the record date
thereof. If, as a result of an adjustment made pursuant to this paragraph (a),
the holder of any Warrant thereafter surrendered for exercise shall become
entitled to receive shares of two or more classes of capital stock of the
Company, the Board of Directors of the Company (whose determination shall be
described in a certificate filed with the Warrant Agent) shall in good faith
determine the allocation of the adjusted Exercise Price between or among shares
of such classes of capital stock.
(b) In the event the Company after the date hereof shall distribute to
all the holders of Common Stock any dividend or other distribution (other than a
cash distribution made as a dividend payable out of earnings or out of any
earned surplus legally available for dividends under the laws of the
jurisdiction of incorporation of the Company) or any evidence of indebtedness or
any assets with respect to the Common Stock, or rights to subscribe or purchase
shares of Common Stock at a price per share less then the current market price
per share of Common Stock (as defined in paragraph (e) below) at the record date
referenced below, then, and thereafter successively upon each such distribution,
the Exercise Price in effect immediately prior to such distribution shall
forthwith be reduced to a price determined by multiplying the Exercise Price in
effect immediately prior to such distribution by a fraction the numerator of
which shall be the current market price per share of Common Stock (as defined in
paragraph (e) below) at the record date referenced below, less the then fair
market value (as determined in good faith by the Board of Directors of the
Company, whose determination shall be described in a certificate filed with the
Warrant Agent) of the portion of such evidences of indebtedness or such assets
so distributed, or of such subscription or purchase rights, applicable to one
share of Common Stock and the denominator of which shall be such current market
price per share of Common Stock. An adjustment made pursuant to this paragraph
(b) shall become effective retroactively immediately after the record date for
the determination of stockholders entitled to receive such distribution.
(c) After each adjustment of the Exercise Price pursuant to paragraphs
(a) and (b) above, the total number of shares of Common Stock or fractional part
thereof purchasable upon the exercise of each Warrant shall be proportionately
adjusted to such number of shares or fractional part thereof as the total
Exercise Price of the number of shares or fractional part thereof purchasable
immediately prior to such adjustment will buy at the adjusted Exercise Price.
(d) The certificate of any independent firm of public accountants of
recognized standing selected by the Board of Directors of the Company shall be
conclusive evidence of the correctness of any computation made under paragraphs
(a) and (b) above.
(e) For the purposes of any computation under paragraphs (a) and (b)
above, the current market price per share of Common Stock as of any date of
determination shall be deemed to be the average of the daily closing prices for
the 10 consecutive trading days preceding the date of determination. The closing
price for each day shall be the last reported sale price regular way or, in case
no such reported sale takes place on such
B-3
<PAGE> 28
day, the average of the reported closing bid and asked prices regular way, in
either case as officially reported by the principal stock exchange on which the
Common Stock is listed or admitted to trading, or, the Common Stock is not
listed or admitted to trading on any national securities exchange, the average
of the closing bid and asked prices as furnished by the National Association of
Securities Dealers, Inc., through NASDAQ or similar organization if NASDAQ is no
longer reporting such information.
(f) No adjustment of the Exercise Price shall be required under
paragraphs (a) and (b) above if the amount of such adjustment is less than 1%;
provided, however, that any adjustments which by reason of the foregoing are not
required at the time to be made shall be carried forward and taken into account
and included in determining the amount of any subsequent adjustment. If the
Company shall take a record of the holders of Common Stock for the purpose of
entitling them to receive any dividend or distribution and shall, thereafter and
before the distribution to stockholders of any such dividend or distribution,
legally abandon its plan to pay or deliver such dividend or distribution, then
no adjustment of the Exercise Price shall be required by reason of the taking of
such record. All calculations under these provisions shall be made to the
nearest cent or to the nearest one-hundredth of a share, as the case may be.
(g) Whenever the Exercise Price is adjusted pursuant to these
provisions, the Company shall promptly file with the Warrant Agent and with each
transfer agent for the Common Stock a certificate signed by the President or a
Vice President and by the Treasurer or an Assistant Treasurer or the Secretary
or an Assistant Secretary of the Company setting forth in reasonable detail the
events requiring the adjustment and the method by which such adjustment was
calculated, and specifying the Exercise Price and the number or kind or class of
shares or other securities or property purchasable upon exercise of the several
Warrants after giving effect to such adjustment, and will cause to be mailed,
first class, postage prepaid, a brief summary thereof to the registered holders
of the Warrant Certificates at their last addresses as they appear on the
registry books of the Warrant Agent.
(h) For the purposes of these provisions, the term "Common Stock" shall
mean (i) the class of stock designated as the common stock, par value $0.001 per
share, of the Company, at the date of the Warrant Agreement or (ii) any other
class of stock resulting from successive changes or reclassifications of such
Common Stock consisting solely of changes in par value, or from par value to no
par value, or from no par value to par value. In the event that at any time, as
a result of an adjustment made pursuant to paragraph (a), shares of capital
stock of the Company other than shares of Common Stock are issuable upon
exercise of the Warrants, thereafter the number of such other shares so issuable
shall be subject to adjustment from time to time in a manner and on terms as
nearly equivalent as practicable to the provisions with respect to the Common
Stock contained in these provisions, and all other provisions of the Warrant
Agreement with respect to Common Stock shall apply on like terms to any such
other shares. Subject to the foregoing, and unless the context requires
otherwise, all references to Common Stock in the Warrant Agreement and in the
Warrant Certificates shall, in the event of an adjustment pursuant to these
provisions, be deemed to refer also to any other securities or property then
issuable upon exercise of the Warrants as a result of such adjustments.
Unless and to the extent that the Company shall exercise the option to
issue new Warrant Certificates as provided in the Warrant Agreement,
irrespective of the fact that the Warrant Certificates theretofore and
thereafter issued shall continue to express the Exercise Price per share and the
number of shares purchasable thereunder as the Exercise Price per share and the
number of shares purchasable were expressed in the Warrant Certificates when
initially issued, such Warrant Certificates shall be deemed to refer to the
Exercise Price and the number of shares purchasable as adjusted or changed
pursuant to these provisions.
This Warrant Certificate, with our without other Warrant Certificates,
upon surrender at the principal office of the Warrant Agent may be exchanged for
another Warrant Certificate or Warrant Certificates entitling the holder to
purchase a like aggregate number of shares of Common Stock as the Warrant
Certificate or Warrant Certificates surrendered entitled him to purchase. If
this Warrant Certificate shall be exercised in part, the holder hereof shall be
entitled to receive upon surrender hereof, another Warrant Certificate or
Warrant Certificates for the number of shares not purchased upon such exercise.
B-4
<PAGE> 29
No fractional shares will be issued upon the exercise of rights to
purchase hereunder. As to any final fraction of a share which the same holder of
one or more Warrant Certificates, the rights to purchase under which are
exercised in the same transaction, would otherwise be entitled to purchase on
such exercise, the Company shall pay the cash value thereof determined as
provided in the Warrant Agreement.
No holder of this Warrant Certificate shall be entitled to vote or
receive dividends or be deemed the holder of Common Stock or any other
securities of the Company which may at any time be issuable on the exercise
hereof for any purpose, nor shall anything contained in the Warrant Agreement or
herein be construed to confer upon the holder hereof, as such, any of the rights
of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to stockholders at any meeting thereof,
or to give or withhold consent to any corporate action (whether upon any
recapitalization, issue of stock, reclassification of stock, change of par value
or change of stock to no par value, consolidation, merger, conveyance, or
otherwise) or to receive notice of meetings, or to receive dividends or
subscription rights or otherwise, until the Warrants evidenced by this Warrant
Certificate shall have been exercised and the Common Stock purchasable upon the
exercise hereof shall have become deliverable as provided in the Warrant
Agreement.
Every holder of this Warrant Certificate by accepting the same consents
and agrees with the Company, the Warrant Agent, and with every other holder of a
Warrant Certificate that:
(a) this Warrant Certificate is transferable only by the
registered holder hereof in person or by his attorney duly authorized in
writing, and only at the principal office of the Warrant Agent duly
endorsed, or accompanied by a proper instrument of transfer satisfactory
to the Warrant Agent and the Company in their sole discretion;
(b) the Company and the Warrant Agent may deem and treat the
person in whose name this Warrant Certificate is registered as the
absolute owner for all purposes whatsoever, and neither the Company nor
the Warrant Agent shall be affected by any notice to the contrary; and
(c) for a period of one year from [ ], 1998, no holder of a
Warrant Certificate evidencing a Representative's Warrant or any shares
of Common Stock received upon the exercise of such Warrants shall sell,
sign, pledge or hypothecate such Warrant Certificate or such shares of
Common Stock, except (i) transfers to officers of such holder, (ii) if
such holder is a partnership, transfers to partners thereof, or (iii)
transfers by operation of law, provided that the transferees in each
case shall be subject to the transfer restrictions set forth in this
paragraph (c).
B-5
<PAGE> 30
[FORM OF]
ELECTION TO PURCHASE
- ----------------------------------
The Warrant Agent
Attention: ______________________
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant(s) for, and to purchase thereunder,
_______________ shares of the stock provided for therein, and requests that
certificates for such shares and a certified check in payment of any fractional
share interest be issued in the name of and sent to:
- --------------------------------------------------------------------------------
(Please Print Name and Address)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
and, if said number of shares shall not be all the shares purchasable
thereunder, that a new Warrant Certificate for the balance remaining of the
shares purchasable under the within Warrant Certificate be registered in the
name of the undersigned warrantholder or his assignee as below indicated and
delivered to the address stated below.
In payment of the Exercise Price, the undersigned hereby and together
herewith tenders payment in accordance with Section 7 of the Warrant Agreement.
Dated: _________________, 199___
Name of Warrantholder or Assignee: _____________________________________________
(Please Print)
Address: _________________________________________________________________
_________________________________________________________________
Signature: _________________________________________________________________
(Note: The above signature must correspond with
the name as written upon the face of
this Warrant Certificate in every
particular, without alteration or
enlargement or any change whatever
unless this Warrant Certificate has been
assigned.)
Signature
Guaranteed: ________________________
B-6
<PAGE> 31
[FORM OF]
ASSIGNMENT
For value received _____________________________________________________
hereby sell, assign, and transfer unto _________________________________________
(Please Print Name and Address)
________________________________________________________________________________
________________________________________________________________________________
_______________________________________ of the Warrants represented by the
within Certificate, together with all right, title and interest therein, and do
hereby irrevocably constitute and appoint
________________________________________________________________________________
________________________________________________________________________________
attorney, to transfer said Warrant(s) on the books of the within-named
Corporation, with full power of substitution in the premises.
Dated: ______________, 199_
Signature
________________________________________________________________________________
(Note: The above signature must correspond with
the name as written upon the face of
this Warrant Certificate in every
particular, without alteration or
enlargement or any change whatever
unless this Warrant Certificate has been
assigned.)
Signature
Guaranteed: ______________________________
B-7
<PAGE> 1
EXHIBIT 4.3
CMG FUNDING CORP.
1996 STOCK OPTION PLAN
(as adopted December 16, 1996)
1. PURPOSE. The CMG Funding Corp. (the "Corporation") 1996 Stock Option
Plan (the "Plan") is intended to provide incentive to key employees, officers
and directors to encourage proprietary interest in the Corporation, to encourage
such key employees, officers and directors to remain in the employ of the
Corporation, to attract new employees with outstanding qualifications, and to
afford additional incentive to such person to increase their efforts in
providing significant services to the Corporation.
2. DEFINITIONS.
a. "Board" shall mean the Board of Directors of the Corporation.
b. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
c. "Committee" shall mean the committee, if any, appointed by the
Board in accordance with Section 4 of the Plan.
d. "Common Stock" shall mean the Common Stock, par value $0.001
per share, of the Corporation.
e. "Corporation" shall mean CMG Funding Corp., a Delaware
corporation, and its Subsidiaries.
f. "Disability" shall mean the condition of an Employee or member
of the Board who is unable to perform his or her substantial and
material job duties due to injury or sickness or such other condition as
the Board or Committee may determine in its sole discretion.
g. "Eligible Persons" shall mean officers, directors and
employees of the Corporation. For purposes of this Plan, a director
shall be deemed to be an Employee, and will be eligible to receive
Non-statutory Stock Options only after finding the value of the services
rendered or to be rendered to the Corporation is at least equal to the
value of the options being granted.
h. "Employee" shall mean an individual who is employed (within
the meaning of Code Section 3401 and the regulations thereunder) by the
Corporation.
i. "Exercise Price" shall mean the price per Share of Common
Stock, determined by the Board or the Committee, at which an Option may
exercised.
<PAGE> 2
j. "Fair Market Value" shall mean the value of one (1) Share of
Common Stock equal to the greater of (a) $3.86 per share or (b) an
amount determined by dividing (i) the product of (x) the net pre-tax
profits of the Corporation for the twelve (12) month period ended as of
the end of the most recent fiscal quarter determined in accordance with
generally accepted accounting principles and (y) five (5) by (ii) the
number of shares of Common Stock outstanding on the date of grant of any
Option (on a fully diluted basis assuming the exercise of all options
and the conversion of all convertible securities outstanding as of such
date).
k. "Incentive Stock Option" shall mean an option described in
Section 422(b) of the Code.
l. "Non-statutory Stock Option" shall mean an option not
described in Section 422(b) or 423(b) of the Code.
m. "Option" shall mean any Non-statutory Stock Option or
Incentive Stock Option granted pursuant to the Plan.
n. "Optionee" shall mean any Eligible Person who has received an
Option.
o. "Participant" shall mean any Eligible Person granted an Option
under the Plan.
p. "Plan" shall mean the CMG Funding Corp. 1996 Stock Option
Plan, as it may be amended from time to time.
q. "Purchase Price" shall mean the Exercise Price times the
number of Shares with respect to which an Option is exercised.
r. "Retirement" shall mean the voluntary termination of
employment by an Employee upon the attainment of age sixty-five (65) and
the completion of not less than seven (7) years of service with the
Corporation or a subsidiary of the Corporation.
s. "Share" shall mean one (1) share of Common Stock, adjusted in
accordance with Section 11 of the Plan (if applicable).
t. "Subsidiary" shall mean any corporation at least fifty percent
(50%) of the total combined voting power of which is owned by the
Corporation or by another Subsidiary.
u. "Termination of Employment" shall mean the time when the
employee-employer relationship or directorship between the Optionee and
the Corporation is terminated for any reason, with or without cause,
including but not limited to any
2
<PAGE> 3
termination by resignation, discharge, death or retirement; provided,
however, Termination of Employment shall not include a termination where
there is a simultaneous reemployment of the Optionee by the Corporation.
The Committee, in its absolute discretion, shall determine the effect of
all matters and questions relating to Termination of Employment,
including but not limited to the question of whether any Termination of
Employment was for cause and all questions of whether particular leaves
of absence constitute Terminations of Employment. With respect to
Incentive Stock Options, a leave of absence shall constitute a
Termination of Employment if, and to the extent that, such leave of
absence interrupts employment for the purposes of Section 422(a)(2) of
the Code.
3. EFFECTIVE DATE. The Plan was adopted by the Board on December 16,
1996, subject to the approval by the Corporation's shareholders. The Plan was
submitted to shareholders for their approval after receipt of Board approval and
was adopted by written consent dated December 16, 1996. The effective date of
the Plan shall be deemed to be December 16, 1996.
4. ADMINISTRATION. The Plan shall be administered by the Board or a
Committee of the Board consisting of two or more members of the Board. The Board
shall appoint one of the members of the Committee, if there be one, as Chairman
of the Committee. The Committee shall hold meetings at such times and places as
it may determine. Acts of a majority of the Board or Committee, or acts reduced
to or approved in writing by a majority of the members of the Board or the
Committee, shall be the valid acts of the Board or the Committee. The Board, or
the Committee if there be one, shall from time to time at its discretion select
the Eligible Employees and consultants who are to be granted Options, determine
the number of Shares, to be applicable to such Option, and designate any Options
as Incentive Stock Options or Non-statutory Stock Options, except that no
Incentive Stock Option may be granted to a non-employee director or a
non-employee consultant. A member of the Board or a Committee member shall in no
event participate in any determination relating to Options held by or to be
granted to such Board or Committee member. The interpretation and construction
by the Board, or by the Committee if there be one, of any provision of the Plan
or of any Option granted thereunder shall be final. No member of the Board or of
the Committee shall be liable for any action or determination made in good faith
with respect to the Plan or any Option granted thereunder. In addition to any
right of indemnification provided by the Articles of Incorporation or Bylaws of
the Corporation, such person shall be indemnified and held harmless by the
Corporation from any loss, cost, liability or expense that may be imposed upon
or reasonably incurred by him in connection with any claim, suit, action or
proceeding to which he may be a party by reason of any action or omission under
the Plan.
5. PARTICIPATION. Only Eligible Persons shall be eligible to receive
grants of Options under the Plan.
6. STOCK. The stock subject to Options granted under the Plan shall be
Shares of the Corporation's authorized but unissued or reacquired Common Stock.
The aggregate number of Shares which may be issued upon exercise of Options
under the Plan shall not exceed 232,877
3
<PAGE> 4
shares. The number of Shares subject to Options outstanding at any time shall
not exceed the number of Shares remaining available for issuance under the Plan.
In the event that any outstanding Option for any reason expires or is
terminated, the Shares allocable to the unexercised portion of such Option may
again be made subject to any Option. The limitations established by this Section
6 shall be subject to adjustment in the manner provided in Section 10 hereof
upon the occurrence of an event specified therein.
7. TERMS AND CONDITIONS OF OPTIONS.
a. Stock Option Agreements. Options granted to Participants shall
be evidenced by written stock option agreements in such form as the
Board or the Committee shall from time to time determine. Such
agreements shall comply with and be subject to the terms and conditions
set forth below.
b. Number of Shares. Each Option granted to a Participant shall
state the number of Shares to which it pertains and shall provide for
the adjustment thereof in accordance with the provisions of Section 10
hereof.
c. Vesting Provisions. Each Option shall be granted subject to
the following vesting provisions. The Board or the Committee shall
establish performance goals for each Participant who is granted Options.
Such performance goals shall be approved by ContiTrade Services, LLC.
All Options shall vest (i) if and only if the performance goals with
respect to such Participant are accomplished and (ii) over a period of
not less than three (3) years in installments not in excess of 33.3% in
each of the first and second years.
d. Exercise Price. Each Option granted to a Participant shall
state the Exercise Price. The Exercise Price for any Option shall not be
less than the Fair Market Value on the date of grant.
e. Medium and Time of Payment. The Purchase Price for each Option
granted to a Participant shall be payable in full in United States
dollars upon the exercise of the Option; provided, however, that if the
applicable Option Agreement so provides the Purchase Price may be paid
(i) by the surrender of Shares in good form for transfer, owned by the
person exercising the Option and having a Fair Market Value on the date
of exercise equal to the Purchase Price, or in any combination of cash
and Shares, as long as the sum of the cash so paid and the Fair Market
Value of the Shares so surrendered equal the Purchase Price, (ii) by
cancellation of indebtedness owed by the Corporation to the Optionee,
(iii) with a full recourse promissory note executed by the Optionee, or
(iv) any combination of the foregoing. The interest rate and other terms
and conditions of such note shall be determined by the Board or the
Committee. The Board or the Committee shall require that the Optionee
pledge his or her Shares to the Corporation for the purpose of securing
the payment of such note. In no event shall the stock certificate(s)
representing such Shares by released to the Optionee until such note
shall be been paid in full. In the
4
<PAGE> 5
event the Corporation determines that it is required to withhold state
or Federal income tax as a result of the exercise of an Option, as a
condition to the exercise thereof, an Employee may be required to make
arrangements satisfactory to the Corporation to enable it to satisfy
such withholding requirements.
f. Term and Nontransferability of Options. Each Option shall
state the time or times which all or part thereof becomes exercisable,
subject to the following restrictions. No Option shall be exercisable
after the expiration of ten (10) years from the date it was granted. No
Option shall be exercisable except by the Optionee. No Option shall be
assignable or transferable, except pursuant to a qualified domestic
relations order as defined in Code Section 414(p) or, in the event of
the Optionee's death, by will or the laws of descent and distribution.
g. Termination of Employment, Except by Death, Disability or
Retirement. Upon any Termination of Employment for any reason other than
his or her death, Disability or Retirement, such Optionee shall have the
right, subject to the restrictions of (f) above, to exercise the Option
at any time within three (3) months after termination of employment, but
only to the extent that, at the date of Termination of Employment, the
Optionee's right to exercise such Option had accrued pursuant to the
terms of the applicable option agreement and had not previously been
exercised; provided, however, that if the Optionee was terminated as an
Employee or removed as a member of the Board for cause (as defined in
the applicable option agreement or as determined by the Board or the
Committee) any Option not exercised in full prior to such termination
shall be canceled. For this purpose, the employment relationship shall
be treated as continuing intact while the Optionee is on military leave,
sick leave or other bona fide leave of absence (to be determined in the
sole discretion of the Board or the Committee). The foregoing
notwithstanding, in the case of an Incentive Stock Option, employment
shall not be deemed to continue beyond the ninetieth (90th) day after
the Optionee's reemployment rights are guaranteed by statute or by
contract.
h. Death of Optionee. If an Optionee dies while an Employee or
within three (3) months after any Termination of Employment other than
for cause, and has not fully exercised the Option, then the Option may
be exercised in full, subject to the restrictions of (f) above, at any
time within twelve (12) months after the Optionee's death, by the
executors or administrators of his or her estate or by any person or
persons who have acquired the Option directly from the Optionee by
bequest or inheritance, but only to the extent that, at the date of
death, the Optionee's right to exercise such Option had accrued and had
not been forfeited pursuant to the terms of the applicable Option
Agreement and had not previously been exercised.
i. Disability of Optionee. Upon Termination of Employment for
reason of Disability, such Optionee shall have the right, subject to the
restrictions of (f) above, to exercise the Option at any time within
twelve (12) months after termination of
5
<PAGE> 6
employment, but only to the extent that, at the date of Termination of
Employment, the Optionee's right to exercise such Option had accrued
pursuant to the terms of the applicable Option Agreement and had not
previously been exercised.
j. Retirement of Optionee. Upon Retirement, an Optionee shall
have the right, subject to the restrictions of (f) above, to exercise
the Option at any time within three (3) months after termination of
employment, but only to the extent that, at the date of termination of
employment, the Optionee's right to exercise such Option had accrued
pursuant to the terms of the applicable Option Agreement and had not
previously been exercised.
k. Rights as a Stockholder. An Optionee, or a transferee of an
Optionee, shall have no rights as a stockholder with respect to any
Shares covered by his or her Option until the date of the issuance of a
stock certificate for such Shares. No adjustment shall be made for
dividends (ordinary or extraordinary, whether in cash, securities or
other property), distributions or other rights for which the record date
is prior to the date such stock certificate is issued, except as
provided in Section 10 hereof.
l. Modification, Extension and Renewal of Option. Within the
limitations of the Plan, the Board or the Committee may modify, extend
or renew outstanding Options or accept the cancellation of outstanding
Options (to the extent not previously exercised) for the granting of new
Options in substitution therefor. The foregoing notwithstanding, no
modification of an Option shall, without the consent of the Optionee,
alter or impair any rights or obligations under any Option previously
granted.
m. Execution of Buy/Sell Agreement. Each Optionee shall be
required to execute and deliver that certain Buy/Sell Agreement between
the Company and all shareholders of the Company dated as of December 16,
1996.
n. Other Provisions. The stock option agreements authorized under
the Plan may contain such other provisions not inconsistent with the
terms of the Plan (including, without limitation, restrictions upon the
exercise of the Option) as the Committee shall deem advisable.
8. LIMITATION ON VALUE OF EXERCISABLE SHARES. In the case of Incentive
Stock Options granted hereunder, the aggregate Fair Market Value (determined as
of the date of the grant thereof) of the Shares with respect to which Incentive
Stock Options become exercisable by any employee of the Company for the first
time during any calendar year (under this Plan and all other plans maintained by
the Corporation, its parent or its Subsidiaries) shall not exceed $100,000.
9. TERM OF PLAN. Options may be granted pursuant to the Plan until the
expiration of ten (10) years from the effective date of the Plan.
6
<PAGE> 7
10. RECAPITALIZATIONS. Subject to any required action by shareholders
the number of Shares covered by the Plan as provided in Section 6 hereof, the
number of Shares covered by each outstanding Option and the Exercise Price
thereof shall be proportionately adjusted for any increase or decrease in the
number of issued Shares resulting from a subdivision or consolidation of Shares
or the payment of a stock dividend (but only of Common Stock) or any other
increase or decrease in the number of issued Shares effected without receipt of
consideration by the Corporation. Subject to any required action by
stockholders, if the Corporation is the surviving corporation in any merger or
consolidation, each outstanding Option shall pertain and apply to the securities
to which a holder of the number of Shares subject to the Option would have been
entitled. In the event of a merger or consolidation in which the Corporation is
not the surviving corporation, the date of exercisability of each outstanding
Option shall be accelerated to a date prior to such merger or consolidation,
unless the agreement of merger or consolidation provides for the assumption of
the Option by the successor to the Corporation. To the extent that the foregoing
adjustments relate to securities of the Corporation, such adjustments shall be
made by the Board or the Committee, whose determination shall be conclusive and
binding on all persons. Except as expressly provided in this Section 10, the
Participant shall have no rights by reason of subdivision or consolidation of
shares of stock of any class, the payment of any stock dividend or any other
increase or decrease in the number of shares of stock of any class or by reason
of any dissolution, liquidation, merger or consolidation or spin-off of assets
or stock of another corporation, and any issue by the Corporation of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall not affect, and no adjustment by reason thereof shall be made with respect
to, the number or Exercise Price of Shares subject to an Option. The grant of an
Option pursuant to the Plan shall not affect in any way the right or power to
the Corporation to make adjustments, reclassifications, reorganizations or
changes of its capital or business structure, to merge or consolidate or to
dissolve, liquidate, sell or transfer all or any part of its business assets.
11. SECURITIES LAW REQUIREMENTS.
a. Legality of Issuance. The issuance of any Shares upon the
exercise of any Option and the grant of any Option shall be contingent
upon the following:
i. the Corporation and the Participant shall have taken
all actions required to register the Shares under the Securities
Act of 1933, as amended (the "Act"), and to qualify the Option
and the Shares under any and all applicable state securities or
"blue sky" laws or regulations, or to perfect an exemption from
the respective registration and qualification requirements
thereof;
ii. any applicable listing requirement of any stock
exchange on which the Common Stock is listed shall have been
satisfied; and
iii. any other applicable provision of state or federal
law shall have been satisfied.
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b. Restrictions on Transfer. Regardless of whether the offering
and sale of Shares under the plan has been registered under the Act or
has been registered or qualified under the securities laws of any state,
the Corporation may impose restrictions on the sale, pledge or other
transfer of such Shares (including the placement of appropriate legends
on stock certificates) if, in the judgment of the Corporation and its
counsel, such restrictions are necessary or desirable in order to
achieve compliance with the provisions of the Act, the securities laws
of any state or any other law. In the event that the sale of Shares
under the Plan is not registered under the Act but an exemption is
available which required an investment representation or other
representation, each Participant shall be required to represent that
such Shares are being acquired for investment, and not with a view to
the sale or distribution thereof, and to make such other representations
as are deemed necessary or appropriate by the Corporation and its
counsel. Any determination by the Corporation and its counsel in
connection with any of the matters set forth in this Section 11 shall be
conclusive and binding on all persons. Stock certificates evidencing
Shares acquired under the Plan pursuant to an unregistered transaction
shall bear the following restrictive legend and such other restrictive
legends as are required or deemed advisable under the provisions of any
applicable law.
"THE SALE OF THE SECURITIES REPRESENTED HEREBY HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "ACT"). ANY TRANSFER OF SUCH SECURITIES
WILL BE INVALID UNLESS A REGISTRATION STATEMENT UNDER THE ACT IS IN EFFECT AS TO
SUCH TRANSFER OR IN THE OPINION OF COUNSEL FOR THE ISSUER SUCH REGISTRATION IS
UNNECESSARY IN ORDER FOR SUCH TRANSFER TO COMPLY WITH THE ACT."
c. Registration or Qualification of Securities. The Corporation
may, but shall not be obligated to, register or qualify the issuance of
Options and/or the sale of Shares under the Act or any other applicable
law. The Corporation shall not be obligated to take any affirmative
action in order to cause the issuance of Options or the sale of Shares
under the plan to comply with any law.
d. Exchange of Certificates. If, in the opinion of the
Corporation and its counsel, any legend placed on a stock certificate
representing shares sold under the Plan is no longer required, the
holder of such certificate shall be entitled to exchange such
certificate for a certificate representing the same number of Shares but
lacking such legend.
12. AMENDMENT OF THE PLAN. The Board or the Committee may from time to
time, with respect to any Shares at the time not subject to Options, suspend or
discontinue the Plan or revise or amend it in any respect whatsoever except
that, without the approval of the Corporation's stockholders, no such revision
or amendment shall:
a. Materially increase the benefits accruing to participants
under the Plan;
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b. Materially increase the number of Shares subject to the Plan;
c. Materially modify the requirements as to eligibility for
participation in the Plan; or
d. Amend this Section 12 to defeat its purpose.
Notwithstanding the foregoing, the Board may revise or amend the Plan
without stockholder approval in order to ensure the Plan's compliance with the
Code, any successor provisions of the Code or any other applicable law.
13. APPLICATION OF FUNDS. The proceeds received by the Corporation from
the sale of Common Stock pursuant to the exercise of an Option will be used for
general corporate purposes.
14. EXECUTION. To record the adoption of the Plan in the form set forth
above by the Board as of December 16, 1996, the Corporation has caused this Plan
to be executed in the name and on behalf of the Corporation where provided below
by an officer of the Corporation thereunto duly authorized.
IN WITNESS WHEREOF, the Plan is adopted as of the effective date hereof.
CMG Funding Corp.,
a Delaware corporation
By: ______________________________
John Fry,
President
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EXHIBIT 4.5
REALTRUST ASSET CORPORATION
1998 STOCK OPTION PLAN
1. GENERAL PURPOSE OF PLAN; DEFINITIONS.
The name of this plan is the RealTrust Asset Corporation 1998 Stock
Option Plan (the "Plan"). The Plan was adopted by the Board of Directors on
April 13, 1998, subject to the approval of the stockholders of RealTrust Asset
Corporation, a Maryland corporation (the "Company"), which approval will be
sought within twelve months of the adoption of the Plan, but not later than the
next annual meeting of the Company's Stockholders. The purpose of the Plan is to
enable the Company and its Subsidiaries to obtain and retain competent personnel
who will contribute to the Company's success by their ability, ingenuity and
industry, to give the Company's non-employee directors a proprietary interest in
the Company and to provide incentives to the participating directors, officers
and other key employees, and agents and consultants which incentives are linked
directly to increases in stock value and will therefore inure to the benefit of
all stockholders of the Company.
For purposes of the Plan, the following terms shall be defined as set forth
below:
(1) "Accrued DERs" means dividend equivalent rights with the accrual
rights described in Section 5(11).
(2) "Administrator" means the Board, or if the Board does not administer
the Plan, the Committee in accordance with Section 2.
(3) "Board" means the Board of Directors of the Company.
(4) "Code" means the Internal Revenue Code of 1986, as amended from time
to time, or any successor thereto.
(5) "Committee" means the Compensation Committee of the Board, which
shall be composed entirely of individuals who meet the qualifications to be a
"Non-Employee Director" as defined in Rule 16b-3 ("Rule 16b-3") as promulgated
by the Securities and Exchange Commission (the "Commission") under the
Securities Exchange Act of 1934 (the "Exchange Act"), and as such Rule may be
amended from time to time, or any successor definition adopted by the
Commission, or any other Committee the Board may subsequently appoint to
administer the Plan. If at any time the Board shall not administer the Plan,
then the functions of the Board specified in the Plan shall be exercised by the
Committee.
(6) "Company" means RealTrust Asset Corporation, a corporation organized
under the laws of the State of Maryland (or any successor corporation).
(7) "Current-pay DER" means dividend equivalent rights with the
current-pay rights described in Section 5(11).
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(8) "DERs" shall mean Accrued DERs and Current-pay DERs.
(9) "Deferred Stock" means an award granted pursuant to Section 7 of the
right to receive Stock at the end of a specified deferral period.
(10) "Disability" means permanent and total disability as determined
under the Company's disability program or policy.
(11) "Effective Date" shall mean the date provided pursuant to Section
12.
(12) "Eligible Employee" means an employee of the Company or any
Subsidiary eligible to participate in the Plan pursuant to Section 4.
(13) "Eligible Non-Employee Director" means a member of the Board or the
board of directors of any Subsidiary who is not a bona fide employee of the
Company or any Subsidiary and who is eligible to participate in the Plan.
(14) "Fair Market Value" means, as of any given date, with respect to
any awards granted hereunder, at the discretion of the Administrator and subject
to such limitations as the Administrator may impose, (A) the closing sale price
of the Stock on the next preceding business day as reported in the Western
Edition of the Wall Street Journal Composite Tape, or (B) the average of the
closing price of the Stock on each day on which the Stock was traded over a
period of up to twenty trading days immediately prior to such date, or (C) if
the Stock is not publicly traded, the fair market value of the Stock as
otherwise determined by the Administrator in the good faith exercise of its
discretion.
(15) "Incentive Stock Option" means any Stock Option intended to be
designated as an "incentive stock option" within the meaning of Section 422 of
the Code.
(16) "Limited Stock Appreciation Right" means a Stock Appreciation Right
that can be exercised only in the event of a "Change of Control" (as defined in
Section 10 below).
(17) "Non-Employee Director" shall have the meaning set forth in Rule
16b-3.
(18) "Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option, including any Stock Option that provides (as of the time
such option is granted) that it will not be treated as an Incentive Stock
Option.
(19) "Parent Corporation" means any corporation (other than the
Company) in an unbroken chain of corporations ending with the Company, if each
of the corporations in the chain (other than the Company) owns stock possessing
50% or more of the combined voting power of all classes of stock in one of the
other corporations in the chain.
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(20) "Participant" means any Eligible Employee or any consultant or
agent of the Company or any Subsidiary or any Eligible Non-Employee Director
selected by the Committee, pursuant to the Administrator's authority in Section
2, to receive grants of Stock Options, DERs, Stock Appreciation Rights, Limited
Stock Appreciation Rights, Restricted Stock awards, Deferred Stock awards,
Performance Shares or any combination of the foregoing.
(21) "Performance Share" means an award of shares of Stock granted
pursuant to Section 7 that is subject to restrictions based upon the attainment
of specified performance objectives.
(22) "Restricted Stock" means an award granted pursuant to Section 7 of
shares of Stock subject to restrictions that will lapse with the passage of
time.
(23) "Stock" means the common stock, $0.001 par value, of the Company.
(24) "Stock Appreciation Right" means the right pursuant to an award
granted under Section 6 to receive an amount equal to the difference between (A)
the Fair Market Value, as of the date such Stock Appreciation Right or portion
thereof is surrendered, of the shares of Stock covered by such right or such
portion thereof, and (B) the aggregate exercise price of such right or such
portion thereof.
(25) "Stock Option" means an option to purchase shares of Stock granted
pursuant to Section 5.
(26) "Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company, if each of the
corporations (other than the last corporation) in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in the chain.
2. ADMINISTRATION.
The Plan shall be administered by the Compensation Committee appointed
by the Board, which shall serve at the pleasure of the Board.
The Administrator shall have the power and authority to grant to
Participants, pursuant to the terms of the Plan: (a) Stock Options (with or
without DERs), (b) Stock Appreciation Rights or Limited Stock Appreciation
Rights, (c) Restricted Stock, (d) Deferred Stock, (e) Performance Shares or (f)
any combination of the foregoing.
In particular, the Administrator shall have the authority:
(a) to select those employees of the Company or any Subsidiary
who shall be Eligible Employees;
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(b) to determine whether and to what extent Stock Options (with
or without DERs), Stock Appreciation Rights, Limited Stock Appreciation Rights,
Restricted Stock, Deferred Stock, Performance Shares or a combination of the
foregoing, are to be granted to Eligible Employees or any other Participant of
the Company or any Subsidiary hereunder;
(c) to determine the number of shares to be covered by each such
award granted hereunder;
(d) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted hereunder (including, but not
limited to, (x) the restricted period applicable to Restricted or Deferred Stock
awards and the date or dates on which restrictions applicable to such Restricted
or Deferred Stock shall lapse during such period, and (y) the performance goals
and periods applicable to the award of Performance Shares); and
(e) to determine the terms and conditions, not inconsistent with
the terms of the Plan, which shall govern all written instruments evidencing the
Stock Options, DERs, Stock Appreciation Rights, Limited Stock Appreciation
Rights, Restricted Stock, Deferred Stock, Performance Shares or any combination
of the foregoing.
The Administrator shall have the authority, in its discretion, to adopt,
alter and repeal such administrative rules, guidelines and practices governing
the Plan as it shall from time to time deem advisable; to interpret the terms
and provisions of the Plan and any award issued under the Plan (and any
agreements relating thereto); and to otherwise supervise the administration of
the Plan.
All decisions made by the Administrator pursuant to the provisions of
the Plan shall be final and binding on all persons, including the Company, any
Subsidiaries and the Participants.
3. STOCK SUBJECT TO THE PLAN.
(a) The total number of shares of Stock reserved and available
for issuance under the Plan shall be 456,667. At all times, the number of shares
reserved and available for issuance hereunder as so determined from time to time
shall be decreased by virtue of awards granted and outstanding or exercised
hereunder.
(b) To the extent that (i) a Stock Option or DER expires or is
otherwise terminated without being exercised, or (ii) any shares of Stock
subject to any Restricted Stock, Deferred Stock or Performance Share award
granted hereunder are forfeited, such shares shall again be available for
issuance in connection with future awards under the Plan. If any shares of Stock
have been pledged as collateral for indebtedness incurred by a Participant in
connection with the exercise of a Stock Option and such shares are returned to
the Company in satisfaction of such indebtedness, such shares shall again be
available for issuance in connection with future awards under the Plan.
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(c) In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, or other change in corporate structure
affecting the Stock, a substitution or adjustment may be made in (i) the
aggregate number of shares reserved for issuance under the Plan, and (ii) the
kind, number and option price of shares subject to outstanding Stock Options and
DERs granted under the Plan as may be determined by the Administrator, in its
sole discretion, provided that the number of shares subject to any award shall
always be a whole number. Such other substitutions or adjustments shall be made
as may be determined by the Administrator, in its sole discretion; provided,
however, that with respect to Incentive Stock Options, such adjustment shall be
made in accordance with Section 424(a) of the Code. An adjusted option price
shall also be used to determine the amount payable by the Company upon the
exercise of any Stock Appreciation Right or Limited Stock Appreciation Right
associated with any Stock Option.
(d) aggregate number of shares of Stock for which Stock Options
or Stock Appreciation Rights may be granted to any individual during any
calendar year may not, subject to adjustment as provided in this Section 3,
exceed 75% of the shares of Stock reserved for the purposes of the Plan in
accordance with the provisions of this Section 3.
4. ELIGIBILITY.
Officers and other key employees of the Company or Subsidiaries who are
responsible for or contribute to the management, growth and/or profitability of
the business of the Company or its Subsidiaries and consultants and agents of
the Company or its Subsidiaries, shall be eligible to be granted Stock Options,
DERs, Stock Appreciation Rights, Limited Stock Appreciation Rights, Restricted
Stock awards, Deferred Stock awards or Performance Shares hereunder. The
Participants under the Plan shall be selected from time to time by the
Administrator, in its sole discretion, from among the Eligible Employees and
consultants and agents recommended by the senior management of the Company, and
the Administrator shall determine, in its sole discretion, the number of shares
covered by each award.
5. STOCK OPTIONS.
Stock Options may be granted alone or in addition to other awards
granted under the Plan, including DERs as described in Section 5(11). Any Stock
Option granted under the Plan shall be in such form as the Administrator may
from time to time approve, and the provisions of Stock Option awards need not be
the same with respect to each optionee. Recipients of Stock Options shall enter
into a stock option agreement with the Company, in such form as the
Administrator shall determine, which agreement shall set forth, among other
things, the exercise price of the option, the term of the option and provisions
regarding exercisability of the option granted thereunder.
The Stock Options granted under the Plan may be of two types: (i)
Incentive Stock Options and (ii) Non-Qualified Stock Options.
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The Administrator shall have the authority under this Section 5 to grant
any optionee Incentive Stock Options, Non-Qualified Stock Options, or both types
of Stock Options (in each case with or without DERs, Stock Appreciation Rights
or Limited Stock Appreciation Rights), provided, however, that Incentive Stock
Options may not be granted to any individual who is not an employee of the
Company or its Subsidiaries. To the extent that any Stock Option does not
qualify as an Incentive Stock Option, it shall constitute a separate
Non-Qualified Stock Option. More than one option may be granted to the same
optionee and be outstanding concurrently hereunder.
Stock Options to be issued to a Non-Employee Director who is a member of
the Administrator are subject to approval by the Administrator without the
participation or vote of the proposed recipient Non-Employee Director.
Stock Options granted under the Plan shall be subject to the following
terms and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Administrator shall deem
desirable:
(1) Option Price. The option price per share of Stock purchasable under
a Stock Option shall be determined by the Administrator in its sole discretion
at the time of grant but shall not, in the case of Incentive Stock Options, be
less than 100% of the Fair Market Value of the Stock on such date, and shall
not, in any event, be less than the par value of the Stock. The option price per
share of Stock purchasable under a Non-Qualified Stock Option may be less than
100% of such Fair Market Value. If an employee owns or is deemed to own (by
reason of the attribution rules applicable under Section 424(d) of the Code)
more than 10% of the combined voting power of all classes of stock of the
Company or any Parent Corporation or Subsidiary and an Incentive Stock Option is
granted to such employee, the option price of such Incentive Stock Option (to
the extent required by the Code at the time of grant) shall be no less than 110%
of the Fair Market Value of the Stock on the date such Incentive Stock Option is
granted.
(2) Option Term. The term of each Stock Option shall be fixed by the
Administrator, but no Stock Option shall be exercisable more than ten years
after the date such Stock Option is granted; provided, however, that if an
employee owns or is deemed to own (by reason of the attribution rules of Section
424(d) of the Code) more than 10% of the combined voting power of all classes of
stock of the Company or any Parent Corporation or Subsidiary and an Incentive
Stock Option is granted to such employee, the term of such Incentive Stock
Option (to the extent required by the Code at the time of grant) shall be no
more than five years from the date of grant.
(3) Exercisability. The Stock Options granted shall vest on the
following terms. For each annual period over a five-year period that the Company
delivers a total return (stock price appreciation, warrant value, appreciation
and dividends) to investors in the Company's initial public offering equal to or
exceeding 20%, one-third of the Stock Options will vest, until all such Stock
Options have vested. Alternatively, if at any time prior to the end of the
five-year period the total return to investors equals or exceeds 100%, all of
the Stock Options will vest. Such automatic grants of Stock Options vest 25% on
the anniversary date in the year following the date of the grant and 25% on each
anniversary date thereafter.
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(4) Method of Exercise.
(a) Subject to Section 5(3), Stock Options may be exercised in
whole or in part at any time during the option period, by giving written notice
of exercise to the Company specifying the number of shares to be purchased,
accompanied by payment in full of the purchase price in cash or its equivalent
as determined by the Administrator. As determined by the Administrator, in its
sole discretion, payment in whole or in part may also be made in the form of
unrestricted Stock already owned by the optionee, or, in the case of the
exercise of a Non-Qualified Stock Option, Restricted Stock or Performance Shares
subject to an award hereunder (based, in each case, on the Fair Market Value of
the Stock on the date the option is exercised); provided, however, that in the
case of an Incentive Stock Option, the right to make payment in the form of
already owned shares may be authorized only at the time of grant. Any payment in
the form of stock already owned by the optionee may be effected by use of an
attestation form approved by the Administrator. If payment of the option
exercise price of a Non-Qualified Stock Option is made in whole or in part in
the form of Restricted Stock or Performance Shares, the shares received upon the
exercise of such Stock Option (to the extent of the number of shares of
Restricted Stock or Performance Shares surrendered upon exercise of such Stock
Option) shall be restricted in accordance with the original terms of the
Restricted Stock or Performance Share award in question, except that the
Administrator may direct that such restrictions shall apply only to that number
of shares equal to the number of shares surrendered upon the exercise of such
option. An optionee shall generally have the rights to dividends and other
rights of a stockholder with respect to shares subject to the option only after
the optionee has given written notice of exercise, has paid in full for such
shares, and, if requested, has given the representation described in paragraph
(1) of Section 11.
(b) The Administrator may require the voluntary surrender of all
or a portion of any Stock Option granted under the Plan as a condition precedent
to a grant of a new Stock Option. Subject to the provisions of the Plan, such
new Stock Option shall be exercisable at the price, during such period and on
such other terms and conditions as are specified by the Administrator at the
time the new Stock Option is granted; provided, however, that should the
Administrator so require, the number of shares subject to such new Stock Option
shall not be greater than the number of shares subject to the surrendered Stock
Option. Upon their surrender, Stock Options shall be canceled and the shares
previously subject to such canceled Stock Options shall again be available for
grants of Stock Options and other awards hereunder.
(5) Loans. The Company may make loans available to Stock Option holders
in connection with the exercise of outstanding options granted under the Plan,
as the Administrator, in its discretion, may determine. Such loans shall (i) be
evidenced by promissory notes entered into by the Stock Option holders in favor
of the Company, (ii) be subject to the terms and conditions set forth in this
Section 5(5) and such other terms and conditions, not inconsistent with the
Plan, as the Administrator shall determine, and (iii) bear interest, if any, at
such rate as the Administrator shall determine. In no event may the principal
amount of any such loan exceed the sum of (x) the exercise price less the par
value of the shares of Stock covered by the option, or portion thereof,
exercised by the holder, and (y) any federal, state, and local income tax
attributable to such
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exercise. The initial term of the loan, the schedule of payments of principal
and interest under the loan, the extent to which the loan is to be with or
without recourse against the holder with respect to principal or interest and
the conditions upon which the loan will become payable in the event of the
holder's termination of employment shall be determined by the Administrator;
provided, however, that the term of the loan, including extensions, shall not
exceed seven years. Unless the Administrator determines otherwise, when a loan
is made, shares of Stock having a Fair Market Value at least equal to the
principal amount of the loan shall be pledged by the holder to the Company as
security for payment of the unpaid balance of the loan, and such pledge shall be
evidenced by a pledge agreement, the terms of which shall be determined by the
Administrator, in its discretion; provided, however, that each loan shall comply
with all applicable laws, regulations and rules of the Board of Governors of the
Federal Reserve System and any other governmental agency having jurisdiction.
(6) Limits on Transferability of Options.
(a) Subject to Section 5(6)(b), no Stock Option shall be
transferable by the optionee otherwise than by will or by the laws of descent
and distribution or pursuant to a "qualified domestic relations order," as such
term is defined in the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and all Stock Options shall be exercisable, during the
optionee's lifetime, only by the optionee or in accordance with the terms of a
qualified domestic relations order.
(b) The Administrator may, in its discretion, authorize all or a
portion of the options (other than the Incentive Stock Options which shall be
subject to the restrictions on transfer of Code Section 422) to be granted to an
optionee to be on terms which permit transfer by such optionee to (i) the
spouse, children or grandchildren of the optionee and any other persons related
to the optionee as may be approved by the Administrator ("Immediate Family
Members"), (ii) a trust or trusts for the exclusive benefit of such Immediate
Family Members, (iii) a partnership or partnerships in which such Immediate
Family Members are the only partners, or (iv) any other persons or entities as
may be approved by the Administrator, provided that (x) there may be no
consideration for any transfer unless approved by the Administrator, (y) the
stock option agreement pursuant to which such options are granted must be
approved by the Administrator, and must expressly provide for transferability in
a manner consistent with this Section 5(6)(b), and (z) subsequent transfers of
transferred options shall be prohibited except those in accordance with Section
5(6)(a) or expressly approved by the Administrator. Following transfer, any such
options shall continue to be subject to the same terms and conditions as were
applicable immediately prior to transfer, provided that, except for purposes of
Sections 5(7), (8) and (9) and Section 11(3) hereof, the terms "optionee,"
"Stock Option holder" and "Participant" shall be deemed to refer to the
transferee. The events of termination of employment under Sections 5(7), (8) and
(9) hereof shall continue to be applied with respect to the original optionee,
following which the options shall be exercisable by the transferee only to the
extent, and for the periods specified, under such sections unless the option
agreement governing such options otherwise provides. Notwithstanding the
transfer, the original optionee will continue to be subject to the provisions of
Section 11(3) regarding payment of taxes, including the provisions entitling the
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Company to deduct such taxes from amounts otherwise due to such optionee. Any
transfer of a Stock Option that was originally granted with DERs related thereto
shall automatically include the transfer of such DERs, any attempt to transfer
such Stock Option separately from such DERs shall be void, and such DERs shall
continue in effect according to their terms.
(7) Termination by Death. If an optionee's employment with the Company
or any Subsidiary terminates by reason of death, the Stock Option may thereafter
be immediately exercised, to the extent then exercisable (or on such accelerated
basis as the Administrator shall determine at or after grant), by the legal
representative of the estate or by the legatee of the optionee under the will of
the optionee, for a period of twelve months (or such shorter period as the
Administrator shall specify at grant) from the date of such death or until the
expiration of the stated term of such Stock Option, whichever period is shorter.
(8) Termination by Reason of Disability. If an optionee's employment
with the Company or any Subsidiary terminates by reason of Disability, any Stock
Option held by such optionee may thereafter be exercised, to the extent it was
exercisable at the time of such termination (or on such accelerated basis as the
Administrator shall determine at the time of grant), for a period of twelve
months (or such shorter period as the Administrator shall specify at grant) from
the date of such termination of employment or until the expiration of the stated
term of such Stock Option, whichever period is shorter; provided, however, that,
if the optionee dies within such twelve-month period (or such shorter period as
the Administrator shall specify at grant) and prior to the expiration of the
stated term of such Stock Option, any unexercised Stock Option held by such
optionee shall thereafter be exercisable to the extent to which it was
exercisable at the time of termination for a period of twelve months (or such
shorter period as the Administrator shall specify at grant) from the time of
death or until the expiration of the stated term of such Stock Option, whichever
period is shorter. In the event of a termination of employment by reason of
Disability, if an Incentive Stock Option is exercised after the expiration of
the applicable exercise periods under Section 422 of the Code, such Stock Option
shall thereafter be treated as a Non-Qualified Stock Option.
(9) Other Termination. Except as otherwise determined by the
Administrator, if an optionee's employment with the Company or any Subsidiary
terminates for any reason other than death or Disability, the Stock Option may
be exercised for a period of three months from the date of such termination, or
until the expiration of the stated term of such Stock Option, whichever period
is shorter.
(10) Annual Limit on Incentive Stock Options. To the extent that the
aggregate Fair Market Value (determined as of the date the Incentive Stock
Option is granted) of shares of Stock with respect to which Incentive Stock
Options granted to an Optionee under this Plan and all other option plans of the
Company, its Parent Corporation or any Subsidiary become exercisable for the
first time by the Optionee during any calendar year exceeds $100,000, such Stock
Options shall be treated as Non-Qualified Stock Options.
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(11) DERs. The Administrator shall have the discretion to grant DERs in
conjunction with grants of Stock Options pursuant to this Section 5. DERs may be
granted in either of two forms, "Current-pay DERs" and "Accrued DERs" and the
Administrator may condition the payment or accrual of amounts in respect thereof
subject to satisfaction of such performance objectives as the Administrator may
specify at the time of grant. Assuming satisfaction of any applicable
conditions, Current-pay DERs shall be paid concurrently with any dividends or
distributions paid on the Stock during the time the related Stock Options are
outstanding in an amount equal to the cash dividend (or Stock or other property
hereby distributed) per share being paid on the Stock times the number of shares
subject to the related Stock Options. Current-pay DERs are payable in cash,
Stock or such other property in the same manner as may be distributed to
shareholders. Accrued DERs may be accrued in respect of cash dividends only or
cash dividends and the value of any Stock or other property distributed to
shareholders, as the Administrator shall determine at the time of grant.
Assuming satisfaction of any applicable conditions, Accrued DERs shall be
accrued with respect to the related Stock Options outstanding as of the date
dividends are declared on the Company's Stock in accordance with the following
formula:
(A x B) / C
under which "A" equals the number of shares subject to such Stock Options, "B"
equals the cash dividend per share or the value per share of the Stock or other
property being distributed, as the case may be, and "C" equals the Fair Market
Value per share of Stock on the dividend payment date. The Accrued DERs shall
represent shares of Stock which shall be issuable to the holder of the related
Stock Option proportionately as the holder exercises the Stock Option to which
the Accrued DERs relate, rounded down to the nearest whole number of shares.
DERs shall expire upon the expiration of the Stock Options to which they relate.
The Administrator shall specify at the time of grant whether dividends shall be
payable or credited on Accrued DERs. Notwithstanding anything to the contrary
herein, Accrued DERs granted with respect to Stock Options shall be accrued only
to the extent of the number of shares of Stock then reserved and available for
issuance under the Plan in excess of the number of shares subject to issuance
pursuant to outstanding Stock Option, Accrued DER, Stock Appreciation Right,
Limited Stock Appreciation Right, Deferred Stock or Performance Share awards.
6. STOCK APPRECIATION RIGHTS AND LIMITED STOCK APPRECIATION RIGHTS.
(1) Grant and Exercise. Stock Appreciation Rights and Limited Stock
Appreciation Rights may be granted either alone ("Free Standing Rights") or in
conjunction with all or part of any Stock Option granted under the Plan
("Related Rights"). In the case of a Non-Qualified Stock Option, Related Rights
may be granted either at or after the time of the grant of such Stock Option. In
the case of an Incentive Stock Option, Related Rights may be granted only at the
time of the grant of the Incentive Stock Option.
A Related Right or applicable portion thereof granted in conjunction
with a given Stock Option shall terminate and no longer be exercisable upon the
termination or exercise of the related Stock Option, except that, unless
otherwise provided by the Administrator at the time of grant,
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a Related Right granted with respect to less than the full number of shares
covered by a related Stock Option shall only be reduced if and to the extent
that the number of shares covered by the exercise or termination of the related
Stock Option exceeds the number of shares not covered by the Stock Appreciation
Right.
A Related Right may be exercised by an optionee, in accordance with
paragraph (2) of this Section 6, by surrendering the applicable portion of the
related Stock Option. Upon such exercise and surrender, the optionee shall be
entitled to receive an amount determined in the manner prescribed in paragraph
(2) of this Section 6. Stock Options which have been so surrendered, in whole or
in part, shall no longer be exercisable to the extent the Related Rights have
been so exercised.
(2) Terms and Conditions. Stock Appreciation Rights shall be subject to
such terms and conditions, not inconsistent with the provisions of the Plan, as
shall be determined from time to time by the Administrator, including the
following:
(a) Stock Appreciation Rights that are Related Rights ("Related
Stock Appreciation Rights") shall be exercisable only at such time or times and
to the extent that the Stock Options to which they relate shall be exercisable
in accordance with the provisions of Section 5 and this Section 6; provided,
however, that no Related Stock Appreciation Right shall be exercisable during
the first six months of its term, except that this additional limitation shall
not apply in the event of death or Disability of the optionee prior to the
expiration of such six-month period.
(b) Upon the exercise of a Related Stock Appreciation Right, an
optionee shall be entitled to receive up to, but not more than, an amount in
cash or that number of shares of Stock (or in some combination of cash and
shares of Stock) equal in value to the excess of the Fair Market Value of one
share of Stock as of the date of exercise over the option price per share
specified in the related Stock Option multiplied by the number of shares of
Stock in respect of which the Related Stock Appreciation Right is being
exercised, with the Administrator having the right to determine the form of
payment.
(c) Related Stock Appreciation Rights shall be transferable or
exercisable only when and to the extent that the underlying Stock Option would
be transferable or exercisable under paragraph (6) of Section 5.
(d) Upon the exercise of a Related Stock Appreciation Right, the
Stock Option or part thereof to which such Related Stock Appreciation Right is
related shall be deemed to have been exercised for the purpose of the limitation
set forth in Section 3 on the number of shares of Stock to be issued under the
Plan.
(e) A Related Stock Appreciation Right granted in connection with
an Incentive Stock Option may be exercised only if and when the Fair Market
Value of the Stock subject to the Incentive Stock Option exceeds the exercise
price of such Stock Option.
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(f) Stock Appreciation Rights that are Free Standing Rights
("Free Standing Stock Appreciation Rights") shall be exercisable at such time or
times and subject to such terms and conditions as shall be determined by the
Administrator at or after grant; provided, however, that no Free Standing Stock
Appreciation Right shall be exercisable during the first six months of its term,
except that this limitation shall not apply in the event of death or Disability
of the recipient of the Free Standing Stock Appreciation Right prior to the
expiration of such six-month period.
(g) The term of each Free Standing Stock Appreciation Right shall
be fixed by the Administrator, but no Free Standing Stock Appreciation Right
shall be exercisable more than ten years after the date such right is granted.
(h) Upon the exercise of a Free Standing Stock Appreciation
Right, a recipient shall be entitled to receive up to, but not more than, an
amount in cash or that number of shares of Stock (or any combination of cash or
shares of Stock) equal in value to the excess of the Fair Market Value of one
share of Stock as of the date of exercise over the price per share specified in
the Free Standing Stock Appreciation Right (which price shall be no less than
100% of the Fair Market Value of the Stock on the date of grant) multiplied by
the number of shares of Stock with respect to which the right is being
exercised, with the Administrator having the right to determine the form of
payment.
(i) Free Standing Stock Appreciation Rights shall be transferable
or exercisable subject to the provisions governing the transferability and
exercisability of Stock Options set forth in paragraphs (3) and (6) of Section
5.
(j) In the event of the termination of an employee who has been
granted one or more Free Standing Stock Appreciation Rights, such rights shall
be exercisable to the same extent that a Stock Option would have been
exercisable in the event of the termination of the optionee.
(k) Limited Stock Appreciation Rights may only be exercised
within the 30-day period following a "Change of Control" (as defined in Section
10 below), and, with respect to Limited Stock Appreciation Rights that are
Related Rights ("Related Limited Stock Appreciation Rights"), only to the extent
that the Stock Options to which they relate shall be exercisable in accordance
with the provisions of Section 5 and this Section 6; provided, however, that no
Related Limited Stock Appreciation Right shall be exercisable during the first
six months of its term, except that this additional limitation shall not apply
in the event of death or Disability of the optionee prior to the expiration of
such six-month period.
(l) Upon the exercise of a Limited Stock Appreciation Right, the
recipient shall be entitled to receive an amount in cash equal in value to the
excess of the "Change of Control Price" (as defined in Section 10) of one share
of Stock as of the date of exercise over (A) the option price per share
specified in the related Stock Option, or (B) in the case of a Limited Stock
Appreciation Right which is a Free Standing Stock Appreciation Right, the price
per share specified in the Free Standing Stock Appreciation Right, such excess
to be multiplied by the number of shares in respect of which the Limited Stock
Appreciation Right shall have been exercised.
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(m) For the purpose of the limitation set forth in Section 3 on
the number of shares to be issued under the Plan, the grant or exercise of Free
Standing Stock Appreciation Rights shall be deemed to constitute the grant or
exercise, respectively, of Stock Options with respect to the number of shares of
Stock with respect to which such Free Standing Stock Appreciation Rights were so
granted or exercised.
7. RESTRICTED STOCK, DEFERRED STOCK AND PERFORMANCE SHARES.
(1) General. Restricted Stock, Deferred Stock or Performance Share
awards may be issued either alone or in addition to other awards granted under
the Plan. The Administrator shall determine the Eligible Employees to whom, and
the time or times at which, grants of Restricted Stock, Deferred Stock or
Performance Share awards shall be made; the number of shares to be awarded; the
price, if any, to be paid by the recipient of Restricted Stock, Deferred Stock
or Performance Share awards; the Restricted Period (as defined in Section 7(3))
applicable to Restricted Stock or Deferred Stock awards; the performance
objectives applicable to Performance Share or Deferred Stock awards; the date or
dates on which restrictions applicable to such Restricted Stock or Deferred
Stock awards shall lapse during such Restricted Period; and all other conditions
of the Restricted Stock, Deferred Stock and Performance Share awards. The
Administrator may also condition the grant of Restricted Stock, Deferred Stock
awards or Performance Shares upon the exercise of Stock Options, or upon such
other criteria as the Administrator may determine, in its sole discretion. The
provisions of Restricted Stock, Deferred Stock or Performance Share awards need
not be the same with respect to each recipient.
(2) Awards and Certificates. The prospective recipient of a Restricted
Stock, Deferred Stock or Performance Share award shall not have any rights with
respect to such award, unless and until such recipient has executed an agreement
evidencing the award (a "Restricted Stock Award Agreement," "Deferred Stock
Award Agreement," or "Performance Share Award Agreement," as appropriate) and
delivered a fully executed copy thereof to the Company, within a period of sixty
days (or such other period as the Administrator may specify) after the award
date. Except as otherwise provided below in this Section 7(2), (i) each
Participant who is awarded Restricted Stock or Performance Shares shall be
issued a stock certificate in respect of such shares of Restricted Stock or
Performance Shares; and (ii) such certificate shall be registered in the name of
the Participant, and shall bear an appropriate legend referring to the terms,
conditions, and restrictions applicable to such award, substantially in the
following form:
"The transferability of this certificate and the shares of stock represented
hereby are subject to the terms and conditions (including forfeiture) of the
RealTrust Asset Corporation Stock Option Plan and a Restricted Stock Award
Agreement or Performance Share Award Agreement entered into between the
registered owner and RealTrust Asset Corporation. Copies of such Plan and
Agreement are on file in the offices of RealTrust Asset Corporation."
The Company shall require that the stock certificates evidencing such
shares be held in the custody of the Company until the restrictions thereon
shall have lapsed, and that, as a condition of any Restricted Stock award or
Performance Share award, the Participant shall have delivered a stock power,
endorsed in blank, relating to the Stock covered by such award.
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(3) Restrictions and Conditions. The Restricted Stock, Deferred Stock
and Performance Share awards granted pursuant to this Section 7 shall be subject
to the following restrictions and conditions:
(a) Subject to the provisions of the Plan and the Restricted
Stock, Deferred Stock or Performance Share award agreement, during such period
as may be set by the Administrator commencing on the grant date (the "Restricted
Period"), the Participant shall not be permitted to sell, transfer, pledge or
assign shares of Restricted Stock, Performance Shares or Deferred Stock awarded
under the Plan; provided, however, that the Administrator may, in its sole
discretion, provide for the lapse of such restrictions in installments and may
accelerate or waive such restrictions in whole or in part based on such factors
and such circumstances as the Administrator may determine, in its sole
discretion, including, but not limited to, the attainment of certain performance
related goals, the Participant's termination, death or Disability or the
occurrence of a "Change of Control" as defined in Section 10.
(b) Except as provided in paragraph (3)(a) of this Section 7, the
Participant shall have, with respect to the shares of Restricted Stock or
Performance Shares, all of the rights of a stockholder of the Company, including
the right to vote the shares, and the right to receive any dividends thereon
during the Restricted Period. With respect to Deferred Stock awards, the
Participant shall generally not have the rights of a stockholder of the Company,
including the right to vote the shares during the Restricted Period; provided,
however, that dividends declared during the Restricted Period with respect to
the number of shares covered by a Deferred Stock award shall be paid to the
Participant. Certificates for shares of unrestricted Stock shall be delivered to
the Participant promptly after, and only after, the Restricted Period shall
expire without forfeiture in respect of such shares covered by the award of
Restricted Stock, Performance Shares or Deferred Stock, except as the
Administrator, in its sole discretion, shall otherwise determine.
(c) Subject to the provisions of the Restricted Stock, Deferred
Stock or Performance Share award agreement and this Section 7, upon termination
of employment for any reason during the Restricted Period, all shares subject to
any restriction as of the date of such termination shall be forfeited by the
Participant, and the Participant shall only receive the amount, if any, paid by
the Participant for such Restricted Stock or Performance Shares, plus simple
interest on such amount at the rate of 8% per year.
8. AMENDMENT AND TERMINATION.
The Board may amend, alter or discontinue the Plan, but no amendment,
alteration, or discontinuation shall be made that would impair the rights of a
Participant under any award theretofore granted without such Participant's
consent, or that without the approval of the stockholders (as described below)
would:
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(1) except as provided in Section 3, increase the total number of shares
of Stock reserved for the purpose of the Plan;
(2) change the employees or class of employees eligible to participate
in the Plan; or
(3) extend the maximum option period under paragraph (2) of Section 5 of
the Plan.
Notwithstanding the foregoing, stockholder approval under this Section 8
shall only be required at such time and under such circumstances as stockholder
approval would be required under (a) Rule 16b-3 issued under the Exchange Act
with respect to any material amendment to any employee benefit plan of the
Company or (b) Sections 162(m), 280G or 422 of the Code.
The Administrator may amend the terms of any award theretofore granted,
prospectively or retroactively, but, subject to Section 3, no such amendment
shall impair the rights of any holder without his or her consent.
9. UNFUNDED STATUS OF PLAN.
The Plan is intended to constitute an "unfunded" plan for incentive
compensation. With respect to any payments not yet made to a Participant or
optionee by the Company, nothing contained herein shall give any such
Participant or optionee any rights that are greater than those of a general
creditor of the Company.
10. CHANGE OF CONTROL.
The following acceleration and valuation provisions shall apply in the
event of a "Change of Control" as defined in paragraph (2) of this Section 10:
(1) In the event of a "Change of Control," unless otherwise determined
by the Administrator or the Board in writing at or after grant (including under
any individual agreement), but prior to the occurrence of such Change of
Control:
(a) any Stock Appreciation Rights outstanding for at least six
months and any Stock Options awarded under the Plan not previously exercisable
and vested shall become fully exercisable and vested;
(b) the restrictions applicable to any Restricted Stock, Deferred
Stock or Performance Share awards under the Plan shall lapse, and such shares
and awards shall be deemed fully vested; and
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(c) the value of all outstanding Stock Options, DERs, Stock
Appreciation Rights, Limited Stock Appreciation Rights, and Restricted Stock,
Deferred Stock and Performance Share awards shall, to the extent determined by
the Administrator at or after grant, be cashed out by a payment in cash or other
property, as the Administrator may determine, on the basis of the "Change of
Control Price" (as defined in paragraph (3) of this Section 10) as of the date
the Change of Control occurs or such other date as the Administrator may
determine prior to the Change of Control.
(2) For purposes of paragraph (1) of this Section 10, a "Change of
Control" shall be deemed to have occurred if, at any time following an initial
public offering of Common Stock by the Company:
(a) any "person," as such term is used in Sections 13(d) and
14(d) of the Exchange Act (other than the Company; any trustee or other
fiduciary holding securities under an employee benefit plan of the Company; or
any company owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of Stock of the Company)
is or becomes after the Effective Date the "beneficial owner" (as defined in
Rule 13d-3 issued under the Exchange Act), directly, of securities of the
Company (not including in the securities beneficially owned by such person any
securities acquired directly from the Company or its affiliates) representing
25% or more of the combined voting power of the Company's then outstanding
securities; or
(b) during any period of two consecutive years (not including any
period prior to the Effective Date), individuals who at the beginning of such
period constitute the Board, and any new director (other than a director
designated by a person who has entered into an agreement with the Company to
effect a transaction described in clause (a), (c) or (d) of this Section 10(2))
whose election by the Board or nomination for election by the Company's
stockholders was approved by a vote of at least two-thirds (2/3) of the
directors then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so approved,
cease for any reason to constitute at least a majority thereof; or
(c) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than (A) a merger
or consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity), in combination with the ownership of any trustee or other
fiduciary holding securities under an employee benefit plan of the Company, at
least 75% of the combined voting power of the voting securities of the Company
or such surviving entity outstanding immediately after such merger or
consolidation or (B) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no person
acquires more than 50% of the combined voting power of the Company's then
outstanding securities; or
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(d) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.
(3) For purposes of this Section 10, "Change of Control Price" means the
higher of (i) the highest price per share paid or offered in any transaction
related to a Change of Control of the Company or (ii) the highest price per
share paid in any transaction reported on the exchange or national market system
on which the Stock is listed, at any time during the preceding sixty day period
as determined by the Administrator, except that, in the case of Incentive Stock
Options and Stock Appreciation Rights or Limited Stock Appreciation Rights
relating to Incentive Stock Options, such price shall be based only on
transactions reported for the date on which the Administrator decides to cash
out such options.
11. GENERAL PROVISIONS.
(1) The Administrator may require each person purchasing shares pursuant
to a Stock Option to represent to and agree with the Company in writing that
such person is acquiring the shares without a view to distribution thereof. The
certificates for such shares may include any legend which the Administrator
deems appropriate to reflect any restrictions on transfer.
All certificates for shares of Stock delivered under the Plan shall be
subject to such stock-transfer orders and other restrictions as the
Administrator may deem advisable under the rules, regulations, and other
requirements of the Commission, any stock exchange upon which the Stock is then
listed, and any applicable federal or state securities law, and the
Administrator may cause a legend or legends to be placed on any such
certificates to make appropriate reference to such restrictions.
(2) Nothing contained in the Plan shall prevent the Board from adopting
other or additional compensation arrangements, subject to stockholder approval
if such approval is required; and such arrangements may be either generally
applicable or applicable only in specific cases. The adoption of the Plan shall
not confer upon any employee of the Company or any Subsidiary any right to
continued employment with the Company or a Subsidiary, as the case may be, nor
shall it interfere in any way with the right of the Company or a Subsidiary to
terminate the employment of any of its employees at any time.
(3) Each Participant shall, no later than the date as of which the value
of an award first becomes includable in the gross income of the Participant for
federal income tax purposes, pay to the Company, or make arrangements
satisfactory to the Administrator regarding payment of, any federal, state, or
local taxes of any kind required by law to be withheld with respect to the
award. The obligations of the Company under the Plan shall be conditional on the
making of such payments or arrangements, and the Company (and, where applicable,
its Subsidiaries) shall, to the extent permitted by law, have the right to
deduct any such taxes from any payment of any kind otherwise due to the
Participant.
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(4) No member of the Board or the Administrator, nor any officer or
employee of the Company acting on behalf of the Board or the Administrator,
shall be personally liable for any action, determination, or interpretation
taken or made in good faith with respect to the Plan, and all members of the
Board or the Administrator and each and any officer or employee of the Company
acting on their behalf shall, to the extent permitted by law, be fully
indemnified and protected by the Company in respect of any such action,
determination or interpretation.
12. EFFECTIVE DATE OF PLAN.
The Plan became effective (the "Effective Date") on April 13, 1998, the
date the Company's Board formally approved the Plan.
13. TERM OF PLAN.
No Stock Option, Stock Appreciation Right, Limited Stock Appreciation
Right, Restricted Stock, Deferred Stock or Performance Share award shall be
granted pursuant to the Plan on or after the tenth anniversary of the Effective
Date, but awards theretofore granted may extend beyond that date.
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EXHIBIT 4.8
WARRANT
Warrant No. 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 EXEMPTION THEREFROM IS AVAILABLE
WARRANT TO PURCHASE COMMON STOCK
OF
CMG FUNDING CORP.
THIS CERTIFIES THAT, for value received CONTITRADE SERVICES
L.L.C., the holder of this Warrant or its registered successors and assigns (the
"Holder"), is entitled to purchase from CMG Funding Corp., a Delaware
corporation (the "Company"), at the purchase price of $1 the number of shares of
common stock of the Company ("Common Stock"), that will equal, immediately after
the exercise of this Warrant, the percentage of the total equity of the Company
on a fully diluted basis equal to the product of (a) five percent (5%), and (b)
the ratio of (i) the Aggregate Working Capital Advance Balance as of January 1,
1999 under the Standby and Working Capital Financing Agreement dated as of
December 17, 1996 by and among CMG Funding Corp. and Continental Mortgage Group
L.L.C. (now succeeded by CMG Funding Corp.) as Borrowers, ContiTrade Services
L.L.C. as Lender and CMG Funding Securities Corp. as Residualholder, as amended
(the "Standby Agreement"), together with all other unpaid interest or amounts
due as of January 1, 1999, divided by (ii) $2,000,000.
This Warrant No. 2 is issued in exchange for Warrant No. 1
previously issued to the Holder.
SECTION 1. RESTRICTIONS ON EXERCISE OF WARRANT. The Holder may exercise
this Warrant only in the event that the Company has failed to repay in full the
working capital facility under the Standby Agreement, on or prior to January 1,
1999.
<PAGE> 2
SECTION 2. TERM OF WARRANT, RESTRICTIONS ON TRANSFER, EXERCISE OF
WARRANT.
2.1. 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 during the period commencing on January 2, 1999 and
terminating January 1, 2009 (such period, the "Exercise Period"), to purchase
from the Company the number of fully paid and nonassessable shares of the Common
Stock of the Company 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. The Company shall notify the Holder in writing, not less than 30 days
nor more than 60 days prior to the expiration of the Exercise Period, of the
last date on which this Warrant is exercisable.
2.2. RESTRICTIONS ON TRANSFER. This Warrant and the Warrant Shares are
restricted securities as defined under the Securities Act of 1933, as amended
(the "Act") and therefore are non-transferable except in compliance with
applicable federal and state securities laws, including Rule 144 adopted under
the Act. Unless Warrant Shares shall have been duly registered under the Act,
certificates representing such shares shall bear a legend comparable to the
legend on the first page of this Warrant regarding restrictions on transfer.
Unless the transfer restrictions have been terminated pursuant to Section 9
hereof, the Holder agrees to give written notice to the Company before offering
for sale, selling or otherwise disposing of any of the Warrant or the Warrant
Shares, except when such offer, sale or other disposition is made pursuant to a
registration statement then in effect under the Act. The notice shall describe
briefly the manner of any proposed offer, sale or other disposition and shall be
accompanied by a written opinion of counsel for the Holder, which counsel shall
be a firm generally recognized as knowledgeable in the securities laws, to the
effect that the proposed offer, sale or other disposition of such Warrant or
Warrant Shares may be effected without registration under the Act.
In addition the Holder shall not sell or transfer any of the Warrant
or the Warrant Shares during any period occurring within 90 days after the
effective date of a registration statement relating to a public offering of the
Company's shares of Common Stock and in which public offering the Holder is
participating.
2.3. EXERCISE OF WARRANT. This Warrant may be exercised in whole or in
part upon surrender hereof to the Company at its principal office, together with
the Notice of Exercise Form attached hereto as Exhibit A duly filled in and
signed, and upon payment to the Company of the portion of the Warrant Price
equal to the percentage of the Warrant Shares specified in the Notice of
Exercise compared to the total amount of Warrant Shares to which this Warrant
entitles the Holder to purchase.
Subject to Section 2.2 and to Section 4 hereof, upon such surrender
of this Warrant and payment of the Warrant Price, the Company shall issue and
cause to be delivered with all reasonable dispatch to or upon the written order
of the Holder and in such name or names as the Holder may designate a
certificate or certificates for the number of full Warrant Shares so purchased
upon the exercise of this Warrant, in whole or in part. Such certificate or
certificates shall be deemed to have been issued and any person so designated to
be named therein shall be deemed to have become a holder of
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<PAGE> 3
record of such Warrant Shares as of the date of the surrender of this Warrant
and payment of the portion of Warrant Price equal to the percentage of the
Warrant Shares specified in the Notice of Exercise compared to the total amount
of Warrant Shares to which this Warrant entitles the Holder to purchase.
If this Warrant is exercised in part only, the Company shall,
upon surrender of this Warrant for cancellation, deliver a new Warrant
evidencing the rights of the Holder or its permitted designees to purchase the
balance of the Warrant Shares which Holder is entitled to purchase hereunder.
If, as of the last day of the Exercise Period, this Warrant has
not been fully exercised, then as of such date this Warrant shall be
automatically converted in full, in accordance with this Section 2.3, without
any notice or action of the Holder, unless the Holder sends written notice to
the contrary to the Company prior to the last day of the Exercise Period.
SECTION 3. EXCHANGE OF WARRANT. Subject to Section 2.2 and Section 4
hereof, this Warrant may be exchanged for another Warrant or Warrants entitling
the Holder, or any designated transferee or transferees of the Holder, to
purchase up to the aggregate percentage 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 4. PAYMENT OF TAXES. The issuance of Warrant Shares upon
exercise of this Warrant shall be made without charge to the Holder for any
issuance tax with respect thereto or any other cost incurred by the Company in
connection with the exercise of this Warrant and the related issuance of Warrant
Shares.
SECTION 5. 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 interest, but only upon
receipt of evidence reasonably satisfactory to the Company of such loss, theft
or destruction of this Warrant and indemnity (which may include a bond), if
requested, also reasonably satisfactory the Company; provided, however, that for
any Holder which is an affiliate of ContiTrade Services L.L.C., an affidavit of
loss and written agreement of indemnity shall suffice for such evidence and
indemnity.
SECTION 6. CERTAIN COVENANTS.
6.1. 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 capital stock issuable upon the exercise of any of the rights of
purchase as set out in this Warrant, will be irrevocably
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<PAGE> 4
authorized and directed at all times by the Company to reserve such number of
authorized shares as shall be requisite for such purpose. The Company will 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 capital
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.
6.2. NO IMPAIRMENT. The Company shall not by any action including,
without limitation, amending its Certificate 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 will at all
times take 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 will (a) not change the "stated value" of the Common
Stock to par value, (b) 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 (c) obtain all 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.
Upon the request of the Holder, the Company will 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.
If at any time the Company shall issue any warrant with terms more
favorable to the holder thereof than the terms of this Warrant are to the
Holder, then the Company shall issue to the Holder a replacement warrant
containing such new favorable terms, provided that the other terms of the
replaced warrant shall not be changed in any manner which adversely affects the
Holder.
6.3. 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.
6.4. STOCK TRANSFER RESTRICTIONS. During the term of this Warrant, the
Company shall not, without the prior written consent of the Holder, issue,
distribute, sell or transfer, or allow the issuance, distribution, sale or
transfer by the Company or by any affiliate of the Company, including, without
limitation, the controlling shareholders of the Company, the Company's capital
stock or securities other than (a) the sale of the Company's Common Stock to the
Holder occurring upon the exercise of the Warrant, (b) the sale of the Company's
capital stock pursuant to a firm commitment public offering, (c) the transfer of
the Company's capital stock for estate planning purposes or pursuant to a
domestic relations settlement order, or (d) the transfer of the Company's Common
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<PAGE> 5
Stock pursuant to a buy/sell agreement solely among the Company's existing
shareholders.
SECTION 7. DISTRIBUTIONS ON STOCK. The Company shall not declare any
dividends or redeem any capital stock without the prior written consent of the
Holder.
SECTION 8. PRESERVATION OF PURCHASE RIGHTS UPON RECLASSIFICATION,
CONSOLIDATION, MERGER ETC. In case of any reclassification of the Common Stock
into securities other than the Common Stock, or any consolidation of the Company
with, or merger of the Company into, another person, or in case of any sale or
conveyance to another person of the property of the Company as an entirety or
substantially as an entirety, the Company or such successor or purchasing
person, as the case may be, shall execute with the Holder an agreement such that
the Holder at its option shall have the right thereafter, upon payment of the
Warrant Price in effect immediately prior to such reclassification,
consolidation, merger, sale or conveyance, upon exercise of this Warrant to
receive either (A) cash in an amount equal to the fair market value of the
Common Stock the Holder would have been entitled to receive had this Warrant
been exercised immediately prior to the consummation of such event or (B) the
kind and amount of shares and other securities and property which the Holder
would have owned or have been entitled to receive after the happening of such
reclassification, consolidation, merger, sale or conveyance had such Warrant
been exercised immediately prior to such event. Such agreement shall provide for
terms as nearly equivalent as may be practicable to the adjustments provided for
in this Warrant. The provisions of this Section 8 shall similarly apply to
successive reclassifications, consolidations, mergers, sales or conveyances.
SECTION 9. TERMINATION OF RESTRICTIONS. The restrictions imposed by
Section 2.2 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, or (b) when, in the opinions of
both counsel for the Holder and counsel for the Company, such restrictions are
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, new securities of like
tenor not bearing a legend as to restrictions on transfer.
SECTION 10. NOTICES TO HOLDER. If at any time prior to the expiration of
this Warrant and prior to its exercise, any of the following events shall occur:
(a) the Company shall declare any dividend payable in any
securities upon its stock or make any distribution to the holders of its
stock; or
(b) the Company shall offer to the holders of its stock any
additional stock or securities convertible into stock or any right to
subscribe thereto; or
(c) a reclassification, consolidation, merger or sale or all or
substantially all of the Company's property, assets and business as an
entirety or a dissolution, liquidation or winding up of the Company
shall be proposed;
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<PAGE> 6
then in any one or more of such events, the Company shall give
notice in writing of such event to the Holder at least 20 days prior to the date
fixed as a record date for the determination of the shareholders entitled to
such dividend, distribution or subscription rights, or for the determination of
shareholders entitled to vote on such proposed reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up. Such notice shall specify
such record date.
SECTION 11. Representations and Warranties.
11.1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. 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 Delaware, and has full power
and lawful authority to carry on its business;
(b) The Company has the full corporate 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 Board of Directors of the Company; no other corporate 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); and
(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 by-laws of the Company or any loan
agreement, indenture, note or other instrument, or decree, order, statute, rule
or regulation applicable to the Company.
11.2. Representations and Warranties of the Holder. The Holder hereby
represents and warrants that:
(a) It is acquiring this Warrant, for its own account and not
with a view to, or for sale in connection with, any distribution of the
Warrant.
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<PAGE> 7
(b) As of the date of exercise of any portion of this Warrant, it
is acquiring the Warrant Shares, for its own account and not with a view
to, or for sale in connection with, any distribution of such Warrant
Shares, unless it is exercising this Warrant in connection with a public
offering of the related Warrant Shares.
SECTION 12. NOTICES. Any notice pursuant to this Warrant by the Company
or by the Holder shall be in writing and shall be mailed first class, postage
prepaid, or delivered (a) to the Company, at its principal office at 2855 East
Cottonwood Parkway, Suite 500, Salt Lake City, Utah 84121 or (b) to the Holder,
to ContiTrade Services, L.L.C., 277 Park Avenue, New York, N.Y. 10172,
Attention: Chief Counsel. 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. MISCELLANEOUS.
13.1. MAINTENANCE OF EXISTENCE OF THE COMPANY. The Company will keep in
full effect its existence, rights and franchises as a corporation under the laws
of the state of its formation except as permitted herein, and will obtain and
preserve its qualification to do business as a foreign corporation in each
jurisdiction in which such qualification is or shall be necessary to protect the
validity and enforceability of this Warrant and to perform its duties under this
Warrant.
13.2. COSTS. All costs and expenses incurred in connection with the
transfer of the Common Stock of the Company to the Holder, including any legal
expenses in connection with the enforcement of the Holder's rights hereunder,
shall be borne by the Company.
13.3. PROTECTION OF CONFIDENTIAL INFORMATION. The Holder and the
Company shall keep confidential and shall not divulge to any party, without each
other's prior written consent, any of the terms of this Warrant, except to the
extent that it is appropriate for the parties hereto to do so in working with
legal counsel, auditors, taxing authorities or other governmental agencies or
pursuant to any applicable law, rule or regulation of a governmental authority
or agency.
13.4. ENTIRE WARRANT. This Warrant, including the Exhibits hereto,
contains the entire agreement of the parties with respect to the subject matter
hereto, and supersedes all prior agreements between them, whether oral or
written, of any nature whatsoever with respect to the subject matter hereof.
13.5. SEVERABILITY CLAUSE. Any part or provision of this Warrant that
is prohibited or that 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 or provision of this Warrant that 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 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 that prohibits or renders void or
unenforceable any provision hereof. If the invalidity of any
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<PAGE> 8
part or provision of this Warrant shall deprive the Holder of the economic
benefit intended to be conferred by this Warrant, the Company and the Holder
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 Warrant, without
regard to such invalidity.
13.6. GOVERNING LAW; CONSENT TO FORUM; IMMUNITIES. This Warrant has
been negotiated, executed and delivered at and shall be deemed to have been made
in New York, New York. This Warrant shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to the
conflict of laws rules therein. The Company hereby consents and agrees that the
Supreme Court of New York County, New York or, at the Holder's option, the
United States District Court for the Southern District of New York, shall have
exclusive jurisdiction to hear and determine any claims or disputes pertaining
to this Warrant or to any matter arising out of or related to this Warrant. The
Company expressly submits and consents in advance to such jurisdiction in any
action or suit commenced in any such court, and hereby waives any objection
which it may have based upon lack of personal jurisdiction, improper venue or
forum non conveniens and hereby consents to the granting for such legal or
equitable relief as is deemed appropriate by such court. The Company irrevocably
consents to the service of process by registered or certified mail, postage
prepaid, to it at its address given pursuant to Section 12 hereof. Nothing in
this Warrant shall be deemed or operate to affect the right of the Holder to
serve legal process in any other manner permitted by law, or to preclude the
enforcement by the Holder of any judgement or order obtained in such forum or
the taking of any action under this Warrant to enforce same in any other
appropriate forum or jurisdiction.
To the extent that the Company has or may hereafter acquire any
immunity from the jurisdiction of any court or from any legal process (whether
through service or notice, attachment prior to judgement, attachment in aid of
execution, execution or otherwise) with respect to the Company or the Company's
property, the Company hereby irrevocably waives such immunity in respect of
their respective obligations under this Warrant.
13.7. WAIVER OF TRIAL BY JURY. Each party hereto waives the right to
trial by jury in any action, suit, proceeding or counterclaim of any kind
arising out of or related to this Warrant. In the event of litigation, this
Warrant may be filed as a written consent to a trial by the court.
13.8. FURTHER AGREEMENTS. The Company agrees to execute and deliver to
the Holder such additional documents, instruments or agreements as may be
necessary or appropriate to effectuate the purposes of this Warrant.
13.9 . AMENDMENT; WAIVERS. This Warrant may be amended from time to time
only by written agreement of the Company and the Holder. No failure on the part
of the Holder to exercise, and no delay in exercising, any right, power, or
remedy under this Warrant shall operate as a waiver thereof; nor shall any
single or partial exercise of any right under this Warrant preclude any other or
further exercise thereof or the exercise of any other right. No term or
provision of this Warrant may be waived or modified unless
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<PAGE> 9
such waiver or modification is in writing and signed by the party against whom
such waiver or modification is sought to be enforced.
13.10. THIRD-PARTY RIGHTS; ASSIGNMENT. This Warrant is for the
exclusive benefit of the Holder and its successors and assigns and shall not be
deemed to give any legal or equitable right to any other person. Unless
otherwise agreed to by the Company, this Warrant may only be assigned by the
Holder to its Affiliates.
13.11. REPRODUCTION OF DOCUMENTS. This Warrant 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.
13.12. ADVICE FROM INDEPENDENT COUNSEL. The parties hereto understand
that this Warrant is a legally binding agreement that may affect such party's
rights. Each party represents to the other that it has received legal advice
from counsel of its choice regarding the meaning and legal significance of this
Warrant and that it is satisfied with its legal counsel and the advice received
from it.
13.13. NO AGENCY; NO PARTNERSHIP; NO JOINT VENTURE. Neither the Holder
nor the Company are the agent or representative of the other, and nothing in
this Warrant shall be construed to make either the Holder or the Company liable
to any third party for services performed by such third party or for debts or
claims accruing to such third party against either the Holder or the Company.
Nothing contained herein nor the acts of the Company and the Holder shall be
construed to create a partnership, agency or joint venture between the Holder
and the Company.
13.14. JUDICIAL INTERPRETATION. Should any provision of this Warrant
require judicial interpretation, it is agreed that a court interpreting or
construing the same shall not apply a presumption that the terms hereof shall be
more strictly construed against any party by reason of the rule of construction
that a document is to be construed more strictly against the party who itself or
through its agent prepared the same, it being agreed that both the Company and
the Holder have participated in the preparation of this Warrant.
13.15. SUMMARY JUDGMENT. The Company hereby acknowledges and agrees that
any enforcement action relating to this Warrant or any Warrant Shares may be
brought by motion for summary judgment in lieu of a complaint pursuant to
Section 3212 of the New York Civil Practice Law and Rules.
SECTION 14. RULES OF INTERPRETATION. Except as otherwise expressly
provided in this Warrant, the following rules shall apply hereto: (a) the
singular includes the plural
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and the plural includes the singular; (b) "or" is not exclusive and "include"
and "including" are not limiting; (c) a reference to any agreement or other
contract includes permitted supplements, amendments and other modifications; (d)
a reference to a law includes any amendment or modification of such law and the
rules or regulations issued thereunder; (e) a reference to a party includes its
permitted successors and assigns in the applicable capacity; (f) a reference in
this Warrant to a Section, clause, recital or Exhibit is to the Section, clause,
recital or Exhibit of this Warrant unless otherwise expressly provided; (g)
words such as "hereunder", "hereto", "hereof", and "herein" and other words of
like import shall, unless the context clearly indicates to the contrary, refer
to the whole of this Warrant and not to any particular Section or clause hereof;
(h) all obligations under this Warrant are continuing obligations throughout the
term of this Warrant; (i) any right in this Warrant may be exercised at any time
and from time to time; (j) the headings of the Sections and the Subsections are
for convenience and shall not affect the meaning of this Warrant; and (k) time
is of the essence in performing all obligations.
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<PAGE> 11
IN WITNESS WHEREOF, the undersigned have executed this Warrant as
of the 31st day of December, 1997.
CMG FUNDING CORP.
By:
---------------------------------------
Name:
Title:
Attest:
------------------------------------
Name:
Title:
<PAGE> 12
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 [or if partial assignment is being made, indicate
percentage], irrevocably constituting and appointing
_____________________________________ Attorney to transfer such Warrant on the
books of the Company, with full power of substitution in the premises.
DATED: ____________ , ____
Signature of Registered Holder
<PAGE> 13
EXHIBIT "A"
(To be executed only upon partial or full
exercise of the within Warrant)
The undersigned registered Holder of the within Warrant hereby
irrevocably exercises the within Warrant for and purchases shares of Common
Stock of CMG Funding Corp., and herewith makes payment therefor in the amount
specified below, all at the price and on the terms and conditions specified in
the within Warrant and requests that a certificate (or certificates in
denominations of shares) for the shares of Common Stock of CMG Funding Corp,
hereby purchased be issued in the name of and delivered to [CHOOSE ONE] (a)
_____________________ (the undersigned) or (b) ________________, whose address
is _________________________________________________________ and, if such shares
of Common Stock shall not include all the shares of Common Stock issuable as
provided in the within Warrant, that a new Warrant of like tenor for the number
of shares of Common Stock of CMG Funding Corp., not being purchased hereunder be
issued in the name of and delivered to [CHOOSE ONE] (a) _____________________
(the undersigned) or (b) _____________________, whose address is
___________________________________________________________ .
Percentage of equity of CMG Funding Corp. (on a fully diluted
basis) _____%
Exercise Price: $1
Dated: ____________, ____
--------------------------------------------
--------------------------------------------
By:
-----------------------------------------
(Signature of Registered Holder)
Title:
--------------------------------------
NOTICE: The signature to this Notice of Exercise must correspond with the
name as written upon the face of the within Warrant in every
particular, without alteration or enlargement or any change
whatever.
A-1
<PAGE> 1
EXHIBIT 4.9
WARRANT
Warrant No. 3
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 EXEMPTION THEREFROM IS AVAILABLE
WARRANT TO PURCHASE COMMON STOCK
OF
CMG FUNDING CORP.
THIS CERTIFIES THAT, for value received CONTITRADE SERVICES
L.L.C., the holder of this Warrant or its registered successors and assigns (the
"Holder"), is entitled to purchase from CMG Funding Corp., a Delaware
corporation (the "Company"), at the purchase price of $1 the number of shares of
common stock of the Company ("Common Stock"), that will equal, immediately after
the exercise of this Warrant, the percentage of the total equity of the Company
on a fully diluted basis equal to the value of the entitlement (described more
fully in Section 1 hereof) (the "Entitlement") as of the date of the exercise of
this Warrant.
SECTION 1. PRE-TAX NET INCOME TARGET ADJUSTMENT. Schedule A hereto sets
forth a list of after tax net income targets for the Company on a quarterly
basis (each a "PTNI Target" for the respective quarter). (Each PTNI Target has
been determined prior to the deduction of all costs and expenses of the REIT
Issuance (as defined in "Amendment 2 to Letter Agreement referred to as the
Investment Banking Services Agreement", dated as of December 31, 1997 among the
Company, the Holder and ContiFinancial Services Corporation)). To the extent
that upon the closure of any quarter as to which a PTNI Target is listed on
Schedule A, the after tax net income of the Company for such quarter, determined
in accordance with GAAP, is less than ninety (90%) percent of the PTNI Target
for such quarter, then 1.00% shall be added to the Entitlement for each such
event. Initially as of December 31, 1997, the Entitlement shall equal zero.
<PAGE> 2
SECTION 2. TERM OF WARRANT, RESTRICTIONS ON TRANSFER, EXERCISE OF
WARRANT.
2.1 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 during the period prior to the earlier to occur of (i) January
1, 1999 and (ii) the date on which the Company receives the proceeds of the REIT
Issuance (such period, the "Exercise Period"), to purchase from the Company the
number of fully paid and nonassessable shares of the Common Stock of the Company
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. The
Company shall notify the Holder in writing, not less than 30 days nor more than
60 days prior to the expiration of the Exercise Period, of the last date on
which this Warrant is exercisable.
2.2 RESTRICTIONS ON TRANSFER. This Warrant and the Warrant Shares are
restricted securities as defined under the Securities Act of 1933, as amended
(the "Act") and therefore are non-transferable except in compliance with
applicable federal and state securities laws, including Rule 144 adopted under
the Act. Unless Warrant Shares shall have been duly registered under the Act,
certificates representing such shares shall bear a legend comparable to the
legend on the first page of this Warrant regarding restrictions on transfer.
Unless the transfer restrictions have been terminated pursuant to Section 9
hereof, the Holder agrees to give written notice to the Company before offering
for sale, selling or otherwise disposing of any of the Warrant or the Warrant
Shares, except when such offer, sale or other disposition is made pursuant to a
registration statement then in effect under the Act. The notice shall describe
briefly the manner of any proposed offer, sale or other disposition and shall be
accompanied by a written opinion of counsel for the Holder, which counsel shall
be a firm generally recognized as knowledgeable in the securities laws, to the
effect that the proposed offer, sale or other disposition of such Warrant or
Warrant Shares may be effected without registration under the Act. In addition
the Holder shall not sell or transfer any of the Warrant or the Warrant Shares
during any period occurring within 90 days after the effective date of a
registration statement relating to a public offering of the Company's shares of
Common Stock and in which public offering the Holder is participating.
2.3 EXERCISE OF WARRANT. This Warrant may be exercised in whole or in
part upon surrender hereof to the Company at its principal office, together with
the Notice of Exercise Form attached hereto as Exhibit A duly filled in and
signed, and upon payment to the Company of the portion of the Warrant Price
equal to the percentage of the Warrant Shares specified in the Notice of
Exercise compared to the total amount of Warrant Shares to which this Warrant
entitles the Holder to purchase.
Subject to Section 2.2 and to Section 4 hereof, upon such
surrender of this Warrant and payment of the Warrant Price, the Company shall
issue and cause to be delivered with all reasonable dispatch to or upon the
written order of the Holder and in such name or names as the Holder may
designate a certificate or certificates for the number of full Warrant Shares so
purchased upon the exercise of this Warrant, in whole or in part. Such
certificate or certificates shall be deemed to have been issued and any
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<PAGE> 3
person so designated to be named therein shall be deemed to have become a holder
of record of such Warrant Shares as of the date of the surrender of this Warrant
and payment of the portion of Warrant Price equal to the percentage of the
Warrant Shares specified in the Notice of Exercise compared to the total amount
of Warrant Shares to which this Warrant entitles the Holder to purchase.
If this Warrant is exercised in part only, the Company shall,
upon surrender of this Warrant for cancellation, deliver a new Warrant
evidencing the rights of the Holder or its permitted designees to purchase the
balance of the Warrant Shares which Holder is entitled to purchase hereunder.
If, as of the last day of the Exercise Period, this Warrant has
not been fully exercised, then as of such date this Warrant shall be
automatically converted in full, in accordance with this Section 2.3, without
any notice or action of the Holder, unless the Holder sends written notice to
the contrary to the Company prior to the last day of the Exercise Period.
SECTION 3. EXCHANGE OF WARRANT. Subject to Section 2.2 and Section 4
hereof, this Warrant may be exchanged for another Warrant or Warrants entitling
the Holder, or any designated transferee or transferees of the Holder, to
purchase up to the aggregate percentage 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 4. PAYMENT OF TAXES. The issuance of Warrant Shares upon
exercise of this Warrant shall be made without charge to the Holder for any
issuance tax with respect thereto or any other cost incurred by the Company in
connection with the exercise of this Warrant and the related issuance of Warrant
Shares.
SECTION 5. 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 interest, but only upon
receipt of evidence reasonably satisfactory to the Company of such loss, theft
or destruction of this Warrant and indemnity (which may include a bond), if
requested, also reasonably satisfactory the Company; provided, however, that for
any Holder which is an affiliate of ContiTrade Services L.L.C., an affidavit of
loss and written agreement of indemnity shall suffice for such evidence and
indemnity.
SECTION 6. Certain Covenants.
6.1 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 capital stock issuable upon the
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<PAGE> 4
exercise of any of the rights of purchase as set out in this Warrant, will be
irrevocably authorized and directed at all times by the Company to reserve such
number of authorized shares as shall be requisite for such purpose. The Company
will 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
capital 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.
6.2 NO IMPAIRMENT. The Company shall not by any action including,
without limitation, amending its Certificate 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 will at all
times take 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 will (a) not change the "stated value" of the Common
Stock to par value, (b) 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 (c) obtain all 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.
Upon the request of the Holder, the Company will 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.
If at any time the Company shall issue any warrant with terms
more favorable to the holder thereof than the terms of this Warrant are to the
Holder, then the Company shall issue to the Holder a replacement warrant
containing such new favorable terms, provided that the other terms of the
replaced warrant shall not be changed in any manner which adversely affects the
Holder.
6.3 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.
6.4 STOCK TRANSFER RESTRICTIONS. During the term of this Warrant, the
Company shall not, without the prior written consent of the Holder, issue,
distribute, sell or transfer, or allow the issuance, distribution, sale or
transfer by the Company or by any affiliate of the Company, including, without
limitation, the controlling shareholders of the Company, the Company's capital
stock or securities other than (a) the sale of the Company's Common Stock to the
Holder occurring upon the exercise of the Warrant, (b) the sale of the Company's
capital stock pursuant to a firm commitment public offering, (c) the transfer of
the Company's capital stock for estate planning purposes or pursuant to
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<PAGE> 5
a domestic relations settlement order, or (d) the transfer of the Company's
Common Stock pursuant to a buy/sell agreement solely among the Company's
existing shareholders.
SECTION 7. DISTRIBUTIONS ON STOCK. The Company shall not declare any
dividends or redeem any capital stock without the prior written consent of the
Holder.
SECTION 8. PRESERVATION OF PURCHASE RIGHTS UPON RECLASSIFICATION,
CONSOLIDATION, MERGER ETC. In case of any reclassification of the Common Stock
into securities other than the Common Stock, or any consolidation of the Company
with, or merger of the Company into, another person, or in case of any sale or
conveyance to another person of the property of the Company as an entirety or
substantially as an entirety, the Company or such successor or purchasing
person, as the case may be, shall execute with the Holder an agreement such that
the Holder at its option shall have the right thereafter, upon payment of the
Warrant Price in effect immediately prior to such reclassification,
consolidation, merger, sale or conveyance, upon exercise of this Warrant to
receive either (A) cash in an amount equal to the fair market value of the
Common Stock the Holder would have been entitled to receive had this Warrant
been exercised immediately prior to the consummation of such event or (B) the
kind and amount of shares and other securities and property which the Holder
would have owned or have been entitled to receive after the happening of such
reclassification, consolidation, merger, sale or conveyance had such Warrant
been exercised immediately prior to such event. Such agreement shall provide for
terms as nearly equivalent as may be practicable to the adjustments provided for
in this Warrant. The provisions of this Section 8 shall similarly apply to
successive reclassifications, consolidations, mergers, sales or conveyances.
SECTION 9. TERMINATION OF RESTRICTIONS. The restrictions imposed by
Section 2.2 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, or (b) when, in the opinions of
both counsel for the Holder and counsel for the Company, such restrictions are
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, new securities of like
tenor not bearing a legend as to restrictions on transfer.
SECTION 10. NOTICES TO HOLDER. If at any time prior to the expiration of
this Warrant and prior to its exercise, any of the following events shall occur:
(a) the Company shall declare any dividend payable in any
securities upon its stock or make any distribution to the holders of its stock;
or
(b) the Company shall offer to the holders of its stock any
additional stock or securities convertible into stock or any right to subscribe
thereto; or
(c) a reclassification, consolidation, merger or sale or all or
substantially all of the Company's property, assets and business as an entirety
or a dissolution, liquidation or winding up of the Company shall be proposed;
5
<PAGE> 6
then in any one or more of such events, the Company shall give notice in writing
of such event to the Holder at least 20 days prior to the date fixed as a record
date for the determination of the shareholders entitled to such dividend,
distribution or subscription rights, or for the determination of shareholders
entitled to vote on such proposed reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up. Such notice shall specify such record
date.
SECTION 11. Representations and Warranties.
11.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. 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 Delaware, and has
full power and lawful authority to carry on its business;
(b) The Company has the full corporate 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 Board of Directors of the Company; no other corporate 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); and
(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 by-laws of the Company or any loan
agreement, indenture, note or other instrument, or decree, order, statute, rule
or regulation applicable to the Company.
11.2 REPRESENTATIONS AND WARRANTIES OF THE HOLDER. The Holder hereby
represents and warrants that:
(a) It is acquiring this Warrant, for its own account and not
with a view to, or for sale in connection with, any distribution of the Warrant.
(b) As of the date of exercise of any portion of this Warrant, it
is acquiring the Warrant Shares, for its own account and not with a view to, or
for sale in
6
<PAGE> 7
connection with, any distribution of such Warrant Shares, unless it is
exercising this Warrant in connection with a public offering of the related
Warrant Shares.
SECTION 12. NOTICES. Any notice pursuant to this Warrant by the Company
or by the Holder shall be in writing and shall be mailed first class, postage
prepaid, or delivered (a) to the Company, at its principal office at 2855 East
Cottonwood Parkway, Suite 500, Salt Lake City, Utah 84121 or (b) to the Holder,
to ContiTrade Services, L.L.C., 277 Park Avenue, New York, N.Y. 10172,
Attention: Chief Counsel. 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. MISCELLANEOUS.
13.1 MAINTENANCE OF EXISTENCE OF THE COMPANY. The Company will keep in
full effect its existence, rights and franchises as a corporation under the laws
of the state of its formation except as permitted herein, and will obtain and
preserve its qualification to do business as a foreign corporation in each
jurisdiction in which such qualification is or shall be necessary to protect the
validity and enforceability of this Warrant and to perform its duties under this
Warrant.
13.2 COSTS. All costs and expenses incurred in connection with the
transfer of the Common Stock of the Company to the Holder, including any legal
expenses in connection with the enforcement of the Holder's rights hereunder,
shall be borne by the Company.
13.3 PROTECTION OF CONFIDENTIAL INFORMATION. The Holder and the Company
shall keep confidential and shall not divulge to any party, without each other's
prior written consent, any of the terms of this Warrant, except to the extent
that it is appropriate for the parties hereto to do so in working with legal
counsel, auditors, taxing authorities or other governmental agencies or pursuant
to any applicable law, rule or regulation of a governmental authority or agency.
13.4 ENTIRE WARRANT. This Warrant, including the Exhibits hereto,
contains the entire agreement of the parties with respect to the subject matter
hereto, and supersedes all prior agreements between them, whether oral or
written, of any nature whatsoever with respect to the subject matter hereof.
13.5 SEVERABILITY CLAUSE. Any part or provision of this Warrant that is
prohibited or that 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 or provision of this Warrant that 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 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 that prohibits or renders void or
unenforceable any provision hereof. If the invalidity of any part or provision
of this Warrant shall deprive the Holder of the economic benefit intended to be
conferred by this Warrant, the Company and the Holder shall negotiate, in
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<PAGE> 8
good-faith, to develop a structure, the economic effect of which is as close as
possible to the economic effect of this Warrant, without regard to such
invalidity.
13.6 GOVERNING LAW; CONSENT TO FORUM; IMMUNITIES. This Warrant has been
negotiated, executed and delivered at and shall be deemed to have been made in
New York, New York. This Warrant shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to the
conflict of laws rules therein. The Company hereby consents and agrees that the
Supreme Court of New York County, New York or, at the Holder's option, the
United States District Court for the Southern District of New York, shall have
exclusive jurisdiction to hear and determine any claims or disputes pertaining
to this Warrant or to any matter arising out of or related to this Warrant. The
Company expressly submits and consents in advance to such jurisdiction in any
action or suit commenced in any such court, and hereby waives any objection
which it may have based upon lack of personal jurisdiction, improper venue or
forum non conveniens and hereby consents to the granting for such legal or
equitable relief as is deemed appropriate by such court. The Company irrevocably
consents to the service of process by registered or certified mail, postage
prepaid, to it at its address given pursuant to Section 12 hereof. Nothing in
this Warrant shall be deemed or operate to affect the right of the Holder to
serve legal process in any other manner permitted by law, or to preclude the
enforcement by the Holder of any judgement or order obtained in such forum or
the taking of any action under this Warrant to enforce same in any other
appropriate forum or jurisdiction.
To the extent that the Company has or may hereafter acquire any
immunity from the jurisdiction of any court or from any legal process (whether
through service or notice, attachment prior to judgement, attachment in aid of
execution, execution or otherwise) with respect to the Company or the Company's
property, the Company hereby irrevocably waives such immunity in respect of
their respective obligations under this Warrant.
13.7 WAIVER OF TRIAL BY JURY. Each party hereto waives the right to
trial by jury in any action, suit, proceeding or counterclaim of any kind
arising out of or related to this Warrant. In the event of litigation, this
Warrant may be filed as a written consent to a trial by the court.
13.8 FURTHER AGREEMENTS. The Company agrees to execute and deliver to
the Holder such additional documents, instruments or agreements as may be
necessary or appropriate to effectuate the purposes of this Warrant.
13.9 AMENDMENT; WAIVERS. This Warrant may be amended from time to time
only by written agreement of the Company and the Holder. No failure on the part
of the Holder to exercise, and no delay in exercising, any right, power, or
remedy under this Warrant shall operate as a waiver thereof; nor shall any
single or partial exercise of any right under this Warrant preclude any other or
further exercise thereof or the exercise of any other right. No term or
provision of this Warrant 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.
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<PAGE> 9
13.10 THIRD-PARTY RIGHTS; ASSIGNMENT. This Warrant is for the exclusive
benefit of the Holder and its successors and assigns and shall not be deemed to
give any legal or equitable right to any other person. Unless otherwise agreed
to by the Company, this Warrant may only be assigned by the Holder to its
Affiliates.
13.11 REPRODUCTION OF DOCUMENTS. This Warrant 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.
13.12 ADVICE FROM INDEPENDENT COUNSEL. The parties hereto understand
that this Warrant is a legally binding agreement that may affect such party's
rights. Each party represents to the other that it has received legal advice
from counsel of its choice regarding the meaning and legal significance of this
Warrant and that it is satisfied with its legal counsel and the advice received
from it.
13.13 NO AGENCY; NO PARTNERSHIP; NO JOINT VENTURE. Neither the Holder
nor the Company are the agent or representative of the other, and nothing in
this Warrant shall be construed to make either the Holder or the Company liable
to any third party for services performed by such third party or for debts or
claims accruing to such third party against either the Holder or the Company.
Nothing contained herein nor the acts of the Company and the Holder shall be
construed to create a partnership, agency or joint venture between the Holder
and the Company.
13.14 Judicial Interpretation. Should any provision of this Warrant
require judicial interpretation, it is agreed that a court interpreting or
construing the same shall not apply a presumption that the terms hereof shall be
more strictly construed against any party by reason of the rule of construction
that a document is to be construed more strictly against the party who itself or
through its agent prepared the same, it being agreed that both the Company and
the Holder have participated in the preparation of this Warrant.
13.15 SUMMARY JUDGMENT. The Company hereby acknowledges and agrees that
any enforcement action relating to this Warrant or any Warrant Shares may be
brought by motion for summary judgment in lieu of a complaint pursuant to
Section 3212 of the New York Civil Practice Law and Rules.
SECTION 14. RULES OF INTERPRETATION. Except as otherwise expressly
provided in this Warrant, the following rules shall apply hereto: (a) the
singular includes the plural and the plural includes the singular; (b) "or" is
not exclusive and "include" and "including" are not limiting; (c) a reference to
any agreement or other contract includes permitted supplements, amendments and
other modifications; (d) a reference to a law
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<PAGE> 10
includes any amendment or modification of such law and the rules or regulations
issued thereunder; (e) a reference to a party includes its permitted successors
and assigns in the applicable capacity; (f) a reference in this Warrant to a
Section, clause, recital or Exhibit is to the Section, clause, recital or
Exhibit of this Warrant unless otherwise expressly provided; (g) words such as
"hereunder", "hereto", "hereof", and "herein" and other words of like import
shall, unless the context clearly indicates to the contrary, refer to the whole
of this Warrant and not to any particular Section or clause hereof; (h) all
obligations under this Warrant are continuing obligations throughout the term of
this Warrant; (i) any right in this Warrant may be exercised at any time and
from time to time; (j) the headings of the Sections and the Subsections are for
convenience and shall not affect the meaning of this Warrant; and (k) time is of
the essence in performing all obligations.
10
<PAGE> 11
IN WITNESS WHEREOF, the undersigned have executed this Warrant as
of the 31st day of December, 1997.
CMG FUNDING CORP.
By:
---------------------------------
Name:
Title:
Attest:
-----------------------------
Name:
Title:
<PAGE> 12
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 [or if partial assignment is being made, indicate
percentage], irrevocably constituting and appointing
_____________________________________________ Attorney to transfer such Warrant
on the books of the Company, with full power of substitution in the premises.
DATED: _____________ , ____
Signature of Registered Holder
<PAGE> 13
EXHIBIT "A"
(To be executed only upon partial or full
exercise of the within Warrant)
The undersigned registered Holder of the within Warrant hereby
irrevocably exercises the within Warrant for and purchases shares of Common
Stock of CMG Funding Corp., and herewith makes payment therefor in the amount
specified below, all at the price and on the terms and conditions specified in
the within Warrant and requests that a certificate (or certificates in
denominations of shares) for the shares of Common Stock of CMG Funding Corp,
hereby purchased be issued in the name of and delivered to [CHOOSE ONE] (a)
_____________________ (the undersigned) or (b) ________________, whose address
is _________________________________________________________ and, if such shares
of Common Stock shall not include all the shares of Common Stock issuable as
provided in the within Warrant, that a new Warrant of like tenor for the number
of shares of Common Stock of CMG Funding Corp., not being purchased hereunder be
issued in the name of and delivered to [CHOOSE ONE] (a) _____________________
(the undersigned) or (b) _____________________, whose address is
___________________________________________________________ .
Percentage of equity of CMG Funding Corp. (on a fully diluted
basis) _____%
Exercise Price: $1
Dated: ____________, ____
--------------------------------------------
--------------------------------------------
By:
-----------------------------------------
(Signature of Registered Holder)
Title:
--------------------------------------
NOTICE: The signature to this Notice of Exercise must correspond with the
name as written upon the face of the within Warrant in every
particular, without alteration or enlargement or any change
whatever.
A-1
<PAGE> 14
Schedule A
Quarterly Pre Tax Net Income Target
<TABLE>
<CAPTION>
Quarter Ended Amount
------------- ------
<S> <C>
March 31, 1998 $ 290,206
June 30, 1998 $ 832,120
September 30, 1998 $1,107,524
December 31, 1998 $1,214,037
</TABLE>
A-2
<PAGE> 1
EXHIBIT 4.10
REALTRUST ASSET CORPORATION
WARRANT AGREEMENT
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THIS WARRANT MAY NOT BE TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR UNLESS AN EXEMPTION THEREFROM IS AVAILABLE.
This Warrant Agreement (this "Agreement") is entered into as of April 1,
1998 by and between RealTrust Asset Corporation, a Maryland corporation (the
"Company"), and Capstone Investments, Inc., a Nevada corporation (the "Holder").
RECITALS
WHEREAS, the Company has agreed to grant to Holder warrants to purchase
50,000 shares of Company Common Stock in exchange and in consideration of making
that certain loan in the principal amount of $850,000 to CMG Funding Corp., a
subsidiary of the Company evidenced by that certain Convertible Secured
Promissory Note of even date herewith.
NOW, THEREFORE, BE IT RESOLVED, the parties agree hereto as follows:
1. DESCRIPTION; EXECUTION.
(a) The Company agrees to issue to the Holder and the Holder agrees to
accept the Warrant Certificate evidencing the right to purchase 50,000 shares of
Company Common Stock at the Exercise Price (as defined below). The Warrant
Certificate shall be substantially in the form annexed hereto as Exhibit A.
(b) This Agreement shall be executed on behalf of the Company by its
President. Upon delivery of this Warrant to the Holder, this Agreement shall be
binding upon the Company, and the Holder shall be entitled to all the benefits
set forth herein.
2. TERM OF WARRANT.
The Warrant shall become exercisable at any time after the date hereof,
and remain exercisable, subject to the conditions set forth in Section 3 until
the close of business on April 1, 2001 (the "Expiration Date").
3. EXERCISE OF WARRANT.
(a) Subject to (b) below, at any time until the Expiration Date, the
Holder shall have the right to purchase from the Company (and the Company shall
promptly issue to the Holder) one fully-paid and nonassessable share of Common
Stock at the Exercise Price (as defined below) for each Warrant, by surrendering
the appropriate Warrant Certificate and the Subscription Form attached hereto to
the Company at its executive offices and paying the aggregate Exercise Price for
the shares to be purchased, in cash or by check or shares of Company Common
Stock.
(b) The Warrant may be exercised in whole and in part but not in
increments of less than 100 shares. In case of a partial exercise, the Warrant
Certificate shall be surrendered and a new Warrant Certificate of the same tenor
and for the purchase of the number of shares not purchased upon such partial
exercise shall be issued by the Company to the Holder hereof. The Warrants shall
be deemed to have been exercised immediately prior to the close of business on
the date of their surrender for exercise as provided above, and the person or
entity entitled to receive the shares of Common Stock issuable upon the exercise
shall be treated for all purposes as the holder of such shares of record as of
the close of business on such date. Prior to any such exercise, neither the
Holder nor any person entitled to receive shares issuable upon exercise shall be
or have any of the rights of a shareholder of the Company. No adjustment shall
be made for dividends or other stockholder rights for which the record date is
prior to the date of exercise. As soon as practicable on or after such date, the
Company shall issue in the name of, and deliver to the person or persons
entitled to receive, a certificate or certificates for the full number of shares
of Common Stock issuable upon such exercise.
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<PAGE> 2
4. EXERCISE PRICE. The exercise price (the "Exercise Price") for each share of
Common Stock issuable pursuant to the Warrant shall be equal to the Price to
Public of the securities sold by the Company in its initial public offering,
adjusted as provided below. The Exercise Price may be paid, at the election of
the Holder, by certified or cashier's check.
5. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES OF COMMON STOCK.
The number and kind of securities purchasable upon the exercise of the
Warrants and the Exercise Price shall be subject to adjustment from time to time
upon the happening of certain events, as follows:
5.1 Adjustments. The Exercise Price of the Warrant shall be subject to
adjustment as follows:
(a) In case the Company shall issue rights, options, warrants or
convertible securities to all or substantially all holders of its Common Stock,
without any charge to such holders, entitling the holder thereof to subscribe
for or purchase Stock at a price per share which is lower at the date of
issuance of such rights, options, warrants or securities than the then Current
Fair Market Value (as defined in Section 7 hereof), the price of shares of Stock
thereafter purchasable upon the exercise of the Warrant shall be reduced to a
price equal to an amount which would entitle the Holder to receive the same
number of shares of Common Stock and other securities that he would have
received had he exercised the Warrants immediately prior to such issuance.
(b) For the purpose of this Section 5, the term "Common Stock"
shall mean (i) the class of stock designated as the Common Stock of the Company
at the date of this Agreement, or (ii) any other class of stock resulting from
successive changes or reclassifications of such Common Stock consisting solely
of changes in par value, or from par value to no par value, or from no par value
to par value.
5.2 No Adjustment for Dividends. Except as provided in Section 5.1
hereof, no adjustment in respect of any dividends or distributions out of
earnings shall be made during the term of a Warrant or upon the exercise of a
Warrant.
5.3 No Adjustment in Certain Cases. No adjustments shall be made
pursuant to Section 5 hereof in connection with the grant or exercise of
presently authorized or outstanding options to purchase Common Stock under the
Company's existing stock option plan or the exercise of presently outstanding
warrants to purchase Common Stock.
5.4 Preservation of Purchase Rights upon Reclassification,
Consolidation, etc. In case of any consolidation of the Company with or merger
of the Company into another corporation or in case of any sale or conveyance to
another corporation of the property, assets or business of the Company as an
entirety or substantially as an entirety, the Company or such successor or
purchasing corporation, as the case may be, shall execute with the Holder an
agreement that the Holder shall have the right thereafter, upon payment of the
Exercise Price in effect immediately prior to such action, to purchase, upon
exercise of each Warrant, the kind and amount of shares and other securities and
property which it would have owned or have been entitled to receive after the
occurrence of such consolidation, merger, sale or conveyance had each Warrant
been exercised immediately prior to such action. In the event of a merger
described in Section 368(a)(2)(E) of the Internal Revenue Code of 1986, as
amended, in which the Company is the surviving corporation, the right to
purchase shares of Common Stock under the Warrant shall terminate on the date of
such merger and thereupon the Warrant shall become null and void, but only if
the controlling corporation shall agree to substitute for the Warrant its
warrant which entitle the holders thereof to purchase upon their exercise the
kind and amount of shares and other securities and property which they would
have owned or been entitled to receive had the Warrant been exercised
immediately prior to such merger. Any such agreements referred to in this
Subsection 5.4 shall provide for adjustments, which shall be as nearly
equivalent as may be practicable to the adjustments provided for in Section 5
hereof. The provisions of this Subsection 5.4 shall similarly apply to
successive consolidations, mergers, sales or conveyances.
6. FRACTIONAL SHARES; ISSUANCE OF SHARES; LEGENDS.
6.1 Fractional Shares. The Company shall not be required to issue
fractional shares of Company Common Stock on the exercise of a Warrant. If any
fraction of a share of Stock would, except for the provisions of this Section 6,
be issuable on the exercise of a Warrant (or specified portion thereof), the
Company shall in lieu thereof pay an
2
<PAGE> 3
amount in cash equal to the then Current Fair Market Value, multiplied by such
fraction. For purposes of this Agreement, the term "Current Fair Market Value"
shall mean (i) if the Common Stock is traded in the over-the-counter market and
not in the NASDAQ Small Cap Market or the National Market nor on any national
securities exchange, the average of the per share closing bid prices of the
Common Stock on the 10 consecutive trading days immediately preceding the date
in question, as reported by NASDAQ or an equivalent generally accepted reporting
service, or (ii) if the Common Stock is traded in the NASDAQ Small Cap Market or
the National Market or on a national securities exchange, the average for the 10
consecutive trading days immediately preceding the date in question of the daily
per share closing prices of the Common Stock in the NASDAQ Small Cap Market or
the National Market or on the principal stock exchange on which it is listed, as
the case may be. or (iii) if the class of Stock is not publicly traded or
quoted, the fair market value as determined by the Board of Directors of the
Company based on (with appropriate adjustments) the most recent purchases of the
Company's Stock and/or other relevant factors including the Company's income and
assets or evaluation reports received by the Company.
6.2 Issuance of Shares. All shares of Stock issued upon exercise of a
Warrant will be duly authorized, validly issued, fully paid and nonassessable.
6.3 Legends. If the Stock to be issued upon exercise of this Warrant has
not been registered under the Securities Act of 1933, as amended, then the stock
certificates representing such shares of Common Stock shall bear a legend
substantially in the following form:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR APPLICABLE
STATE SECURITIES LAWS AND ARE RESTRICTED SECURITIES. SUCH SECURITIES MAY
NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
EXEMPTION THEREFROM UNDER THE ACT AND STATE SECURITIES LAWS.
7. TRANSFERABILITY.
The Warrant or the Shares of Company Common Stock underlying the Warrant
may not be transferred without the prior consent of the Company. The Company
shall not be required to register any transfer on the books of the Company. The
Company may require, as a condition to any transfer an opinion of counsel
satisfactory to it prior to such transfer that registration under the Securities
Act and applicable state securities laws is not required in connection with the
transaction resulting in such transfer. Each new Warrant or Company Common Stock
certificate issued upon any transfer as above provided shall bear an appropriate
investment legend, except that such Warrant or Company Common Stock certificate
shall not bear such restrictive legend if the opinion of counsel referred to
above is to further effect that such legend is not required in order to
establish compliance with the provisions of the Securities Act or if such
transfer is made in accordance with the provisions of Rule 144(k) promulgated
under the Securities Act. The Warrant may also be transferred by will or devise
and by the laws of descent.
8. MISCELLANEOUS.
8.1 Notices.
All notices, requests, demands and other communications required
or permitted to be given hereunder shall be deemed to have been duly given if in
writing and delivered personally, given by prepaid telegram, or mailed first
class, postage prepaid, registered or certified mail, return receipt requested,
to the following addresses:
If to the Company: Real Trust Asset Corporation
CMG Funding Corp.,
2855 East Cottonwood Parkway
Suite 500
Salt Lake City, Utah 84121
Attention: John D. Fry
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With a copy to: Jeffers, Wilson, Shaff & Falk, LLP
18881 Von Karman Avenue, Suite 1400
Irvine, California 92612
Attention: Christopher A. Wilson, Esq.
If to the Holder: Capstone Investments, Inc.
1601 North Rancho Drive
Las Vegas, Nevada 89106
Attention: David Ferradino
Any party may change the address to which such communications are
to be directed to it by giving written notice to the other party. Except as
otherwise provided in this Warrant, all notices shall be deemed to be given when
delivered in person, or if placed in the mail as aforesaid, then two (2) days
thereafter.
8.2 Modifications.
The parties may, by mutual consent, amend, modify, supplement and
waive any right under this Warrant in any manner agreed by them in writing at
any time.
8.3 Entire Agreement.
This Agreement, and any documents, instruments or agreements
specifically referred to herein, set forth the entire agreement and
understanding of the parties with respect to the transactions contemplated
hereby and supersede all prior agreements, arrangements and understandings
relating to the subject matter hereof.
8.4 Headings.
The section and paragraph headings contained in this Agreement
are for convenient reference only, and shall not in any way affect the meaning
or interpretation hereof.
8.5 Governing Law; Arbitration.
This Agreement shall be governed by and construed in accordance
with the laws of the State of Maryland, without any regard to the choice of law
provisions thereof. Any dispute arising under this Agreement shall be resolved
by binding arbitration under the rules of commercial arbitration of the American
Arbitration Association in Salt Lake City, Utah.
8.6 Severability.
If any provision of this Agreement shall be held to be invalid,
illegal or unenforceable, it shall be deemed severable from the remaining
provisions of this Agreement which shall remain in full force and effect.
8.7 Waiver.
No waiver of any provision of this Agreement or any breach
thereof shall be deemed or shall constitute a waiver of any other provision
hereof (whether or not similar) or any other breach hereunder nor shall such
waiver constitute a continuing waiver. Either party may waive performance of any
provision of this Agreement, the non-performance of which would otherwise
constitute a breach of this Agreement, including but not limited to the
non-performance of any condition precedent to such party's performance, without
affecting the enforceability of this Agreement or the provisions contained
herein.
8.8 Heirs; Successors and Assigns.
The terms and conditions of this Agreement shall inure to the
benefit of and be binding upon the respective heirs, successors and assigns of
the parties hereto. Holders may transfer and assign the Warrants only as
provided in Section 7 and any assignment in violation of the foregoing shall be
void.
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8.9 Attorneys' Fees.
If any legal action is instituted to enforce or interpret the
terms of this Agreement, the prevailing party in such action shall be entitled
to actual attorneys' fees in addition to any other relief to which the party is
entitled.
IN WITNESS WHEREOF, the parties have executed this instrument as of the
date first written above.
REALTRUST ASSET CORPORATION,
A MARYLAND CORPORATION
By: ______________________________
John D. Fry,
Chief Executive Officer
"HOLDER"
CAPSTONE INVESTMENTS, INC.,
A NEVADA CORPORATION
By: ______________________________
David Ferradino,
Authorized Signatory
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<PAGE> 1
EXHIBIT 4.12
CONTRIBUTION AGREEMENT
CONTRIBUTION AGREEMENT (the "Contribution Agreement") is entered into
this 1st day of April, 1998 by and between the undersigned shareholders (the
"Contributors") of CMG Funding Corp., a Delaware corporation ("CMG"), and
RealTrust Asset Corporation, a Maryland corporation ("RealTrust").
RECITALS
WHEREAS, the Contributors desire to contribute their certain shares of
CMG to RealTrust in exchange for shares of capital stock of RealTrust (the
"Contribution") subject to the terms and conditions set forth herein;
WHEREAS, it is the intent of the Contributors that the Contribution of
capital stock of CMG for shares of capital stock of RealTrust qualify as a
contribution under Section 351 of the Internal Revenue Code of 1986, as amended;
NOW, THEREFORE, in consideration of the premises and the warranties,
representations, mutual covenants, and agreements set forth herein and for the
purpose of setting forth certain terms and conditions of the Contribution and
the mode of carrying the same into effect and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
Parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
For purposes of this Contribution Agreement, unless the context
requires a different meaning, the following terms shall have the following
meanings.
1.1 "CMG" means CMG Funding Corp., a Delaware corporation.
1.2 "Code" means the Internal Revenue Code of 1986, as amended.
1.3 "Contributed Shares" means the shares of capital stock of CMG
contributed by the Contributors as specifically set forth on Schedule A hereto
in exchange for the RealTrust Shares.
1.4 "Contribution" means the contribution by the Contributors of
the Contributed Shares in exchange for RealTrust Shares in a contribution under
Section 351 of the Code.
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1.5 "Contribution Agreement" means this Agreement and the
Schedules and Exhibits hereto, as the same may be amended, supplemented or
modified from time to time.
1.6 "Contributors" means each of the shareholders of CMG
contributing the Contributed Shares as identified on Schedule A hereto.
1.7 "Effective Date" means the day and time on which CMG and
RealTrust take all steps necessary to reflect the change in stock ownership on
both their internal records, which shall be April 23, 1998.
1.8 "Party" means RealTrust and/or the Contributors.
1.9 "Person" means any individual, limited partnership,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or other agency or political
subdivision thereof.
1.10 "RealTrust" means RealTrust Asset Corporation, a Maryland
corporation.
1.11 "State" means each of the states of the United States, the
District of Columbia and the Commonwealth of Puerto Rico.
1.12 "State Commission" means any agency of any State having
jurisdiction to enforce such State's securities laws.
For the purposes of interpreting this Contribution Agreement: (a) a
term has the meaning assigned to it; (b) an accounting term not otherwise
defined has the meaning assigned to it in accordance with generally accepted
accounting principles in effect on the date hereof, and any other reference in
this Contribution Agreement to "generally accepted accounting principles" refers
to generally accepted accounting principles on the date hereof; (c) "or" is not
exclusive; (d) words in the singular include the plural, and words in the plural
include the singular; (e) "herein", "hereof" and other words of similar import
refer to this Contribution Agreement as a whole and not to any particular
Article, Section or other subdivision; (f) words in the masculine gender include
the feminine gender and words in the feminine gender include the masculine
gender; and (g) the Article and Section headings used or contained in this
Agreement are for convenience of reference only and shall not affect the
construction of this Contribution Agreement.
ARTICLE 2
PLAN OF CONTRIBUTION
2.1 Contribution. Subject to the terms and conditions of this
Contribution Agreement, (a) on the Effective Date, the Contributors shall
transfer the Contributed Shares to RealTrust and
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(b) RealTrust shall issue, in exchange for the Contributed Shares, the RealTrust
Shares set forth on Schedule A hereto.
2.2 Effect of Contribution. Subject to the terms and conditions of this
Contribution Agreement, from and after the Effective Date, the following effects
of the Contribution shall occur:
2.2.1 Certificate of Incorporation of CMG. The Certificate of
Incorporation of CMG as in effect immediately prior to the Effective Date and
Bylaws in effect immediately prior to the Effective Date shall remain in full
force and effect and shall not be affected.
2.2.2 Capitalization. After the Effective Date, the
capitalization of CMG shall remain as reflected on the financial statements of
CMG immediately prior to the Effective Date.
2.2.3 Registered and Principal Business Office. As of the
Effective Date, the registered business office and the principal place of
business of CMG shall continue to be at 2855 East Cottonwood Parkway, Suite 500,
Salt Lake City, Utah 84121.
2.3 Delivery of the RealTrust Shares. On the Effective Date, RealTrust
shall revise its stock ledger to reflect the RealTrust Shares issued to
Contributors and shall issue to the Contributors stock certificates representing
the RealTrust Shares.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE CONTRIBUTORS
The Contributors (except ContiFinancial Corporation, ContiTrade
Services L.L.C. and David and Sara Ferradino Investments which make no
representations or warranties under Sections 3.1, 3.2 and 3.4.2) severally, but
not jointly, hereby represent and warrant to RealTrust as of the Effective Date
of the Contribution, as follows:
3.1 Organization, Standing and Authority of CMG. CMG is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware. CMG is duly qualified or licensed to do business and in good
standing in the States of the United States of America and in each foreign
jurisdiction where its ownership or leasing of property or the
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<PAGE> 4
conduct of its business as now conducted requires it to be so qualified or
licensed and in which the failure to be duly qualified or licensed and in good
standing could have a material effect on the financial condition of CMG taken as
a whole. CMG has the power and authority to carry on its business as now
conducted and to own, lease and operate its assets, properties, and business.
CMG has in effect all federal, state, local and foreign governmental
authorizations, permits and licenses necessary for it to own or lease its
properties and assets and to carry on its business as is now being conducted
except where the failure to have such authorizations, permits and licenses would
not have a material adverse effect on the financial condition of CMG taken as a
whole.
3.2 Valid Issuance. All of the Contributed Shares are duly authorized,
validly issued, and fully paid.
3.3 Ownership of Contributed Shares. With respect to Schedule A
attached hereto, the number of Contributed Shares to be contributed by such
Contributor is accurately set forth. Except as set forth on the attached
Disclosure Schedule, there are no (nor will there be at the Effective Date of
the Contribution any) contracts, commitments, understandings, or arrangements by
which such Contributor is or may be bound to transfer or issue to any third
party any of the related Contributed Shares, and there are no (nor will there be
at the Effective Date of the Contribution any) contracts, agreements,
understandings or commitments relating to the right of such Contributor to vote
or to dispose of any of the related Contributed Shares. The related Contributed
Shares are owned by such Contributor free and clear of any and all liens, claims
and encumbrances.
3.4 Authority.
3.4.1 The execution and delivery of this Contribution
Agreement and the consummation of the transactions contemplated hereby have been
duly authorized by all necessary action in respect thereof on the part of such
Contributor. Upon the execution and delivery of this Contribution Agreement by
the Parties, this Contribution Agreement shall represent a legal, valid, and
binding obligation of such Contributor, enforceable against such Contributor in
accordance with its terms, except as such enforceability may be limited by (i)
applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws
affecting the enforcement of creditors' rights generally, (ii) the fact that the
availability of the equitable remedy of specific performance or injunctive
relief is subject to the discretion of the court before which any proceeding may
be pending and (iii) the fact that rights to indemnity hereunder may be limited
by federal or state securities laws.
3.4.2 Neither the execution and delivery of this Contribution
Agreement by such Contributor, nor the consummation by the transactions
contemplated herein, nor compliance by such Contributor with any of the
provisions hereof will (i) conflict with or result in a breach of any provision
of CMG's Certificate of Incorporation or Bylaws; (ii) hereto, constitute or
result in the breach of any material term, condition or provision of, or
constitute a default under, or give rise to any right of termination,
cancellation, or acceleration with respect to any note, bond,
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<PAGE> 5
mortgage, indenture, license, contract, agreement, lease or other instrument or
obligation to which such Contributor is a party or by which it or any of its
properties or assets may be subject; (iii) result in the creation of any lien,
charge, or encumbrance upon any of the related Contributed Shares, or (iv) to
the knowledge of such Contributor, violate any order, writ, injunction, decree,
statute, rule, or regulation applicable to such Contributor or the related
Contributed Shares.
3.4.3 No notice to, filing with, authorization of, or
exemption by, or consent or approval of any public body or authority is
necessary for the consummation by such Contributor of the Contribution, or any
other transaction contemplated by this Contribution Agreement with respect to
such Contributor.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF REALTRUST
RealTrust hereby represents and warrants to the Contributors as of the
Effective Date of the Contribution, as follows:
4.1 Organization and Standing. RealTrust is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Maryland.
4.2 Authority.
4.2.1 The execution and delivery of this Contribution
Agreement and the consummation of the transactions contemplated hereby have been
duly authorized by all necessary action in respect thereof on the part of
RealTrust, and RealTrust has taken all necessary action to approve the execution
and delivery of this Contribution Agreement and the related transaction. This
Contribution Agreement represents a legal, valid, and binding obligation of
RealTrust, enforceable against RealTrust in accordance with its terms, except as
(i) such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or similar laws affecting the enforcement of
creditors' rights generally, (ii) the fact that the availability of the
equitable remedy of specific performance or injunctive relief is subject to the
discretion of the court before which any proceeding may be pending and (iii) the
fact that rights to indemnity hereunder may be limited by federal or state
securities laws.
4.2.2 Neither the execution and delivery of this Contribution
Agreement by RealTrust, nor the consummation by RealTrust of the transactions
contemplated herein as appropriate, nor compliance by RealTrust with any of the
provisions hereof, will (i) conflict with or result in a breach of any provision
of RealTrust's Articles of Incorporation and Bylaws; (ii) constitute or result
in the breach of any term, condition, or provision of, or constitute a default
under, or give rise to any right of termination, cancellation, or acceleration
with respect to any note, bond, mortgage, indenture, license, contract,
agreement, lease, or other instrument or
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<PAGE> 6
obligation to which RealTrust is a party or by which it or any of its properties
or assets may be subject that would, in any such event, have a material adverse
effect on RealTrust or be reasonably expected to prevent or materially delay the
consummation of any of the transactions contemplated hereby; (iii) result in the
creation of any lien, charge, encumbrance upon any property or assets of
RealTrust which would have a material adverse effect on the consolidated
financial condition of RealTrust; or (iv) subject to receipt of the requisite
approvals of this Contribution Agreement, to the knowledge of RealTrust's
management, violate any order, writ, injunction, decree, statute, rule, or
regulation applicable to RealTrust or any of its subsidiaries or any of their
properties of assets.
4.2.3 No notice to, filing with, authorization of, or
exemption by, or consent or approval of any public body or authority is
necessary for the consummation by RealTrust of the transactions contemplated in
this Contribution Agreement.
4.3 RealTrust Shares. RealTrust Shares to be issued upon the
consummation of the Contribution have been duly authorized and, upon issuance in
accordance with the provisions hereof, will be validly issued, fully paid and
nonassessable. Upon issuance of RealTrust Shares pursuant to this Contribution
Agreement, the Contributors will be the owners of the RealTrust Shares, free and
clear of any encumbrances, liens or adverse claims. On the Effective Date, the
only shares of capital stock of RealTrust issued and outstanding shall be the
RealTrust Shares issued to the Contributors.
4.4 Compliance with Laws. Each of RealTrust and its subsidiaries:
4.4.1 Is in compliance with all laws, regulations, rules,
reporting and licensing requirements, and orders applicable to its business or
employees conducting its business, the breach of violation of which could
reasonably be expected to impede the transactions contemplated by this
Contribution Agreement or have a material adverse effect on the consolidated
financial condition of RealTrust; and
4.4.2 Has received no written notification or communication
from any agency or department of federal, state, or local government, or any
self-regulatory organization for the real estate industry (i) asserting that
RealTrust or any of its subsidiaries is not in compliance with or has violated
any of the statutes, regulations, or ordinances that such governmental authority
or self-regulatory organization enforces, that, as a result of such
noncompliance, would materially adversely affect the consolidated financial
condition of RealTrust or otherwise impede the consummation of the transactions
contemplated by this Contribution Agreement, or (ii) threatening to revoke any
license, franchise, permit, or governmental authorization that is material to
the consummation of the transactions contemplated by this Contribution
Agreement.
4.5 Statements True and Correct. None of the information prepared by or
on behalf of RealTrust regarding RealTrust or any RealTrust subsidiary for
inclusion in any documents will, at the respective time such documents become
effective or are distributed, be false or misleading
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with respect to any material fact, or omit to state any material fact necessary
to make the statements therein in light of the circumstances under which they
were made, not misleading.
ARTICLE 5
CONDITIONS PRECEDENT TO CONTRIBUTION
5.1 Conditions to Obligations of RealTrust. The obligations of
RealTrust hereunder are subject to the satisfaction or waiver at or prior to the
Effective Date of the following conditions:
5.1.1 Performance. The Contributors shall have performed in
all material respects each of the acts and undertakings of the Contributors to
be performed at or before the Effective Date pursuant to this Contribution
Agreement;
5.1.2 Representations and Warranties True. Each of the
representations and warranties of the Contributors contained herein and in any
certificate or other writing delivered by the Contributors pursuant hereto or in
connection herewith shall be true in all material respects on and as of the
Effective Date with the same effect as though made on and as of such date;
5.2 Conditions to Obligations of the Contributors. The obligations of
the Contributors hereunder are subject to the satisfaction at or prior to the
Effective Date of the following conditions:
5.2.1 Performance. RealTrust shall have performed in all
material respects each of the acts and undertakings of RealTrust to be performed
at or before the Effective Date pursuant hereto;
5.2.2 Representations and Warranties True. Each of the
representations and warranties of RealTrust contained in this Contribution
Agreement and in any certificate or other writing delivered pursuant hereto or
in connection with the transactions contemplated hereby shall be true in all
material respects on and as of the Effective Date with the same effect as though
made on and as of such date;
5.2.3 Deliveries. RealTrust shall have complied with its
obligation to deliver the RealTrust Shares as provided in Section 2.4 hereof.
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ARTICLE 6
TERMINATION
6.1 Termination Prior to Effective Date. Notwithstanding any other
provision of this Contribution Agreement, this Contribution Agreement may be
terminated and each of the transactions contemplated by this Contribution
Agreement may be abandoned at any time prior to the Effective Date of the
Contribution:
6.1.1 By mutual agreement of the Parties;
6.1.2 By either Party in the event of a material breach by the
other Party of any representation, warranty, covenant, or agreement contained
herein which cannot be or has not been cured within five (5) business days after
the giving of written notice to the breaching Party of such breach; and
6.1.3 By either Party in the event that any of the conditions
precedent to the obligations of such Party to consummate the Contribution shall
not have been satisfied or fulfilled or waived by said Party on or before the
Effective Date, provided that neither Party shall be entitled to terminate this
Contribution Agreement pursuant to this subparagraph 6.1.3 if the condition
precedent or conditions precedent which provided the basis for termination can
reasonably be and are satisfied within a reasonable period of time, in which
case the Effective Date shall be appropriately postponed.
6.2 Effect of Termination Prior to Effective Date. In the event of the
termination and abandonment of this Contribution Agreement pursuant to Section
6.1 of this Contribution Agreement, written notice thereof shall forthwith be
given to the other Parties specifying the provision hereof pursuant to which
such termination is made, and this Contribution Agreement shall become void and
have no effect, and there shall be no liability hereunder on the part of the
Parties or to any of their unit holders, partners, employees, agents,
consultants or representatives provided that Section 7.1 hereof shall survive
any termination of this Agreement. Nothing in this Section 6.2 shall relieve any
of the Parties of liability for breach of this Agreement.
6.3 Termination After Effective Date. In the event that RealTrust does
not consummate a public or private offering of equity securities on or before
January 1, 1999, then any Party may request that the Contribution be terminated.
Such termination shall be accomplished in a manner that the Parties will, after
the termination, be returned to the ownership of the same number and class of
securities of CMG as each Party held immediately prior to the Contribution. The
Parties agree that they shall use their best efforts to ensure that such
termination is effectuated in a tax-free manner, whether through
re-contribution, merger, reorganization, dissolution or otherwise. Each Party
hereby agrees to affirmatively vote its shares of RealTrust and CMG in favor of
such re-contribution, merger, reorganization, dissolution or other termination
as may be requested by RealTrust.
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6.4 Survival of Representations, Warranties and Covenants. The
representations and warranties of the Parties set forth in Articles 3 and 4
hereof shall survive the Effective Date of the Contribution until the earlier of
(i) one (1) year from the Effective Date or (ii) the date on which audited
financial statements of CMG are included in audited financial statements of
RealTrust which are filed with the Securities and Exchange Commission pursuant
to the Securities and Exchange Act of 1934.
6.5 Limitation of Liability. Notwithstanding the provision of Section
6.4 or any other provision herein, to the extent that any Contributor is subject
to any liability by virtue of its obligations under this Agreement, each
Contributor's maximum liability for any claim related to this Contribution
Agreement made by RealTrust shall be limited to the fair market value of the
RealTrust Shares delivered to such Contributor on the Effective Date.
ARTICLE 7
MISCELLANEOUS
7.1 Expenses. Each of the Parties shall bear and pay all costs and
expenses incurred by it or on its behalf in connection with the transactions
contemplated hereunder, including fees and expenses of its own financial or
other consultants, printing costs, investment bankers, accountants, and counsel.
7.2 Entire Contribution Agreement. Except as otherwise expressly
provided herein, this Contribution Agreement contains the entire agreement
between the Parties with respect to the transactions contemplated hereunder, and
such Agreement supersedes any and all prior agreements, letters of intent,
arrangements or understandings with respect thereto, written or oral. The terms
and conditions of this Contribution Agreement shall inure to the benefit of and
be binding upon the Parties and their respective successors. Nothing in this
Contribution Agreement, expressed or implied, is intended to confer upon any
party, other than the Parties or their respective successors, any rights,
remedies, obligations, or liabilities under or by reason of this Contribution
Agreement.
7.3 Amendments. To the extent permitted by law, this Contribution
Agreement may be amended by a subsequent writing signed by authorized officers
of RealTrust and CMG; provided, however, that if any Party shall request, all
other Parties shall agree to amend this Contribution Agreement to meet
applicable legal and regulatory requirements and obstacles, to effect tax
savings, to minimize or insulate against liabilities or to serve some other
meritorious purpose so long as the consideration to be received by the
Contributors shall not be reduced.
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7.4 Waivers. Prior to or at the Effective Date of the Contribution, any
Party shall have the right to waive in writing any breach of or default in the
performance of any term of this Contribution Agreement by any other Party, to
waive in writing or extend the time for the compliance or fulfillment by any
other Party of any and all of its obligations under this Contribution Agreement,
and to waive in writing any or all of the conditions precedent to the
obligations of this Party pursuant to this Contribution Agreement, except any
condition which, if not satisfied, would result in the violation of any law or
applicable governmental regulation.
7.5 No Assignment. No Party may assign any of its rights or obligations
under this Contribution Agreement to any other person; provided that
ContiFinancial Corporation and ContiTrade Services L.L.C. may assign the rights
and obligations under this Agreement to any of its affiliates.
7.6 Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered by hand, by
facsimile transmission, or by registered or certified mail, postage pre-paid to
the persons at the addresses set forth below (or at such other address as may be
provided hereunder), and shall be deemed to have been delivered as of the date
so delivered.
RealTrust: RealTrust Asset Corporation
2855 East Cottonwood Parkway, Suite 500
Salt Lake City, Utah 84121
The Contributors: The addresses set forth on the stockholder
records of RealTrust.
7.7 Governing Law. This Contribution Agreement shall be governed by and
construed in accordance with the laws of the State of Maryland except to the
extent that federal law shall be controlling.
7.8 Counterparts. This Contribution Agreement may be executed in one or
more counterparts, including electronically transmitted counterparts, each of
which shall constitute one and the same instrument.
7.9 Third Parties. Each Party hereto intends that this Contribution
Agreement shall not benefit or create any right or cause of action for the
benefit of any person other than the Parties hereto.
7.10 Attorneys Fees. If any action at law or in equity, including an
action for declaratory relief, is brought to enforce or interpret the provisions
of this Contribution Agreement, the prevailing Party shall be entitled to
recover reasonable attorneys fees from the other Party, which fees may be set by
the Court in the trial of such action or may be enforced in a separate action
brought for the purpose, and which fees shall be in addition to any other relief
which may be awarded.
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7.11 Knowledge of the Parties. Where any representative or warranty
contained in this Agreement is expressly qualified by reference to the knowledge
or belief of any Party, such Party hereby confirms that no information has come
to the attention to such Party (or the officers of such Party if the Party is a
corporation) which could give such Party actual knowledge of the existence of
the documents or facts so qualified. However, except as set forth herein, no
Party has undertaken any investigation to determine the existence of such
documents or facts.
7.12 Exhibits. Each and all of the Schedules and Exhibits referred to
herein and attached hereto are hereby incorporated into this Agreement for all
purposes as fully as if set forth herein.
7.13 Severability. If any portion of this Contribution Agreement is
declared by a court of competent jurisdiction to be invalid or unenforceable,
such declaration shall not affect the validity of the remaining provisions.
7.14 Time of Essence. Time is of the essence in the performance of the
obligations stated herein.
IN WITNESS WHEREOF, each of the Parties has caused this Contribution
Agreement to be executed, attested and delivered on its behalf by its duly
appointed and authorized officers as of the day and year first above written.
"RealTrust"
REALTRUST ASSET CORPORATION
a Maryland corporation
By:_____________________________________
John D. Fry, Chief Executive Officer
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"Contributors"
________________________________ ________________________________
John D. Fry Bill Reed
________________________________ ________________________________
Terry L. Mott Brenda Colson
________________________________ ________________________________
Patrick Croghan Kent Bills
________________________________ ContiTrade Services L.L.C.
Shauna Reimann
By:_____________________________
Authorized Signatory
________________________________ By:_____________________________
David and Sara Ferradino Investments Authorized Signatory
ContiFinancial Corporation
By:_____________________________
Authorized Signatory
By:_____________________________
Authorized Signatory
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SCHEDULE A
Contributed Shares
<TABLE>
<CAPTION>
Number of Class of Number of
Class of Contributed RealTrust RealTrust
Contributor Contributed Shares Shares Shares Shares
- ----------- ------------------ ------ ------ ------
<S> <C> <C> <C> <C>
John D. Fry Class A Preferred 550,774 Class A Preferred 550,774
Common 140,326 Common 140,326
Terry L. Mott Class A Preferred 50,000 Class A Preferred 50,000
Common 165,365 Common 165,365
Patrick Croghan Common 167,865 Common 167,865
Shauna Reimann Common 167,865 Common 167,865
Bill Reed Common 111,910 Common 111,910
Brenda Colson Common 33,535 Common 33,535
Kent Bills Common 33,535 Common 33,535
Ferradino Investments Common 99,655 Common 99,655
ContiTrade Services LLC Common 506,933 Common 506,933
ContiFinancial Corporation Class A Preferred 252,117 Class A Preferred 252,117
ContiFinancial Corporation Class A Preferred 410,581 Class B Preferred 410,581
</TABLE>
<PAGE> 1
EXHIBIT 4.13
REALTRUST ASSET CORPORATION
BONUS INCENTIVE COMPENSATION PLAN
SECTION 1. PURPOSE OF PLAN. The purpose of the RealTrust Asset
Corporation (the "Company") Bonus Incentive Compensation Plan (the "Plan") is to
provide key employees of the Company with the opportunity to receive annual
bonus awards from a bonus pool that is based, subject to certain adjustments, on
the Company's Return on Equity, as defined and set forth below.
SECTION 2. DEFINITIONS. As used in the Plan, the following terms shall
have the meanings set forth below:
(a) "ADJUSTED NET PROFIT" or "ANP" shall mean the net income of the
Company before income taxes, as determined in accordance with generally accepted
accounting principles ("GAAP") and in a manner consistent with the Company's
audited financial statements.
(b) "BOARD" shall mean the Board of Directors of the Company as
constituted from time to time.
(c) "CAUSE" shall mean any one or more of the following events: (i)
Employee's breach of any material term or condition of any employment agreement;
(ii) Employee's indictment or conviction for, or plea of nolo contendere to, a
felony or for or of a crime involving moral turpitude; (iii) Employee's
commission of a material act of personal dishonesty or breach of fiduciary duty
in connection with Employee's employment by the Company or the misappropriation
by Employee of any funds, properties or opportunities of the Company; (iv)
Employee's commission of an act which the Board of Directors of the Company
shall have found to have involved gross negligence or gross misconduct on the
part of Employee in the conduct of his duties hereunder; (v) habitual
absenteeism (except as a result of a disability); (vi) chronic alcoholism or any
other form of addiction on the part of Employee; and (vii) Employee's
non-compliance with any lawful instruction of the Board of Directors; provided,
however, with respect to any employee subject to a written employment agreement,
Cause shall have the meaning set forth in such agreement.
(d) "COMMITTEE" or "PLAN COMMITTEE" shall mean (i) the Compensation
Committee of the Board, or (ii) if at any time such a committee has not been
designated by the Board, or an effective designation is no longer in effect or
any other authorized Committee thereof.
(e) "COMPANY" shall mean RealTrust Asset Corporation, its subsidiaries
or affiliates, a corporation organized under the laws of the State of Maryland,
and any successor thereto.
(f) "DISABILITY" shall have the same meaning as set forth in the
Company's long-term disability plan as in effect from time to time, or if there
is no such plan in effect, the employee's becoming physically or mentally
incapacitated and consequent inability for a period of six (6)
1
<PAGE> 2
months in any twelve (12) consecutive month period to perform his duties to the
Company; provided, however, with respect to any employee subject to a written
employment agreement, Disability shall have the meaning set forth in such
agreement.
(g) "PARTICIPANT" shall mean, for any given fiscal year with respect to
which the Plan is in effect, each eligible key employee of the Company who is
designated as a Participant in the Plan for such year by the Committee pursuant
to Section 4 below, following the end of such year.
(h) "PLAN" shall mean the RealTrust Asset Corporation Bonus Incentive
Compensation Plan as set forth in this document, and as amended from time to
time.
SECTION 3. ADMINISTRATION
(a) GENERAL. The Plan shall be administered by the Committee. Subject to
the terms of the Plan and applicable law, and in addition to any other express
powers and authorizations conferred on the Committee by the Plan, the Committee
shall have the full power and authority, after taking into account, in its sole
and absolute discretion, the recommendations of the Company's President/Chief
Executive Officer:
(i) to determine and certify the size of the bonus pool earned
for each fiscal year, based on the Company's Return on
Equity;
(ii) to establish and administer any other award terms and
conditions that apply under the Plan for purposes of
determining the bonus pool for each fiscal year;
(iii) to designate the actual Participants in the Plan for each
fiscal year and determine how the bonus pool for each
fiscal year is to be allocated among such persons;
(iv) to decide any issues relating to the impact on the bonus
awards for each fiscal year of an employee's termination
of employment due to Death, Disability, Retirement,
voluntary termination by the Company other than for Cause,
or termination by the Company for Cause that are not
resolved under the express terms of the Plan;
(v) to adopt, revise, suspend, waive or repeal, when and as
appropriate, in its sole and absolute discretion, such
administrative rules, guidelines and procedures for the
Plan as it deems necessary or advisable to implement the
terms and conditions of the Plan;
(vi) to interpret and administer the terms and provisions of
the Plan and any award issued under the Plan (including
reconciling any inconsistencies, correcting any defaults
and addressing any omissions in the Plan or any related
instrument or agreement); and
2
<PAGE> 3
(vi) to otherwise supervise the administration of the Plan.
(b) BINDING NATURE OF COMMITTEE DECISIONS. Unless otherwise expressly
provided in the Plan, all designations, determinations, interpretations and
other decisions made under or with respect to the Plan or any award under the
Plan shall be within the sole and absolute discretion of the Committee, and
shall be final, conclusive and binding on all persons, including the Company,
any employee, and any award beneficiary or other person having, or claiming, any
rights under the Plan.
(c) OTHER. No member of the Committee shall be liable for any action or
determination (including, but not limited to, any decision not to act) made in
good faith with respect to the Plan or any award under the Plan.
SECTION 4. PLAN PARTICIPATION
(a) ELIGIBLE EMPLOYEES. All employees of the Company shall be eligible
to be selected to participate in the Plan for each fiscal year.
(b) PARTICIPANT DESIGNATIONS. Following the completion of each fiscal
year, the Plan Committee, in its sole and absolute discretion, shall designate
those key employees of the Company who shall be Participants in the Plan for
such fiscal year, based on such criteria as the Committee deems appropriate, in
its sole and absolute discretion, after taking into account the recommendations
of the Company's President/Chief Executive Officer.
SECTION 5. ANNUAL BONUS POOL FOR EACH FISCAL YEAR
(a) CALCULATION OF ANNUAL BONUS POOL. The annual bonus pool under the
Plan for each fiscal year shall be based on a stated percentage of Return on
Equity ("ROE") to the following schedule:
<TABLE>
<CAPTION>
Bonus as % of Average Net
ROE(1) in Excess of Base Rate(2) Worth(3) Outstanding
-------------------------------- --------------------
<S> <C>
zero or less 0%
greater than 0% but less than 6% 10% * (actual ROE - Base Rate)
greater than 6% (10% * 6%) + 15% * (Actual ROE -
(Base Rate + 6%))
</TABLE>
- ----------
(1) "ROE" is determined for the fiscal year by averaging the monthly ratios
calculated each month by dividing the Company's monthly Net Income (adjusted
to an annual rate) by its Average Net Worth for such month. For such
calculations, the "Net Income" of the Company means the net income or net
loss of the Company determined according to GAAP, but after deducting any
dividends paid or payable on preferred stock issued after the Qualified IPO
and before giving effect to the bonus incentive compensation or any
valuation allowance adjustment to stockholders' equity. The definition "ROE"
is used only for purposes of calculating the bonus incentive compensation
payable pursuant to the Bonus Incentive Compensation Plan, and is not
related to the
3
<PAGE> 4
actual distributions received by stockholders. The bonus payments will be
made before any income distributions are made to stockholders.
(2) "Base Rate" is the average for each month of the Ten-Year U.S.
Treasury Rate, plus 4%.
(3) "Average Net Worth" for any month means the arithmetic average of the sum of
(i) the net proceeds from all offerings of equity securities by the Company
since formation (but excluding any offerings of preferred stock), after
deducting any underwriting discounts and commissions and other expenses and
costs relating to the offerings, plus (ii) the Company's retained earnings
(without taking into account any losses incurred in prior fiscal years,
after deducting any amounts reflecting taxable income to be distributed as
dividends and without giving effect to any valuation allowance adjustment to
stockholders' equity) computed by taking the daily average of such values
during such period.
(b) IMPACT OF EXTRAORDINARY ITEMS OR CHANGES IN ACCOUNTING. The
Company's ROE for each fiscal year shall be determined without regard to (i)
extraordinary items as determined by the Company's independent public
accountants in accordance with GAAP or (ii) changes in accounting, unless, in
each case, the Plan Committee decides to take such items into account in
reducing, increasing or otherwise adjusting award payouts under the Plan.
SECTION 6. BONUS POOL ALLOCATIONS AND PAYOUTS
(a) BONUS POOL ALLOCATIONS. Except allocations of the bonus pool made
pursuant to written employment agreements approved by the Board of Directors,
all determinations regarding the allocation of the Company's bonus pool for each
fiscal year shall be made by the Plan Committee, in its sole and absolute
discretion, after taking into account the recommendations of the President/Chief
Executive Officer of the Company.
(b) BONUS DETERMINATIONS AND PAYOUTS.
(i) TIMING. Within 45 days after certification by the independent
outside accountants of the audited results for each fiscal year, the Plan
Committee shall determine and certify the Company's ROE results and shall
determine the size of the bonus pool payable under the Plan for each fiscal
year, and how such pool shall be allocated.
(ii) RESTRICTIONS. Except to the extent otherwise provided in
Section 7, no bonus shall be payable to any employee if such employee's
employment with the Company is terminated for any reason prior to the date on
which the actual bonus awards for each fiscal year are made under the Plan
following the completion of each fiscal year.
(iii) FORM OF PAYOUT. Unless otherwise determined by the Plan
Committee, any bonus awards paid out under the Plan for each fiscal year shall
be paid in the form of one-half (1/2) in the form of cash and one-half (1/2) in
the form of shares of Common Stock of the Company, with the number of shares to
be calculated based on the average price per share during the preceding year.
SECTION 7. GENERAL PROVISIONS.
(a) PLAN AMENDMENT OR TERMINATION. The Plan Committee may at any time
amend or terminate the Plan, provided that, without the written consent of the
employees affected, no
4
<PAGE> 5
such amendment or termination shall adversely affect the provisions set forth
above regarding (i) the overall size of the annual bonus pool under the Plan for
each fiscal year, (ii) which employees are eligible to participate in the Plan
for each fiscal year, or (iii) any other rights created herein regarding the
size, form or timing of bonus payouts for each fiscal year.
(b) APPLICABLE LAW. All issues arising under the Plan shall be governed
by, and construed in accordance with, the laws of the State of Utah, applied
without regard to conflict of law principles.
(c) TAX WITHHOLDING. The Company (and its subsidiaries) shall have the
right to make such provisions and take such action as it may deem necessary or
appropriate for the withholding of any and all Federal, state and local taxes
that the Company (or any of its subsidiaries) may be required to withhold.
(d) NO EMPLOYMENT RIGHTS CONFERRED. The existence of the Plan shall not
confer on any employee the right to remain employed by the Company, and the
Company and its subsidiaries specifically reserve the right to terminate any
employee's employment at any time with or without cause or notice.
(e) IMPACT OF PLAN AWARDS ON OTHER PLANS. Plan awards shall not be
treated as compensation for purposes of any other compensation or benefit plan,
program or arrangement of the Company, unless and except to the extent that the
Board or the Plan Committee so determines in writing. The adoption of the Plan
shall not be construed as limiting the power of the Board or the Plan Committee
to adopt such other incentive arrangements as it may otherwise deem appropriate.
(f) BENEFICIARY PROVISIONS. If, pursuant to Section 6(b), any bonus
award is made for each fiscal year with respect to an eligible employee who died
prior to the bonus payout date for each fiscal year, any such bonus award shall
be paid to the employee's estate.
(g) NON-TRANSFERABILITY OF RIGHTS. Except as and to the extent required
by law, an employee's rights (if any) under the Plan may not be assigned or
transferred in whole or in part either directly or by operation of law or
otherwise (except, pursuant to Section 7(f), in the event of the employee's
death), including, but not limited to, by way of execution, levy, garnishment,
attachment, pledge, bankruptcy or in any such other manner, and no such right
(if any) of an eligible employee shall be subject to any obligation or liability
of such employee other than any obligation or liability owed by such employee to
the Company (or any of its subsidiaries).
SECTION 8. EFFECTIVE DATE. The Plan was adopted by the Board on April
13, 1998, effective for the fiscal year ending December 31, 1998.
5
<PAGE> 1
EXHIBIT 5.1
JEFFERS, WILSON, SHAFF & FALK, LLP
ATTORNEYS AT LAW
18881 VON KARMAN AVENUE
SUITE 1400
IRVINE, CALIFORNIA 92612
TELEPHONE: (949) 660-7700
FACSIMILE: (949) 660-7799
May ___, 1998
RealTrust Asset Corporation
2855 East Cottonwood Parkway, Suite 500
Salt Lake City, Utah 84121
Re: Registration Statement on Form S-11
Gentlemen:
We have acted as counsel to RealTrust Asset Corporation (the "Company"),
a Maryland corporation, in connection with the Registration Statement on Form
S-11 (No. 333-48653), filed with the Securities and Exchange Commission on March
25, 1998, as amended (the "Registration Statement"), covering 5,750,000 of the
Company's Units, each consisting of one share of Common Stock, par value $.001,
and one Stock Purchase Warrant (the "Units").
In acting as counsel for the Company and arriving at the opinions as
expressed below, we have examined and relied upon originals or copies, certified
or otherwise identified to our satisfaction, of such records of the Company,
agreements and other instruments, certificates of officers and representatives
of the Company, certificates of public officials and other documents as we have
deemed necessary or appropriate as a basis for the opinions expressed herein.
In connection with our examination we have assumed the genuineness of
all signatures, the authenticity of all documents tendered to us as originals,
the legal capacity of natural persons and the conformity to original documents
of all documents submitted to us as certified or photostated copies.
Based on the foregoing, and subject to the qualifications and
limitations set forth herein, it is our opinion that upon payment therefor and
delivery of stock certificates representing such shares, the shares of Common
Stock included in the Units have been duly authorized and when issued, delivered
and paid for, will be validly issued, fully paid and non-assessable.
We express no opinion with respect to laws other than those of the State
of California, the Maryland General Corporation Code and the federal laws of the
United States of America, and we assume no responsibility as to the
applicability thereof, or the effect thereon, of the laws of any other
jurisdiction.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to its use as part of the Registration Statement.
Very truly yours,
JEFFERS, WILSON, SHAFF & FALK, LLP
<PAGE> 1
EXHIBIT 8.1
JEFFERS, WILSON, SHAFF & FALK, LLP
ATTORNEYS AT LAW
18881 VON KARMAN AVENUE
SUITE 1400
IRVINE, CALIFORNIA 92612
TELEPHONE: (949) 660-7700
FACSIMILE: (949) 660-7799
May 12, 1998
RealTrust Asset Corporation.
2855 East Cottonwood Parkway, Suite 500
Salt Lake City, Utah 84121
RE: INITIAL PUBLIC OFFERING
Gentlemen:
This is an opinion (the "Opinion") which you have requested as to (a)
the discussion entitled "Federal Income Tax Considerations" and (b) the
discussion entitled "ERISA Investors," both as set forth in the Prospectus (the
"Prospectus"), contained in the Registration Statement on Form S-11 of RealTrust
Asset Corporation (the "Company"), Registration No. 333-48653, as amended, filed
by the Company, in connection with the issuance (the "Offering") of 5,750,000
shares of Units, each comprised of one share of Common Stock the Company (the
"Shares") and one warrant to purchase one Share of Common Stock.
The Company is a Maryland corporation that is intended to qualify as a
real estate investment trust ("REIT") under the Code. Capitalized terms used in
this Opinion and not otherwise defined are as defined in the Prospectus. Our
Opinion is based on existing law, including the Code, existing Treasury
Regulations, Revenue Rulings, Revenue Procedures, U.S. Department of Labor
regulations and administrative interpretations, proposed regulations and case
law, all of which are subject to change either prospectively or retroactively.
No assurance can be given that such existing law may not change in a manner that
would modify the conclusions expressed in this Opinion. Moreover, relevant laws
could change in a manner that could adversely affect the Company or its
stockholders. We have no obligation to inform you of any such change in the law.
We have not been requested to opine, and we have not opined, as to any issues
other than those expressly set forth herein. This Opinion extends only to
questions under the Code and ERISA. We express no opinion with respect to any
other law or the laws of any other jurisdiction.
Our Opinion is based upon certain statements, factual representations
and warranties made by the Company as to factual matters regarding the Company's
assets, business and Common Stock as set forth in the Prospectus and in the
Company's letter, dated May 12, 1998, to us, and we have assumed that such
statements, representations and warranties are true and accurate. As
<PAGE> 2
RealTrust Asset Corporation
May 12, 1998
Page 2
to such factual matters material to our Opinion, we have relied solely upon such
statements, factual representations and warranties of the Company. We have
assumed the authenticity of all documents submitted to us, the genuineness of
all signatures, the legal capacity of all natural persons, the conformity to the
originals of all documents submitted to us as copies and the due execution and
delivery of all documents where due execution and delivery are prerequisites to
the effectiveness thereof. No facts have come to our attention, however, that
would cause us to question the accuracy in a material way of any documents,
letters, statements, representations or warranties of the Company.
We are admitted to practice law in the State of California and our
Opinion is limited to federal law. Our Opinion is solely for the benefit of the
Company in connection with the Offering, and is not to be circulated or quoted
or otherwise relied upon by the Company for any other purpose without our prior
written consent.
1. Federal Income Tax Considerations. We have acted as tax counsel to
the Company in connection with the Company's Offering of the Shares. In that
connection, we have reviewed the section of the Prospectus entitled "Federal
Income Tax Considerations" and in our opinion such section identifies and fairly
summarizes the federal income tax considerations that are likely to be material
to a holder of the Shares and to the extent that such summaries involve matters
of law, we are of the opinion that such statements of law are correct under the
Code. We expressly confirm that all of the opinions attributed to Tax Counsel in
the section of the Prospectus entitled "Federal Income Tax Considerations"
accurately reflect our opinion on the outcome of each such issue if challenged
by the Service.
The Company's qualification as a REIT under the Code will depend upon
the Company's ability to meet, through actual operating results, distribution
levels, diversity of stock ownership and the various income and asset
qualification tests imposed under the Code. Such operating results may not be
reviewed by us as Counsel. Moreover, certain aspects of the Company's operations
have not been considered by the courts or the Service. There can be no assurance
that the courts or the Service will agree with this Opinion. In addition,
qualification as a REIT depends on future transactions and events that cannot be
known at this time.
2. ERISA Investors. The Company has requested our opinion as to whether
the Shares will constitute "publicly-offered securities" under regulations (the
"Regulations") issued by the U.S. Department of Labor so that the assets of the
Company will not be deemed to constitute "plan assets" for purposes of ERISA or
for purposes of Code Section 4975 following an investment in the Shares by an
ERISA Plan.
<PAGE> 3
RealTrust Asset Corporation
May 12, 1998
Page 3
The Regulations generally provide that, in the case of an ERISA Plan's
investment in an equity interest of an entity, the ERISA Plan's assets include
both the equity investment and an undivided interest in each of the underlying
assets of the entity unless the entity can satisfy at least one of a number of
exceptions set forth in the Regulations. One exception to such plan assets
treatment is for an equity interest that is a "publicly-offered security."
The Regulations provide that a security is a "publicly-offered security"
if it is (a) "freely transferable," (b) part of a class of securities that is
"widely held" (namely, owned by 100 or more investors independent of the issuer
and of one another ("Independent Investors")), and (c) either (1) part of a
class of securities that is registered under Section 12(b) or 12(g) of the
Securities Exchange Act of 1934, or (2) sold to the ERISA Plan as part of an
offering to the public pursuant to an effective registration statement under the
Securities Act of 1933, and the class of securities of which it is part is
registered under the Securities Exchange Act of 1934 within a specified period
of time (generally 120 days) after the end of the entity's fiscal year in which
the offering occurs.
The Company has represented that the Shares will be timely registered
with the Securities and Exchange Commission pursuant to Section 12(b) of the
Securities Exchange Act of 1934. Assuming that the Shares will be properly
registered under the Securities Exchange Act of 1934 within the time period
specified in the Regulations and that the initial closing of the sale of Shares
out of escrow pursuant to the terms of the Offering will not take place unless
and until the Company has properly determined (a) that the Shares would be
acquired by at least 150 purchasers who are Independent Investors and (b) that
the Shares will be widely held after the initial offering, the assets of the
Company will not be deemed to be plan assets of an ERISA Plan if the Shares are
freely transferable within the meaning of the Regulations.
The Regulations provide that a determination as to whether a security is
freely transferable is inherently factual in nature and must be made on the
basis of all relevant facts and circumstances. The Regulations provide that if a
security is part of an offering in which the minimum investment is $10,000 or
less (as is the case with the Shares since there is no minimum investment
required for the Shares), certain restrictions on transfer or assignment
enumerated in the Regulations (the "Enumerated Restrictions") ordinarily will
not, alone or in combination, affect a finding that such securities are freely
transferable.
The preamble to the Regulations (the "Preamble") (which is not primary
legal authority) goes one step further, providing that if the minimum investment
amount is not exceeded and if a security has no restrictions other than the
Enumerated Restrictions, the security in effect will be presumed to be freely
transferable. However, even if a security is not entitled to this presumption,
it may nevertheless be considered to be "freely transferable" if the facts and
circumstances so
<PAGE> 4
RealTrust Asset Corporation
May 12, 1998
Page 4
indicate. The Regulations and the Preamble provide little additional guidance as
to what restrictions would cause a security to fail to be freely transferable.
We have examined the Prospectus and copies that the Company has provided
to us of a specimen certificate of the Common Stock, the Company's Articles of
Incorporation and the Company's Bylaws, and have determined that the Shares
contain no restriction that is not permitted under the Enumerated Restrictions.
The Company has represented that the Shares are not subject to any restrictions
on transferability other than those described in the section of the Prospectus
entitled "Description of Capital Stock." Based on the foregoing, in our opinion,
the Shares are freely transferable within the meaning of the Regulations. The
Company has represented to us that the closing of the purchase of the Shares
will not take place unless the Shares would be held by 150 or more Independent
Investors immediately after such closing.
Consequently, assuming that (i) the Shares are properly registered for
securities purposes under the requirements discussed above, and (ii) at least
150 Independent Investors purchase Shares in the initial public offering, in our
opinion, the Shares will constitute "publicly-offered securities" so that the
assets invested in the Company by an ERISA Plan will not constitute plan assets.
We have not opined concerning whether the requirements of any of the alternative
exemptions to plan assets treatment would be satisfied by the Company.
3. Consent. We hereby consent to the filing of this opinion as an
exhibit to the Registration Statement and to the references to this firm under
the captions "Federal Income Tax Considerations," "ERISA Investors" and "Legal
Matters" in connection with this opinion.
Very truly yours,
JEFFERS, WILSON, SHAFF & FALK, LLP
MES: gml
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), dated as of the 13th day of
April, 1998, is entered into by and between John D. Fry ("Executive") and
RealTrust Asset Corporation, a Maryland corporation ("Company"), and is
effective as of and conditioned upon the completion of the Company's initial
public offering of up to 5,750,000 Units, each Unit consisting of one share of
Common Stock and One Stock Purchase Warrant ("IPO").
WHEREAS, the Company desires to establish its right to the continued
services of the Executive, in the capacity described below, on the terms and
conditions and subject to the rights of termination hereinafter set forth, and
the Executive is willing to accept such employment on such terms and conditions.
NOW, THEREFORE, in consideration of the mutual agreements hereinafter
set forth, the Executive and the Company have agreed and do hereby agree as
follows:
1. Employment by the Company. The Company does hereby employ, engage and hire
the Executive as Chairman of the Board and Chief Executive Officer of the
Company, and the Executive does hereby accept and agree to such hiring,
engagement and employment. The Executive's duties shall be such executive and
managerial duties as the Board of Directors of the Company or its subsidiaries
shall from time to time prescribe and as provided in the bylaws of the Company.
The terms of this Agreement shall be subject to the personnel policies of the
Company as determined by the Board of Directors from time to time, except to the
extent that any such policy would have a material adverse effect on the rights
of the Executive under the terms of this Agreement. The Executive shall devote
such time, energy and skill to the performance of his duties for the Company and
for the benefit of the Company as may be necessary or required for the effective
conduct and operation of the Company's business. The Executive agrees, during
the Term of this Agreement and any extension of this Agreement, to devote his
entire business and professional time, attention, and energies exclusively to
the business of the Company as shall be necessary, advisable or required to
perform the duties of the Executive's position, and to conform to the rules,
regulations, instructions, personnel practices and policies of the Company, as
existing and amended from time to time by the Company or its Board. Furthermore,
the Executive shall exercise due diligence and care in the performance of his
duties to the Company under this Agreement.
2. Term of Agreement. The term ("Term") of this Agreement shall commence on the
date of the closing of the IPO (the "Effective Date") and shall continue through
April 13, 2003; provided, however, that on each April 13 commencing April 13,
2003 the Term of the Agreement shall automatically be extended for one
additional year unless, not later than three months prior to any such April 13,
either party shall have given written notice to the other that it does not wish
to extend the Term of the Agreement.
1
<PAGE> 2
3. Compensation.
a. Base Salary. The Company shall pay the Executive, and the Executive
agrees to accept from the Company, in payment for his services to the Company
beginning on the Effective Date, a base salary at the rate per annum to be
determined by the Compensation Committee of the Board of Directors and provided
to the Executive in writing ("Base Salary"), which is subject to change upon
thirty (30) days' notice and shall initially be set at Two Hundred Fifty
Thousand Dollars ($250,000.00) and is subject to Annual Review by the Board of
Directors. Base Salary is payable in equal biweekly installments or at such
other time or times as the Executive and Company agree.
b. Performance Bonus. The Executive shall be entitled to receive an
incentive performance bonus equal to 33% of the Bonus Incentive Compensation
Plan established by the Company ("Bonus"), which, during the initial Term of
this Agreement, shall substantially reflect the provisions set forth in
Exhibit A. The Executive shall be entitled to receive the Bonus provided he is
employed at the time of its distribution.
c. Incentive Stock Options. At the Effective Date, the Company shall
grant Executive options to purchase 126,874 shares of its common stock at an
exercise price equal to the initial public offering price. Such options shall
vest and become exerciseable only as provided in the Company's 1998 Stock Option
Plan, subject to the completion of the Company's planned IPO.
d. Annual Review. The Compensation Committee of the Company's Board of
Directors shall, at least annually, review the Executive's entire compensation
package to determine whether it continues to meet the Company's compensation
objectives. Such annual review will include a determination of whether to
increase (i) the Base Salary set forth in Section 3(a) and (ii) the Bonus to be
awarded in accordance with Section 3(b).
4. Fringe Benefits. The Executive shall be entitled to participate in any
benefit programs adopted from time to time by the Company for the benefit of its
executive employees at an appropriate level for the duties of the officer, and
the Executive shall be entitled to receive such other fringe benefits as may be
granted from time to time by the Company's Board of Directors or its
Compensation Committee.
a. Benefit Plans. The Executive shall be entitled to participate in any
benefit plans relating to stock options, stock purchases, pension, thrift,
profit sharing, life insurance, medical coverage, education or other retirement
or employee benefits available to other executive employees of the Company at an
appropriate level for the duties of the office, subject to any restrictions
(including waiting periods) specified in such plans. The Company shall make
commercially reasonable efforts to obtain medical and disability insurance, and
such other forms of insurance as the Board of Directors shall determine, for its
employees.
2
<PAGE> 3
b. Vacation. The Executive shall be entitled to five (5) weeks of paid
vacation per calendar year, with such vacation to be scheduled and taken in
accordance with the Company's standard vacation policies.
5. Business Expenses. The Company shall reimburse the Executive for any and all
necessary, customary and usual expenses, properly receipted in accordance with
Company policies, incurred by the Executive on behalf of the Company. Executive
shall be entitled to a monthly reimbursement of automobile leasing and
maintenance expenses, when properly receipted in accordance with Company
policies, of up to $1,000 per month.
6. Termination of Executive's Employment
a. Death. If the Executive dies while employed by the Company, his
employment shall immediately terminate. The Executive's compensation and
benefits shall be determined in accordance with Section 8 below.
b. Disability.
(i) If, as a result of the Executive's incapacity due to
physical or mental illness ("Disability"), Executive shall have been absent from
the full-time performance of his duties with the Company for six (6) consecutive
months, and, within thirty (30) days after written notice is provided to him by
the Company, he shall not have returned to the full-time performance of his
duties, the Executive's employment under this Agreement may be terminated by the
Company for Disability. During any period prior to such termination during which
the Executive is absent from the full-time performance of his duties with the
Company due to Disability, the Company shall continue to pay the Executive his
Base Salary and Bonus at the rate in effect at the commencement of such period
of Disability. Subsequent to such termination, the Executive's compensation and
benefits upon termination by Disability shall be determined in accordance with
Section 8 below.
(ii) If, however, as a result of the Executive's partial
incapacity due to physical or mental illness in which Executive shall not have
been absent from his duties for six consecutive months and shall have returned
to work on a full-time basis but is not able to perform at the same level as
when hired and/or is not able to perform the same functions for which originally
hired ("Partial Disability"), the Company shall make reasonable efforts to
accommodate the Executive's Partial Disability by modifying his job description
appropriately, together with a commensurate adjustment in compensation;
provided, however, the Company shall be required to so continue the employment
of the Executive in the event of a Partial Disability of the Executive only if
the Company determines, in its sole discretion, that it can create a position
for which the Executive would be suited and that would be economically
advantageous to the Company.
c. Termination by the Company for Cause. The Company may terminate the
Executive's employment under this Agreement for "Cause," at any time prior to
expiration of the Term of the Agreement, only in the event of (i) acts or
omissions constituting gross negligence,
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recklessness or willful misconduct on the part of the Executive in respect of
his fiduciary obligations or otherwise relating to the business of the Company,
(ii) the Executive's material breach of this Agreement, or (iii) the Executive's
conviction or entry of a plea of nolo contendere for fraud, misappropriation or
embezzlement. In such a case, the Executive's employment under this Agreement
may be terminated immediately without any advance written notice, and the
Company's obligation to pay the Executive's Base Salary will cease and the
Company shall have no obligation to pay any Bonus or Fringe Benefits which may
have accrued or vested as of the termination date.
d. Termination by the Executive for Good Reason. The Executive shall
have the right to terminate this Agreement for Good Reason. For purposes of this
Agreement, "Good Reason" shall mean the occurrence, without the Executive's
express written consent, of any one or more of the following events:
(i) A reduction in title and/or compensation of the Executive or
the assignment of duties to the Executive not consistent with those of an
executive of the Company, except in connection with the Company's termination of
the Executive's employment for Cause pursuant to Section 6(c) or as otherwise
expressly contemplated herein;
(ii) The Company's material breach of any of the provisions of
this Agreement, including, but not limited to, a reduction by the Company in the
Executive's Base Salary or Bonus or Fringe Benefits in effect as of the
Effective Date; or a change in the conditions of the Executive's employment
(e.g., including, without limitation, a failure by the Company to provide the
Executive with incentive compensation and benefit plans that provide benefits
and the opportunity to obtain incentive compensation, in each case comparable to
those available under benefits programs in effect as of the Effective Date and
at an appropriate level for the duties of the officer, etc.); or
(iii) The relocation of the Company's principal executive offices
to a location more than fifty (50) miles from its location as of the Effective
Date or the Company's requiring the Executive to be based anywhere other than
the Company's principal executive offices, except for requiring travel on the
Company's business to an extent substantially consistent with the Executive's
duties hereunder.
The Executive agrees to provide the Company with thirty (30) days prior written
notice of any termination for Good Reason.
e. Termination by the Executive Without Good Reason. The Executive may
at any time during the Term of this Agreement terminate his employment hereunder
without Good Reason by giving the Company notice in writing not less than one
hundred twenty (120) days in advance of such termination. Except as may be
provided in Sections 11 and 12, the Executive shall have no further obligations
to the Company after the effective date of termination, as set forth in the
notice. Notwithstanding the foregoing, in the event any "person" (as defined in
Section 10
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below) begins a tender or exchange offer, circulates a proxy to shareholders or
takes other steps to effect a Change in Control, the Executive agrees that he
will not voluntarily leave the employ of the Company, and will render services
to the Company commensurate with his position, until such "person" has abandoned
or terminated efforts to effect a Change in Control or until a Change in Control
has occurred. In the event of a termination by the Executive under this
paragraph, the Company will pay only the portion of Base Salary or previously
awarded Bonus unpaid as of the termination date. Fringe benefits which have
accrued and/or vested on the termination date will continue in effect according
to their terms, but no additional benefits shall accrue or vest.
7. Compensation Upon Termination by the Company After Change in Control Other
than for Cause. Notwithstanding the provisions of Section 8 below, if the
Executive's employment shall be terminated by the Company after a Change in
Control (as defined in Section 10) other than for Cause the Executive shall be
entitled to the following benefits:
a. Payment of Unpaid Base Salary. The Company shall immediately pay the
Executive any portion of the Executive's Base Salary or previously awarded Bonus
not paid prior to the termination date.
b. Severance Payment. The Company shall pay the Executive an amount (the
"Change in Control Severance Amount") equal to three times the Executive's
combined current year Base Salary and actual Bonus compensation for the
preceding fiscal year; provided, however, the Change in Control Severance Amount
shall not be less than Seven Hundred Fifty Thousand Dollars ($750,000.00) nor
more (once the minimum is reached) than one percent (1.0%) of the book value of
the Company (i.e., the amount reported on the Company's balance sheet prepared
in accordance with generally accepted accounting principles as stockholders'
equity). The Change in Control Severance Amount shall be payable fifty percent
(50%) within five (5) days after the termination date and the remaining fifty
percent (50%) shall be payable in twelve (12) equal consecutive monthly
installments beginning on the first day of the month following the termination
date.
c. Immediate Vesting of Stock Options. The Company shall take all
appropriate action to ensure that all stock options on the Company's stock owned
by the Executive as of the Effective Date and which have not been exercised
prior to the termination date become immediately exercisable by the Executive,
whether or not the right to exercise such stock options would otherwise then be
vested in the Executive. The provisions of this Section 7(c) shall constitute an
amendment to any existing stock option agreements of the Company as of the
Effective Date. All other stock options owned by the Executive as of the
termination date shall be exercisable in accordance with the Company's stock
option plan and the applicable stock option agreements.
d. Continuation of Fringe Benefits. From and after termination of the
Executive's employment, the Company shall continue to provide the Executive with
all life insurance and medical coverage fringe benefits set forth in Section 4
as if the Executive's employment under the Agreement had not been terminated
until the earlier to occur of (i) such time as the Executive finds
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full-time employment or (ii) the expiration of three years. Notwithstanding the
immediately preceding sentence, if, as the result of termination of the
Executive's employment, the Executive and/or his otherwise eligible dependents
or beneficiaries shall become ineligible for benefits under any one of the
Company's benefit plans or the cost of providing such benefits exceeds two
hundred percent (200%) of the cost of providing such benefits to other members
of senior management, the Company, at the Company's option, shall (i) continue
to provide the Executive and his eligible dependents or beneficiaries with
benefits at a level at least equivalent to the level of benefits for which the
Executive and his dependents and beneficiaries were eligible under such plans
immediately prior to the termination date or (ii) for any fringe benefit not so
provided, the Company shall pay the Executive 200% of the cost of providing such
fringe benefit to other members of senior management.
8. Compensation upon Termination by the Company upon Death, Disability or
Without Cause or by Executive for Good Reason. If the Executive's employment
shall be terminated (i) by Executive's death, (ii) upon Executive's Disability,
(iii) by the Company without Cause or (iv) by Executive for Good Reason,
Executive shall be entitled to the following benefits:
a. Payment of Base Salary. The Company shall immediately pay the
Executive any portion of the Executive's Base Salary or previously awarded Bonus
not paid prior to the termination date.
b. Severance Payment. The Company shall pay the Executive an amount (the
"Other Severance Amount") equal to the Executive's current year Base Salary plus
any actual Bonus compensation for the preceding fiscal year; provided, however,
the Other Severance Amount shall not be less than Two Hundred Fifty Thousand
Dollars ($250,000.00) nor more (once the minimum is reached) than one percent
(1.0%) of the book value of the Company (i.e., the amount reported on the
Company's balance sheet prepared in accordance with generally accepted
accounting principles as stockholders' equity). The Other Severance Amount shall
be payable immediately upon the termination date.
c. Stock Options. Stock options owned by the Executive as of the
termination date shall be exercisable in accordance with the Company's stock
option plan and the applicable stock option agreements.
d. Continuation of Fringe Benefits. From and after termination of the
Executive's employment (other than Executive's Death), the Company shall
continue to provide the Executive with all life insurance and medical coverage
fringe benefits set forth in Section 4 as if the Executive's employment under
the Agreement had not been terminated until the earlier to occur of (i) such
time as the Executive finds full-time employment or (ii) the expiration of one
(1) year. Notwithstanding the immediately preceding sentence, if, as the result
of termination of the Executive's employment, the Executive and/or his otherwise
eligible dependents or beneficiaries shall become ineligible for benefits under
any one of the Company's benefit plans or the cost of providing such benefits
exceeds two hundred percent (200%) of the cost of providing such benefits
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to other members of senior management, the Company, at the Company's option,
shall (i) continue to provide the Executive and his eligible dependents or
beneficiaries with benefits at a level at least equivalent to the level of
benefits for which the Executive and his dependents and beneficiaries were
eligible under such plans immediately prior to the termination date or (ii) for
any fringe benefit not so provided, the Company shall pay the Executive 200% of
the cost of providing such fringe benefit to other members of senior management.
9. No Mitigation Required; No Other Entitlement to Benefits under Agreement. The
Executive shall not be required in any way to mitigate the amount of any payment
provided for in Sections 7 or 8, including, but not limited to, by seeking other
employment, nor shall the amount of any payment provided for in Sections 7 or 8
be reduced by any compensation earned by the Executive as a result of employment
with another employer after the termination date of employment, or otherwise.
Except as set forth in Sections 7 or 8, following a termination governed by
Sections 7 or 8, the Executive shall not be entitled to any other compensation
or benefits set forth in this Agreement, except as may be separately negotiated
by the parties and approved by the Board of Directors of the Company in writing
in conjunction with the termination of Executive's employment under Sections 7
or 8.
10. Change in Control. A "Change in Control" shall be deemed to have occurred if
the conditions set forth in any one of the following paragraphs shall have been
satisfied.
a. Any "person," as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934 (the "Exchange Act") (other than the Company;
any trustee or other fiduciary holding securities under an Executive benefit
plan of the Company; or any company owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of the stock of the Company), is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of the
securities of the Company (not including in the securities beneficially owned by
such person, any securities acquired directly from the Company or from a
transferor in a transaction expressly approved or consented to by the Board of
Directors) representing more than 25% of the combined voting power of the
Company's then outstanding securities; or
b. During any period of two consecutive years (not including any period
prior to the execution of this Agreement), individuals who at the beginning of
such period constitute the Board of Directors and any new director (other than a
director designated by a person who has entered into an agreement with the
Company to effect a transaction described in clause (a), (c) or (d) of this
section), (i) whose election by the Board of Directors or nomination for
election by the Company's stockholders was approved by a vote of at least two-
thirds (2/3) of the directors then still in office who either were directors at
the beginning of the period or whose election or nomination for election was
previously so approved or (ii) whose election is to replace a person who ceases
to be a director due to death, disability or age, cease for any reason to
constitute a majority thereof; or
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c. The shareholders of the Company approve a merger or consolidation of
the Company with another corporation, other than (i) a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity), in combination with the ownership of any trustee or other fiduciary
holding securities under an Executive benefit plan of the Company, at least 75%
of the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation, or
(ii) a merger or consolidation effected to implement a recapitalization of the
Company (or similar transaction) in which no person acquires more than 50% of
the combined voting power of the Company's then outstanding securities; or
d. The shareholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.
11. Proprietary Information.
a. Executive acknowledges that certain technological and other
information may from time to time be disclosed to Executive by Company during
the continuance hereof. Executive hereby acknowledges that all such information
and technology, whether currently existing or hereafter developed by Company
through or involving the services and efforts of Executive hereunder, shall at
all times consist of and be preserved by Executive as valuable trade secrets and
confidential information which is proprietary to and owned exclusively by
Company, and that Executive does not have, and shall not have or hereafter
acquire, any rights in or to any of such information and technology, including
without limitation any patents, inventions, discoveries, know-how, trademarks or
trade names used or adopted by Company in connection with the design,
development, manufacture, or marketing of any financial or mortgage products
which at any time during the continuation hereof may be offered or sold by
Company. Executive further warrants and agrees that he shall not at any time,
whether during the continuance of this Agreement or after its expiration or
earlier termination, whether by Executive or by Company, in any manner or form,
directly or indirectly, use, disclose, duplicate, license, sell, reveal,
divulge, publish or communicate any portion of any such information or
technology, nor use, disclose duplicate, license, sell, reveal, divulge, publish
or communicate any other confidential information concerning Company, or any
customers or products of Company, to any person, firm or entity.
b. Executive acknowledges that the Company possesses information
obtained from its customers and clients ("Customer Confidences"). Executive
agrees never to make use of Customer Confidences for any use not expressly
authorized by the Customer whose Customer Confidences are in question.
c. The Executive agrees that all styles, designs, lists, materials,
books, files, reports, correspondence, records and other documents ("Company
Materials") used, prepared or made available to the Executive, shall be and
shall remain the property of the Company. Upon the
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termination of employment or the expiration of this Agreement, all Company
Materials shall be returned immediately to the Company, and the Executive shall
not make or retain any copies thereof.
d. Executive agrees that the terms of this Section 11 will survive the
term of this Agreement and will continue in full force and effect throughout his
tenure with the Company in any capacity, whether as an employee, officer,
director or outside consultant.
12. Competition. During the Term hereof, Executive shall not, without the
Company's prior written consent, directly or indirectly engage in any business
activity, or have any interest in any person, firm or other entity engaged in
any business activity, in which Company at the time is engaged or is planning to
engage. During the Term hereof and for a period of two (2) years thereafter,
Executive shall not directly or indirectly: (a) divert or take away or solicit
or attempt to divert or take away any of Company's customers, including without
limitation those customers with whom Executive became acquainted while retained
by Company; (b) employ, or knowingly permit any business entity controlled by
Executive to employ, any person who during the period of twelve (12) months
immediately preceding such time has been employed by Company; (c) solicit or
otherwise seek to induce any employee of Company to leave his or her employment
with the Company; or (d) undertake planning for or organization of any business
activity that will injure Company's business, or conspire with employees of
Company for the purpose of organizing any such injurious business activity.
Executive agrees that the terms of this Section 12 will survive the term of this
Agreement and will continue in full force and effect throughout his tenure with
the Company in any capacity, whether as an employee, officer, director or
outside consultant. However, this Section 12 shall not continue after
termination of employment in the event that the Company terminates Executive
without Cause or in the event that the Executive terminates this Agreement for
Good Reason (as defined in Section 6(d)).
13. Notices. All notices and other communications under this Agreement shall be
in writing and shall be given by fax or first class mail, certified or
registered with return receipt requested, and shall be deemed to have been duly
given three (3) days after mailing or twenty-four (24) hours after transmission
of a fax to the respective persons named below:
If to Company: RealTrust Asset Corporation
Attn: Board of Directors
2855 E. Cottonwood Parkway
Salt Lake City, UT 84121
Phone: (801) 365-3000
Fax: (801) 365-3125
If to Executive: John D. Fry
107 S. Matterhorn Drive
Alpine, UT 84004
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Either party may change such party's address for notices by notice duly given
pursuant hereto.
14. Attorneys Fees. In the event judicial determination is necessary of any
dispute arising as to the parties' rights and obligations hereunder, each party
shall have the right, in addition to any other relief granted by the court, to
attorneys' fees based on a determination by the court of the extent to which
each party has prevailed as to the material issues raised in determination of
the dispute.
15. Termination of Prior Agreements. This Agreement terminates and supersedes
any and all prior agreements and understandings between the parties with respect
to employment or with respect to the compensation of the Executive by the
Company.
16. Assignment; Successors. This Agreement is personal in its nature and neither
of the parties hereto shall, without the consent of the other, assign or
transfer this Agreement or any rights or obligations hereunder; provided that,
in the event of the merger, consolidation, transfer, or sale of all or
substantially all of the assets of the Company with or to any other individual
or entity, this Agreement shall, subject to the provisions hereof, be binding
upon and inure to the benefit of such successor and such successor shall
discharge and perform all the promises, covenants, duties, and obligations of
the Company hereunder.
17. Governing Law. This Agreement and the legal relations thus created between
the parties hereto shall be governed by and construed under and in accordance
with the laws of the State of Utah.
18. Entire Agreement; Headings. This Agreement embodies the entire agreement of
the parties respecting the matters within its scope and may be modified only in
writing. Section headings in this Agreement are included herein for convenience
of reference only and shall not constitute a part of this Agreement for any
other purpose.
19. Waiver; Modification. Failure to insist upon strict compliance with any of
the terms, covenants or conditions hereof shall not be deemed a waiver of such
term, covenant or condition, nor shall any waiver or relinquishment of, or
failure to insist upon strict compliance with, any right or power hereunder at
any one or more times be deemed a waiver or relinquishment of such right or
power at any other time or times. This Agreement shall not be modified in any
respect except by a writing executed by each party hereto.
20. Severability. In the event that a court of competent jurisdiction determines
that any portion of this Agreement is in violation of any statute or public
policy, only the portions of this Agreement that violate such statute or public
policy shall be stricken. All portions of this Agreement that do not violate any
statute or public policy shall continue in full force and effect. Further, any
court order striking any portion of this Agreement shall modify the stricken
terms as narrowly as possible to give as much effect as possible to the
intentions of the parties under this Agreement.
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21. Indemnification. The Company shall indemnify and hold Executive harmless to
the maximum extent permitted by Maryland Law and the Bylaws of the Company.
22. Counterparts. This Agreement may be executed in counterparts.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered as of the date first above written.
"Company" "Executive"
RealTrust Asset Corporation, John D. Fry
a Maryland corporation
By: ____________________________ _______________________________
Terry Mott John D. Fry
Executive Vice President
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EXHIBIT A
BONUS INCENTIVE COMPENSATION PLAN
The Bonus Incentive Compensation Plan shall be effective commencing upon
closing of the Company's initial public offering ("IPO"). The annual bonus
pursuant to the Bonus Incentive Compensation Plan will be paid one-half in cash
and one-half in shares of Common Stock of the Company, annually, following
receipt of the audit for the related fiscal year. This program will award
bonuses annually to those officers out of a total pool determined by shareholder
return on equity ("ROE") as follows:
ROE/(1)/ in Excess of Base Rate/(2) Bonus as % of Average Net
Worth/(3)/ Outstanding
Zero or less 0%
Greater than 0% but less than 6% 10% * (actual ROE - Base Rate)
Greater than 6% (10% * 6%) + 15% * (Actual
ROE - (Base Rate + 6%))
Of the amount so determined, one-half will be deemed contributed to the
total pool in cash and the other half deemed contributed to the total pool in
the form of shares of Common Stock, with the number of shares to be calculated
based on the average price per share during the preceding year.
- ----------
/(1) /"ROE" is determined for the fiscal year by averaging the monthly ratios
calculated each month by dividing the Company's monthly Net Income
(adjusted to an annual rate) by its Average Net Worth for such month. For
such calculations, the "Net Income" of the Company means the net income or
net loss of the Company determined according to GAAP, but after deducting
any dividends paid or payable on preferred stock issued after the IPO and
before giving effect to the bonus incentive compensation or any valuation
allowance adjustment to stockholders' equity. The definition "ROE" is used
only for purposes of calculating the bonus incentive compensation payable
pursuant to the Bonus Incentive Compensation Plan, and is not related to
the actual distributions received by stockholders. The bonus payments will
be made before any income distributions are made to stockholders.
/(2) /"Base Rate" is the average for each month of the Ten-Year U.S. Treasury
Rate, plus 4%.
<PAGE> 13
/(3) /"Average Net Worth" for any month means the arithmetic average of the sum
of (i) the net proceeds from all offerings of equity securities by the
Company since formation (but excluding any offerings of preferred stock
subsequent to the IPO), after deducting any underwriting discounts and
commissions and other expenses and costs relating to the offerings, plus
(ii) the Company's retained earnings (without taking into account any
losses incurred in prior fiscal years, after deducting any amounts
reflecting taxable income to be distributed as dividends and without giving
effect to any valuation allowance adjustment to stockholders' equity)
computed by taking the daily average of such values during such period.
<PAGE> 1
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), dated as of the 13th day of
April, 1998, is entered into by and between Terry Mott ("Executive") and
RealTrust Asset Corporation, a Maryland corporation ("Company"), and is
effective as of and conditioned upon the completion of the Company's initial
public offering of up to 5,750,000 Units, each Unit consisting of one share of
Common Stock and One Stock Purchase Warrant ("IPO").
WHEREAS, the Company desires to establish its right to the continued
services of the Executive, in the capacity described below, on the terms and
conditions and subject to the rights of termination hereinafter set forth, and
the Executive is willing to accept such employment on such terms and conditions.
NOW, THEREFORE, in consideration of the mutual agreements hereinafter
set forth, the Executive and the Company have agreed and do hereby agree as
follows:
1. Employment by the Company. The Company does hereby employ, engage and hire
the Executive as Executive Vice President of the Company, and the Executive does
hereby accept and agree to such hiring, engagement and employment. The
Executive's duties shall be such executive and managerial duties as the Board of
Directors of the Company or its subsidiaries shall from time to time prescribe
and as provided in the bylaws of the Company. The terms of this Agreement shall
be subject to the personnel policies of the Company as determined by the Board
of Directors from time to time, except to the extent that any such policy would
have a material adverse effect on the rights of the Executive under the terms of
this Agreement. The Executive shall devote such time, energy and skill to the
performance of his duties for the Company and for the benefit of the Company as
may be necessary or required for the effective conduct and operation of the
Company's business. The Executive agrees, during the Term of this Agreement and
any extension of this Agreement, to devote his entire business and professional
time, attention, and energies exclusively to the business of the Company as
shall be necessary, advisable or required to perform the duties of the
Executive's position, and to conform to the rules, regulations, instructions,
personnel practices and policies of the Company, as existing and amended from
time to time by the Company or its Board of Directors. Furthermore, the
Executive shall exercise due diligence and care in the performance of his duties
to the Company under this Agreement.
2. Term of Agreement. The term ("Term") of this Agreement shall commence on the
date of the closing of the IPO (the "Effective Date") and shall continue through
April 13, 2003; provided, however, that on each April 13 commencing April 13,
2003 the Term of the Agreement shall automatically be extended for one
additional year unless, not later than three months prior to any such April 13,
either party shall have given written notice to the other that it does not wish
to extend the Term of the Agreement.
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3. Compensation.
a. Base Salary. The Company shall pay the Executive, and the Executive
agrees to accept from the Company, in payment for his services to the Company
beginning on the Effective Date, a base salary at the rate per annum to be
determined by the Compensation Committee of the Board of Directors and provided
to the Executive in writing ("Base Salary"), which is subject to change upon
thirty (30) days' notice and shall initially be set at Two Hundred Thousand
Dollars ($200,000.00) and is subject to Annual Review by the Board of Directors.
Base Salary is payable in equal biweekly installments or at such other time or
times as the Executive and Company agree.
b. Performance Bonus. The Executive shall be entitled to receive an
incentive performance bonus equal to 20% of the Bonus Incentive Compensation
Plan established by the Company ("Bonus"), which, during the initial Term of
this Agreement, shall substantially reflect the provisions set forth in
Exhibit A. The Executive shall be entitled to receive the Bonus provided he is
employed at the time of its distribution.
c. Incentive Stock Options. At the Effective Date, the Company shall
grant Executive options to purchase 39,537 shares of its common stock at an
exercise price equal to the initial public offering price. Such options shall
vest and become exerciseable only as provided in the Company's 1998 Stock Option
Plan, subject to the completion of the Company's planned IPO.
d. Annual Review. The Compensation Committee of the Company's Board of
Directors shall, at least annually, review the Executive's entire compensation
package to determine whether it continues to meet the Company's compensation
objectives. Such annual review will include a determination of whether to
increase (i) the Base Salary set forth in Section 3(a) and (ii) the Bonus to be
awarded in accordance with Section 3(b).
4. Fringe Benefits. The Executive shall be entitled to participate in any
benefit programs adopted from time to time by the Company for the benefit of its
executive employees at an appropriate level for the duties of the officer, and
the Executive shall be entitled to receive such other fringe benefits as may be
granted from time to time by the Company's Board of Directors or its
Compensation Committee.
a. Benefit Plans. The Executive shall be entitled to participate in any
benefit plans relating to stock options, stock purchases, pension, thrift,
profit sharing, life insurance, medical coverage, education or other retirement
or employee benefits available to other executive employees of the Company at an
appropriate level for the duties of the office, subject to any restrictions
(including waiting periods) specified in such plans. The Company shall make
commercially reasonable efforts to obtain medical and disability insurance, and
such other forms of insurance as the Board of Directors shall determine, for its
employees.
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b. Vacation. The Executive shall be entitled to four (4) weeks of paid
vacation per calendar year, with such vacation to be scheduled and taken in
accordance with the Company's standard vacation policies.
5. Business Expenses. The Company shall reimburse the Executive for any and all
necessary, customary and usual expenses, properly receipted in accordance with
Company policies, incurred by the Executive on behalf of the Company.
6. Termination of Executive's Employment.
a. Death. If the Executive dies while employed by the Company, his
employment shall immediately terminate. The Executive's compensation and
benefits shall be determined in accordance with Section 8 below.
b. Disability.
(i) If, as a result of the Executive's incapacity due to
physical or mental illness ("Disability"), Executive shall have been absent from
the full-time performance of his duties with the Company for six (6) consecutive
months, and, within thirty (30) days after written notice is provided to him by
the Company, he shall not have returned to the full-time performance of his
duties, the Executive's employment under this Agreement may be terminated by the
Company for Disability. During any period prior to such termination during which
the Executive is absent from the full-time performance of his duties with the
Company due to Disability, the Company shall continue to pay the Executive his
Base Salary and Bonus at the rate in effect at the commencement of such period
of Disability. Subsequent to such termination, the Executive's compensation and
benefits upon termination by Disability shall be determined in accordance with
Section 8 below.
(ii) If, however, as a result of the Executive's partial
incapacity due to physical or mental illness in which Executive shall not have
been absent from his duties for six consecutive months and shall have returned
to work on a full-time basis but is not able to perform at the same level as
when hired and/or is not able to perform the same functions for which originally
hired ("Partial Disability"), the Company shall make reasonable efforts to
accommodate the Executive's Partial Disability by modifying his job description
appropriately, together with a commensurate adjustment in compensation;
provided, however, the Company shall be required to so continue the employment
of the Executive in the event of a Partial Disability of the Executive only if
the Company determines, in its sole discretion, that it can create a position
for which the Executive would be suited and that would be economically
advantageous to the Company.
c. Termination by the Company for Cause. The Company may terminate the
Executive's employment under this Agreement for "Cause," at any time prior to
expiration of the Term of the Agreement, only in the event of (i) acts or
omissions constituting gross negligence, recklessness or willful misconduct on
the part of the Executive in respect of his fiduciary obligations or otherwise
relating to the business of the Company, (ii) the Executive's material
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breach of this Agreement, or (iii) the Executive's conviction or entry of a plea
of nolo contendere for fraud, misappropriation or embezzlement. In such a case,
the Executive's employment under this Agreement may be terminated immediately
without any advance written notice, and the Company's obligation to pay the
Executive's Base Salary will cease, and the Company shall have no obligation to
pay any Bonus or Fringe Benefits which may have accrued or vested as of the
Termination Date.
d. Termination by the Executive. The Executive may at any time during
the Term of this Agreement terminate his employment hereunder for any reason or
no reason by giving the Company notice in writing not less than one hundred
twenty (120) days in advance of such termination. Except as may be provided in
Sections 11 and 12, the Executive shall have no further obligations to the
Company after the effective date of termination, as set forth in the notice.
Notwithstanding the foregoing, in the event any "person" (as defined in Section
10 below) begins a tender or exchange offer, circulates a proxy to shareholders
or takes other steps to effect a Change in Control, the Executive agrees that he
will not voluntarily leave the employ of the Company, and will render services
to the Company commensurate with his position, until such "person" has abandoned
or terminated efforts to effect a Change in Control or until a Change in Control
has occurred. In the event of a termination by the Executive under this
paragraph, the Company will pay only the portion of Base Salary or previously
awarded Bonus unpaid as of the termination date. Fringe benefits which have
accrued and/or vested on the termination date will continue in effect according
to their terms, but no additional benefits shall accrue or vest.
7. Compensation Upon Termination by the Company After Change in Control Other
than for Cause. Notwithstanding the provisions of Section 8 below, if the
Executive's employment shall be terminated by the Company after a Change in
Control (as defined in Section 10) by the Company other than for Cause, the
Executive shall be entitled to the following benefits:
a. Payment of Unpaid Base Salary. The Company shall immediately pay the
Executive any portion of the Executive's Base Salary or previously awarded Bonus
not paid prior to the termination date.
b. Severance Payment. The Company shall pay the Executive an amount (the
"Change in Control Severance Amount") equal to three times the Executive's
combined current year Base Salary and actual Bonus compensation for the
preceding fiscal year; provided, however, the Change in Control Severance Amount
shall not be less than Six Hundred Thousand Dollars ($600,000.00) nor more (once
the minimum is reached) than one percent (1.0%) of the book value of the Company
(i.e., the amount reported on the Company's balance sheet prepared in accordance
with generally accepted accounting principles as stockholders' equity). The
Change in Control Severance Amount shall be payable fifty percent (50%) within
five (5) days after the termination date and the remaining fifty percent (50%)
shall be payable in twelve (12) equal consecutive monthly installments beginning
on the first day of the month following the termination date.
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c. Immediate Vesting of Stock Options. The Company shall take all
appropriate action to ensure that all stock options on the Company's stock owned
by the Executive as of the Effective Date and which have not been exercised
prior to the termination date become immediately exercisable by the Executive,
whether or not the right to exercise such stock options would otherwise then be
vested in the Executive. The provisions of this Section 7(c) shall constitute an
amendment to any existing stock option agreements of the Company as of the
Effective Date. All other stock options owned by the Executive as of the
termination date shall be exercisable in accordance with the Company's stock
option plan and the applicable stock option agreements.
d. Continuation of Fringe Benefits. From and after termination of the
Executive's employment, the Company shall continue to provide the Executive with
all life insurance and medical coverage fringe benefits set forth in Section 4
as if the Executive's employment under the Agreement had not been terminated
until the earlier to occur of (i) such time as the Executive finds full-time
employment or (ii) the expiration of three years. Notwithstanding the
immediately preceding sentence, if, as the result of termination of the
Executive's employment, the Executive and/or his otherwise eligible dependents
or beneficiaries shall become ineligible for benefits under any one of the
Company's benefit plans or the cost of providing such benefits exceeds two
hundred percent (200%) of the cost of providing such benefits to other members
of senior management, the Company, at the Company's option, shall (i) continue
to provide the Executive and his eligible dependents or beneficiaries with
benefits at a level at least equivalent to the level of benefits for which the
Executive and his dependents and beneficiaries were eligible under such plans
immediately prior to the termination date or (ii) for any fringe benefit not so
provided, the Company shall pay the Executive 200% of the cost of providing such
fringe benefit to other members of senior management.
8. Compensation upon Termination by the Company upon Death, Disability or
Without Cause. If the Executive's employment shall be terminated either (i) by
Executive's Death, (ii) by the Company upon Executive's Disability or (iii) by
the Company without Cause, the Executive shall be entitled to the following
benefits:
a. Payment of Base Salary. The Company shall immediately pay the
Executive any portion of the Executive's Base Salary or previously awarded Bonus
not paid prior to the termination date.
b. Severance Payment. The Company shall pay the Executive an amount (the
"Other Severance Amount") equal to the Executive's current year Base Salary plus
any actual Bonus compensation for the preceding fiscal year; provided, however,
the Other Severance Amount shall not be less than Two Hundred Thousand Dollars
($200,000.00) nor more (once the minimum is reached) than one percent (1.0%) of
the book value of the Company (i.e., the amount reported on the Company's
balance sheet prepared in accordance with generally accepted accounting
principles as stockholders' equity). The Other Severance Amount shall be payable
immediately upon the termination date.
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c. Stock Options. Stock options owned by the Executive as of the
termination date shall be exercisable in accordance with the Company's stock
option plan and the applicable stock option agreements.
d. Continuation of Fringe Benefits. From and after termination of the
Executive's employment (other than Executive's Death), the Company shall
continue to provide the Executive with all life insurance and medical coverage
fringe benefits set forth in Section 4 as if the Executive's employment under
the Agreement had not been terminated until the earlier to occur of (i) such
time as the Executive finds full-time employment or (ii) the expiration of one
(1) year. Notwithstanding the immediately preceding sentence, if, as the result
of termination of the Executive's employment, the Executive and/or his otherwise
eligible dependents or beneficiaries shall become ineligible for benefits under
any one of the Company's benefit plans or the cost of providing such benefits
exceeds two hundred percent (200%) of the cost of providing such benefits to
other members of senior management, the Company, at the Company's option, shall
(i) continue to provide the Executive and his eligible dependents or
beneficiaries with benefits at a level at least equivalent to the level of
benefits for which the Executive and his dependents and beneficiaries were
eligible under such plans immediately prior to the termination date or (ii) for
any fringe benefit not so provided, the Company shall pay the Executive 200% of
the cost of providing such fringe benefit to other members of senior management.
9. No Mitigation Required; No Other Entitlement to Benefits under Agreement. The
Executive shall not be required in any way to mitigate the amount of any payment
provided for in Sections 7 or 8, including, but not limited to, by seeking other
employment, nor shall the amount of any payment provided for in Sections 7 or 8
be reduced by any compensation earned by the Executive as a result of employment
with another employer after the termination date of employment, or otherwise.
Except as set forth in Sections 7 or 8, following a termination governed by
Sections 7 or 8, the Executive shall not be entitled to any other compensation
or benefits set forth in this Agreement, except as may be separately negotiated
by the parties and approved by the Board of Directors of the Company in writing
in conjunction with the termination of Executive's employment under Sections 7
or 8.
10. Change in Control. A "Change in Control" shall be deemed to have occurred if
the conditions set forth in any one of the following paragraphs shall have been
satisfied.
a. Any "person," as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934 (the "Exchange Act") (other than the Company;
any trustee or other fiduciary holding securities under an Executive benefit
plan of the Company; or any company owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of the stock of the Company), is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of the
securities of the Company (not including in the securities beneficially owned by
such person, any securities acquired directly from the Company or from a
transferor in a transaction expressly approved or
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consented to by the Board of Directors) representing more than 25% of the
combined voting power of the Company's then outstanding securities; or
b. During any period of two consecutive years (not including any period
prior to the execution of this Agreement), individuals who at the beginning of
such period constitute the Board of Directors and any new director (other than a
director designated by a person who has entered into an agreement with the
Company to effect a transaction described in clause (a), (c) or (d) of this
section), (i) whose election by the Board of Directors or nomination for
election by the Company's stockholders was approved by a vote of at least two-
thirds (2/3) of the directors then still in office who either were directors at
the beginning of the period or whose election or nomination for election was
previously so approved or (ii) whose election is to replace a person who ceases
to be a director due to death, disability or age, cease for any reason to
constitute a majority thereof; or
c. The shareholders of the Company approve a merger or consolidation of
the Company with another corporation, other than (i) a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity), in combination with the ownership of any trustee or other fiduciary
holding securities under an Executive benefit plan of the Company, at least 75%
of the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation, or
(ii) a merger or consolidation effected to implement a recapitalization of the
Company (or similar transaction) in which no person acquires more than 50% of
the combined voting power of the Company's then outstanding securities; or
d. The shareholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.
11. Proprietary Information.
a. Executive acknowledges that certain technological and other
information may from time to time be disclosed to Executive by Company during
the continuance hereof. Executive hereby acknowledges that all such information
and technology, whether currently existing or hereafter developed by Company
through or involving the services and efforts of Executive hereunder, shall at
all times consist of and be preserved by Executive as valuable trade secrets and
confidential information which is proprietary to and owned exclusively by
Company, and that Executive does not have, and shall not have or hereafter
acquire, any rights in or to any of such information and technology, including
without limitation any patents, inventions, discoveries, know-how, trademarks or
trade names used or adopted by Company in connection with the design,
development, manufacture, or marketing of any financial or mortgage products
which at any time during the continuation hereof may be offered or sold by
Company. Executive further warrants and agrees that he shall not at any time,
whether during the continuance of this Agreement or after
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its expiration or earlier termination, whether by Executive or by Company, in
any manner or form, directly or indirectly, use, disclose, duplicate, license,
sell, reveal, divulge, publish or communicate any portion of any such
information or technology, nor use, disclose duplicate, license, sell, reveal,
divulge, publish or communicate any other confidential information concerning
Company, or any customers or products of Company, to any person, firm or entity.
b. Executive acknowledges that the Company possesses information
obtained from its customers and clients ("Customer Confidences"). Executive
agrees never to make use of Customer Confidences for any use not expressly
authorized by the Customer whose Customer Confidences are in question.
c. The Executive agrees that all styles, designs, lists, materials,
books, files, reports, correspondence, records and other documents ("Company
Materials") used, prepared or made available to the Executive, shall be and
shall remain the property of the Company. Upon the termination of employment or
the expiration of this Agreement, all Company Materials shall be returned
immediately to the Company, and the Executive shall not make or retain any
copies thereof.
d. Executive agrees that the terms of this Section 11 will survive the
term of this Agreement and will continue in full force and effect throughout his
tenure with the Company in any capacity, whether as an employee, officer,
director or outside consultant.
12. Competition. During the Term hereof, Executive shall not, without the
Company's prior written consent, directly or indirectly engage in any business
activity, or have any interest in any person, firm or other entity engaged in
any business activity, in which Company at the time is engaged or is planning to
engage. During the Term hereof and for a period of two (2) years thereafter,
Executive shall not directly or indirectly: (a) divert or take away or solicit
or attempt to divert or take away any of Company's customers, including without
limitation those customers with whom Executive became acquainted while retained
by Company; (b) employ, or knowingly permit any business entity controlled by
Executive to employ, any person who during the period of twelve (12) months
immediately preceding such time has been employed by Company; (c) solicit or
otherwise seek to induce any employee of Company to leave his or her employment
with the Company; or (d) undertake planning for or organization of any business
activity that will injure Company's business, or conspire with employees of
Company for the purpose of organizing any such injurious business activity.
Executive agrees that the terms of this Section 12 will survive the term of this
Agreement and will continue in full force and effect throughout his tenure with
the Company in any capacity, whether as an employee, officer, director or
outside consultant. However, this Section 12 shall not continue after
termination of employment in the event that the Company terminates Executive
without Cause.
13. Notices. All notices and other communications under this Agreement shall be
in writing and shall be given by fax or first class mail, certified or
registered with return receipt requested,
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and shall be deemed to have been duly given three (3) days after mailing or
twenty-four (24) hours after transmission of a fax to the respective persons
named below:
If to Company: RealTrust Asset Corporation
Attn: Board of Directors
2855 E. Cottonwood Parkway
Salt Lake City, UT 84121
Phone: (801) 365-3000
Fax: (801) 365-3125
If to Executive: Terry L. Mott
2845 Marrcrest East
Provo, UT 84604
Either party may change such party's address for notices by notice duly given
pursuant hereto.
14. Attorneys Fees. In the event judicial determination is necessary of any
dispute arising as to the parties' rights and obligations hereunder, each party
shall have the right, in addition to any other relief granted by the court, to
attorneys' fees based on a determination by the court of the extent to which
each party has prevailed as to the material issues raised in determination of
the dispute.
15. Termination of Prior Agreements. This Agreement terminates and supersedes
any and all prior agreements and understandings between the parties with respect
to employment or with respect to the compensation of the Executive by the
Company.
16. Assignment; Successors. This Agreement is personal in its nature and neither
of the parties hereto shall, without the consent of the other, assign or
transfer this Agreement or any rights or obligations hereunder; provided that,
in the event of the merger, consolidation, transfer, or sale of all or
substantially all of the assets of the Company with or to any other individual
or entity, this Agreement shall, subject to the provisions hereof, be binding
upon and inure to the benefit of such successor and such successor shall
discharge and perform all the promises, covenants, duties, and obligations of
the Company hereunder.
17. Governing Law. This Agreement and the legal relations thus created between
the parties hereto shall be governed by and construed under and in accordance
with the laws of the State of Utah.
18. Entire Agreement; Headings. This Agreement embodies the entire agreement of
the parties respecting the matters within its scope and may be modified only in
writing. Section headings in this Agreement are included herein for convenience
of reference only and shall not constitute a part of this Agreement for any
other purpose.
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19. Waiver; Modification. Failure to insist upon strict compliance with any of
the terms, covenants or conditions hereof shall not be deemed a waiver of such
term, covenant or condition, nor shall any waiver or relinquishment of, or
failure to insist upon strict compliance with, any right or power hereunder at
any one or more times be deemed a waiver or relinquishment of such right or
power at any other time or times. This Agreement shall not be modified in any
respect except by a writing executed by each party hereto.
20. Severability. In the event that a court of competent jurisdiction determines
that any portion of this Agreement is in violation of any statute or public
policy, only the portions of this Agreement that violate such statute or public
policy shall be stricken. All portions of this Agreement that do not violate any
statute or public policy shall continue in full force and effect. Further, any
court order striking any portion of this Agreement shall modify the stricken
terms as narrowly as possible to give as much effect as possible to the
intentions of the parties under this Agreement.
21. Indemnification. The Company shall indemnify and hold Executive harmless to
the maximum extent permitted by Maryland Law and the Bylaws of the Company.
22. Counterparts. This Agreement may be executed in counterparts.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered as of the date first above written.
"Company" "Executive"
RealTrust Asset Corporation, Terry L. Mott
a Maryland corporation
By: ____________________________ _______________________________________
Terry L. Mott, Executive Vice President
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EXHIBIT A
BONUS INCENTIVE COMPENSATION PLAN
The Bonus Incentive Compensation Plan shall be effective commencing upon
closing of the Company's initial public offering ("IPO"). The annual bonus
pursuant to the Bonus Incentive Compensation Plan will be paid one-half in cash
and one-half in shares of Common Stock of the Company, annually, following
receipt of the audit for the related fiscal year. This program will award
bonuses annually to those officers out of a total pool determined by shareholder
return on equity ("ROE") as follows:
ROE/(1)/ in Excess of Base Rate/(2) Bonus as % of Average Net
Worth/(3)/ Outstanding
Zero or less 0%
Greater than 0% but less than 6% 10% * (actual ROE - Base Rate)
Greater than 6% (10% * 6%) + 15% * (Actual
ROE - (Base Rate + 6%))
Of the amount so determined, one-half will be deemed contributed to the
total pool in cash and the other half deemed contributed to the total pool in
the form of shares of Common Stock, with the number of shares to be calculated
based on the average price per share during the preceding year.
- ----------
/(1) /"ROE" is determined for the fiscal year by averaging the monthly ratios
calculated each month by dividing the Company's monthly Net Income
(adjusted to an annual rate) by its Average Net Worth for such month. For
such calculations, the "Net Income" of the Company means the net income or
net loss of the Company determined according to GAAP, but after deducting
any dividends paid or payable on preferred stock issued after the IPO and
before giving effect to the bonus incentive compensation or any valuation
allowance adjustment to stockholders' equity. The definition "ROE" is used
only for purposes of calculating the bonus incentive compensation payable
pursuant to the Bonus Incentive Compensation Plan, and is not related to
the actual distributions received by stockholders. The bonus payments will
be made before any income distributions are made to stockholders.
/(2) /"Base Rate" is the average for each month of the Ten-Year U.S. Treasury
Rate, plus 4%.
<PAGE> 12
/(3) /"Average Net Worth" for any month means the arithmetic average of the sum
of (i) the net proceeds from all offerings of equity securities by the
Company since formation (but excluding any offerings of preferred stock
subsequent to the IPO), after deducting any underwriting discounts and
commissions and other expenses and costs relating to the offerings, plus
(ii) the Company's retained earnings (without taking into account any
losses incurred in prior fiscal years, after deducting any amounts
reflecting taxable income to be distributed as dividends and without giving
effect to any valuation allowance adjustment to stockholders' equity)
computed by taking the daily average of such values during such period.
<PAGE> 1
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), dated as of the 13th day of
April, 1998, is entered into by and between John P. McMurray ("Executive") and
RealTrust Asset Corporation, a Maryland corporation ("Company"), and is
effective as of the date of execution hereof.
WHEREAS, the Company desires to establish its right to the continued
services of the Executive, in the capacity described below, on the terms and
conditions and subject to the rights of termination hereinafter set forth, and
the Executive is willing to accept such employment on such terms and conditions.
NOW, THEREFORE, in consideration of the mutual agreements hereinafter
set forth, the Executive and the Company have agreed and do hereby agree as
follows:
1. Employment by the Company. The Company does hereby employ, engage and hire
the Executive as Executive Vice President of Capital Markets and Asset Liability
Management of the Company, and the Executive does hereby accept and agree to
such hiring, engagement and employment. The Executive's duties shall be such
executive and managerial duties as the Board of Directors of the Company or its
subsidiaries shall from time to time prescribe and as provided in the bylaws of
the Company. The terms of this Agreement shall be subject to the personnel
policies of the Company as determined by the Board of Directors from time to
time, except to the extent that any such policy would have a material adverse
effect on the rights of the Executive under the terms of this Agreement. The
Executive shall devote such time, energy and skill to the performance of his
duties for the Company and for the benefit of the Company as may be necessary or
required for the effective conduct and operation of the Company's business. The
Executive agrees, during the Term of this Agreement and any extension of this
Agreement, to devote his entire business and professional time, attention, and
energies exclusively to the business of the Company as shall be necessary,
advisable or required to perform the duties of the Executive's position, and to
conform to the rules, regulations, instructions, personnel practices and
policies of the Company, as existing and amended from time to time by the
Company or its Board. Furthermore, the Executive shall exercise due diligence
and care in the performance of his duties to the Company under this Agreement.
2. Term of Agreement. The term ("Term") of this Agreement shall commence as of
the date of execution hereof (the "Effective Date") and shall continue through
April 13, 2001; provided, however, that on each April 13 commencing April 13,
2001 the Term of the Agreement shall automatically be extended for one
additional year unless, not later than three months prior to any such April 13,
either party shall have given written notice to the other that it does not wish
to extend the Term of the Agreement.
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3. Compensation.
a. Base Salary. The Company shall pay the Executive, and the Executive
agrees to accept from the Company, in payment for his services to the Company
beginning on the Effective Date, a base salary at the rate per annum to be
determined by the Compensation Committee of the Board of Directors and provided
to the Executive in writing ("Base Salary"), which is subject to increase upon
thirty (30) days' notice and shall initially be set at One Hundred Sixty
Thousand Dollars ($160,000.00) and is subject to Annual Review by the Board of
Directors. Base Salary is payable in equal biweekly installments or at such
other time or times as the Executive and Company agree.
b. Performance Bonus. Commencing with fiscal year ending December 31,
1999, the Executive shall be entitled to receive an incentive performance bonus
equal to 10% of the Bonus Incentive Compensation Plan established by the Company
("Bonus"), which, during the initial Term of this Agreement, shall substantially
reflect the provisions set forth in Exhibit A, provided, however, that such
Bonus shall not exceed the Executive's Base Salary unless the Board otherwise
determines. For the fiscal year ending December 31, 1998, Executive shall
receive a bonus of $40,000 upon completion of the Company's IPO (as defined
below).
c. Incentive Stock Options. At the Effective Date, the Company shall
grant Executive options to purchase 30,000 shares of the Company's Common Stock
at an exercise price equal to the price effective at the Company's planned
initial public offering of 5,750,000 Units each consisting of one share of
Common Stock and One Stock Purchase Warrant ("IPO"). Such options shall
immediately vest and become exercisable as provided in the Company's 1996 Stock
Option Plan.
d. Annual Review. The Compensation Committee of the Company's Board of
Directors shall, at least annually, review the Executive's entire compensation
package to determine whether it continues to meet the Company's compensation
objectives. Such annual review will include a determination of whether to
increase (i) the Base Salary set forth in Section 3(a) and (ii) the Bonus to be
awarded in accordance with Section 3(b).
4. Fringe Benefits. The Executive shall be entitled to participate in any
benefit programs adopted from time to time by the Company for the benefit of its
executive employees at an appropriate level for the duties of the officer, and
the Executive shall be entitled to receive such other fringe benefits as may be
granted from time to time by the Company's Board of Directors or its
Compensation Committee.
a. Benefit Plans. The Executive shall be entitled to participate in any
benefit plans relating to stock options, stock purchases, pension, thrift,
profit sharing, life insurance, medical coverage, education or other retirement
or employee benefits available to other executive employees of the Company at an
appropriate level for the duties of the office, subject to any restrictions
(including waiting periods) specified in such plans. The Company shall make
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commercially reasonable efforts to obtain medical and disability insurance, and
such other forms of insurance as the Board of Directors shall determine, for its
employees.
b. Vacation. The Executive shall be entitled to four (4) weeks of paid
vacation per calendar year and to compensation for earned but unused vacation
days, with such vacation to be scheduled and taken in accordance with the
Company's standard vacation policies. Executive shall also be entitled to all
paid holidays given by the Company to its employees and key management
Executives.
5. Expenses.
a. Business Expenses. The Company shall reimburse the Executive for any
and all necessary, customary and usual expenses, properly receipted in
accordance with Company policies, incurred by the Executive on behalf of the
Company.
b. Relocation Expenses. The Company shall bear, or reimburse the
Executive for, the following expenses incurred by Executive in moving from
Seattle, Washington, his current principal place of business, to the vicinity of
Salt Lake City, Utah. Such relocation expenses shall be:
i. Reasonable closing costs incurred on acquisition of a
principal residence in the Salt Lake City area;
ii. Reasonable monthly rent and utilities for temporary housing
in a corporate apartment with kitchen facilities (Pinehurst Union Creek) for up
to four (4) months;
iii. Three trips (via coach class air) for the purpose of
locating a principal residence for Executive's immediate family to the Salt Lake
City area from Seattle, Washington; and travel costs (via coach class air) for
three trips by Executive from Seattle, Washington per month until relocation of
Employee for up to four (4) months;
iv. The reasonable costs of moving Executive's personal property
from Seattle, Washington to Salt Lake City, Utah.
v. The reasonable sales expenses incurred on the sale of
Executive's principal residence in Bellevue, Washington.
6. Termination of Executive's Employment
a. Death. If the Executive dies while employed by the Company, his
employment shall immediately terminate. The Executive's compensation and
benefits shall be determined in accordance with Section 8 below.
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b. Disability.
(i) If, as a result of the Executive's incapacity due to physical
or mental illness ("Disability"), Executive shall have been absent from the
full-time performance of his duties with the Company for six (6) consecutive
months, and, within thirty (30) days after written notice is provided to him by
the Company, he shall not have returned to the full-time performance of his
duties, the Executive's employment under this Agreement may be terminated by the
Company for Disability. During any period prior to such termination during which
the Executive is absent from the full-time performance of his duties with the
Company due to Disability, the Company shall continue to pay the Executive his
Base Salary and Bonus at the rate in effect at the commencement of such period
of Disability. Subsequent to such termination, the Executive's compensation and
benefits upon termination by Disability shall be determined in accordance with
Section 8 below.
(ii) If, however, as a result of the Executive's partial
incapacity due to physical or mental illness in which Executive shall not have
been absent from his duties for six consecutive months and shall have returned
to work on a full-time basis but is not able to perform at the same level as
when hired and/or is not able to perform the same functions for which originally
hired ("Partial Disability"), the Company shall make reasonable efforts to
accommodate the Executive's Partial Disability by modifying his job description
appropriately, together with a commensurate adjustment in compensation;
provided, however, the Company shall be required to so continue the employment
of the Executive in the event of a Partial Disability of the Executive only if
the Company determines, in its sole discretion, that it can create a position
for which the Executive would be suited and that would be economically
advantageous to the Company.
c. Termination by the Company for Cause. The Company may terminate the
Executive's employment under this Agreement for "Cause," at any time prior to
expiration of the Term of the Agreement, only in the event of (i) acts or
omissions constituting gross negligence, recklessness or willful misconduct on
the part of the Executive in respect of his fiduciary obligations or otherwise
relating to the business of the Company, (ii) the Executive's material breach of
this Agreement, or (iii) the Executive's conviction or entry of a plea of nolo
contendere for fraud, misappropriation or embezzlement. In such a case, the
Executive's employment under this Agreement may be terminated immediately
without any advance written notice, and the Company's obligation to pay the
Executive's Base Salary will cease and the Company shall have no obligation to
pay any Bonus or Fringe Benefits which may have accrued or vested as of the
termination date.
d. Termination by the Executive. The Executive may at any time during
the Term of this Agreement terminate his employment hereunder for any reason or
no reason by giving the Company notice in writing in advance of such
termination. Except as may be provided in Sections 9 and 10, the Executive shall
have no further obligations to the Company after the effective date of
termination, as set forth in the notice. In the event of a termination by the
Executive under this paragraph, the Company will pay only the portion of Base
Salary or previously awarded Bonus unpaid as of the termination date. Fringe
benefits which have accrued and/or vested on the
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termination date will continue in effect according to their terms, but no
additional accrual or vesting will take place.
7. Compensation upon Termination by the Company upon Death, Disability or
Without Cause. If the Executive's employment shall be terminated (i) by
Executive's death, (ii) upon Executive's Disability or (iii) without cause, the
Executive shall be entitled to the following benefits:
a. Payment of Base Salary. The Company shall immediately pay the
Executive any portion of the Executive's Base Salary or previously awarded Bonus
not paid prior to the termination date.
b. Severance Payment. The Company shall pay the Executive an amount (the
"Severance Amount") equal to one half of the Executive's combined current year
Base Salary and any actual Bonus compensation for the preceding fiscal year;
provided, however, that the Severance Amount shall not be less than Eighty
Thousand Dollars ($80,000.00) nor more (once the minimum is reached) than one
percent (1.0%) of the book value of the Company (i.e., the amount reported on
the Company's balance sheet prepared in accordance with generally accepted
accounting principles as stockholders' equity). The Severance Amount shall be
payable immediately upon the termination date.
c. Stock Options. Stock options owned by the Executive as of the
termination date shall be exercisable in accordance with the Company's stock
option plan and the applicable stock option agreements.
d. Continuation of Fringe Benefits. From and after termination of the
Executive's employment, other than Executive's Death, the Company shall continue
to provide the Executive with all life insurance and medical coverage fringe
benefits set forth in Section 4 as if the Executive's employment under the
Agreement had not been terminated until the earlier to occur of (i) such time as
the Executive finds full-time employment or (ii) the expiration of one (1) year.
Notwithstanding the immediately preceding sentence, if, as the result of
termination of the Executive's employment, the Executive and/or his otherwise
eligible dependents or beneficiaries shall become ineligible for benefits under
any one of the Company's benefit plans or the cost of providing such benefits
exceeds two hundred percent (200%) of the cost of providing such benefits to
other members of senior management, the Company, at the Company's option, shall
(i) continue to provide the Executive and his eligible dependents or
beneficiaries with benefits at a level at least equivalent to the level of
benefits for which the Executive and his dependents and beneficiaries were
eligible under such plans immediately prior to the termination date or (ii) for
any fringe benefit not so provided, the Company shall pay the Executive 200% of
the cost of providing such fringe benefit to other members of senior management.
8. No Mitigation Required; No other Entitlement to Benefits under Agreement. The
Executive shall not be required in any way to mitigate the amount of any payment
provided for
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in Section 7, including, but not limited to, by seeking other employment, nor
shall the amount of any payment provided for in Section 7 be reduced by any
compensation earned by the Executive as a result of employment with another
employer after the termination date of employment, or otherwise. Except as set
forth in Section 7, following a termination governed by Section 7, the Executive
shall not be entitled to any other compensation or benefits set forth in this
Agreement, except as may be separately negotiated by the parties and approved by
the Board of Directors of the Company in writing in conjunction with the
termination of Executive's employment under Section 7.
9. Proprietary Information.
a. Executive acknowledges that certain technological and other
information may from time to time be disclosed to Executive by Company during
the continuance hereof. Executive hereby acknowledges that all such information
and technology, whether currently existing or hereafter developed by Company
through or involving the services and efforts of Executive hereunder, shall at
all times consist of and be preserved by Executive as valuable trade secrets and
confidential information which is proprietary to and owned exclusively by
Company, and that Executive does not have, and shall not have or hereafter
acquire, any rights in or to any of such information and technology, including
without limitation any patents, inventions, discoveries, know-how, trademarks or
trade names used or adopted by Company in connection with the design,
development, manufacture, or marketing of any financial or mortgage products
which at any time during the continuation hereof may be offered or sold by
Company. Executive further warrants and agrees that he shall not at any time,
whether during the continuance of this Agreement or after its expiration or
earlier termination, whether by Executive or by Company, in any manner or form,
directly or indirectly, use, disclose, duplicate, license, sell, reveal,
divulge, publish or communicate any portion of any such information or
technology, nor use, disclose, duplicate, license, sell, reveal, divulge,
publish or communicate any other confidential information concerning Company, or
any customers or products of Company, to any person, firm or entity.
b. Executive acknowledges that the Company possesses information
obtained from its customers and clients ("Customer Confidences"). Executive
agrees never to make use of Customer Confidences for any use not expressly
authorized by the Customer whose Customer Confidences are in question.
c. The Executive agrees that all styles, designs, lists, materials,
books, files, reports, correspondence, records and other documents ("Company
Materials") used, prepared or made available to the Executive, shall be and
shall remain the property of the Company. Upon the termination of employment or
the expiration of this Agreement, all Company Materials shall be returned
immediately to the Company, and the Executive shall not make or retain any
copies thereof.
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d. Executive agrees that the terms of this Section 9 will survive the
term of this Agreement and will continue in full force and effect throughout his
tenure with the Company in any capacity, whether as an employee, officer,
director or outside consultant.
10. Competition. During the Term hereof, Executive shall not, without the
Company's prior written consent, directly or indirectly engage in any business
activity, or have any interest in any person, firm or other entity engaged in
any business activity, in which Company at the time is engaged or is planning to
engage. During the Term hereof and for a period of two (2) years thereafter,
Executive shall not directly or indirectly: (a) divert or take away or solicit
or attempt to divert or take away any of Company's customers, including without
limitation those customers with whom Executive became acquainted while retained
by Company; (b) employ, or knowingly permit any business entity controlled by
Executive to employ, any person who during the period of twelve (12) months
immediately preceding such time has been employed by Company; (c) solicit or
otherwise seek to induce any employee of Company to leave his or her employment
with the Company; or (d) undertake planning for or organization of any business
activity that will injure Company's business, or conspire with employees of
Company for the purpose of organizing any such injurious business activity.
Executive agrees that the terms of this Section 10 will survive the term of this
Agreement and will continue in full force and effect throughout his tenure with
the Company in any capacity, whether as an employee, officer, director or
outside consultant. However, this Section 10 shall not continue after
termination of employment in the event that the Company terminates Executive
without Cause.
11. Notices. All notices and other communications under this Agreement shall be
in writing and shall be given by fax or first class mail, certified or
registered with return receipt requested, and shall be deemed to have been duly
given three (3) days after mailing or twenty-four (24) hours after transmission
of a fax to the respective persons named below:
If to Company: RealTrust Asset Corporation
Attn: Board of Directors
2855 E. Cottonwood Parkway
Salt Lake City, UT 84121
Phone: (801) 365-3000
Fax: (801) 365-3125
If to Executive: John P. McMurray
___________________________
___________________________
Either party may change such party's address for notices by notice duly given
pursuant hereto.
12. Attorneys Fees. In the event judicial determination is necessary of any
dispute arising as to the parties' rights and obligations hereunder, each party
shall have the right, in addition to any other relief granted by the court, to
attorneys' fees based on a determination by the court of the
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extent to which each party has prevailed as to the material issues raised in
determination of the dispute.
13. Termination of Prior Agreements. This Agreement terminates and supersedes
any and all prior agreements and understandings between the parties with respect
to employment or with respect to the compensation of the Executive by the
Company.
14. Assignment; Successors. This Agreement is personal in its nature and neither
of the parties hereto shall, without the consent of the other, assign or
transfer this Agreement or any rights or obligations hereunder; provided that,
in the event of the merger, consolidation, transfer, or sale of all or
substantially all of the assets of the Company with or to any other individual
or entity, this Agreement shall, subject to the provisions hereof, be binding
upon and inure to the benefit of such successor and such successor shall
discharge and perform all the promises, covenants, duties, and obligations of
the Company hereunder.
15. Governing Law. This Agreement and the legal relations thus created between
the parties hereto shall be governed by and construed under and in accordance
with the laws of the State of Utah.
16. Entire Agreement; Headings. This Agreement embodies the entire agreement of
the parties respecting the matters within its scope and may be modified only in
writing. Section headings in this Agreement are included herein for convenience
of reference only and shall not constitute a part of this Agreement for any
other purpose.
17. Waiver; Modification. Failure to insist upon strict compliance with any of
the terms, covenants or conditions hereof shall not be deemed a waiver of such
term, covenant or condition, nor shall any waiver or relinquishment of, or
failure to insist upon strict compliance with, any right or power hereunder at
any one or more times be deemed a waiver or relinquishment of such right or
power at any other time or times. This Agreement shall not be modified in any
respect except by a writing executed by each party hereto.
18. Severability. In the event that a court of competent jurisdiction determines
that any portion of this Agreement is in violation of any statute or public
policy, only the portions of this Agreement that violate such statute or public
policy shall be stricken. All portions of this Agreement that do not violate any
statute or public policy shall continue in full force and effect. Further, any
court order striking any portion of this Agreement shall modify the stricken
terms as narrowly as possible to give as much effect as possible to the
intentions of the parties under this Agreement.
19. Indemnification. The Company shall indemnify and hold Executive harmless to
the maximum extent permitted by Maryland Law and the Bylaws of the Company.
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20. Counterparts. This Agreement may be executed in counterparts.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered as of the date first above written.
"Company" "Executive"
RealTrust Asset Corporation, John P. McMurray
a Maryland corporation
By: ________________________________ _________________________________
John D. Fry John P. McMurray
President and Chief Executive
Officer
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<PAGE> 10
EXHIBIT A
BONUS INCENTIVE COMPENSATION PLAN
The Bonus Incentive Compensation Plan shall be effective commencing upon
closing of the Company's initial public offering ("IPO"). The annual bonus
pursuant to the Bonus Incentive Compensation Plan will be paid one-half in cash
and one-half in shares of Common Stock of the Company, annually, following
receipt of the audit for the related fiscal year. This program will award
bonuses annually to those officers out of a total pool determined by shareholder
return on equity ("ROE") as follows:
ROE/(1)/ in Excess of Base Rate/(2) Bonus as % of Average Net
Worth/(3)/ Outstanding
Zero or less 0%
Greater than 0% but less than 6% 10% * (actual ROE - Base Rate)
Greater than 6% (10% * 6%) + 15% * (Actual
ROE - (Base Rate + 6%))
Of the amount so determined, one-half will be deemed contributed to the
total pool in cash and the other half deemed contributed to the total pool in
the form of shares of Common Stock, with the number of shares to be calculated
based on the average price per share during the preceding year.
- ----------
/(1) /"ROE" is determined for the fiscal year by averaging the monthly ratios
calculated each month by dividing the Company's monthly Net Income
(adjusted to an annual rate) by its Average Net Worth for such month. For
such calculations, the "Net Income" of the Company means the net income or
net loss of the Company determined according to GAAP, but after deducting
any dividends paid or payable on preferred stock issued after the IPO and
before giving effect to the bonus incentive compensation or any valuation
allowance adjustment to stockholders' equity. The definition "ROE" is used
only for purposes of calculating the bonus incentive compensation payable
pursuant to the Bonus Incentive Compensation Plan, and is not related to
the actual distributions received by stockholders. The bonus payments will
be made before any income distributions are made to stockholders.
/(2) /"Base Rate" is the average for each month of the Ten-Year U.S. Treasury
Rate, plus 4%.
<PAGE> 11
/(3) /"Average Net Worth" for any month means the arithmetic average of the sum
of (i) the net proceeds from all offerings of equity securities by the
Company since formation (but excluding any offerings of preferred stock
subsequent to the IPO), after deducting any underwriting discounts and
commissions and other expenses and costs relating to the offerings, plus
(ii) the Company's retained earnings (without taking into account any
losses incurred in prior fiscal years, after deducting any amounts
reflecting taxable income to be distributed as dividends and without giving
effect to any valuation allowance adjustment to stockholders' equity)
computed by taking the daily average of such values during such period.
<PAGE> 1
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), dated as of the 13th day of
April, 1998, is entered into by and between Steven K. Passey ("Executive") and
RealTrust Asset Corporation, a Maryland corporation ("Company"), and is
effective as of and conditioned upon the completion of the Company's initial
public offering of up to 5,750,000 Units, each Unit consisting of one share of
Common Stock and One Stock Purchase Warrant ("IPO).
WHEREAS, the Company desires to establish its right to the continued
services of the Executive, in the capacity described below, on the terms and
conditions and subject to the rights of termination hereinafter set forth, and
the Executive is willing to accept such employment on such terms and conditions.
NOW, THEREFORE, in consideration of the mutual agreements hereinafter
set forth, the Executive and the Company have agreed and do hereby agree as
follows:
1. Employment by the Company. The Company does hereby employ, engage and hire
the Executive as Senior Vice President and Chief Financial Officer of the
Company, and the Executive does hereby accept and agree to such hiring,
engagement and employment. The Executive's duties shall be such executive and
managerial duties as the Board of Directors of the Company or its subsidiaries
shall from time to time prescribe and as provided in the bylaws of the Company.
The terms of this Agreement shall be subject to the personnel policies of the
Company as determined by the Board of Directors from time to time, except to the
extent that any such policy would have a material adverse effect on the rights
of the Executive under the terms of this Agreement. The Executive shall devote
such time, energy and skill to the performance of his duties for the Company and
for the benefit of the Company as may be necessary or required for the effective
conduct and operation of the Company's business. The Employee agrees, during the
Term of this Agreement and any extension of this Agreement, to devote his entire
business and professional time, attention, and energies exclusively to the
business of the Company as shall be necessary, advisable or required to perform
the duties of the Employee's position, and to conform to the rules, regulations,
instructions, personnel practices and policies of the Company, as existing and
amended from time to time by the Company or its Board. Furthermore, the
Executive shall exercise due diligence and care in the performance of his duties
to the Company under this Agreement.
2. Term of Agreement. The term ("Term") of this Agreement shall commence on the
date of the closing of the IPO (the "Effective Date") and shall continue through
April 13, 2001; provided, however, that on each April 13 commencing April 13,
2001 the Term of the Agreement shall automatically be extended for one
additional year unless, not later than three months prior to any such April 13,
either party shall have given written notice to the other that it does not wish
to extend the Term of the Agreement.
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3. Compensation.
a. Base Salary. The Company shall pay the Executive, and the Executive
agrees to accept from the Company, in payment for his services to the Company
beginning on the Effective Date, a base salary at the rate per annum to be
determined by the Compensation Committee of the Board of Directors and provided
to the Executive in writing ("Base Salary"), which is subject to change upon
thirty (30) days' notice and shall initially be set at One Hundred Twenty
Thousand Dollars ($120,000.00) and is subject to Annual Review by the Board of
Directors. Base Salary is payable in equal biweekly installments or at such
other time or times as the Executive and Company agree.
b. Performance Bonus. The Executive shall be entitled to receive an
incentive performance bonus equal to 7% of the Bonus Incentive Compensation Plan
established by the Company ("Bonus"), which, during the initial Term of this
Agreement, shall substantially reflect the provisions set forth in Exhibit A,
provided, however, that such Bonus shall not exceed the Executive's Base Salary
unless the Board otherwise determines. The Executive shall be entitled to
receive the Performance Bonus provided he is employed at the time of its
distribution.
c. Incentive Stock Options. At the Effective Date, the Company shall
grant Executive options to purchase 5,000 shares of the Company's Common Stock
at an exercise price equal to the IPO price. Such options shall vest and become
exercisable only as provided in the Company's 1998 Stock Option Plan, subject to
the completion of the Company's planned IPO.
d. Annual Review. The Compensation Committee of the Company's Board of
Directors shall, at least annually, review the Executive's entire compensation
package to determine whether it continues to meet the Company's compensation
objectives. Such annual review will include a determination of whether to
increase (i) the Base Salary set forth in Section 3(a) and (ii) the incentive
performance bonus to be awarded in accordance with Section 3(b).
4. Fringe Benefits. The Executive shall be entitled to participate in any
benefit programs adopted from time to time by the Company for the benefit of its
executive employees at an appropriate level for the duties of the officer, and
the Executive shall be entitled to receive such other fringe benefits as may be
granted from time to time by the Company's Board of Directors or its
Compensation Committee.
a. Benefit Plans. The Executive shall be entitled to participate in any
benefit plans relating to stock options, stock purchases, pension, thrift,
profit sharing, life insurance, medical coverage, education or other retirement
or employee benefits available to other executive employees of the Company at an
appropriate level for the duties of the office, subject to any restrictions
(including waiting periods) specified in such plans. The Company shall make
commercially reasonable efforts to obtain medical and disability insurance, and
such other forms of insurance as the Board of Directors shall determine, for its
employees.
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b. Vacation. The Executive shall be entitled to three (3) weeks of paid
vacation per calendar year, with such vacation to be scheduled and taken in
accordance with the Company's standard vacation policies.
5. Business Expenses. The Company shall reimburse the Executive for any and all
necessary, customary and usual expenses, properly receipted in accordance with
Company policies, incurred by the Executive on behalf of the Company.
6. Termination of Executive's Employment.
a. Death. If the Executive dies while employed by the Company, his
employment shall immediately terminate. The Executive's compensation and
benefits shall be determined in accordance with Section 8 below.
b. Disability.
(i) If, as a result of the Executive's incapacity due to physical
or mental illness ("Disability"), Executive shall have been absent from the
full-time performance of his duties with the Company for six (6) consecutive
months, and, within thirty (30) days after written notice is provided to him by
the Company, he shall not have returned to the full-time performance of his
duties, the Executive's employment under this Agreement may be terminated by the
Company for Disability. During any period prior to such termination during which
the Executive is absent from the full-time performance of his duties with the
Company due to Disability, the Company shall continue to pay the Executive his
Base Salary and Bonus at the rate in effect at the commencement of such period
of Disability. Subsequent to such termination, the Executive's compensation and
benefits upon termination by Disability shall be determined in accordance with
Section 8 below.
(ii) If, however, as a result of the Executive's partial
incapacity due to physical or mental illness in which Executive shall not have
been absent from his duties for six consecutive months and shall have returned
to work on a full-time basis but is not able to perform at the same level as
when hired and/or is not able to perform the same functions for which originally
hired ("Partial Disability"), the Company shall make reasonable efforts to
accommodate the Executive's Partial Disability by modifying his job description
appropriately, together with a commensurate adjustment in compensation;
provided, however, the Company shall be required to so continue the employment
of the Executive in the event of a Partial Disability of the Executive only if
the Company determines, in its sole discretion, that it can create a position
for which the Executive would be suited and that would be economically
advantageous to the Company.
c. Termination by the Company for Cause. The Company may terminate the
Executive's employment under this Agreement for "Cause," at any time prior to
expiration of the Term of the Agreement, only in the event of (i) acts or
omissions constituting gross negligence, recklessness or willful misconduct on
the part of the Executive in respect of his fiduciary obligations or otherwise
relating to the business of the Company, (ii) the Executive's material
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breach of this Agreement, or (iii) the Executive's conviction or entry of a plea
of nolo contendere for fraud, misappropriation or embezzlement. In such a case,
the Executive's employment under this Agreement may be terminated immediately
without any advance written notice, and the Company's obligation to pay the
Executive's Base Salary will cease and the Company shall have no obligation to
pay any Bonus or Fringe Benefits which may have accrued or vested as of the
termination date.
d. Termination by the Executive. The Executive may at any time during
the Term of this Agreement terminate his employment hereunder for any reason or
no reason by giving the Company notice in writing not less than one hundred
twenty (120) days in advance of such termination. Except as may be provided in
Sections 9 and 10, the Executive shall have no further obligations to the
Company after the effective date of termination, as set forth in the notice. In
the event of a termination by the Executive under this paragraph, the Company
will pay only the portion of Base Salary or previously awarded Bonus unpaid as
of the termination date. Fringe benefits which have accrued and/or vested on the
termination date will continue in effect according to their terms, but no
additional accrual or vesting will take place.
7. Compensation upon Termination by the Company upon Death, Disability or
Without Cause. If the Executive's employment shall be terminated (i) by
Executive's death, (ii) upon Executive's Disability or (iii) without cause, the
Executive shall be entitled to the following benefits:
a. Payment of Base Salary. The Company shall immediately pay the
Executive any portion of the Executive's Base Salary or previously awarded Bonus
not paid prior to the termination date.
b. Severance Payment. The Company shall pay the Executive an amount (the
"Severance Amount") equal to the one half of the Executive's current year Base
Salary plus any actual Bonus compensation for the preceding fiscal year;
provided, however, the Severance Amount shall not be less than Sixty Thousand
Dollars ($60,000.00) nor more (once the minimum is reached) than one percent
(1.0%) of the book value of the Company (i.e., the amount reported on the
Company's balance sheet prepared in accordance with generally accepted
accounting principles as stockholders' equity). The Severance Amount shall be
payable immediately upon the termination date.
c. Stock Options. Stock options owned by the Executive as of the
termination date shall be exercisable in accordance with the Company's stock
option plan and the applicable stock option agreements.
d. Continuation of Fringe Benefits. From and after termination of the
Executive's employment, the Company shall continue to provide the Executive with
all life insurance and medical coverage fringe benefits set forth in Section 4
as if the Executive's employment under the Agreement had not been terminated
until the earlier to occur of (i) such time as the Executive finds
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full-time employment or (ii) the expiration of one (1) year. Notwithstanding the
immediately preceding sentence, if, as the result of termination of the
Executive's employment, the Executive and/or his otherwise eligible dependents
or beneficiaries shall become ineligible for benefits under any one of the
Company's benefit plans or the cost of providing such benefits exceeds two
hundred percent (200%) of the cost of providing such benefits to other members
of senior management, the Company, at the Company's option, shall (i) continue
to provide the Executive and his eligible dependents or beneficiaries with
benefits at a level at least equivalent to the level of benefits for which the
Executive and his dependents and beneficiaries were eligible under such plans
immediately prior to the termination date or (ii) for any fringe benefit not so
provided, the Company shall pay the Executive 200% of the cost of providing such
fringe benefit to other members of senior management.
8. No Mitigation Required; No other Entitlement to Benefits under Agreement. The
Executive shall not be required in any way to mitigate the amount of any payment
provided for in Section 7, including, but not limited to, by seeking other
employment, nor shall the amount of any payment provided for in Section 7 be
reduced by any compensation earned by the Executive as a result of employment
with another employer after the termination date of employment, or otherwise.
Except as set forth in Section 7, following a termination governed by Section 7,
the Executive shall not be entitled to any other compensation or benefits set
forth in this Agreement, except as may be separately negotiated by the parties
and approved by the Board of Directors of the Company in writing in conjunction
with the termination of Executive's employment under Section 7.
9. Proprietary Information.
a. Executive acknowledges that certain technological and other
information may from time to time be disclosed to Executive by Company during
the continuance hereof. Executive hereby acknowledges that all such information
and technology, whether currently existing or hereafter developed by Company
through or involving the services and efforts of Executive hereunder, shall at
all times consist of and be preserved by Executive as valuable trade secrets and
confidential information which is proprietary to and owned exclusively by
Company, and that Executive does not have, and shall not have or hereafter
acquire, any rights in or to any of such information and technology, including
without limitation any patents, inventions, discoveries, know-how, trademarks or
trade names used or adopted by Company in connection with the design,
development, manufacture, or marketing of any financial or mortgage products
which at any time during the continuation hereof may be offered or sold by
Company. Executive further warrants and agrees that he shall not at any time,
whether during the continuance of this Agreement or after its expiration or
earlier termination, whether by Executive or by Company, in any manner or form,
directly or indirectly, use, disclose, duplicate, license, sell, reveal,
divulge, publish or communicate any portion of any such information or
technology, nor use, disclose, duplicate, license, sell, reveal, divulge,
publish or communicate any other confidential information concerning Company, or
any customers or products of Company, to any person, firm or entity.
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b. Executive acknowledges that the Company possesses information
obtained from its customers and clients ("Customer Confidences"). Executive
agrees never to make use of Customer Confidences for any use not expressly
authorized by the Customer whose Customer Confidences are in question.
c. The Executive agrees that all styles, designs, lists, materials,
books, files, reports, correspondence, records and other documents ("Company
Materials") used, prepared or made available to the Executive, shall be and
shall remain the property of the Company. Upon the termination of employment or
the expiration of this Agreement, all Company Materials shall be returned
immediately to the Company, and the Executive shall not make or retain any
copies thereof.
d. Executive agrees that the terms of this Section 9 will survive the
term of this Agreement and will continue in full force and effect throughout his
tenure with the Company in any capacity, whether as an employee, officer,
director or outside consultant.
10. Competition. During the Term hereof, Executive shall not, without Company's
prior written consent, directly or indirectly engage in any business activity,
or have any interest in any person, firm or other entity engaged in any business
activity, in which Company at the time is engaged or is planning to engage.
During the Term hereof and for a period of two (2) years thereafter, Executive
shall not directly or indirectly: (a) divert or take away or solicit or attempt
to divert or take away any of Company's customers, including without limitation
those customers with whom Executive became acquainted while retained by Company;
(b) employ, or knowingly permit any business entity controlled by Executive to
employ, any person who during the period of twelve (12) months immediately
preceding such time has been employed by Company; (c) solicit or otherwise seek
to induce any employee of Company to leave his or her employment with the
Company; or (d) undertake planning for or organization of any business activity
that will injure Company's business, or conspire with employees of Company for
the purpose of organizing any such injurious business activity. Executive agrees
that the terms of this Section 10 will survive the term of this Agreement and
will continue in full force and effect throughout his tenure with the Company in
any capacity, whether as an employee, officer, director or outside consultant.
However, this Section 10 shall not continue after termination of employment in
the event that the Company terminates Executive without Cause.
11. Notices. All notices and other communications under this Agreement shall be
in writing and shall be given by fax or first class mail, certified or
registered with return receipt requested, and shall be deemed to have been duly
given three (3) days after mailing or twenty-four (24) hours after transmission
of a fax to the respective persons named below:
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If to Company: RealTrust Asset Corporation
Attn: Board of Directors
2855 E. Cottonwood Parkway
Salt Lake City, UT 84121
Phone: (801) 365-3000
Fax: (801) 365-3125
If to Executive: Steven K. Passey
1004 East 320 South
Layton, UT 84041
Either party may change such party's address for notices by notice duly given
pursuant hereto.
12. Attorneys Fees. In the event judicial determination is necessary of any
dispute arising as to the parties' rights and obligations hereunder, each party
shall have the right, in addition to any other relief granted by the court, to
attorneys' fees based on a determination by the court of the extent to which
each party has prevailed as to the material issues raised in determination of
the dispute.
13. Termination of Prior Agreements. This Agreement terminates and supersedes
any and all prior agreements and understandings between the parties with respect
to employment or with respect to the compensation of the Executive by the
Company.
14. Assignment; Successors. This Agreement is personal in its nature and neither
of the parties hereto shall, without the consent of the other, assign or
transfer this Agreement or any rights or obligations hereunder; provided that,
in the event of the merger, consolidation, transfer, or sale of all or
substantially all of the assets of the Company with or to any other individual
or entity, this Agreement shall, subject to the provisions hereof, be binding
upon and inure to the benefit of such successor and such successor shall
discharge and perform all the promises, covenants, duties, and obligations of
the Company hereunder.
15. Governing Law. This Agreement and the legal relations thus created between
the parties hereto shall be governed by and construed under and in accordance
with the laws of the State of Utah.
16. Entire Agreement; Headings. This Agreement embodies the entire agreement of
the parties respecting the matters within its scope and may be modified only in
writing. Section headings in this Agreement are included herein for convenience
of reference only and shall not constitute a part of this Agreement for any
other purpose.
17. Waiver; Modification. Failure to insist upon strict compliance with any of
the terms, covenants or conditions hereof shall not be deemed a waiver of such
term, covenant or condition, nor shall any waiver or relinquishment of, or
failure to insist upon strict compliance with, any
7
<PAGE> 8
right or power hereunder at any one or more times be deemed a waiver or
relinquishment of such right or power at any other time or times. This Agreement
shall not be modified in any respect except by a writing executed by each party
hereto.
18. Severability. In the event that a court of competent jurisdiction determines
that any portion of this Agreement is in violation of any statute or public
policy, only the portions of this Agreement that violate such statute or public
policy shall be stricken. All portions of this Agreement that do not violate any
statute or public policy shall continue in full force and effect. Further, any
court order striking any portion of this Agreement shall modify the stricken
terms as narrowly as possible to give as much effect as possible to the
intentions of the parties under this Agreement.
19. Indemnification. The Company shall indemnify and hold Executive harmless to
the maximum extent permitted by Maryland Law and the Bylaws of the Company.
20. Counterparts. This Agreement may be executed in counterparts.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered as of the date first above written.
"Company" "Executive"
RealTrust Asset Corporation, Steven K. Passey
a Maryland corporation
By: ________________________________ _________________________________
John D. Fry Steven K. Passey
President and Chief Executive
Officer
8
<PAGE> 9
EXHIBIT A
BONUS INCENTIVE COMPENSATION PLAN
The Bonus Incentive Compensation Plan shall be effective commencing upon
closing of the Company's initial public offering ("IPO"). The annual bonus
pursuant to the Bonus Incentive Compensation Plan will be paid one-half in cash
and one-half in shares of Common Stock of the Company, annually, following
receipt of the audit for the related fiscal year. This program will award
bonuses annually to those officers out of a total pool determined by shareholder
return on equity ("ROE") as follows:
ROE/(1)/ in Excess of Base Rate/(2) Bonus as % of Average Net
Worth/(3)/ Outstanding
Zero or less 0%
Greater than 0% but less than 6% 10% * (actual ROE - Base Rate)
Greater than 6% (10% * 6%) + 15% * (Actual
ROE - (Base Rate + 6%))
Of the amount so determined, one-half will be deemed contributed to the
total pool in cash and the other half deemed contributed to the total pool in
the form of shares of Common Stock, with the number of shares to be calculated
based on the average price per share during the preceding year.
- ----------
/(1) /"ROE" is determined for the fiscal year by averaging the monthly ratios
calculated each month by dividing the Company's monthly Net Income
(adjusted to an annual rate) by its Average Net Worth for such month. For
such calculations, the "Net Income" of the Company means the net income or
net loss of the Company determined according to GAAP, but after deducting
any dividends paid or payable on preferred stock issued after the IPO and
before giving effect to the bonus incentive compensation or any valuation
allowance adjustment to stockholders' equity. The definition "ROE" is used
only for purposes of calculating the bonus incentive compensation payable
pursuant to the Bonus Incentive Compensation Plan, and is not related to
the actual distributions received by stockholders. The bonus payments will
be made before any income distributions are made to stockholders.
/(2) /"Base Rate" is the average for each month of the Ten-Year U.S. Treasury
Rate, plus 4%.
<PAGE> 10
/(3) /"Average Net Worth" for any month means the arithmetic average of the sum
of (i) the net proceeds from all offerings of equity securities by the
Company since formation (but excluding any offerings of preferred stock
subsequent to the IPO), after deducting any underwriting discounts and
commissions and other expenses and costs relating to the offerings, plus
(ii) the Company's retained earnings (without taking into account any
losses incurred in prior fiscal years, after deducting any amounts
reflecting taxable income to be distributed as dividends and without giving
effect to any valuation allowance adjustment to stockholders' equity)
computed by taking the daily average of such values during such period.
<PAGE> 1
EXHIBIT 10.5
Execution Copy
As of December 17, 1996
CMG Funding Corp.
5295 Commerce Drive
Suite 400
Salt Lake City, Utah 88107
Re: Exclusive Right to Purchase and Securitize Loans
and Investment Banking Services
Ladies and Gentlemen:
This letter (the "Investment Banking Services Agreement") hereby confirms that
each of CMG Funding Corp., ("CMG") and Continental Mortgage Group, L.C. and its
successors ("CMLC" which together with CMG are referred to herein as "CMGFC") in
consideration of (i) ContiTrade Services L.L.C. ("CTS") providing a mortgage
loan purchase and sale facility to CMG pursuant to the Purchase and Sale
Agreement dated as of December 17, 1996 (the "Purchase Agreement") among CMG,
CMLC and CTS, (ii) CTS providing a standby financing facility to CMG, CMLC
pursuant to the Standby and Working Capital Financing Agreement dated as of
December 17, 1996 (the "Standby Agreement") among CTS, CMGFC, CMLC and CMG
Funding Securities Corp., (iii) CTS providing subordinated debt financing (the
"Subordinated Debt") pursuant to the Subordinated Debt Agreement dated as of
December 17, 1996 (the "Subordinated Debt Agreement") between CMG and CTS, (iv)
ContiFinancial Corporation, a Delaware corporation ("CFC"), investing in CMG
through the purchase of its Class A preferred stock (the "Preferred Stock")
pursuant to the Preferred Stock Purchase Agreement, dated as of December 17,
1996, between CFC and CMG, and (v) the mutual promises and other valuable
consideration described herein (a) irrevocably appoints ContiFinancial Services
Corporation (the "Agent" or "CFS") as the exclusive agent of CMGFC with respect
to any securitization, financing, sale or transfer of loans, other than as
provided for in Section 3 hereof with respect to Alternate Sale Loans (as
hereinafter defined), by CMGFC or any special purpose corporation or trust
created for such purpose (the "Issuer") (CMGFC, the Issuer, any affiliate of
either, and any entity owned, controlled or created by either, collectively, the
"CMGFC Group"), or by any other member of CMGFC Group, of closed-end
non-conforming credit, fixed rate and adjustable rate mortgage loans and home
equity loans which satisfy the Securitization Program Mortgage Loan Underwriting
Guidelines of the Purchase Agreement (the "Loans") or any sale of asset-backed
securities representing an interest in the Loans, and any additional credit
enhancement ("Credit Enhancement") (as described below) in pass-through,
pay-through or any other format, either in single-tranche or multi-tranche
structures, such
<PAGE> 2
format to be determined by the Agent with CMGFC's consent, which shall not be
unreasonably withheld, (such asset-backed securities, the "Securities"), in a
series of one or more private placement(s) (whether under Rule 144A under the
Securities Act of 1933 or otherwise) or public offering(s) (each such placement
or offering of Securities constituting a "Securitization"), upon the terms and
conditions described below, (b) grants to CTS or an affiliate thereof, in
connection with any Securitization, (i) the option, to be exercised in CTS's
sole discretion, to purchase at fair market value certain Loans representing up
to (A) 75%, during and prior to 1997, (B) 50%, during 1998, and (C) 25%, during
1999 and thereafter, of the Loans intended to be securitized in such
Securitization (however, in individual transactions, the percentage so purchased
may vary by as much as 5% from the level specified for such year) or such
greater amount as agreed to by CMGFC and the Agent immediately prior to their
transfer for securitization and (ii) the right upon the exercise of such option
to deposit such purchased Loans into the Issuer effecting such Securitization
and to receive in consideration therefor the proportionate interest in any
residual interest ("Residual Interest") or interest only interests ("I/O
Interests") issued in such Securitization, and (c) grants to CTS or an affiliate
thereof the right to bid to provide certain investment banking services to
CMGFC. It is currently anticipated that CMGFC Group will sell or finance
substantially all Loans, subject to Section 3 herein, through Securitizations
for the term of this Investment Banking Services Agreement (as described in
Section 5 herein).
1. Loans. The Loans with regard to each respective Securitization
will: (a) have terms and conditions as set forth in the underwriting guidelines
annexed as Exhibits A and B to the Purchase Agreement or as jointly agreed from
time to time by CMGFC and CTS; (b) be secured by a mortgage in a related
mortgaged property; and (c) meet the underwriting criteria established for
securitization as specified in the Purchase Agreement and consistent with
marketplace securitization requirements or as otherwise jointly agreed.
2. Securities. It is expected that each Securitization shall
consist of at least one class of Securities rated "A" (or the equivalent) or
higher by at least one nationally recognized rating agency ("Rating Agency")
acceptable to the Agent and CMGFC. The Agent will determine, with CMGFC's
consent, which shall not be unreasonably withheld, the form of Credit
Enhancement and pricing for the Securities, if any, as required by the Rating
Agency, which may consist of a financial guarantee or guarantees, subordination,
overcollateralization or other form of credit enhancement or some combination of
the foregoing.
3. Form of Delivery. The Securities may be issued as notes,
certificates or a combination thereof pursuant to a pooling and servicing
agreement, indenture, or other form of securitization agreement acceptable to
the Agent and CMGFC (together with related documents, the related "Agreement")
to be entered into between CMGFC, ContiMortgage Corporation ("CMC") as servicer
with respect to such transaction, the Issuer and a trustee (the "Trustee")
mutually acceptable to the Agent and CMGFC. The Issuer shall pay the ongoing
costs of the Trustee. CMGFC and CTS, where applicable, will convey the Loans to
the Issuer in exchange for the net proceeds of
2
<PAGE> 3
the Securities. The Securities may be issued in one or more classes,
representing various interests and rights of priority in payment as required by
the purchaser(s) of such Securities. In order to enhance the pool
characteristics for a group of Loans relating to a particular Securitization or
for other reasonable business purposes, it is currently contemplated that from
time to time a member of the CMGFC Group may sell Loans, without the need to
obtain the prior written approval of the Agent, through whole loan sales,
participation sales or by some other means that does not involve the
consummation of a Securitization or a financing of such Loans (as determined in
the reasonable discretion of the Agent) (the "Alternate Sale Loans"); provided
that during the period leading up to each Securitization, commencing on the date
of this Investment Banking Services Agreement, for the period leading up to the
first Securitization, or commencing on the date of closing of the immediately
preceding Securitization for all subsequent Securitizations, any member of the
CMGFC Group shall not sell an amount of Alternate Sale Loans which in the
aggregate is greater than (a) with respect to the initial transaction,
$5,000,000, and (b) with respect to all subsequent transaction, 10% of the
aggregate principal amount of Loans expected by the Agent to be included in the
next Securitization as indicated in a written notice provided by the Agent from
time to time; provided however, that CMGFC may sell a greater amount of
Alternate Sale Loans to the extent that Seller has fully utilized its (a)
purchase capacity under the Purchase Agreement and (b) borrowing capacity under
the Standby Agreement and all other facilities available to CMGFC to inventory
Loans and such additional sales are necessary to maintain liquidity for
continued operations. In addition, CTS shall have the right to purchase such
Alternate Sale Loans at a price which equals the highest bid received by the
CMGFC Group for such Alternate Sale Loans. It is currently anticipated that
CMGFC shall consummate Securitizations on a quarterly basis. CMGFC shall use its
best efforts to cause the CMGFC Group to effectuate Securitizations on such
schedule.
4. Servicing of the Loans. For a particular Securitization, the
Loans will be serviced by CMC in accordance with the terms and provisions of the
servicing agreement referred to in the Purchase Agreement with respect to Loans
to be securitized and, upon securitization, the related Agreement. CMC shall be
entitled to a servicing fee equal to 0.50% per annum on the unpaid balance of
the Loans related to such Securitization or under the Purchase Agreement. Such
servicing agreement and the related Agreement, as applicable, will, among other
things, (a) require that CMGFC make certain representations and warranties
concerning the quality and the underwriting of the Loans, (b) require that CMC
make certain representations and warranties concerning the servicing of the
Loans, and (c) to the extent such representations and warranties are breached
with respect to a particular Loan, will require that CMGFC or CMC repurchase
such Loan, as the case may be. If and when CMGFC is acceptable to the Rating
Agencies and the credit enhancers (if any) to act as the Servicer in particular
Securitizations, CMGFC may act as the Servicer in such future Securitizations,
and possess the rights and perform the obligations of the Servicer hereunder
with respect to such future Securitizations.
5. Term. The term established hereby shall be in effect for the
period commencing on the date hereof and expiring upon the earlier to occur of
(a) the date five
3
<PAGE> 4
years after the date of this Agreement, (b) the date written notice of
termination is given by the Agent, at the sole discretion of the Agent in the
event that CMGFC is in material default under any of the Documents (as
hereinafter defined), or (c) the date written notice of termination is given by
CMGFC, at the sole discretion of CMGFC in the event that (i) CTS or CFS is in
material breach of its obligations under this Investment Banking Services
Agreement, the Purchase Agreement or the Standby Agreement such that such
material breach is the cause of the termination of such agreement or (ii) the
Agent has habitually failed to securitize pools of Loans (except where alternate
forms of disposition provide comparable execution) for a period in excess of a
year during such periods when similar sized pools of mortgage loans having
similar characteristics and quality have been readily securitized by others (the
"Termination Date").
6. Exclusive. The placement agency created hereby is (i)
irrevocable, being a power coupled with an interest, namely the extension of
credit by CTS, under the Standby Agreement and the Subordinated Debt Agreement
to CMGFC as partial consideration for the appointment of the Agent hereunder and
(ii) exclusive from the date hereof through the earlier of (A) the date CTS
terminates the Purchase Agreement or the Standby Agreement and such termination
materially and adversely interferes with the ability of CMGFC to continue its
business or (B) the Termination Date (the "Term of Exclusivity"), and CMGFC
shall cause each member of the CMGFC Group, except as permitted pursuant to
Section 3 with respect to Alternate Sale Loans, (a) not to employ any other
agent, broker or person for any securitization of Loans or the sale or placement
of any Securities or other interests in the Loans or secured thereby during the
term of this Investment Banking Services Agreement, except as determined to be
appropriate in the judgment of the Agent, (b) not to withdraw any Loans or
Securities from sale, (c) not to attempt to sell or otherwise finance any Loans
or Securities itself during the Term of Exclusivity, and (d) to refer to the
Agent all inquiries with respect to any purchase or financing of any Loans or
Securities. Further, during the Term of Exclusivity and for a period of 18
months thereafter, CMGFC shall cause each member of the CMGFC Group, not to (x)
directly or indirectly seek to sell any Loans or Securities, to any offeree,
subscriber, person or entity whose name is or was provided to the CMGFC Group by
the Agent pursuant to this Investment Banking Services Agreement, other than an
entity generally known in the industry as an investor in such products or known
to CMGFC prior to the date of this Investment Banking Services Agreement as an
investor in such products (y) use such names except in connection with this
Investment Banking Services Agreement or (z) disclose such names to any other
agent, broker or person, unless prior thereto the CMGFC Group has obtained the
written consent of the Agent.
7. Best Efforts. The Agent agrees to utilize its best efforts in
its ordinary course of business to obtain one or more purchasers of rated
Securities which are issued as applicable during the term of this Investment
Banking Services Agreement and upon the terms set forth herein.
8. Compensation. In the event a letter of intent, placement
agreement, purchase price letter, purchase agreement or any other written or
verbal agreement with respect to the Securitization of any Loans (other than
Alternate Sale
4
<PAGE> 5
Loans) or the sale of Securities issued in respect thereof is entered into
during the term of this Investment Banking Services Agreement (whether or not
through the efforts of the Agent), CMGFC shall pay compensation as required by
this Section 8 to the Agent simultaneously with the closing of the sale of the
Securities, the Securitization of the Loans, or interests therein,
notwithstanding that such closing may occur after the expiration of the term of
this Investment Banking Services Agreement. With respect to any Securitization
of a pool of Loans (other than Alternate Sale Loans) or the sale of Securities
issued in respect thereof, CMGFC shall pay to the Agent as compensation an
amount equal to the greater of (i) an amount equal to the product of (A) (x)
0.50%, with respect to privately placed Securitizations, or (y) 0.25%, with
respect to publicly offered Securitizations, and (B) the principal amount of
Securities issued in the Securitization of such pool of Loans, or (ii) the
Minimum Placement and Structuring Fee which equals $200,000.
9. Investment Banking Services. In those cases where CMGFC, in
its sole discretion, determines that it has a need for general investment
banking services, CMGFC shall give to CTS or an affiliate thereof the
opportunity to bid to provide to CMGFC such services, including, without
limitation, those services customarily provided by investment banking firms to
their clients in connection with mergers and acquisitions, capital markets
access and corporate finance, including, without limitation, the following:
(a) evaluation and recommendation or financial and
strategic alternatives;
(b) evaluation and recommendation of internal policies,
procedures and systems, in each case, relating to the
requirements of the securitization market;
(c) introduction of CMGFC to, and facilitation of CMGFC's
discussions with, guarantors, rating agencies, investors and
other third parties involved in the securitization market;
(d) advice concerning the strategy and tactics of
negotiations, and participation in such negotiations;
(e) advice on the timing, structure and pricing of a
transaction; and
(f) such additional investment banking services as from
time to time may be mutually agreed upon.
Except as expressly set forth in this Agreement, neither CTS nor
CFS shall be responsible for providing, nor does either make any representations
or commitments concerning financing (whether in the form of debt or equity or
any combination or derivative thereof) or for the underwriting or placement of
securities for CMGFC.
5
<PAGE> 6
10. Loan Purchase. During the Term of Exclusivity, in connection
with any Securitization, CTS or an affiliate thereof (the "Purchaser") shall
have the right to purchase from CMGFC, at CTS's sole option, an amount of Loans
(the "Purchased Loans") representing up to (A) 75%, during and prior to 1997,
(B) 50%, during 1998, and (C) 25%, during 1999 and thereafter, of the Loans, by
principal balance, intended to be securitized in such Securitization (however,
in individual transactions, the percentage so purchased may vary by as much as
5% from the level specified for such year), or such greater amount as agreed to
by CMGFC and the Agent, immediately prior to their transfer for such
Securitization. The Purchased Loans will be selected so as to be representative
in all respects to the Loans being securitized in such Securitization. The
Purchaser shall pay CMGFC an amount equal to the fair market value of the
Purchased Loans as the purchase price therefor. If CMGFC questions the
Purchaser's determination of the fair market value of the Purchased Loans, CMGFC
and the Purchaser will agree to reexamine such determination if CMGFC
demonstrates that such determination is materially different from the prices bid
by two or more separate unrelated third party investors who have extended
binding offers to purchase such Purchased Loans. The sale of the Purchased Loans
will be effected through a purchase agreement wherein CMGFC will provide the
Purchaser with (i) the same representations and warranties with respect to the
Purchased Loans as will be provided in the Securitization to the Issuer, with
respect to the Loans securitized thereunder, (ii) indemnification for any
liabilities resulting from the breach of such representations and warranties,
and (iii) the right to assign such representations and warranties and such right
to indemnification to any assignee of the Purchaser. The Purchaser shall have
the right (x) to deposit the Purchased Loans into the Issuer effecting such
Securitization, (y) to assign the rights described in clause (iii) above to the
Issuer in lieu of being required to separately provide such representations and
warranties and such indemnification and (z) to receive in consideration therefor
a fractional portion of the total amount of (A) the Residual Interest and the
I/O Interests issued in such Securitization, (B) the other Securities issued in
such Securitization which were not sold to the public or the underwriters or
privately placed with third persons, and (C) the net proceeds of such
Securitization equal to the ratio between the principal balance of the Purchased
Loans and the principal balance of all the Loans securitized in such
Securitization.
11. Information Disclosure. CMGFC agrees, from time to time with
respect to each Securitization, to make available to the Agent and any
prospective purchaser of Securities for their review, and for use in disclosure
materials in connection with such Securitization (the "Disclosure Materials")
all documents and records relating to the Loans, the underwriting, origination
and servicing practices and loan portfolio performance history of CMGFC and CMC,
and such other related information as the Agent may reasonably request from time
to time. Further, in connection with each Securitization, CMGFC agrees to review
the Disclosure Materials for accuracy and completeness and to notify the Agent
of any errors and omissions therein.
12. Cooperation. CMGFC agrees, and shall cause each member of the
CMGFC Group, to cooperate with prospective purchasers of Securities designated
by the Agent in the furnishing of information relating to the Loans or
Securities. CMGFC
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<PAGE> 7
further agrees, and shall cause each member of the CMGFC Group, to execute and
deliver such instruments and take such actions as the Agent or any purchaser
may, from time to time, reasonably request in order to effectuate the sale of
Loans or Securities. CMGFC shall cause each member of the CMGFC Group to abide
by the terms of this Investment Banking Services Agreement as if it were a party
hereto.
13. Expenses. All reasonable costs and expenses in connection
with this agency, the issuance of the Securities, and the transfer of the Loans
to the Trustee, the Issuer, or any purchaser shall be paid by CMGFC and CTS
based on CMGFC's and CTS's pro rata portion or respective percentage ownership
interest in the Residual Interests of the related Securitization. Such costs and
expenses shall include among other things, costs and expenses related to the
fees and disbursements of the CMGFC Group's external counsel, the Trustee's
up-front fees (including the fees and disbursements of its external counsel),
the Agent's external counsel, CTS's external counsel (if any), external counsel
for any purchaser of the Securities and the fees of the CMGFC Group's external
accounting firm.
14. Purchaser's Ability to Perform. Neither CTS nor CFS shall
make, nor shall either entity be deemed to have made, any representation or
warranty in respect of any purchaser's ability or capacity to perform any
contractual obligations to CMGFC or to purchase any Securities or Loans, other
than CTS's or CFS's own ability and capacity to fulfill their respective
obligations as contemplated in this Investment Banking Services Agreement.
15. CMGFC's Representation. CMGFC hereby represents and warrants
as of the date of this Investment Banking Services Agreement and shall represent
and warrant as of dates designated from time to time by the Agent with respect
to each Securitization that (a) the CMGFC Group has not, directly or indirectly
(except through the Agent), sold or offered, or attempted or offered to dispose
of or solicited any offer to buy, or otherwise approached or negotiated in
respect of, any Securities, and (b) the Disclosure Materials used in connection
with such Securitization, or the information provided by CMGFC to any
prospective purchaser of Securities, do not include any untrue statement of a
material fact or do not omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. As used herein the
terms "offer" and "sales" have the meanings specified in Section 2(3) of the
Securities Act of 1933, as amended.
16. Indemnity. CMGFC will indemnify and hold harmless CFS, CTS
and any affiliates thereof and their respective officers, directors, members,
employees and affiliates (the "Indemnified Parties") against any losses, claims,
damages or liabilities to which the Indemnified Parties may become subject in
connection with any matter related to or arising out of this Investment Banking
Services Agreement; provided, however, there shall be excluded from such
indemnification any such loss, claim, damage or liability which results from the
gross negligence or willful misconduct of the Indemnified Parties in performing
the services which they are to render pursuant hereto. Such
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<PAGE> 8
indemnity shall include, but not be limited to, any claims made against the
Indemnified Parties respecting (a) the accuracy or completeness of the materials
or information provided by CMGFC to any Indemnified Party or a purchaser or
prospective purchaser of Loans or Securities placed by CTS or (b) any action, or
failure to act, by any Indemnified Party undertaken at CMGFC's written request
or with CMGFC's written consent. In the event any Indemnified Party intends to
seek indemnification by CMGFC hereunder, it will, as soon as practicable, advise
CMGFC of the circumstances giving rise to CMGFC's obligation hereunder.
17. Amendment and Termination. Except as specifically provided
for herein, neither CMGFC nor the Agent shall have the right to amend, modify or
terminate this Investment Banking Services Agreement or the Term of Exclusivity
without the written consent of the other party hereto; provided that CMGFC's and
the CMGFC Group's obligations under (i) Sections 8, 11, 12, 13, 14, 15, 16, 19,
20 and 21 hereof shall survive any termination of this Investment Banking
Services Agreement and (ii) Sections 6 and 10 hereof shall survive any
termination of this Investment Banking Services Agreement unless terminated
pursuant to the terms of Section 5(c).
18. Documentation. As a condition to the obligations of CTS and
CFS under this Investment Banking Services Agreement, CTS and CFS shall execute
documentation establishing the Purchase Agreement and each of the other
Significant Documents as defined therein (the "Documents"). In addition, with
respect to any Loans or Securities placed by CTS or an affiliate thereof, the
Agreement and any related purchase agreement(s) and other customary documents,
instruments, certificates and opinions of counsel shall be executed and
delivered by the appropriate parties. Such customary items shall include, but
not be limited to, (a) opinions from the CMGFC Group's external counsel, which
counsel and opinions shall be acceptable to CTS and CFS, regarding (i) the true
sale of the Loans from CMGFC to the Issuer and (ii) the non-consolidation of the
Issuer into CMGFC's estate upon a bankruptcy of CMGFC and (b) a letter from the
CMGFC Group's external accounting firm (such firm to be reasonably acceptable to
the Agent) (i) verifying the accuracy of any portfolio performance information
and statistical stratifications and analyses of the Loans used in Disclosure
Materials and marketing the Loans or Securities to prospective purchasers and
(ii) describing the agreed-upon-procedures performed by such accounting firm on
a statistical sample of Loans involved in a Securitization.
19. Contribution. If the indemnification provided for in Section
16 is unavailable or insufficient to hold harmless an Indemnified Party, then
CMGFC shall contribute to the amount paid or payable by such Indemnified Party
as a result of the losses, claims, damages or liabilities referred to in Section
16 (a) in such proportion as is appropriate to reflect the relative benefits
received by CMGFC and the CMGFC Group on the one hand and the Agent and CTS on
the other, from the offering of the Securities or (b) if the allocation provided
by clause (a) is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (a)
above but also the relative fault of CMGFC and the CMGFC Group on the one hand
and the Agent and CTS on the other, in connection with the statements or
omissions
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<PAGE> 9
which resulted in such losses, claims, damages or liabilities, as well as any
other relevant equitable considerations.
20. GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF TRIAL BY
JURY. THIS INVESTMENT BANKING SERVICES AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD
TO CONFLICT OF LAWS RULES APPLIED IN THE STATE OF NEW YORK. WITH RESPECT TO ANY
CLAIM ARISING OUT OF THIS INVESTMENT BANKING SERVICES AGREEMENT (A) EACH PARTY
IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF
NEW YORK AND THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW
YORK, AND (B) EACH PARTY IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY HAVE AT
ANY TIME TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF
OR RELATING HERETO BROUGHT IN ANY SUCH COURT, IRREVOCABLY WAIVES ANY CLAIM THAT
ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT
IN AN INCONVENIENT FORUM AND FURTHER IRREVOCABLY WAIVES THE RIGHT TO OBJECT,
WITH RESPECT TO SUCH CLAIM, SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH
COURT, THAT SUCH COURT DOES NOT HAVE JURISDICTION OVER SUCH PARTY. TO THE EXTENT
PERMITTED BY APPLICABLE LAW, CFS, CTS AND CMGFC EACH IRREVOCABLY WAIVES ALL
RIGHT OF TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF
OR IN CONNECTION WITH THIS INVESTMENT BANKING SERVICES AGREEMENT OR ANY MATTER
ARISING HEREUNDER. TO THE EXTENT PERMITTED BY APPLICABLE LAW, CMGFC SHALL CAUSE
EACH MEMBER OF THE CMGFC GROUP TO IRREVOCABLY WAIVE THROUGH A SIGNED WRITTEN
INSTRUMENT ALL RIGHT OF TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM
ARISING OUT OF OR IN CONNECTION WITH THIS INVESTMENT BANKING SERVICES AGREEMENT
OR ANY MATTER ARISING HEREUNDER AND SHALL PROMPTLY DELIVER TO THE AGENT SUCH
WRITTEN WAIVERS.
21. Representation by Counsel. CMGFC hereby acknowledges to CFS
and CTS that it has been represented by counsel of its choice during the course
of the negotiation of this Investment Banking Services Agreement and the
Documents.
[Remainder of Page Intentionally Left Blank]
9
<PAGE> 10
If you agree to the foregoing terms and conditions, please so
indicate by executing the acknowledgment on the enclosed copy of this Investment
Banking Services Agreement and returning it to us.
Very truly yours,
CONTIFINANCIAL SERVICES CORPORATION
By:
------------------------------------------
Name:
Title: Authorized Signatory
By:
------------------------------------------
Name:
Title: Authorized Signatory
CONTITRADE SERVICES L.L.C.
By:
------------------------------------------
Name:
Title: Authorized Signatory
By:
------------------------------------------
Name:
Title: Authorized Signatory
Accepted and agreed by:
CMG FUNDING CORP.
By:
-------------------------------
Name: John Fry
Title: President
CONTINENTAL MORTGAGE GROUP, L.C.
By:
-------------------------------
Name: John Fry
Title: President
10
<PAGE> 11
[Signature Page to Investment Banking Services Agreement]
11
<PAGE> 12
Execution Copy
AMENDMENT 1 TO LETTER AGREEMENT
REFERRED TO AS THE INVESTMENT BANKING SERVICES AGREEMENT
This Amendment 1, dated as of November 18, 1997 (the
"Amendment"), to the Letter Agreement (the "Investment Banking Services
Agreement"), dated as of December 17, 1996, among CMG Funding Corp., ("CMGFC")
and Continental Mortgage Group, L.C. (now succeeded by CMG Funding Corp.),
ContiTrade Services L.L.C., ("CTS") and ContiFinancial Services Corporation.
WHEREAS, the parties hereto have entered into the Investment
Banking Services Agreement, as well as a series of other agreements designated
as Documents in the Letter Agreement; and
WHEREAS, the parties hereto now wish to amend the certain
provisions in the Investment Banking Services Agreement.
NOW, THEREFORE, in consideration of the promises and agreements
contained herein, the parties hereto agree, pursuant to section 17 of the
Investment Banking Services Agreement, to amend the Investment Banking Services
Agreement and restate certain provisions thereof as follows:
1. Defined Terms. Capitalized terms used herein without
definition have the meanings ascribed to them in the Investment Banking Services
Agreement.
2. Initial Paragraph. The initial paragraph of the Investment
Banking Services Agreement is amended as follows:
(a) through the replacement of the phrase "the option," in
clause (b)(i) thereof with the phrase "the option, prior to the
REIT Issuance (as defined herein, as amended),";
(b) through the inclusion of a new clause (c) immediately
after clause (b) thereof, as follows: (c) grants to CTS or an
affiliate thereof the option, on or after the REIT Issuance, to
be exercised in CTS's sole discretion, to purchase certain Loans
each month which in the aggregate equal or exceed by principal
balance the Monthly Purchase Target (as defined herein, as
amended) as more fully set forth in Section 10 hereof,";
(c) through the relettering of the existing clause (c)
thereof as clause (d) thereof;
(d) through the substitution of the phrase "substantially
all ARM Loans (as defined herein, as amended)" for the phrase
"substantially all Loans" in the last sentence therof.
<PAGE> 13
(e) through appending the following sentence at the end
thereof: "The Agent may exercise its rights hereunder directly
or, with respect to the public offering of Securities, the Agent
may act as financial advisor to arrange on behalf of CMGFC with
other parties to perform or participate in any underwriting of
Securities."
3. Form of Delivery. Section 3 of the Investment Banking Services
Agreement shall be amended as follows:
(a) through the replacement of the phrase "it is currently
contemplated that" in the fifth sentence thereof with the phrase
"it is currently contemplated that, prior to the REIT
Issuance,"; and
(b) through the addition of the following sentence
immediately after the sixth sentence thereof: "On and after the
REIT Issuance, (i) no Loan will qualify as an Alternate Sale
Loan, and (ii) no member of the CMGFC Group may sell any
Alternate Sale Loans."
4. Servicing of the Loans. Section 4 of the Investment Banking
Services Agreement shall be replaced in its entirety with the following:
4. Servicing of the Loans: For a particular
Securitization, the Loans will be serviced by a servicer that is
reasonably acceptable to CTS (the "Servicer"), in accordance
with the terms and provisions of the servicing agreement
referred to in the Purchase Agreement with respect to Loans to
be securitized and, upon securitization, the related Agreement.
The Servicer shall be entitled to a servicing fee no greater
than 0.50% per annum on the unpaid balance of the Loans related
to such Securitization or under the Purchase Agreement. Such
servicing agreement and the related Agreement, as applicable,
will, among other things, (a) require that CMGFC make certain
representations and warranties concerning the quality and the
underwriting of the Loans, (b) require that the Servicer make
certain representations and warranties concerning the servicing
of the Loans, and (c) to the extent such representations and
warranties are breached with respect to a particular Loan, will
require that CMGFC or the Servicer repurchase such Loan, as the
case may be. If and when CMGFC is acceptable to the Rating
Agencies and the credit enhancers (if any) to act as the
Servicer in particular Securitizations, CMGFC may act as the
Servicer in such future Securitizations, and possess the rights
and perform the obligations of the Servicer hereunder with
respect to such future Securitizations.'
5. Term. Section 5 of the Investment Banking Services Agreement
is amended as follows:
2
<PAGE> 14
(a) through the insertion of the phrase "which remain in
effect" immediately following the closure of the
parenthetical in clause (b) thereof;
(b) through the insertion of the notation "(A)" immediately
following the phrase "habitually failed" in clause (c)
(ii) thereof; and
(c) through the insertion of the phrase "or (B) to arrange, as
financial advisor, on behalf of CMGFC for the
securitization of pools of Loans through public offerings
with other parties acting as underwriters,"
6. Exclusive. Section 6 of the Investment Banking Services
Agreement is amended as follows:
(a) through the insertion of the notation "(A)" immediately
following the phrase "namely the extension of "in clause
(i) thereof;
(b) through the insertion of the phrase ", and/or (B) a
purchase facility by CTS under the Purchase Agreement to
CMGFC," immediately following the acronym "CMGFC" in
clause (i) thereof;
(c) through the insertion of the word "unilaterally"
immediately following the acronym "CTS" in clause (ii)(A)
thereof; and
(d) through the deletion of the phrase "or the Standby
Agreement" in clause (ii)(A) thereof.
7. Compensation. Section 8 of the Investment Banking Services
Agreement is amended through appending the following sentences at the end
thereof: 'During the Term of the Investment Banking Services Agreement, the
Agent shall be entitled to the above stated compensation whether or not it shall
(1) directly effect the Securitization of the Loans or (2) arrange as financial
advisor, on behalf of CMGFC, for the Securitization of the Loans through public
offerings by other parties acting as underwriters the "Other Underwriters"). Any
fees and expenses of such Other Underwriters shall be paid by CMGFC and shall
not reduce the compensation paid to the Agent under this Investment Banking
Services Agreement.'
8. Loan Purchase. Section 10 of the Investment Banking Services
Agreement shall be replaced in its entirety with the following:
10. Loan Purchase.
(a) Prior to the issuance by CMGFC of its stock or units
including its stock in anticipation of CMGFC electing Real
Estate Investment Trust status (the "REIT Issuance"), in
connection with any Securitization, CTS or an affiliate
thereof (the "Purchaser") shall
3
<PAGE> 15
have the right to purchase from CMGFC, at CTS's sole
option, an amount of Loans (the "Purchased Loans")
representing up to (A) 75%, during and prior to 1997, (B)
50%, during 1998, and (C) 25%, during 1999 and thereafter,
of the Loans, by principal balance, intended to be
securitized in such Securitization (however, in individual
transactions, the percentage so purchased may vary by as
much as 5% from the level specified for such year), or
such greater amount as agreed to by CMGFC and the Agent,
immediately prior to their transfer for such
Securitization.
(b) On or after the REIT Issuance, and through and including
December 31, 2001, during each month the Purchaser shall
have the right to purchase from CMGFC, at CTS's sole
option, an amount of Loans (also the "Purchased Loans")
representing up to 75% of the Loans that are fixed rate
loans which are originated or acquired by CMGFC during
such month, by principal balance (the "Monthly Purchase
Target"), or such greater amount as agreed to by CMGFC and
the Agent. CMGFC may also use Loans which are adjustable
rate loans ("ARM Loans") to satisfy the Monthly Purchase
Target for any month by offering to sell such Loans to the
Purchaser, provided that the ARM Loans, by principal
balance, represent no more than 50% of the related Monthly
Purchase Target.
(c) On or after the REIT Issuance, and through and including
December 31, 2001, on the fifth business day after the
close of each calendar quarter, to the extent that the (i)
sum of the Monthly Purchase Targets for the months in the
previous calendar quarter, exceeds (ii) the aggregate
principal balance of eligible Loans offered for sale by
CMGFC to the Purchaser during such calendar quarter in
accordance with the terms of this Investment Banking
Services Agreement, then CMGFC shall promptly pay to CTS a
sum equal to the product of (y) 0.0040, and (z) the amount
by which value determined pursuant to clause (i) hereof,
exceeds the value determined pursuant to clause (ii)
hereof.
(d) The Purchased Loans will be selected so as to be
representative in all respects to the Loans being
securitized in such Securitization. The Purchaser shall
pay CMGFC an amount equal to the fair market value of the
Purchased Loans as the purchase price therefor, as
determined as set forth in the best published rate sheet
price for such Loans by CMC. The sale of the Purchased
Loans will be effected through a purchase agreement
wherein CMGFC will provide the Purchaser with (i) the same
representations and warranties with respect to the
Purchased Loans as will be provided in the Securitization
to the Issuer, with respect to the Loans securitized
thereunder, (ii) indemnification for any liabilities
4
<PAGE> 16
resulting from the breach of such representations and
warranties, and (iii) the right to assign such
representations and warranties and such right to
indemnification to any assignee of the Purchaser. The
Purchaser shall have the right (x) to deposit the
Purchased Loans into the Issuer effecting such
Securitization, (y) to assign the rights described in
clause (iii) above to the Issuer in lieu of being required
to separately provide such representations and warranties
and such indemnification and (z) to receive in
consideration therefor a fractional portion of the total
amount of (A) the Residual Interest and the I/O Interests
issued in such Securitization, if any, (B) the other
Securities issued in such Securitization which were not
sold to the public or the underwriters or privately placed
with third persons, and (C) the net proceeds of such
Securitization equal to the ratio between the principal
balance of the Purchased Loans and the principal balance
of all the Loans securitized in such Securitization.'
9. Address. The Address block set forth on page one of the
Investment Banking Services Agreement is replaced in its entirety by the
following:
CMG Funding Corp.
2855 East Cottonwood Parkway
Suite 500
Salt Lake City, Utah 84121
10. Effectiveness This Agreement, even after due execution by the
parties hereto, will not become effective until (i) each of the Conversion
Letter Agreement dated as of November 18, 1997 by and between CTS and CMGFC (the
"Conversion Letter Agreement"), the Termination Letter dated as of November 18,
1997, by and between CTS and John Fry as Shareholder of CMGFC, Amendment 2 to
the Registration Rights Agreement dated as of November 18, 1997, by and between
CMGFC and CTS, Amendment 2 to the Standby and Working Capital Financing
Agreement dated as of November 18, 1997, by and among CMGFC as Borrower, CTS as
Lender and CMG Funding Securities Corp. as Residualholder, and Warrant No. 1
issued by CMGFC to CTS and dated as of November 18, 1997, have each also been
duly executed and delivered by the parties thereto, and (ii) the 546,883 shares
of Common Stock have been conveyed to CTS pursuant to Paragraph 2 of the
Conversion Letter Agreement.
11. Governing Law. This Amendment shall be governed by and
construed in accordance with the Laws of the State of New York, without regard
to its rules regarding conflict of laws.
5
<PAGE> 17
IN WITNESS WHEREOF, the parties have executed this Amendment 1 to
the Investment Banking Services Agreement as of the day and year first above
written.
CMG Funding Corp.
By:
--------------------------
Name: John D. Fry
Title:
ContiTrade Services, L.L.C.
By:
--------------------------
Name:
Title:
By:
--------------------------
Name:
Title:
ContiFinancial Services
Corporation
By:
--------------------------
Name:
Title:
By:
--------------------------
Name:
Title:
6
<PAGE> 18
AMENDMENT 2 TO LETTER AGREEMENT
REFERRED TO AS THE INVESTMENT BANKING SERVICES AGREEMENT
This Amendment 2, dated as of December 31, 1997 (the
"Amendment"), to the Letter Agreement (the "Investment Banking Services
Agreement"), dated as of December 17, 1996, among CMG Funding Corp., ("CMGFC")
and Continental Mortgage Group, L.C. (now succeeded by CMG Funding Corp.),
ContiTrade Services L.L.C., ("CTS") and ContiFinancial Services Corporation.
WHEREAS, the parties hereto have entered into the Investment
Banking Services Agreement, as well as a series of other agreements designated
as Documents in the Letter Agreement;
WHEREAS, the parties hereto have previously amended the
Investment Banking Services Agreement pursuant to an amendment dated as of
November 18, 1997 ("Amendment 1"); and
WHEREAS, the parties hereto now wish to amend the certain
provisions in the Investment Banking Services Agreement, as amended by Amendment
1.
NOW, THEREFORE, in consideration of the promises and agreements
contained herein, the parties hereto agree, pursuant to section 17 of the
Investment Banking Services Agreement, to amend the Investment Banking Services
Agreement and restate certain provisions thereof as follows:
1. Defined Terms. Capitalized terms used herein without
definition have the meanings ascribed to them in the Investment Banking Services
Agreement.
2. Loan Purchase. Section 10 of the Investment Banking Services
Agreement shall be replaced in its entirety with the following:
10. Loan Purchase.
(a) Prior to January 1, 1998 and prior to the issuance by
CMGFC of its stock or units including its stock in
anticipation of CMGFC electing Real Estate Investment
Trust status (the "REIT Issuance"), in connection with any
Securitization, CTS or an affiliate thereof (the
"Purchaser") shall have the right to purchase from CMGFC,
at CTS's sole option, an amount of Loans (the "Purchased
Loans") representing up to 75% of the Loans, by principal
balance, intended to be securitized in such Securitization
(however, in individual transactions, the percentage so
purchased may vary by as much as 5% from the level
specified for such year), or such greater amount as agreed
to by CMGFC and the Agent, immediately prior to their
transfer for such Securitization.
<PAGE> 19
(b) On or after January 1, 1998 and prior to the earlier to
occur of (i) the REIT Issuance, or (ii) January 1, 2002,
during each month the Purchaser shall have the right to
purchase from CMGFC, at CTS's sole option, an amount of
Loans (also the "Purchased Loans") representing up to 50%
of the Loans which are originated or acquired by CMGFC
during such month, by principal balance (the "Monthly
Purchase Target"), or such greater amount as agreed to by
CMGFC and the Agent.
(c) On or after the REIT Issuance, and through and including
December 31, 2001, during each month the Purchaser shall
have the right to purchase from CMGFC, at CTS's sole
option, an amount of Loans (also the "Purchased Loans")
representing up to 75% of the Loans that are fixed rate
loans which are originated or acquired by CMGFC during
such month, by principal balance (also the "Monthly
Purchase Target"), or such greater amount as agreed to by
CMGFC and the Agent. CMGFC may also use Loans which are
adjustable rate loans ("ARM Loans") to satisfy the Monthly
Purchase Target for any month by offering to sell such
Loans to the Purchaser, provided that the ARM Loans, by
principal balance, represent no more than 50% of the
related Monthly Purchase Target.
(d) On or after January 1, 1998, and through and including
December 31, 2001, on the fifth business day after the
close of each calendar quarter, to the extent that the (i)
sum of the Monthly Purchase Targets for the months in the
previous calendar quarter, exceeds (ii) the aggregate
principal balance of eligible Loans offered for sale by
CMGFC to the Purchaser during such calendar quarter in
accordance with the terms of this Investment Banking
Services Agreement, then CMGFC shall promptly pay to CTS a
sum equal to the product of (y) 0.0040, and (z) the amount
by which value determined pursuant to clause (i) hereof,
exceeds the value determined pursuant to clause (ii)
hereof.
(e) The Purchased Loans will be selected so as to be
representative in all respects to the Loans being
securitized in such Securitization. The Purchaser shall
pay CMGFC an amount equal to the fair market value of the
Purchased Loans as the purchase price therefor, as
determined as set forth in the best published rate sheet
price for such Loans by CMC. The sale of the Purchased
Loans will be effected through a purchase agreement
wherein CMGFC will provide the Purchaser with (i) the same
representations and warranties with respect to the
Purchased Loans as will be provided in the Securitization
to the Issuer, with respect to the Loans securitized
thereunder, (ii) indemnification for any liabilities
resulting from the breach of such representations and
warranties,
2
<PAGE> 20
and (iii) the right to assign such representations and
warranties and such right to indemnification to any
assignee of the Purchaser. The Purchaser shall have the
right (x) to deposit the Purchased Loans into the Issuer
effecting such Securitization, (y) to assign the rights
described in clause (iii) above to the Issuer in lieu of
being required to separately provide such representations
and warranties and such indemnification and (z) to receive
in consideration therefor a fractional portion of the
total amount of (A) the Residual Interest and the I/O
Interests issued in such Securitization, if any, (B) the
other Securities issued in such Securitization which were
not sold to the public or the underwriters or privately
placed with third persons, and (C) the net proceeds of
such Securitization equal to the ratio between the
principal balance of the Purchased Loans and the principal
balance of all the Loans securitized in such
Securitization.'
3. Effectiveness This Agreement, even after due execution by the
parties hereto, will not become effective until (i) each of the Conversion
Letter Agreement No. 2 dated as of December 31, 1997 by and between CTS and
CMGFC (the "Conversion Letter Agreement No. 2"), Amendment 3 to the Registration
Rights Agreement dated as of December 31, 1997, by and between CMGFC and CTS,
Amendment 3 to the Standby and Working Capital Financing Agreement dated as of
December 31, 1997, by and among CMGFC as Borrower, CTS as Lender and CMG Funding
Securities Corp. as Residualholder, Amendment 2 to the Purchase and Sale
Agreement dated as of December 31, 1997, among CMGFC and CTS, Warrant No. 2
issued by CMGFC to CTS and dated as of December 31, 1997 has been exchanged for
Warrant No. 1 held by CTS, and Warrant No. 3 issued by CMGFC to CTS and dated as
of December 31, 1997, have each also been duly executed and delivered by the
parties thereto, and (ii) the 410,581 shares of Class A Preferred Stock have
been conveyed to CTS pursuant to Paragraph 2 of the Conversion Letter Agreement
No. 2.
4. Governing Law. This Amendment shall be governed by and
construed in accordance with the Laws of the State of New York, without regard
to its rules regarding conflict of laws.
3
<PAGE> 21
IN WITNESS WHEREOF, the parties have executed this Amendment 2 to
the Investment Banking Services Agreement as of the day and year first above
written.
CMG Funding Corp.
By:
---------------------------
Name: John D. Fry
Title:
ContiTrade Services, L.L.C.
By:
---------------------------
Name:
Title:
By:
---------------------------
Name:
Title:
ContiFinancial Services
Corporation
By:
---------------------------
Name:
Title:
By:
---------------------------
Name:
Title:
4
<PAGE> 1
EXHIBIT 10.8
PURCHASE AND SALE AGREEMENT dated as of December 17, 1996, among
CONTITRADE SERVICES L.L.C., a Delaware limited liability company, as purchaser,
and CMG FUNDING CORP., a Delaware corporation, and CONTINENTAL MORTGAGE GROUP,
L.C., a Utah limited liability company, as seller.
WHEREAS, the Seller desires to sell from time to time to the
Purchaser certain Eligible Assets (as hereinafter defined), and the Purchaser
desires to purchase such Eligible Assets, each in accordance with the terms and
conditions set forth in this Purchase Agreement.
NOW, THEREFORE, the parties, in consideration of good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, and intending to be legally bound, hereby agree as follows:
ARTICLE I.
DEFINITIONS
As used in this Purchase Agreement, the following terms shall
have the following meanings:
"Adjusted Tranche Amount": As of any date of determination in
respect of any Purchase, the difference between (i) the Initial Tranche Amount
with respect thereto and (ii) all payments of principal received by the
Purchaser in respect of the related Eligible Assets on or prior to such date.
"Affiliate": Any Person: (a) which directly or indirectly
controls, or is controlled by, or is under common control with such Person; (b)
which directly or indirectly beneficially owns or holds five percent (5%) or
more of the voting stock of such Person; or (c) five percent (5%) or more of the
voting stock of which is directly or indirectly beneficially owned or held by
such Person. The term control means the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities, by contract or
otherwise.
"Aggregate Adjusted Tranche Amount": At any date, the sum of the
Adjusted Tranche Amounts as of such date, in
<PAGE> 2
respect of Purchases as to which the related Eligible Assets have not been
disposed of by the Purchaser (other than in connection with a Repurchase
Transaction or to an affiliate of the Purchaser pursuant to this Purchase
Agreement).
"Appraised Value": With respect to any Mortgaged Property, the
value of such Mortgaged Property as determined at the time of origination in
accordance with the appraisal policies in the Securitization Program Mortgage
Loan Underwriting Guidelines or the Conforming Mortgage Loan Underwriting
Guidelines.
"ARM Loan": A Mortgage Loan which accrues interest at an
adjustable interest rate pursuant to the terms of the related Mortgage Note.
"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 transfer of the Mortgage to the Purchaser.
"Available Amount": The Maximum Available Amount less the
then-outstanding Aggregate Adjusted Tranche Amount.
"B/C Loan": A Securitization Program Mortgage Loan which is of
non-conforming credit quality is are of a type and quality that is eligible for
inclusion in a securitized mortgage loan pool which would qualify for credit
enhancement by a Monoline Insurance Company and which would be expected to issue
a security which would be rated in one of the investment grade generic rating
categories by any nationally recognized statistical rating agency other than a
Standard A Loan or a Special Program Loan.
"Bonus Compensation": With respect to any employee the amount by
which the total compensation, excluding Fringe Benefits, for such employee
during any year exceeds such employee's base salary.
"Business Day": Any day, other than a Saturday or Sunday, that is
neither a legal holiday, nor a day on which banking institutions are authorized
or required by law or regulation to close, in the City of New York or State of
Utah.
2
<PAGE> 3
"CFS": ContiFinancial Services Corporation, a Delaware
corporation, its successors in interest and its permitted assigns.
"Change of Control": Any of:
(a) without the prior written consent of the Purchaser, the
issuance, distribution, sale or transfer by the Seller or by any
Affiliate of the Seller, including, without limitation, the Controlling
Shareholders of the Seller's capital stock or securities other than (i)
the sale of the Seller's common stock to the Purchaser occurring upon
the exercise of the Conversion Privileges, (ii) the pledge of the
Seller's capital stock to the Purchaser, (iii) the transfer of the
Seller's capital stock for estate planning purposes or pursuant to a
domestic relations settlement or order, (iv) the transfer of the
Purchaser's Common Stock pursuant to the Stock Option Plan for a price
greater than or equal to the Share Fair Market Value, (v) pursuant to a
buy/sell agreement solely among the Purchaser's existing shareholders or
(vi) the sale, transfer or issuance of no more than five (5%) percent of
the Seller's Common Stock (which percentage shall be determined on a
cumulative basis together with all other sales, transfers or issuances
of the Seller's Common Stock under this clause (vi) from the date of
this Agreement) at a price at least equal to Share Fair Market Value
with the prior written consent of the Purchaser;
(b) a sale or voluntary transfer or, in the aggregate, sales or
voluntary transfers, of more than five per cent (5%) of the Seller's
assets (as set forth in the Seller's most recently audited or unaudited
financial statement) other than the sale of loans in the ordinary course
of business, whether on a flow or pool basis; or
(c) the resignation, termination or departure of Terry L. Mott or
John D. Fry from the employ of the Seller, or the reassignment of Terry
L. Mott or John D. Fry to a position of significantly reduced
responsibility within the Seller.
"Closing Date": The date on which the Mortgage Loan made by the
Seller to the Obligor is funded by the Seller.
3
<PAGE> 4
"CLTV": With respect to a Mortgage Loan, the aggregate principal
amount of such Mortgage Loan together with all senior obligations of the Obligor
secured by a lien on the related Mortgaged Property divided by the Appraised
Value of the related Mortgaged Property.
"CMGFC": CMG Funding Corp., a Delaware corporation, and its
successors.
"CMLC": Continental Mortgage Group, L.C., a Utah limited
liability company, or its successors.
"Collateral": As defined in Section 6.07 hereof.
"Common Stock" means shares of the Common Stock of the Seller, a
class of capital stock of the Seller which (i) possesses full voting rights, and
(ii) is the sole class which fully participates in the income and value of the
Seller.
"Conforming Mortgage Loan": A mortgage loan originated pursuant
to, and which complies with, the Conforming Mortgage Loan Underwriting
Guidelines and is, or was, the subject of a Purchase hereunder.
"Conforming Mortgage Loan Underwriting Guidelines": The
underwriting guidelines for mortgage loans, which conform to FNMA, FHLMC, GNMA,
FHA, or VA guidelines or are jumbo loans of an "A" quality Obligor and attached
hereto as Exhibit B, as may be amended from time to time by the Seller and, with
respect to any Material Changes, after obtaining the Purchaser's prior written
consent regarding such Material Changes.
"Consumer Credit Laws": Real Estate Settlement Procedures Act of
1974, as amended, Trust in Lending Act of 1969, the Consumer Credit Protection
Act, as amended, the Financial Institutions Reform, Recovery & Enforcement Act
of 1989, the Depository Institutions Deregulation & Monetary Control Act of
1980, the Community Reinvestment Act, the Equal Credit Opportunity Act of 1974,
the Fair Credit Reporting Act, the Home Mortgage Disclosure Act and Regulation
Z.
"Controlling Shareholders": John D. Fry or Terry L. Mott.
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"Conversion Privileges": The rights which the Purchaser has
pursuant to the terms of the (i) Subordinated Debt Agreement to convert to
Preferred Stock of the Seller and (ii) the Preferred Stock to convert to Common
Stock of the Seller.
"Custody Agent": First Security Bank, N.A. and its successors.
"Custody Agreement": The Custody Agreement, dated as of December
17, 1996, by and among the Custody Agent, the Purchaser and the Seller.
"Default Rate": LIBOR on the related LIBOR Reset Date plus 6.00%.
"Detailed Mortgage Loan Schedule": The schedule of Mortgage Loans
i-dentifying each Mortgage Loan by the address of the Mortgaged Property and the
name of the mortgagor and setting forth as to each Mortgage Loan all of the
information set forth in Exhibit F-2 hereof.
"Eligible Assets": Mortgage Loans.
"Extension Notice": The notice given by the Purchaser, in its
sole discretion, to offer to extend the Termination Date, by written notice to
the Seller at least ninety days prior to the date of expiration, which the
Seller shall accept by written notice to the Purchaser.
"Event of Termination": As defined in Article VIII hereof.
"FHA": The Federal Housing Administration or any successor
thereto.
"FHLMC": The Federal Home Loan Mortgage Corporation or any
successor thereto.
"Fixed Rate Mortgage Loan": A Mortgage Loan which accrues
interest at a fixed rate of interest pursuant to the terms of the related
Mortgage Note.
"FNMA": The Federal National Mortgage Association or any
successor thereto.
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"Forbearance Waiver": As defined in Section 3.01(e).
"Fringe Benefits": The payment of premiums for health insurance,
life insurance, workman's compensation, disability insurance and the payment of
payroll taxes for social security and Medicare.
"GAAP": Generally accepted accounting principles in the United
States, consistently applied.
"Gain Amount": With respect to any sale of Eligible Assets by the
Purchaser hereunder, that portion of the realized net proceeds inclusive of
accrued interest in excess of the sum of (i) the related Adjusted Tranche Amount
thereof (computed as of the date of such sale) and (ii) the Net Securities
Amount with respect thereto, which amount the Purchaser shall remit to the
Seller pursuant to Section 4.03. The Gain Amount shall be calculated for each
Tranche sold by the Purchaser.
"GNMA": The Government National Mortgage Association or any
successor thereto.
"Governmental Approvals": Any authorization, consent, approval,
license or exemption of, registration or filing with or report or notice to, any
Governmental Authority, whether federal, state, local or foreign.
"Governmental Authority": Any nation or government, any state or
other political subdivision thereof, and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.
"Initial Tranche Amount": With respect to any Purchase hereunder,
the purchase amount paid for the related Eligible Assets by the Purchaser on the
related Purchase Date, such purchase amount being equal to the product of (x)
the Principal of the related Eligible Assets as of such Purchase Date and (y)
the related Purchase Price Percentage.
"Investment Banking Services Agreement": The Investment Banking
Services Agreement dated as of December 17, 1996 among the Seller, the Purchaser
and ContiFinancial Services Corporation, as may be amended from time to time
pursuant to the terms thereof.
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"Law": Any federal, state or local statute, law, rule,
regulation, ordinance, order, code, policy or rule of common law, now or
hereafter in effect, and in each case as amended, and any judicial or
administrative interpretation thereof by a Governmental Authority or otherwise,
including any judicial or administrative order, consent, decree or judgment.
"Letter Agreement": The letter agreement dated as of December 17,
1996, between the Controlling Shareholders or certain transferees as specified
therein and the Purchaser.
"LIBOR": The per annum rate for deposits in Dollars for a period
of one month which appears on Telerate Page 3750 or the Bloomberg Screen as of
11:00 a.m., London time, on the monthly anniversary of the initial Closing Date.
If such rate does not appear on Telerate Page 3750 or the Bloomberg Screen on
such day, the rate will be determined on the basis of the rates at which
deposits in Dollars are offered by the reference banks selected by the Purchaser
at approximately 11:00 a.m., London time, on such day to prime banks on that
day. The Purchaser will request the principal London office of each of the
reference banks to provide a quotation of its rate. If at least two such
quotations are provided, the rate for that day will be the arithmetic mean of
the quotations. If fewer than two quotations are provided as requested, the rate
for that day will be the arithmetic mean of the rates quoted by two or more
major banks in New York City selected by the Purchaser, at approximately 11:00
a.m., New York City time, on that day for loans in Dollars to leading European
banks for a period of one month.
"LIBOR Reset Date": With respect to any Tranche Period, unless
otherwise agreed to, the Business Day immediately preceding the start of such
Tranche Period, provided that if such Business Day is not a London Business Day,
then the London Business Day immediately preceding such Business Day.
"London Business Day": Any day, other than a Saturday or Sunday,
that is neither a legal holiday, nor a day on which banking institutions are
authorized or required by law or regulation to close in the city of London.
"Losses": Any and all out-of-pocket losses, claims, damages,
liabilities or expenses (including reasonable
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attorneys' fees and disbursements) directly incurred by any person specified in
this Purchase Agreement, resulting from transactions entered into under this
Purchase Agreement (other than liability for Taxes). Losses must be accounted
for and presented for reimbursement documented in reasonable detail and within a
reasonable time.
"LTV" or "Loan-To-Value": With respect to a Mortgage Loan secured
by a first lien on the related Mortgaged Property, the original principal
balance of the Mortgage Loan divided by the Appraised Value of the related
Mortgaged Property.
"Market Movement Allowance": For each Purchase, the amount of
diminution in the Market Value of the related Eligible Assets (expressed as a
percentage) that may occur before the occurrence of a Required Sale Event with
respect to such Eligible Assets as specified by the Purchaser for such Purchase,
as described in Section 4.02 hereof and Exhibit D hereto.
"Market Value": For each date of determination in respect of a
Purchase, the market value (expressed as a percentage of par of the Principal)
of the related Eligible Asset as determined by the Purchaser (subject to the
provisions of Section 4.02 hereof) and taking into account (i) credit rating;
(ii) credit worthiness of the account debtor, lessee or other obligors
(including third party credit enhancements); (iii) realizable distress sale
liquidation value; (iv) impediments (legal or otherwise) to prompt and effective
enforcement; (v) general industry and overall economic conditions; (vi) current
interest rates; (vii) availability of purchasers; and (viii) such other
considerations as reasonably appropriate in the circumstances.
"Material Change": With respect to the Securitization Program
Mortgage Loan Underwriting Guidelines or the Conforming Mortgage Loan
Underwriting Guidelines, any change to such guidelines other than a change (a)
correcting typographical errors, spelling, grammar or punctuation in such
guidelines or (b) modifying such guidelines provided that such modification does
not lower the quality of the loans underwritten pursuant thereto.
"Maximum Available Amount": $30,000,000.
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"Merger Agreement" means the Plan and Agreement of Merger,
Contribution and Reorganization dated as of December 16, 1996 by and between
Continental Mortgage Group, L.C. and the Seller.
"Monoline Insurance Company": Municipal Bond Investors Assurance
Corporation ("MBIA"), Financial Guaranty Insurance Company ("FGIC"), Capital
Markets Assurance Corporation ("CapMAC"), Financial Security Assurance Inc.
("FSA"), GE Mortgage Insurance Company ("GEMICO") or AMBAC Indemnity Corporation
("AMBAC").
"Mortgage": (a) With respect to an ARM Loan, the mortgage, deed
of trust or other instrument creating a first lien on, or first priority
security interest in, the Mortgaged Property securing the obligation evidenced
by the related Mortgage Note and (b) with respect to a Fixed Rate Mortgage Loan
the mortgage, deed of trust or other instrument creating a first or second lien
on, or first or second priority security interest in, the Mortgaged Property
securing the obligation evidenced by the related Mortgage Note.
"Mortgage File": With respect to a Mortgage Loan, the file
containing the following documents relating to such Mortgage Loan:
(a) the related original Mortgage Note, with any intervening
endorsements, endorsed in blank and signed, by facsimile or manual
signature, in the name of the Seller by a responsible officer thereof,
with all prior and intervening endorsements showing a complete chain of
endorsement from the related originator to the Seller, if the Seller was
not such originator;
(b) either: (i) the related original Mortgage, with evidence of
recording thereon, (ii) a copy of such Mortgage certified as a true copy
by a responsible officer of the Seller or by the closing attorney, or by
an officer of the title insurer or agent of the title insurer which
issued the related title insurance policy, or commitment therefor or, if
the original has been transmitted for recording until such time as the
original is returned by the public recording office or (iii) a copy of
such Mortgage certified by the public recording office in those
instances where such original recorded Mortgage has been lost; and in
addition, the Seller shall
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deliver and release to the Purchaser such original recorded Mortgage
within 120 days after the related Purchase Date;
(c) the related original Assignment of Mortgage, executed in
blank, which assignment shall be in form and substance acceptable for
recording in the state or other jurisdiction where the related Mortgaged
Property is located; (subject to the foregoing, and where permitted
under the applicable Law of the jurisdiction where such Mortgaged
Property is located, such Assignments of Mortgage may be made by blanket
assignments for all Mortgage Loans covering related Mortgaged Properties
situated within the same county or other permitted governmental
subdivision);
(d) all related intervening Assignments of Mortgage, if any,
showing a complete chain of assignment from the related originator to
the Seller, including any recorded warehousing assignments, with
evidence of the recording thereon or copies thereof certified by the
related recording offices;
(e) (i) the related original mortgage title insurance policy or
attorney's title of opinion and abstract of title, or if unavailable by
the required delivery date, the related title commitments or binders;
(ii) in addition, the Seller or its designee shall deliver to the
Purchaser the related original policy of title insurance or attorney's
opinion of title and abstract of title within 120 days after the related
Purchase Date; (iii) the policy must be properly endorsed, any necessary
notices of transfer must be forwarded and any other action required to
be taken must be taken in order to fully protect, under the terms of the
policy and applicable law, the Purchaser's interest as the related first
or second mortgagee;
(f) the original of all assumption, extensions and modification
agreements, with evidence of recording thereon or copies thereof
certified by the related recording offices;
(g) the original of any guarantee executed in connection with the
related Mortgage Note; and
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(h) such other documents as may reasonably be requested by the
Purchaser at least two Business Days before the related Purchase Date.
"Mortgage Interest Rate": The interest rate payable by the
Obligor on a Mortgage Loan according to the terms of the Mortgage Note which, in
the case of ARM Loans, may be adjusted periodically as provided in such
Mortgage.
"Mortgage Loan": Either a (1) Securitization Program Mortgage
Loan which are of a type and quality that are eligible for inclusion in a
securitized mortgage loan pool which would qualify for credit enhancement by a
Monoline Insurance Company and which would be expected to issue a security which
would be rated in one of the investment grade generic rating categories by any
nationally recognized statistical rating agency, (ii) a Conforming Mortgage Loan
or (iii) a Wet-Funded Mortgage Loan.
"Mortgage Loan Schedule": Each schedule of Mortgage Loans
delivered by the Seller to the Purchaser and the Custody Agent, such schedule
identifying each Mortgage Loan by the address of the Mortgaged Property and the
name of the mortgagor and setting forth as to each Mortgage Loan the following
information.
"Mortgage Note": The original executed note or other evidence of
indebtedness evidencing the indebtedness of the related Obligor under the
related Mortgage Loan.
"Mortgaged Property": The underlying property securing the
related Mortgage Loan consisting of a fee simple estate or leasehold in a parcel
of real property improved by any of (a) a detached or semi-detached single
family dwelling, (b) a two-to-four-unit dwelling, (c) a townhouse or, (d) a unit
in a condominium or a planned unit development, none of which is a co-operative
unit or a mobile or manufactured home (other than a manufactured home secured to
a permanent foundation).
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"Net Securities Amount": With respect to any Tranche Period which
has terminated, the amount produced for the related Tranche corresponding to
such Tranche Period by application of the following:
TR x TA x AD
--
365
Where
TR = the Tranche Rate applicable to such Tranche
TA = the Adjusted Tranche Amount with respect to such Tranche
AD = the actual number of days elapsed during such Tranche Period;
provided, however, that no provision of this Purchase Agreement shall require
the payment or permit the collection of any Net Securities Amount in excess of
the maximum permitted by applicable law; and provided, further, that Net
Securities Amount shall not be considered paid if at any time payment is
rescinded or must be returned for any reason.
"Obligor": The person or persons obligated to pay the debt
evidenced by the related Mortgage Note.
"Person": An individual, general partnership, limited
partnership, limited liability partnership, corporation, business trust, joint
stock company, limited liability company, trust, unincorporated association,
joint venture, Governmental Authority, or other entity of whatever nature.
"Preferred Stock": Any shares of the Class A Preferred Stock of
the Seller, a class of capital stock of the Seller which (i) possesses full
voting rights, and (ii) is the sole class preferred as to the payment of
dividends and payment upon liquidation.
"Preferred Stock Purchase Agreement" means the Preferred Stock
Purchase Agreement dated as of December 17, 1996, between CMGFC and
ContiFinancial Corporation.
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"Principal": With respect to any Eligible Asset as of any date of
determination, the unamortized principal balance of such Eligible Asset as of
such date.
"Proceeds Shortfall": As defined in Section 4.05 hereof.
"Purchase": Any purchase of Eligible Assets by the Purchaser from
the Seller pursuant to the terms hereof and of the applicable Purchase Request.
"Purchase Agreement": This Purchase and Sale Agreement, dated as
of December 17, 1996 between the Purchaser and the Seller, as may be amended
from time to time pursuant to the terms hereof.
"Purchase Date": With respect to any Purchase, the date on which
the Purchaser purchases the related Eligible Assets from the Seller.
"Purchase Price Percentage": With respect to any Purchase and
Eligible Asset, the percentage (expressed as a percentage of par) of the
Principal with respect to any Eligible Assets equal to the lesser of (a) 100% of
fair market value of such Eligible Asset or (b)(i) 102% of the Principal of such
Eligible Asset, with respect to B/C Loans, (ii) 100% of the Principal of such
Eligible Asset, with respect to Standard A Loans, or (iii) 100% of the Principal
of such Eligible Asset, with respect to Special Program Loans, as set forth in
the related Purchase Request.
"Purchase Request": A request for the purchase of Eligible Assets
in the form of Exhibit D hereto.
"Purchaser": ContiTrade Services L.L.C., a Delaware limited
liability company, its successors in interest and its permitted assigns.
"Quick Certification" means the certification for Quick-Funded
Mortgage Loans, form of which is attached hereto as Exhibit M.
"Quick-Funded Mortgage Loan" means a mortgage loan (a) originated
pursuant to either the Securitization Program Mortgage Loan Underwriting
Guidelines or the Conforming Mortgage Loan Underwriting Guidelines, (b) the
subject of a
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Purchase hereunder and (c) with respect to which the original executed Mortgage
Note and Assignment of Mortgage were delivered to the Custody Agent on or prior
to the Purchase Date.
"Recourse Amount": As of any date of determination, the
difference between (a) 10 percent of the Aggregate Adjusted Tranche Amount as of
such date; provided, however, that clause (a) of the Recourse Amount shall be
fixed upon the earlier of (i) the first date on which a Required Sale Event has
occurred and (ii) the first date on which an Event of Termination has occurred,
and (b) the sum of the amounts of all payments previously made by the Seller
hereunder in respect of amounts payable hereunder which are limited by, or equal
to, the Recourse Amount.
"Registration Rights Agreement": The Registration Rights
Agreement dated as of December 17, 1996 between the Seller and the Purchaser, as
may be amended from time to time pursuant to the terms thereof.
"Release Fee": As defined in Section 6.04(b) hereof.
"Repurchase Transaction": A transaction in which parties contract
to sell and subsequently repurchase securities or other assets at a specified
date and price.
"Required Sale Event": A sale of Eligible Assets pursuant to
Section 4.03.
"Residualholder": CMG Funding Securities Corp., a Delaware
corporation, and its successors.
"SEC": The Securities and Exchange Commission and any successor
thereto.
"Securitization": A Mortgage Loan securitization transaction in
which CFS is the lead or sole underwriter or placement agent.
"Securitization Program Mortgage Loan": A Mortgage Loan
originated pursuant to, and which complies with, the Securitization Program
Mortgage Loan Underwriting Guidelines and is, or was, the subject of a Purchase
hereunder.
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"Securitization Program Mortgage Loan Underwriting Guidelines":
The underwriting guidelines for mortgage loans, attached hereto as Exhibit A, as
may be amended from time to time by the Seller and, with respect to any Material
Changes, after obtaining the Purchaser's prior written consent regarding such
Material Changes.
"Seller" means CMGFC or CMLC.
"Senior Officers" means the Chairman of the Board, the Chief
Executive Officer, the Chief Operating Officer, the Chief Financial Officer, the
General Counsel, the Controller, the President, the Executive Vice President,
the Senior Vice President for Administration, the Senior Vice President for
Secondary Marketing, the Senior Vice President for Retail Production, the Senior
Vice President Wholesale Production of the Seller and any other Senior Vice
President of the Seller and any other Person who performs similar policy-making
functions for the Seller on a regular basis.
"Servicer": ContiMortgage Corporation, a Delaware corporation,
its successors in interest and its permitted assigns.
"Servicing Agreement": The Servicing Agreement dated as of
December 17, 1996 between the Servicer, and the Purchaser, as may be amended
from time to time pursuant to the terms hereof.
"Share Fair Market Value" means, as of any date of determination,
a price per share of Common Stock determined by dividing (x) the product of (i)
the pretax profits of the Seller for the twelve (12) month period ended as of
the most recent fiscal quarter and (ii) five (5) by (y) the number of shares of
Common Stock outstanding on the date of grant (on a fully diluted basis assuming
the conversion of all convertible securities of the Seller and the exercise of
all options to purchase the Common Stock or other securities of the Seller which
have been granted); provided, however in no event shall such price per share be
less than $3.96 per share of Common Stock.
"Shareholders' Equity": The aggregate "assets" of the Seller less
the aggregate "liabilities" of the Seller, with the term "asset" having the
meaning ascribed to such term by GAAP and the term "liabilities" being those
obligations or
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liabilities of the Seller, which, in accordance with GAAP, would be included on
the liability side of the Seller's balance sheet.
"Significant Documents": The Standby Agreement, this Purchase
Agreement, the Subordinated Debt Agreement, the Registration Rights Agreement,
the Investment Banking Services Agreement, the Secured Notes under both the
Standby Agreement and the Subordinated Debt Agreement, the Custody Agreement,
the Merger Agreement and the Servicing Agreement.
"Special Program Loan": A Conforming Mortgage Loan originated
under one of the VA, FHA or FNMA government programs.
"Standard A Loans": A Conforming Mortgage Loan which is of other
than a Special Program Loan.
"Standby Agreement": The Standby and Working Capital Financing
Agreement dated as of December 17, 1996 among the Seller, the Residualholder and
the Purchaser, as may be amended from time to time pursuant to the terms
thereof.
"Stock Option Plan" means the employee stock option plan of the
Seller which appears as Exhibit F to the Standby Agreement and which has been
approved by the management of CMGFC and by the Purchaser.
"Subordinated Debt Agreement": The Subordinated Debt Agreement
dated as of December 17, 1996 between the Seller and the Purchaser, as may be
amended from time to time pursuant to the terms thereof.
"Taxes": As defined in Section 7.02 hereof.
"Termination Date": The later to occur of (a) December 17, 1997,
or (b) the second anniversary of such date, which occurs following the date of
the most recent Extension Notice, if any.
"Tranche": The Eligible Assets specified on any particular
Purchase Request.
"Tranche Period": The period commencing on the day the Purchaser
receives a payment of principal or interest with respect to the Eligible Assets
in the related Tranche and
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ending on (and including) the day preceding the day on which the next such
payment is received. For purposes of the initial Tranche Period, the Purchaser
shall be deemed to have received such a payment with respect to the Eligible
Assets in the related Tranche on the related Purchase Date. The date upon which
the Purchaser disposes of an Eligible Asset (other than in connection with a
Repurchase Transaction or to an affiliate of the Purchaser pursuant to this
Purchase Agreement) shall also end the Tranche Period with respect thereto.
"Tranche Rate": The Tranche Rate shall equal LIBOR plus 225 basis
points. The Tranche Rate shall reset on the LIBOR Reset Date.
"Tranche Selection Notice": As defined in Section 2.05 hereof.
"Tranche Term": With respect to a Tranche, a period of one, two
or three months, or such other period as may be mutually agreeable to the
parties hereto, commencing on a Business Day selected by the Seller and the
Purchaser pursuant to this Purchase Agreement.
"Trust Receipt": A Certificate delivered by the Custody Agent to
the Purchaser, in a form acceptable to the Purchaser, to the effect that, as to
each Mortgage Loan set forth on the related Mortgage Loan Schedules, the Custody
Agent is in receipt of a Mortgage Loan File, endorsed to the Custody Agent.
"VA": The Veteran's Administration or any successor thereto.
"Wet Certification" means the certification for Wet-Funded
Mortgage Loans, form of which is attached hereto as Exhibit M.
"Wet-Funded Mortgage Loan" means a Securitization Program
Mortgage Loan or a Wholesale Mortgage Loan funded pursuant to a Wet-Funding and
with respect to which the Mortgage Note has not yet been received by the Custody
Agent.
"Wet-Funding" means a Purchase, or any part thereof, which is
made against an executed Wet-Funding Escrow Agreement and, subject to the
closing of the Mortgage Loan which is the
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subject of the Wet-Funding Escrow Agreement, is secured by such Mortgage Loan.
"Wet-Funding Escrow Agent" means, with respect to an agent
involved in any Wet-Funding, such agent as (a) may be approved by the Seller
consistent with the Seller's internal written policies and prudent lending
practices and (b) is acceptable to the Purchaser.
"Wet-Funding Escrow Agreement" means a fully completed and
executed Escrow Letter Agreement in substantially the form attached hereto as
Exhibit N, relating to the closing of a loan underlying the Wet-Funding.
"Wet-Funding Limit" means $3,000,000 to be used to fund B/C Loans
after other lines have been fully utilized for Wet-Funded Mortgage Loans.
Capitalized terms which are not otherwise defined herein shall
have the meanings ascribed thereto in the Standby Agreement.
ARTICLE II.
PROCEDURES FOR PURCHASES OF ELIGIBLE ASSETS;
CONDITIONS PRECEDENT; SETTLEMENTS
Section 1.021 Obligation to Purchase. Subject to Section 2.03 and
the other terms and conditions of this Purchase Agreement, at the request of the
Seller, the Purchaser from time to time shall purchase Eligible Assets from the
Seller at the related Initial Tranche Amount for any such Eligible Assets;
provided, however, that each Initial Tranche Amount shall be at least
$1,000,000; and provided, further, that the Purchaser shall purchase Eligible
Assets if, (i) all of the conditions set forth herein have been satisfied and
(ii) immediately following such purchase, the Available Amount would not be less
than zero.
Section 1.022 Delivery of Documents; Initial Purchase of Eligible
Assets. Prior to the initial Purchase of Eligible Assets:
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(a) (i) with respect to each Mortgage Loan other that a
Quick-Funded Mortgage Loan or a Wet-Funded Mortgage Loan, the Seller
shall have delivered, or caused to be delivered, to the Custody Agent
the Mortgage Files for each of the Eligible Assets, (ii) with respect to
each Quick-Funded Mortgage Loan, the Seller shall have delivered, or
caused to be delivered, to the Custody Agent the related original
executed Mortgage Note and Assignment of Mortgage in accordance with
clauses (a) and (c) of the definition of Mortgage File, and (iii) with
respect to each Wet-Funded Mortgage Loan, the Seller shall have
delivered, or caused to be delivered, to the Custody Agent on behalf of
the Purchaser a completed Wet-Funding Escrow Agreement, executed by the
Seller and the Wet-Funding Escrow Agent; provided, however, that in the
case of Eligible Assets with Mortgaged Properties located in
Pennsylvania and Florida, the Seller shall also have delivered the
documents required under Section 3(b)(2) and 3(b)(3)(ii) of the Custody
Agreement;
(b) the Purchaser shall have received a Mortgage Loan Schedule
pertaining to the related Eligible Assets;
(c) the Purchaser shall have received copies of the resolutions
of the Board of Directors of the Seller, certified by its Secretary,
approving this Purchase Agreement;
(d) the Purchaser shall have received the Certificate of
Incorporation of the Seller certified by the Secretary of State of
Delaware;
(e) the Purchaser shall have received a certificate of the
Secretary or Assistant Secretary of the Seller, as set forth in Exhibit
G hereto, certifying (i) the names and signatures of the officers
authorized on its behalf to execute this Purchase Agreement, and any
other documents to be delivered by it hereunder (on which the Purchaser
may conclusively rely until such time as the Purchaser shall receive
from the Seller a revised certificate meeting the requirements of this
item (e)) and (ii) a copy of the Seller's Bylaws;
(f) (i) the Purchaser shall have received a Trust Receipt and a
certificate from the Custody Agent certifying that it has reviewed the
Mortgage Files
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relating to the Eligible Assets and has found no discrepancies between
the information listed on the related Mortgage Loan Schedule and the
information set forth in such Mortgage Files, (ii) with respect to each
Quick-Funded Mortgage Loan, the Purchaser shall have received a Quick
Certification, and (iii) with respect to each Wet-Funded Mortgage Loan,
the Purchaser shall have received a Wet Certification;
(g) the Purchaser shall have received an opinion of counsel to
the Seller, in substantially the form of Exhibit E hereto;
(h) the Seller shall have instructed the applicable debtor,
trustee, paying agent, authenticating agent, transfer agent, registrar,
predecessor in interest, owner (if the Purchase Agreement is
recharacterized as a security agreement), or servicer, if any, in
respect of the related Eligible Assets to reflect on their books and
records the transfer of such Eligible Assets to the Purchaser, as owner
or secured party (if the Purchase Agreement is recharacterized as a
security agreement);
(i) if ContiMortgage Corporation should no longer be the
Servicer, the Purchaser shall have received the most recent available
servicing or like reports, if any, with respect to all of the mortgages
in the Seller's portfolio similar to the Eligible Assets;
(j) On any Purchase Date for a Purchase proposed to be secured by
Wet-Funded Mortgage Loans, the amount to be paid under such Purchase
together with the aggregate of all Purchase with respect to Wet-Funded
Mortgage Loans which remain as such on such date shall not exceed the
Wet-Funding Limit.
(k) On any Purchase Date, the amounts paid and to be paid with
respect to the Standard A Loans and the Wet-Funded Mortgage Loans with
respect to such proposed Purchase and all Outstanding Purchases shall
not exceed $15,000,000;
(l) the bond power or transfer instrument for the related
Eligible Asset shall be executed by appropriate officers of the Seller;
and
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(m) the Purchaser shall have received from KPMG Peat Marwick, an
audit of the Seller's June 1996 financial statements which the Purchaser
finds to be satisfactory in its sole discretion (the costs associated
with such audit shall be paid by the Seller).
Section 1.023 Delivery of Documents; Subsequent Purchases of
Eligible Assets. Prior to any Purchase of Eligible Assets after the initial
Purchase of Eligible Assets, the actions, conditions and deliveries specified in
subsections 2.02(a), (b), (f), (h), (i), (j), (k) and (l) shall have been taken
or made, as the case may be.
Section 1.024 Purchase Requests. (a) Seller shall deliver to the
Purchaser a Purchase Request at least five Business Days prior to the proposed
Purchase Date for any Purchase (unless otherwise agreed by the parties). The
Purchaser shall indicate its acceptance or declination of each Purchase Request
by completing the appropriate section of the Purchase Request and returning the
copy thereof to the Seller; provided, however, that the Purchaser hereby agrees
to accept each Purchase Request if such acceptance would not cause the Aggregate
Adjusted Tranche Amount to exceed the Available Amount and if all of the
conditions to such Purchase provided for in this Purchase Agreement (including,
without limitation, Section 2.02 hereof) have been satisfied.
(b) With respect to all Purchase Requests, if the Purchaser does
not send a copy of a completed Purchase Request to the Seller within at least
three Business Days prior to the proposed Purchase Date (five Business Days, if
the related Purchase Request was received by the Purchaser at least two calendar
weeks prior to the proposed Purchase Date), the Purchaser shall be deemed to
have declined such Purchase Request. Each Purchase Request accepted by the
Purchaser shall be irrevocable and binding on the Purchaser and the Seller. The
Seller shall indemnify the Purchaser and hold it harmless against any Losses
incurred by the Purchaser as a result of any failure by the Seller to timely
deliver the Eligible Assets subject to such Purchase. The Purchaser shall
undertake to take all commercially reasonable steps to mitigate the Seller's
indemnity hereunder. Each Purchase shall cover the Eligible Assets identified in
a Mortgage Loan Schedule attached to the related Purchase Request. Each Purchase
Request shall specify the type of Eligible Asset, the Purchase Price Percentage
and date of such requested Purchase,
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the Initial Tranche Amount, together with the Tranche Term and Tranche Rate
requested by the Seller with respect thereto in accordance with Section 2.05
hereof, the Market Movement Allowance, the Recourse Amount and such other
matters as may be specified on the form of the Purchase Request attached hereto
as Exhibit D. On the applicable Purchase Date, the Purchaser shall either (i)
pay or (ii) cause the Custody Agent, pursuant to the terms of the Custody
Agreement, to pay to the Seller the Initial Tranche Amount for the related
Eligible Assets against receipt of the documents required to be delivered by the
Seller pursuant to either Section 2.02 or 2.03, as the case may be.
Section 1.025 Tranche Selection. The Seller shall, at least three
Business Days prior to the expiration of any Tranche Term, provide the Purchaser
with a notice requesting a new Tranche Term for application to the related
Tranche (a "Tranche Selection Notice"). The Tranche Selection Notice may be
oral, promptly confirmed by the Seller in writing, and shall be deemed to be an
irrevocable offer by the Seller to the Purchaser to apply the requested Tranche
Term to the related Tranche. Failure to provide written confirmation of an oral
Tranche Selection Notice shall not affect the irrevocability of any such Notice.
Notwithstanding the foregoing provisions of this Section, the Purchaser, in its
reasonable discretion, may select a new Tranche Term if (i) the Seller fails to
provide a Tranche Selection Notice on a timely basis or (ii) the Purchaser
determines in its reasonable discretion that any Tranche Term requested by the
Seller is unavailable or would not yield efficient execution to the Purchaser.
Section 1.026 Survival of Representations. The terms and
conditions of the purchase of each Eligible Asset shall be as set forth in this
Purchase Agreement. The Seller will be deemed on each Purchase Date to have made
to the Purchaser the representations and warranties set forth in Article V and
Exhibit H hereof and such representations and warranties of the Seller shall be
true and correct on and as of such Purchase Date and throughout the term of this
Purchase Agreement for as long as Eligible Assets are held by the Purchaser.
Each Purchase Request made by the Seller shall be deemed to be a restatement of
each of the covenants of the Seller made pursuant to Article V and Exhibit J
hereof.
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Section 1.027 Proceeds of Eligible Assets. The transfer and sale
hereby of all of the Seller's right, title and interest in and to each Eligible
Asset shall include all proceeds, products and profits derived therefrom,
including, without limitation, all scheduled payments of principal of and
interest on such Eligible Assets and other amounts due or payable or to become
due or payable in respect thereof and proceeds thereof including, without
limitation, all moneys, goods and other tangible or intangible property received
upon the liquidation or sale thereof.
Section 1.028 Purchase Mechanics. (a) The Seller shall deliver to
the Purchaser a Purchase Request no later than 5:00 p.m., New York time, one
Business Day prior to a Purchase Date of the amount of each Purchase to be paid
on such Purchase Date and the total thereof. By 12:00 noon, New York time, on
the related Purchase Date, the Purchaser will authorize its bank to make payment
of the aggregate amount of each Purchase to be funded on such Purchase Date by a
single wire transfer of immediately available funds to the account of the Seller
set forth in Schedule I attached hereto; provided, however, that with respect to
a Purchase paid in respect of Wet-Funded Mortgage Loans hereof, the Purchaser
shall authorize its bank to make such Purchase by wire transfer of immediately
available funds to the related Purchase Funding Account.
(b) On or before the date of closing of any Wet-Funded Mortgage
Loan with respect to which a Purchase has been made, the Seller shall provide to
the Custody Agent and, if requested by the Purchaser, the Purchaser the wiring
instructions for the transfer of funds from the Purchase Funding Account for the
closing of such Wet-Funded Mortgage Loan.
Section 1.029 Retention of Accrued Interest. The Seller shall
retain all rights with respect to any interest accrued and unpaid with respect
to any Eligible Assets to the related Purchase Date.
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ARTICLE III.
DISTRIBUTIONS
Section 1.031 Distributions.
(a) The Seller agrees to pay the Purchaser during the term of
this Purchase Agreement, on the last day of any Tranche Term the Net Securities
Amount and Adjusted Tranche Amount owed to the Purchaser, if any, with respect
to the applicable Tranche.
(b) The Seller shall provide the Purchaser with an irrevocable
instruction to the applicable paying agent, servicer or other appropriate party
with respect to each Eligible Asset purchased hereunder to remit to the
Purchaser, at the times required by the terms of such Eligible Asset, by wire
transfer in immediately available funds, all distributions thereon or with
respect thereto in accordance with the Purchaser's payment instructions;
provided, however, that the Purchaser agrees that so long as no event of
default, Event of Termination or Forbearance Waiver hereunder shall have
occurred and be continuing, the Purchaser shall not deliver such instruction to
the applicable paying agent, servicer, or other appropriate party, and shall
instead permit the Servicer to receive all distributions as permitted by the
Seller.
(c) Upon receipt by the Purchaser of any payment with respect to
any Eligible Asset, the Purchaser shall apply such payment so received first, to
the reduction of the Net Securities Amount and second, to reduce the Adjusted
Tranche Amount of the applicable Tranche.
(d) Upon receipt by the Purchaser of any payment of principal or
interest with respect to any Eligible Assets, the prior Tranche Period shall
terminate and a new Tranche Period shall begin, and the Purchaser shall request
that Seller cause the Servicer to compute and either remit to the Seller or, at
the Seller's option, deposit in an account maintained by the Purchaser on behalf
of the Seller the amount by which the aggregate amount of any interest payment
received by the Purchaser exceeds the Net Securities Amount with respect to the
Tranche Period then ending.
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(e) Notwithstanding the foregoing provisions of this Article III,
the Purchaser hereby grants a waiver with respect to the Seller's obligation to
remit, or to cause to remit, all payments in respect of principal and interest
of any Eligible Asset (the "Forbearance Waiver"). During the period in which a
Forbearance Waiver is in effect, the Seller will cause the Servicer to remit
payments to the Purchaser once a month on the 17th day of the month, or if not a
Business Day, then on the next succeeding Business Day. Any payment so held by
the Servicer shall be paid to the Purchaser immediately upon the termination of
the Forbearance Waiver. The Forbearance Waiver shall terminate upon the earlier
to occur of (i) the occurrence of any default by the Seller hereunder and (ii)
the Purchaser's delivery of a written notice to the Seller and Servicer
terminating such Forbearance Waiver. During the existence of any Forbearance
Waiver, any payments remitted by the Servicer to the Purchaser shall not
terminate the relevant Tranche Period.
ARTICLE IV.
TRANSFERS OF ELIGIBLE ASSETS BY THE PURCHASER
Section II.01 Purchaser Sale. The Purchaser may, at its election,
and without the consent of the Seller, at any time during this Purchase
Agreement sell, transfer, convey, pledge or assign any or all of its right,
title and interest in, to or under, or grant a security interest in, any
Eligible Assets purchased by the Purchaser hereunder. Prior to effecting any
sale or other disposition of its right, title and interest in any Eligible Asset
(other than Repurchase Transactions), the Purchaser shall offer to the Seller
between the hours of 8:00 a.m. and 6:00 p.m. (New York City time) on any
Business Day (by oral notice to such effect, promptly confirmed in writing), the
right to purchase the offered Eligible Assets in whole from it at the applicable
Adjusted Tranche Amount plus the applicable Net Securities Amount (which has not
been theretofore paid pursuant to Section 3.01) on the related Eligible Assets.
Within the time periods specified below (New York City time), the Seller shall
notify the Purchaser of its intent to so purchase the offered Eligible Assets:
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<TABLE>
<CAPTION>
If the Purchaser makes The Seller shall notify
offer to sell to the Purchaser of intent
the Seller to Purchase
---------------------- -------------------------
<S> <C>
Between 8:00 a.m. and Before noon on the
10:00 a.m. on any next succeeding
Business Day Business Day
Between 10:00 a.m. and Before noon on the
6:00 p.m. on any second succeeding
Business Day Business Day
</TABLE>
If the Seller fails to notify the Purchaser of its intention to purchase the
related Eligible Assets within the time periods set forth above, then the Seller
shall be deemed to have declined the Purchaser's offer to purchase the related
Eligible Assets. If the Seller determines to effect such a purchase, the Seller
shall, on the fifth Business Day next succeeding the Business Day on which the
Seller accepted the offer to purchase the related Eligible Assets from the
Purchaser pursuant to this Section 4.01, pay to the Purchaser the applicable
Adjusted Tranche Amount and any Net Securities Amount required to be paid
pursuant to Section 3.01 hereof. If the Purchaser disposes of any Eligible
Assets which the Seller declines to purchase, and the Purchaser later reacquires
such Eligible Assets for any reason, then prior to any subsequent sale of such
Eligible Assets, the Purchaser shall afford the Seller the right to purchase
such Eligible Assets pursuant to this Section 4.01 at the greater of (i) the
Purchaser's reacquisition price plus applicable costs and expenses or (ii) the
Aggregate Adjusted Tranche Amount plus any Net Securities Amount plus applicable
costs and expenses. This right to purchase the Assets reacquired by the
Purchaser shall be extinguished upon the Seller's second refusal to purchase any
Eligible Asset(s).
Section 1.042 Market Value. On a weekly basis, the Purchaser, in
respect of each Purchase, shall determine the Market Value of each Eligible
Asset which has been purchased by the Purchaser and not disposed of, and shall
notify the Seller thereof. If the Seller shall in good faith disagree with the
Market Value of any such Eligible Asset as so determined by the Purchaser, the
Seller shall notify the Purchaser and the Purchaser and the Seller shall
endeavor in good faith to reach an agreement on the Market Value of such
Eligible Assets. If the Purchaser and the Seller cannot agree
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on the Market Value, a Required Sale Event will be deemed to have occurred. If,
in respect of any Purchase, the Market Value of the Eligible Assets at any time
has declined from the Market Value of the Eligible Assets as of the relevant
Purchase Date by an amount exceeding the applicable Market Movement Allowance, a
Required Sale Event shall be deemed to have occurred.
Section 1.043 Required Sale Event. (a) A "Required Sale Event"
shall occur pursuant to Section 4.02, Section 5.05, Section 6.02, or if any
Event of Termination occurs. Upon the occurrence of a Required Sale Event, the
Purchaser shall in a commercially reasonable manner sell the Eligible Assets,
subject to the Seller's obligation to indemnify the Purchaser against any
resulting Losses from such sale up to the then-applicable Recourse Amount. Prior
to effecting any such sale, the Purchaser shall offer to the Seller the right to
purchase such Eligible Assets from it at the Adjusted Tranche Amount, plus any
Net Securities Amount payable pursuant to Section 3.01 hereof. If the Seller
fails to exercise its right of purchase within the time set forth in Section
4.01 and the Purchaser sells the Eligible Assets (through private or public
sale) to a third party, the Purchaser shall promptly provide a notification to
the Seller of such event, setting forth the net sales proceeds inclusive of
accrued interest received (after giving effect to all selling and related
expenses, including the fees and expenses of any consultants, brokers or
attorneys) and shall notify the Seller of all Losses incurred and invoice the
Seller (with supporting detail) for the amount due to the Purchaser, up to the
amount of the Recourse Amount. Upon receipt of such invoice, the Seller shall
pay to the Purchaser such portion of the Recourse Amount to the extent necessary
to indemnify the Purchaser against the Losses sustained. If, as a result of the
sale of the Eligible Assets, the net realized sales proceeds, inclusive of
accrued interest, if any, on the related Eligible Assets exceed the applicable
Adjusted Tranche Amount plus the applicable Net Securities Amount, then the
Purchaser shall pay any such excess up to the Gain Amount to the Seller.
(b) Notwithstanding the foregoing, if a Required Sale Event
occurs due to an Event of Termination, the Purchaser will not be obligated to
offer the Seller a right to purchase the Eligible Assets. The Purchaser will be
able to sell the Eligible Assets to any other third party first. In
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the event that the Purchaser offers to sell the Eligible Assets to the Seller,
the Seller will be obligated to buy the Eligible Assets at the Adjusted Tranche
Amount, plus any Net Securities Amount payable pursuant to Section 3.01 hereof.
Section 1.044 Bankruptcy Event. With respect to the Seller's
right of purchase set forth in Section 4.01 and Section 4.03, if a bankruptcy
event occurs, as described in Section 8.04 below, involving the Seller, during
the period after which the Seller has notified the Purchaser of its intention to
purchase the offered Eligible Assets but before the expiration of the five
Business Day period in which the Seller has to effect such purchase, the
Purchaser shall be released from its obligation to sell such Eligible Assets to
the Seller and any other obligations set forth in Section 4.01 and 4.03 and may
sell such Eligible Assets (through private or public sale) to any third party.
Section 1.045 Proceeds Shortfall. If the Purchaser sells Eligible
Assets to any third party for an amount less than the applicable Adjusted
Tranche Amount plus the applicable Net Securities Amount, then the Seller shall
pay to purchaser any such shortfall (the "Proceeds Shortfall"). Until the
Proceeds Shortfall is repaid, the Purchaser shall be entitled to deduct from the
proceeds owed to the Seller as a result of any subsequent sales of Eligible
Assets (to the Seller or to any third party), the amount, up to the Proceeds
Shortfall, by which the proceeds of any such subsequent sale exceeds the
Adjusted Tranche Amount plus the Net Securities Amount, in each case applicable
to such subsequent sale.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES
Section 5.01 Representations and Warranties of the Seller. The
Seller represents and warrants to Purchaser that the representations and
warranties attached hereto as Exhibit H are true and correct as of the date of
this Purchase Agreement and as of the date of each Purchase.
Section 5.02 Representations and Warranties of the Purchaser. The
Purchaser represents and warrants to the Seller that the representations and
warranties attached hereto
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as Exhibit I are true and correct as of the date of this Purchase Agreement.
Section 5.03 Covenants of the Seller. The Seller covenants to the
Purchaser are attached hereto as Exhibit J.
Section 5.04 Representations and Warranties Regarding the
Individual Mortgage Loans. The Seller represents and warrants to Purchaser with
respect to each individual Mortgage Loan in a pool of Eligible Assets that each
such Mortgage Loan shall have been originated in conformity with and meets, as
of the date of the Purchase, the criteria set forth in the attached Exhibit K.
Section 5.05 Remedies for Seller's Breach of Representations,
Warranties and Covenants. In the event that the Seller fails to comply with its
representation, warranties and covenants, as set forth in Sections 5.01, 5.03
and 5.04 and their accompanying Exhibits, a Required Sale Event shall occur.
ARTICLE VI.
OPERATIVE PROVISIONS
Section 6.01 Intent of Parties; Security Interest. The Purchaser
and the Seller confirm that the transactions contemplated herein are intended as
purchases and sales rather than as loan transactions. In the event, for any
reason, and solely in such event, any transaction hereunder is construed by any
court or regulatory authority as a loan or other than a purchase and sale of the
related Mortgage Loans, the Seller shall be deemed to have hereby pledged to the
Purchaser as security for the performance by the Seller of all of its
obligations from time to time arising hereunder and under any and all Purchases
effected pursuant hereto, and shall be deemed to have granted to the Purchaser a
first priority perfected security interest in, the related Mortgage and all
distributions in respect thereof, and the proceeds of any and all of the
foregoing and any other Collateral. The Seller shall, with respect to each
Purchase, execute a Receipt, Grant and Assignment substantially in the form of
Exhibit C hereto, as applicable, pursuant to which the Seller shall reconfirm
its grant to the Purchaser of a first priority security interest in, and lien
upon, the Collateral. In furtherance of the foregoing, (i) this Purchase
Agreement shall constitute a
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security agreement, (ii) the Purchaser shall have all of the rights of a secured
party with respect to the Collateral pursuant to applicable law and (iii) the
Seller shall execute all documents, including but not limited to (A) assignments
of mortgages, and (B) financing statements under the Uniform Commercial Code as
in effect in any applicable jurisdictions, as the Purchaser may reasonably
require to effectively perfect and evidence the Purchaser's first priority
security interest in the Collateral. The Seller also covenants not to pledge,
assign or grant any security interest to any other party in any Mortgage Loan
sold to the Purchaser.
Section 6.02 Term. This Purchase Agreement shall automatically
terminate on the earlier to occur of an Event of Termination or the Termination
Date. In the event this Purchase agreement expires on the Termination Date and
at that time there exists no Event of Termination, then, immediately prior to
such Termination Date, as to all Eligible Assets then owned by the Purchaser, a
Required Sale Event shall be deemed to occur unless this Purchase Agreement is
extended.
Section 6.03 Indemnification by the Seller.
(a) If, in connection with the matters that are the subject of
this Purchase Agreement, the Purchaser becomes involved in any capacity in any
action or legal proceeding involving claims by any third party, the Seller
agrees to reimburse the Purchaser, its Subsidiaries and its Affiliates and their
respective directors, officers, employees, agents and controlling persons (each,
an "Indemnified Party") promptly upon request for all reasonable expenses
(including the fees and disbursements of legal counsel, the allocated costs of
in-house counsel, and the cost of investigation and preparation) as they are
incurred, regardless of whether such actions or proceedings are brought by the
Seller, its Affiliates or third parties. The Seller also agrees to indemnify and
hold each Indemnified Party harmless against all losses, claims, damages or
liabilities of any kind, joint or several, which such Indemnified Party may
become subject to in connection with, or relating to, or arising out of this
Purchase Agreement or the Custody Agreement or any transaction contemplated
hereby; provided, however, that the Seller shall not be liable under the
foregoing indemnity agreement in respect of any loss, claim, damage or liability
to the extent that a court having jurisdiction shall have determined by a final
judgment (not subject to further appeal) that such loss,
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claim, damage or liability resulted primarily and directly from the willful
misconduct or gross negligence of such Indemnified Party.
(b) The agreements of the Seller in this Section 6.03 shall be in
addition to any liabilities that the Seller may otherwise have and shall apply
whether or not the Purchaser or any other Indemnified Party is a formal party to
any lawsuit, claim or other proceeding. Solely for purposes of enforcing such
agreements, the Seller hereby consents to personal jurisdiction, service and
venue in any court in which any claim or proceeding which relates to the
services or matters that are the subject of this Purchase Agreement is brought
against the Purchaser or other Indemnified Party.
(c) The sole indemnification with respect to Taxes is that set
forth in Article VIII hereof.
(d) All indemnities and undertakings of the Seller and the
Purchaser hereunder shall survive the termination of this Purchase Agreement.
Section 6.04 Securitization. (a) If the Seller awards
Securitizations on a whole-loan trade involving any Mortgage Loans (other than
those Mortgage Loans underwritten through its Conforming Mortgage Loan
Underwriting Guidelines) to any underwriter or placement agent other than CFS,
or if the Seller determines not to consummate the Securitizations, then Seller
shall owe to the Purchaser, in addition to all other amounts due, a fee for the
facility in an amount equal to the product of (i) 0.25% and (ii) the daily
average outstanding Adjusted Tranche Amount from the Purchase Date until the
date of determination on the Mortgage Loans which are not included in the
Securitizations. The fee for the facility is calculated based on such Mortgage
Loans' average daily outstanding principal balance during the time they were
Mortgage Loans. To the extent that the Adjusted Tranche Amount is outstanding,
any such fee shall be added to the then outstanding Adjusted Tranche Amount, if
the Adjusted Tranche Amount is not then outstanding, such fee shall be
immediately due and payable.
(b) At any time that a Mortgage Loan (other than those Mortgage
Loans underwritten through its Conforming Mortgage Loan Underwriting Guidelines)
is removed from the facility provided hereby (except for the purpose of curing a
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breach of any representations and warranties), an additional fee of 25 basis
points per annum (the "Release Fee") calculated on such Mortgage Loan's average
daily outstanding principal balance during the time that such Mortgage Loan was
owned by the Purchaser hereunder, shall be immediately due and payable to the
Purchaser with respect to such Mortgage Loan.
(c) At any time in which a Mortgage Loan (other than those
Mortgage Loans underwritten through its Conforming Mortgage Loan Underwriting
Guidelines) is not included in a securitization or removed for another purpose
after such Mortgage Loan has been purchased by the Purchaser, the Seller agrees
to either purchase such Mortgage Loan or cause a third-party to purchase such
Mortgage Loan.
Section 6.05 Remedies. If an Event of Termination occurs and is
continuing, the Purchaser may, to the extent provided or permitted by applicable
law and this Purchase Agreement, pursue any available legal remedy including the
sale or other disposition of some or all of the Eligible Assets and related
Collateral in accordance with the provisions of Section 4.03(b); provided,
however, the Purchaser shall not be obligated to offer the relevant Eligible
Asset to the Seller for purchase pursuant to the right of first refusal
contained in Article IV if any Event of Termination hereof has occurred and is
continuing. Following an Event of Termination, in addition to the rights granted
to the Purchaser pursuant to Section 4.03(b) hereof, no further Purchase
hereunder shall occur, unless such Event of Termination shall have been waived
by the Purchaser.
Section 6.06 Consumer Credit Law Obligations. The Seller agrees
to discharge on the Purchaser's behalf all obligations, including, without
limitation, all disclosure obligations, which the Purchaser may have under any
Consumer Credit Laws in connection with the Purchaser's purchases of Mortgage
Loans hereunder. The Purchaser agrees to provide the Seller with such
information as is reasonably necessary for the Seller to discharge such
obligations and hereby appoints the Seller as its agent in its name for the
purposes of, and only for the purposes of, performing such obligations. The
Seller hereby agrees to indemnify the Purchaser and its respective officers,
directors, agents and employees from any losses suffered by any such party in
connection with the Seller's obligations under this Section 6.06.
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Section 6.07 Grant of Security Interest. It is the intention of
the parties hereto, that the transactions described herein shall be regarded as
sales of the Eligible Assets by the Seller to the Purchaser. Nevertheless, to
secure the performance of the Seller's obligations hereunder, Seller pledges and
hypothecates to the Purchaser, and grants a continuing lien and first priority
security interest in favor of the Purchaser in, all of the Seller's right, title
and interest in and to the following (the "Collateral"):
(a) all Mortgage Loans, Mortgages, Mortgage Notes, Mortgage
Files, Servicing Files and other documents and property as shall be
deposited with, or held by or at the direction of the Purchaser pursuant
to this Purchase Agreement and the Custody Agreement;
(b) all payments and prepayments of principal, interest,
penalties and other income due or to become due on all Mortgages Loans,
Mortgages and Mortgage Notes referred to in Paragraph (a) above, and all
proceeds thereof, all the right, title and interest of every nature
whatsoever of the Seller in and to the same and all property used in
connection therewith, including, without limitation, the following: (i)
all rights, liens and security interests existing with respect to, or as
security for, all such Mortgage Loans; (ii) all hazard insurance
policies, flood insurance policies (if applicable), title insurance
policies or condemnation proceeds with respect to each such Mortgage
Loan (and amounts received by the Servicer for the purpose of payment of
real property taxes, assessments and insurance premiums pursuant to the
terms of the Mortgage Notes); (iii) the servicing rights attributable to
the Mortgage Loans; and (iv) all private mortgage insurance policies, if
any, with respect to each such Mortgage Loan;
(c) all files, surveys, certificates, correspondence, appraisals,
computer programs, tapes, discs, cards, accounting records and other
records and data of the Seller related to the Mortgage Loans referred to
in Paragraph (a) above (but not including the general accounting
materials of the Seller); and
(d) all products, profits and proceeds of any of the property
described in the foregoing Paragraphs (a) and (b) and any other property
or documents relating to
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any of the foregoing that may, from time to time hereafter, come into
the Seller's possession and/or be delivered by the Seller to the
Purchaser or its designee under this Purchase Agreement.
Section 6.08 Late Payments. Any late payments shall bear interest
at the Default Rate.
ARTICLE VII.
INDEMNITIES AND OTHER COSTS
Section 1.071 Hold Harmless. The Seller hereby agrees to pay, and
to indemnify, protect, save and hold harmless, on an After-Tax Basis (as defined
in Section 7.05 below), the Purchaser from and against any and all Taxes (as
defined in Section 7.02 below) other than (i) income taxes of the Purchaser,
(ii) Taxes that result from the misconduct or negligence of the Purchaser or
from the failure of the Purchaser to file tax returns or certificates of
exemption from withholding or other reports, properly and on a timely basis or
to claim a deduction or credit and (iii) Taxes that are based on or measured by
fees or compensation received by the Purchaser, which may at any time be imposed
or asserted by reason of, in connection with or in respect of the Eligible
Assets or any transactions contemplated hereby, whether imposed on the
Purchaser, the Seller, or the Eligible Assets or otherwise, whether collected
directly from the party upon which the tax is imposed, by withholding or
otherwise whether arising by reason of the acts to be performed by the Seller
hereunder or otherwise.
Section 1.072 Definition of Taxes. For purposes of this Article
VII, the term "Taxes" shall mean all taxes, charges, fees, levies or other
assessments, including, without limitation, excise, property and sale taxes
(including, in each such case, any interest, penalties or additions attributable
to or imposed on or with respect to any such assessment) imposed by the United
States, any state or political subdivision thereof, any foreign government or
any other jurisdiction or taxing authority.
Section 1.073 After-Tax Calculation. For purposes of this Article
VII, in determining the additional amount necessary so that any payment
hereunder is paid on an After-
<PAGE> 35
Tax Basis, such calculation shall be based on the Purchaser's effective tax rate
in effect from time to time under applicable law.
Section 1.074 Contest, Payment, Interest. In the event that the
Purchaser becomes aware that a taxing jurisdiction has made or is making a claim
with respect to any Tax for which the Seller may be liable under this Article
VII, the Purchaser shall promptly notify the Seller thereof; provided, however,
that if the Purchaser fails to promptly notify the Seller thereof, such failure
shall not relieve the Seller of its obligations hereunder, except and only to
the extent that the Seller is materially prejudiced by such failure. If
reasonably requested by the Seller within 30 days of receipt of such notice, the
Seller shall, at its expense, be entitled to contest the imposition of such Tax.
All payments due pursuant to this Article VII shall be paid no later than the
later of (i) five Business Days after the date of such notice or (ii) five
Business Days before the date the Tax to which such amount payable hereunder
relates is due or is to be paid accompanied by a written statement (which
written statement shall, at the request of the Seller, be verified by a
nationally recognized independent accounting firm mutually acceptable to the
Seller and the Purchaser, such verification to be at the Seller's expense unless
such accountants determine that the amount payable by the Seller is less than
ninety-five percent (95%) of the amount shown on such written statement)
describing in reasonable detail the Tax and the computation of the amount
payable; provided, however, that the Seller shall not be entitled to any payment
in respect of accountants' fees and expenses incurred in connection with the
contest of a taxing authority assessment. Without in any way limiting the
Purchaser's remedies, any such amount not paid when due, shall bear interest at
a rate equal to the Default Rate.
Section 1.075 Definition of "After-Tax Basis"; Tax Savings. For
purposes of this Article VII, the term "After-Tax Basis" shall mean an amount
which after deduction of the net increase in federal, state and foreign income
taxes required to be paid by the Purchaser with respect to the receipt of such
amount is equal to the payment required under the provision of this Article VII
which requires payment to be made on an After-Tax Basis. If the Purchaser
subsequently realizes a tax deduction or credit (including foreign tax credit
and any reduction in Taxes) not previously taken into
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<PAGE> 36
account in computing such payment, the Purchaser shall promptly pay to the
Seller an amount equal to the sum of (a) the actual reduction in Taxes, if any,
realized by the Purchaser which is attributable to such deduction or credit and
(b) the actual reduction in Taxes, if any, realized by the Purchaser as a result
of any payment made by the Purchaser pursuant to this sentence.
Section 1.076 Facility Fee. In consideration of the access to
this facility, the Seller shall pay a facility fee to the Purchaser on a monthly
basis, in an amount equal to the product of (a) 0.0025 per annum, (b) 1/12, and
(c) the Maximum Available Amount.
ARTICLE VIII.
EVENTS OF TERMINATION
Each of the following events shall constitute an "Event of
Termination" hereunder except where remedies are provided for (whatever the
reason for such Event of Termination and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body).
Section 1.081 Failure to Perform. Failure of the Seller to
deliver to the Purchaser or its designee the relevant Eligible Assets on the
relevant Purchase Date; or failure of the Seller to pay when due any sums or
amount equal to or greater than $20,000 payable hereunder or under any Purchase
or to pay within one Business Day of the due date any sums or amount less than
$20,000 payable hereunder or under any Purchase.
Section 1.082 Failure of Representation or Warranty. Any of the
representations and warranties made by the Seller herein, or in any certificate
or other document delivered pursuant to or in connection with this Purchase
Agreement or any transaction contemplated hereby, shall prove to be untrue in
any material respect when made or deemed made. [If such Representation or
warranty is made in connection with individual Mortgage Loans, the Purchaser may
require the Seller to purchase such Mortgage Loans as set forth in Section 4.03.
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<PAGE> 37
Section 1.083 Failure of Covenant. Failure of the Seller to
observe and perform any material covenant, condition or other agreement on its
part to be observed or performed hereunder and such default shall continue
unremedied for five Business Days.
Section 1.084 Bankruptcy Event. (a) Appointment of a receiver,
conservator, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of the Seller, or of any substantial part of its Property, the
ordering of the winding-up or liquidation of its affairs, or the entry of a
decree or order for relief by a court having jurisdiction in the premises in
respect of the Seller in any involuntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect which such order
remains undischarged or unstayed, as the case may be, for 60 days; or
(b) Commencement by the Seller of a voluntary case under any
applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, or the consent by the Seller to the entry of an order for relief in an
involuntary case under any such law or to the appointment of or taking
possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator
(or other similar official) of the Seller or of any substantial part of the
Seller's property, or the making by the Seller of any general assignment for the
benefit of creditors, or the failure of the Seller generally to pay its debts as
such debts become due, or the taking of corporate action by the Seller in
furtherance of any of the foregoing.
Section 1.085 Seller Default. Default by the Seller whether as
principal, guarantor or surety, in the payment of any principal or interest on
any indebtedness or any other obligation of the Seller in the amount of $50,000
or more.
Section 1.086 Material Adverse Change. A material adverse change
in the financial condition of the Seller shall have occurred which, in the
reasonable opinion of the Purchaser, materially impairs the ability of the
Seller to perform its obligations hereunder.
Section 1.087 Cross-Default. The occurrence and continuance of an
"event of default" or of an "event of
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termination" on the part of the Seller under either (i) any Significant
Documents, (ii) any material agreement of the Seller, including, but not limited
to, any warehouse agreements, financing agreement, or any credit agreements, or
(iii) any other agreement between the Seller and the Purchaser or any of its
affiliates on the other hand, which has not been waived by the Purchaser.
Section 1.088 Non-Closure. If (i) the Merger Agreement has not
closed or (ii) all of the Significant Documents have not been executed and
closed by March 31, 1997
ARTICLE IX.
GENERAL PROVISIONS
Section 1.091 Cooperation, Confidentiality, Etc..
(a) Upon reasonable notice the Seller shall furnish, and shall
use its best efforts to cause other relevant parties to furnish, the Purchaser
with all information and data reasonably requested by the Purchaser in
connection with its activities on the Seller's behalf to carry out the terms of
this Purchase Agreement, and shall provide the Purchaser reasonable access to
the Seller's officers, directors, employees and professional advisers.
(b) The Seller recognizes and confirms that the Purchaser in
acting pursuant to this Purchase Agreement may use information in reports and
other information provided by others, including, without limitation, information
provided by the Seller, and that the Purchaser does not assume responsibility
for and may rely, without independent verification, on the accuracy and
completeness of any such reports and information. The Seller agrees that any
advice or information rendered by the Purchaser in connection with this Purchase
Agreement is for the confidential use of the Seller only and, except as
otherwise required by law, the Seller will not, and will not permit any third
party to, disclose such advice or information to others or summarize or refer to
such advice or information or to the Purchaser's engagement hereunder without,
in each case, the Purchaser's prior written consent. The Purchaser agrees to
keep confidential any information furnished to it by the Seller which is clearly
labelled as proprietary to the Seller, is not otherwise
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publicly available to the Purchaser and the disclosure of which is not required
by applicable law or judicial or administrative process.
(c) Neither the Purchaser nor the Seller may place public
announcements or advertisements describing this or any part of this Purchase
Agreement without the prior written consent of the other party.
Section 1.092 Waiver of Trial by Jury. Each party hereto waives
the right to trial by jury in any action, suit, proceeding or counterclaim of
any kind arising out of or related to this Purchase Agreement. In the event of
litigation, this Purchase Agreement may be filed as a written consent to a trial
by the court.
Section 1.093 Amendment; Waivers. This Purchase Agreement may be
amended from time to time only by written agreement of the parties. No failure
on the part of the Purchaser to exercise, and no delay in exercising, any right,
power, or remedy under this Purchase Agreement shall operate as a waiver
thereof; nor shall any single or partial exercise of any right under this
Purchase Agreement preclude any other or further exercise thereof or the
exercise of any other right. No term or provision of this Purchase 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 1.094 Taxes. All payments made by the Seller to the
Purchaser on account of any Mortgage Loan which are due hereunder shall be made
free and clear of, and without reduction by reason of, any taxes, levies,
imposts, deductions, charges or withholdings of any nature, including, without
limitation, any withholding taxes (but excluding any taxes imposed on the
overall net income of the Purchaser) and all liabilities with respect thereto
(all such taxes, levies, imposts, deductions, charges, withholding and
liabilities being hereinafter referred to as "Taxes"). If the Seller shall be
required by law to deduct any Taxes from or in respect of any sum payable
hereunder or under any Secured Note, the sum payable shall be increased as may
be necessary so that after making all required deductions (applicable to
additional sums payable under this subsection) the Purchaser receives an amount
equal to the sum it would have received had no such deductions been made.
<PAGE> 40
Section 1.095 Limited Liability. No recourse under any
Significant Documents shall be had against, and no personal liability shall
attach to, any officer, employee, director, affiliate or shareholder of any
party hereto, as such, by the enforcement of any assessment or by any legal or
equitable proceeding, by virtue of any statute or otherwise in respect of any of
the Significant Documents, it being expressly agreed and understood that each
Significant Document is solely a corporate obligation of each party hereto, and
that any and all personal liability, either at common law or in equity, or by
statute or constitution, of every such officer, employee, director, affiliate or
shareholder for breaches by any party hereto of any obligations under any
Significant Document is hereby expressly waived as a condition of and in
consideration for the execution and delivery of this Purchase Agreement.
Section 1.096 Other Transactions. The Seller acknowledges that
the Purchaser and its Affiliates compete, directly and indirectly in the
business in which the Seller engages and proposes to engage; provided, however,
that the Purchaser shall not compete with respect to any transaction, the terms
of which are revealed to the Purchaser by the Seller in connection with seeking
the services of the Purchaser and assuming that neither the Purchaser nor any of
its Affiliates has prior knowledge of such transaction. The Seller acknowledges
that the Purchaser and its Affiliates have and will in the future have business
dealings with parties other than the Seller, which parties compete, directly or
indirectly with the Seller. Although the Purchaser and its Affiliates may, in
their normal course of business, acquire information about the securitization
market, particular transactions or such other parties, the Purchaser shall have
no obligation to disclose such information to the Seller. The Seller
acknowledges that the Purchaser and its Affiliates may engage in their
businesses and otherwise compete with the Seller without regard to their
relationship to the Seller hereunder.
Section 1.097 Opinion of Counsel to the Seller. Upon the
execution of this Purchase Agreement, the Seller shall deliver to the Purchaser
a legal opinion from their special counsel in the form attached hereto as
Exhibit E, together with such other certificates and documents as the Purchaser
shall require.
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<PAGE> 41
Section 1.098 Costs and Expenses. (a) The Purchaser and the
Seller will each be solely responsible for and bear all of their own respective
expenses (other than the expenses of legal counsel), including, without
limitation, accountants and other advisers, incurred at any time in connection
with pursuing or consummating the Significant Documents and the transactions
contemplated thereby. In addition, the Seller shall be solely responsible for
(i) all accountant's fees incurred in connection with the review of the Seller's
June 30, 1996 financial statements and (ii) fees incurred by an independent
contract underwriter.
(b) The Seller will be responsible for and bear 50% of all the
fees and expenses of legal counsel for the Purchaser in connection with the
preparation, negotiation, and execution of the Significant Documents and the
transactions contemplated thereby; however, the Seller shall not bear more than
$75,000 under this clause (b). The Purchaser will be responsible for and bear
all remaining fees and expenses of legal counsel for the Purchaser in connection
with the preparation, negotiation, and execution of the Significant Documents
and the transactions contemplated thereby.
(c) The Purchaser will be responsible for the bear 50% of all the
fees and expenses of legal counsel for the Seller in connection with the
preparation, negotiation, and execution of the Significant Documents and the
transactions contemplated thereby; however, the Purchaser shall not bear more
than $35,000 under this clause (c). The Seller will be responsible for and bear
all the remaining fees and expenses of legal counsel for the Seller in
connection with the preparation, negotiation, and execution of the Significant
Documents and the transactions contemplated thereby.
(d) All other costs and expenses incurred in connection with the
transactions contemplated herein, including recording fees for the Assignments
of Mortgages, if the Purchaser elects to have them recorded, fees for title
policy endorsements and continuations, fees due to the Custody Agent under the
Custody Agreement and the Seller's attorneys' fees, shall be paid by the Seller.
Section 1.099 Wiring Instructions. Any payment required to be
made by either party hereto, or any Affiliate thereof, pursuant to this Purchase
Agreement shall be made by
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wire transfer of immediately available funds to the account of the other party
set forth in the wiring instructions attached hereto as Schedule I.
Section 9.10 Power of Attorney. The Seller hereby authorizes the
Purchaser, at the Seller's expense, to file such financing statement or
statements relating to the Collateral without the Seller's signature thereon as
the Purchaser at its option may deem appropriate, and appoints the Purchaser as
the Seller's attorney-in-fact (without requiring the Purchaser) to execute any
such financing statement or statements in the Seller's name and to perform all
other acts which the Purchaser deems appropriate to perfect and continue the
security interest granted hereby and to protect, preserve and realize upon the
Collateral, including, but not limited to, the right to endorse notes, complete
blanks in documents and sign assignments on behalf of the Seller as its
attorney-in-fact. This Power of Attorney is coupled with an interest and is
irrevocable without the Purchaser's written consent. Notwithstanding the
foregoing, the power of attorney hereby granted shall only be effective during
the occurrence and continuance of any Event of Default hereunder.
Section 9.11 Right of Set-Off. Upon the occurrence of any event
or circumstance which requires the Seller to make a payment hereunder, the
Purchaser is hereby authorized then or at any time or times thereafter, without
notice to the Seller (any such notice being expressly waived by the Seller), to
set-off and apply any and all deposits (general or special, time or demand,
provisional or final) at any time held and other indebtedness at any time owing
by the Purchaser to or for the credit or the account of the Seller against any
and all of the obligations of the Seller now or hereafter existing hereunder,
irrespective of whether or not the Purchaser shall have made any demand
hereunder. The Purchaser agrees promptly to notify the Seller after any such
set-off and application made by the Purchaser; provided that the failure to give
such notice shall not affect the validity of such set-off and application. The
rights of the Purchaser under this Section 9.11 are in addition to other rights
and remedies which the Purchaser may have.
Section 9.12 Servicing. All of the Mortgage Loans shall be
serviced by the Servicer pursuant to the terms of the Servicing Agreement. Under
the Servicing Agreement, the Servicer will be entitled to receive a Servicing
Fee of 0.50%
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per annum based upon the outstanding principal balance of Mortgage Loans
serviced.
ARTICLE X.
CONSTRUCTION
Section 1.101 Entire Agreement. This Purchase Agreement, together
with the Significant Documents, including the Exhibits and the Schedules
thereto, contains the entire agreement of the parties with respect to the
subject matters hereto, and supersedes all prior agreements between them,
whether oral or written, of any nature whatsoever with respect to the subject
matter hereof.
Section 1.102 Severability Clause. Any part or provision of this
Purchase Agreement that is prohibited or that 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
or provision of this Purchase Agreement that 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 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 that prohibits
or renders void or unenforceable any provision hereof. If the invalidity of any
part or provision of this Purchase Agreement shall deprive any party of the
economic benefit intended to be conferred by this Purchase 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 Purchase
Agreement, without regard to such invalidity.
Section 1.103 Counterparts. This Purchase 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 1.104 Governing Law; Purchase Agreement Constitutes
Security Agreement; Consent To Forum; Immunities. This Purchase Agreement has
been negotiated, executed and
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delivered at and shall be deemed to have been made in New York, New York. This
Purchase Agreement shall be governed by and construed in accordance with the
Laws of the State of New York, without giving effect to the conflict of laws
rules therein, and shall constitute a security agreement within the meaning of
the New York UCC. The parties hereto hereby consent and agree that the Supreme
Court of New York County, New York or, at the Purchaser's option, the United
States District Court for the Southern District of New York, shall have
exclusive jurisdiction to hear and determine any claims or disputes between the
parties hereto pertaining to this Purchase Agreement or to any matter arising
out of or related to this Purchase Agreement. The parties hereto expressly
submit and consent in advance to such jurisdiction in any action or suit
commenced in any such court, and hereby waive any objection which it may have
based upon lack of personal jurisdiction, improper venue or forum non conveniens
and hereby consent to the granting for such legal or equitable relief as is
deemed appropriate by such court. Each party hereto irrevocably consents to the
service of process by registered or certified mail, postage prepaid, to it at
its address given pursuant to Section 11.01 hereof. Nothing in this Purchase
Agreement shall be deemed or operate to affect the right of the Purchaser to
serve legal process in any other manner permitted by Law, or to preclude the
enforcement by the Purchaser of any judgement or order obtained in such forum or
the taking of any action under this Purchase Agreement to enforce same in any
other appropriate forum or jurisdiction.
To the extent that the Seller has or may hereafter acquire any
immunity from the jurisdiction of any court or from any legal process (whether
through service or notice, attachment prior to judgement, attachment in aid of
execution, execution or otherwise) with respect to the Seller or the Seller's
property, the Seller hereby irrevocably waives such immunity in respect of its
obligations under this Purchase Agreement.
Section 1.105 No Agency; No Partnership; No Joint Venture.
Neither the Purchaser nor the Seller is the agent or representative of the
other, and nothing in this Purchase Agreement shall be construed to make either
the Purchaser or the Seller liable to any third party for services performed by
such third party or for debts or claims accruing to such third party against
either the Purchaser or the Seller. Nothing contained herein nor the acts of the
parties hereto shall be
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construed to create a partnership, agency or joint venture between the Purchaser
and the Seller.
Section 1.106 Judicial Interpretation. Should any provision of
this Purchase Agreement or any of the other Significant Documents require
judicial interpretation, it is agreed that a court interpreting or construing
the same shall not apply a presumption that the terms hereof shall be more
strictly construed against any Person by reason of the rule of construction that
a document is to be construed more strictly against the Person who itself or
through its agent prepared the same, it being agreed that all the parties hereto
have participated in the preparation of this Purchase Agreement.
Section 1.107 Recitals. The recitals of this Purchase Agreement
are not intended to constitute substantive provisions hereof.
Section 1.108 Rules of Interpretation. Except as otherwise
expressly provided in this Purchase Agreement, the following rules shall apply
hereto:
(a) the singular includes the plural and the plural includes the
singular;
(b) "or" is not exclusive and "include" and "including" are not
limiting;
(c) a reference to any agreement or other contract includes
permitted supplements, amendments and other modifications;
(d) a reference to a law (or Law) includes any amendment or
modification of such law (or Law) and the rules or regulations issued
thereunder;
(e) a reference to a Person includes its permitted successors and
assigns in the applicable capacity;
(f) a reference in this Purchase Agreement to an Article,
Section, clause, recital or Exhibit is to the Article, Section, clause,
recital or Exhibit of this Purchase Agreement unless otherwise expressly
provided;
(g) words such as "hereunder", "hereto", "hereof", and "herein"
and other words of like import shall, unless
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<PAGE> 46
the context clearly indicates to the contrary, refer to the whole of
this Purchase Agreement and not to any particular Article, Section or
clause hereof;
(h) all obligations under this Purchase Agreement are continuing
obligations throughout the term of this Purchase Agreement;
(i) any right in this Purchase Agreement may be exercised at any
time and from time to time;
(j) the headings of the Articles and Sections are for convenience
and shall not affect the meaning of this Purchase Agreement; and
(k) time is of the essence in performing all obligations.
Section 1.109 Good Faith. The Seller and the Purchaser shall
implement the terms and provisions of this Purchase Agreement in good faith in
accordance with applicable Law.
ARTICLE XI.
MISCELLANEOUS
Section 1.111 Notices. All demands, notices, requests for consent
and other communications hereunder shall be in writing and personally delivered,
mailed by certified mail, return receipt requested, and telecopied, and shall be
deemed to have been duly given upon receipt;
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<PAGE> 47
if to the Seller:
CMG Funding Corp.
5295 Commerce Drive
Suite 400
Salt Lake City, Utah 84107
Attention: John Fry
Telephone Number: (801) 261-1097
Telecopier Number: (801) 261-3879
Continental Mortgage Group, L.C.
5295 Commerce Drive
Suite 400
Salt Lake City, Utah 84107
Attention: John Fry
Telephone Number: (801) 261-1097
Telecopier Number: (801) 261-3879
if to the Purchaser:
ContiTrade Services L.L.C.
277 Park Avenue
New York, New York 10172
Attention: Chief Counsel
Telephone Number: (212) 207-2822
Telecopier Number: (212) 207-2935
with a copy to:
ContiTrade Services L.L.C.
277 Park Avenue
New York, New York 10172
Attention: Jay Remis
Telephone Number: (212) 207-2887
Telecopier Number: (212) 207-5251
or, as to either party, at such other address or telecopy number as shall be
designated by such party in a written notice to the other party.
Section 1.112 Further Agreements. The Seller and the Purchaser
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 Purchase Agreement.
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<PAGE> 48
Section 1.113 Third-Party Rights; Assignment. This Purchase
Agreement is for the exclusive benefit of the parties hereto and their
respective successors and assigns and shall not be deemed to give any legal or
equitable right to any other Person. The Seller may neither assign its rights
nor delegate its obligations under this Purchase Agreement without the prior
written consent of the Purchaser. The Purchaser may assign (a) its rights and/or
delegate its obligations under this Purchase Agreement to an Affiliate without
the consent of the Seller, and (b) its rights under this Purchase Agreement, or
any portion thereof (including, without limitation, the security interest of the
Purchaser in the Collateral, and its right to receive payments and exercise
remedies under a Secured Note), in connection with any financing, borrowing,
repo sale and/or pledge by the Purchaser concerning a Secured Note.
Section 1.114 Advice from Independent Counsel. The parties hereto
understand that this Purchase Agreement and each of the other Significant
Documents to which either of them is a party are legally binding agreements that
may affect such party's rights. Each party represents to the other that it has
received legal advice from counsel of its choice regarding the meaning and legal
significance of this Purchase Agreement and each of the other Significant
Documents to which it is a party and that it is satisfied with its legal counsel
and the advice received from it.
Section 1.115 Summary Judgment. The Seller hereby acknowledges
and agrees that any enforcement action relating to this Purchase Agreement or
any Secured Note may be brought by motion for summary judgment in lieu of a
complaint pursuant to Section 3213 of the New York Civil Practice Law and Rules.
Section 1.116 Reproduction of Documents. This Purchase 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
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<PAGE> 49
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.
[Remainder of Page Intentionally Left Blank]
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<PAGE> 50
IN WITNESS WHEREOF, each of the parties hereto have caused their
duly appointed representative(s) to set their hands as of the date and year
first above written.
CMG FUNDING CORP.
By
----------------------------------
Name:
Title: President
CONTINENTAL MORTGAGE GROUP, L.C.
By
----------------------------------
Name:
Title: President
CONTITRADE SERVICES L.L.C.
By
----------------------------------
Name:
Title:
By
----------------------------------
Name:
Title:
<PAGE> 51
EXHIBIT A
Securitization Program
Mortgage Loan Underwriting Guidelines
[Attached]
A-1
<PAGE> 52
EXHIBIT B
Conforming Mortgage Loan
Underwriting Guidelines
The Conforming Mortgage Loan Underwriting Guidelines include the
standards acceptable under either the FNMA Mortgage Loan Underwriting Guidelines
and the FHMLC Mortgage Loan Underwriting Guidelines as may exist from time to
time.
B-1
<PAGE> 53
EXHIBIT C
RECEIPT, GRANT AND ASSIGNMENT
Reference is made to the Purchase and Sale Agreement (the
"Purchase Agreement") dated as of December 17, 1996 among CMG Funding Corp. and
Continental Mortgage Group, L.C. (the "Seller") and ContiTrade Services L.L.C.
("the Purchaser") and the Purchase Request dated , 19 (a copy of which is
annexed hereto). Capitalized terms used herein but not defined herein have the
meanings assigned such terms in the Purchase Agreement.
The Seller hereby acknowledges receipt of $ in immediately
available funds representing the Initial Tranche Amount for Eligible Assets
which are the subject matter of the annexed Purchase Request. The Seller hereby
confirms and restates with respect to each such Eligible Asset the
representations and warranties contained in Section 5.01 and Exhibit H of the
Purchase Agreement.
The Seller hereby assigns to the Purchaser as security for the
Seller's obligations under the Purchase Agreement all of the Seller's right,
title and interest in, to and under (a) the Eligible Assets set forth on the
Mortgage Loan Schedule, (b) all distributions of principal and interest with
respect thereto and (c) all proceeds of the foregoing. The foregoing grant of a
security interest is given in furtherance of Section 6.07 of the Purchase
Agreement.
CMG FUNDING CORP.
By:
----------------------------------
Name:
Title:
C-1
<PAGE> 54
EXHIBIT D
PURCHASE REQUEST
[Date]
ContiTrade Services L.L.C.
277 Park Avenue
New York, New York 10172
Ladies and Gentlemen:
Pursuant to Section 2.04 of the Purchase Agreement (the "Purchase
Agreement") dated as of December 17, 1996 between you ("the Purchaser") and us
(the "Seller"), the Seller hereby irrevocably requests that the Purchaser
purchase the following Eligible Assets: [describe Eligible Assets]
TYPE OF ELIGIBLE ASSETS:
---------
PURCHASE DATE:
---------
MARKET VALUE OF PRINCIPAL: $
(multiplied by) ---------
PURCHASE PRICE
PERCENTAGE: ____%
(equals)
INITIAL TRANCHE AMOUNT: $
(less) ==========
NET WIRE AMOUNT $
==========
Tranche Term:
-----------
Tranche Rate: LIBOR plus 225
basis points
Market Movement Allowance: %
----------
D-1
<PAGE> 55
Other terms:
CMG FUNDING CORP.
By:
---------------------------------
Name:
Title:
Date:
CONTINENTAL MORTGAGE GROUP, L.C.
By:
---------------------------------
Name:
Title:
Date:
SELECT ONE ONLY:
/ / the Purchaser hereby acknowledges receipt of the foregoing
Purchase Request and by its signature below agrees to purchase
and for this Tranche, the Market Movement Allowance is the
above-described Eligible Assets subject to the terms and
provisions hereof and of the Purchase Agreement. This document
shall operate as a confirmation of the purchase transaction which
is the subject of such request.
/ / the Purchaser hereby acknowledges receipt of the foregoing
Purchase Request and declines to purchase the above-described
Eligible Assets.
CONTITRADE SERVICES L.L.C.
By:
-----------------------------------------
Name:
Title:
D-2
<PAGE> 56
Date:
By:
-----------------------------------------
Name:
Title:
Date:
D-3
<PAGE> 57
EXHIBIT E
[FORM OF OPINION OF COUNSEL TO THE SELLER]
[Attached]
E-1
<PAGE> 58
EXHIBIT F-1
MORTGAGE LOAN SCHEDULE
(a) name of the Obligor
(b) address of the Mortgaged Property
(c) account number
(d) original principal amount of the Mortgage Loan
(e) current principal balance
(f) current interest rate on the Mortgage Loan
(g) stated maturity of the Mortgage Loan
(h) LTV
(i) CLTV
(j) lien priority
(k) next due date on the Mortgage Loan
(l) amount of the original principal and interest payment
(m) Loan Type
(n) Index, if applicable
(o) Gross Margin, if applicable
(p) Start Rate, if applicable
(q) any periodic caps, if applicable,
(r) lifetime cap, if applicable
(s) appraised value of the Mortgage Loan
(t) credit category of the Obligor (as set forth in the related
Securitization Program Mortgage Loan Underwriting Guidelines or
Conforming Mortgage Loan Underwriting Guidelines, as the case may be)
(u) occupancy status (i.e., owner occupied or non-owner occupied)
(v) documentation status of the
Mortgage Loan
(w) with respect to any Conforming Mortgage Loan, the anticipated, date of
sale of such Wholesale Mortgage Loan.
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EXHIBIT F-2
DETAILED MORTGAGE LOAN SCHEDULE
For each Mortgage Loan, the Seller shall provide the following
information:
(a) the account number:
(b) a mortgagor's name:
(c) the mortgaged property's street address, city, state and ZIP code;
(d) the original balance;
(e) the current principal balance;
(f) the mortgage interest rate;
(g) original P&I payment;
(h) the index;
(i) the gross margin;
(j) the floor rate;
(k) the lifetime cap;
(l) the frequency of rate adjustment;
(m) the rate adjustment caps:
(n) the original term:
(o) the amortization term;
(p) the remaining term;
(q) the lien position;
(r) the combined loan-to-value ratio;
(s) loan-to-value ratio with respect to the Mortgage Loan;
(t) the funding date;
(u) the first payment date;
(v) the first adjustment date;
(w) the interest pay through date;
(x) the maturity date;
(y) the appraised value and type;
(z) the owner occupancy status;
(aa) the property type;
(bb) the property's use;
(cc) the borrower credit quality;
(dd) risk upgrade (Y/N); (ee) the debt to income ratio;
(ff) the documentation classification;
(gg) prepayment penalty terms/type;
(hh) broker number;
(ii) broker points;
(jj) premium/discount paid to or received from broker;
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(kk) the wiring instructions for funds to be disbursed by the
Purchaser to the Seller or a specified title company or escrow
agent in respect of the Mortgage Loan (including, but not
limited to, any federal wire reference number, if available);
(ll) the date of the Mortgage Note and the related Mortgage; and
(mm) the beginning date and ending date of each rescission period
under applicable federal, state and local law relating to such
Mortgage Loan.
(nn) next payment date
(oo) lien-status
(pp) loan purpose
(qq) balloon/non-balloon
F-2-2
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EXHIBIT G
[FORM OF OFFICER'S CERTIFICATE]
[ATTACHED]
G-1
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EXHIBIT H
REPRESENTATIONS AND WARRANTIES OF THE SELLER
(a) The Seller hereby makes the following representations and
warranties to the Purchaser as of each Purchase Date, as follows:
(i) the Seller is a corporation, in the case of CMGFC, and a
limited liability company in the case of CMLC, in good standing and has
been duly organized and is validly existing as a corporation under the
Laws of the State of its organization;
(ii) the Seller is duly licensed where required as a
"Licensee" or is otherwise qualified in each state in which it transacts
business and is not in default of such state's applicable laws, rules
and regulations;
(iii) the Seller has the requisite power and authority and
legal right to own and grant a lien on all of its right, title and
interest in and to the Mortgage Loans and the Seller has the requisite
power and authority and legal right to execute and deliver, engage in
the transactions contemplated by, and perform and observe the terms and
conditions of, the Significant Documents;
(iv) the Seller is able to meet its obligations when they
become due and is not in default (beyond any applicable cure period)
under any mortgage, borrowing agreement or other instrument or agreement
pertaining to indebtedness for borrowed money, and the execution and
delivery by the Seller of the Significant Documents will not result in
any violation of any such mortgage, instrument or agreement to which the
Seller is a party or by which its property is bound;
(v) (A) all audited and unaudited financial statements,
budgets and certificates of the Seller or any of its officers furnished
to the Purchaser are true and complete and do not omit to disclose any
material liabilities, contingent or otherwise, or other facts relevant
to the condition of the Seller; and (B) all such
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audited financial statements have been prepared in accordance with GAAP;
(vi) no consent, approval, authorization or order of,
registration or filing with, or notice to any Governmental Authority or
court is required under applicable Law in connection with the execution,
delivery and performance by the Seller of the Significant Documents;
(vii) there is no action, proceeding or investigation pending
or, to the best knowledge of the Seller, threatened against it before
any court, administrative agency or other tribunal (A) asserting the
invalidity of any of the Significant Documents, (B) seeking to prevent
the consummation of any of the transactions contemplated by any of the
Significant Documents, or (C) which might materially and adversely
affect the performance by the Seller of its obligations under, or the
validity or enforceability of, any of the Significant Documents;
(viii) since the date of this Purchase Agreement, there has
been no material adverse change in the business, operations, financial
condition, properties or business plan of the Seller, taken as a whole;
(ix) the person or persons signatory to this Purchase
Agreement and any document executed pursuant to it on behalf of the
Seller have full power and authority to bind the Seller;
(x) each of the Significant Documents has been duly
authorized and executed by the Seller and is a legal, valid and binding
agreement and is enforceable against the Seller in accordance with its
terms;
(xi) the execution, delivery and performance of any of the
Significant Documents, and the exhibits attached thereto, if any, and
the other documents contemplated herein, and the performance by it of
all transactions contemplated herein and therein, (A) have been duly
authorized by all necessary and appropriate corporate action on the part
of the Seller, (B) will not violate any provision of the Certificate of
Incorporation or Bylaws of the Seller, (C) does not conflict with any
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term or provision of any other agreement to which the Seller is a party,
and (D) will not cause a breach of any applicable federal, state or
municipal governmental law or regulations, or any order, judgment, writ,
award, injunction or decree of any court or governmental instrumentality
which is binding upon the Seller;
(xii) there has been no (A) filing against the Seller of a
petition for liquidation, reorganization, arrangement or adjudication as
a bankrupt or similar relief under the bankruptcy, insolvency or similar
Laws of the United States or any state or territory thereof or of any
foreign jurisdiction as to which the Seller fails to secure dismissal
within 60 days of such filing, or (B) commencement by the Seller of a
voluntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, or the consent by the Seller to
the entry of an order for relief in an involuntary case under any such
law or to the appointment of or taking possession by a receiver,
liquidator, assignee, trustee, custodian, sequestrator (or other similar
official) of the Seller or of any substantial part of its property, or
the making by the Seller of any general assignment for the benefit of
creditors, or the failure of the Seller generally to pay its debts as
such debts become due, or the taking of corporate action by the Seller
in furtherance of any of the foregoing;
(xiii) all representations and warranties made pursuant to this
Purchase Agreement and any Significant Documents are and will be true
and correct at the time when made and at all times thereafter under this
Purchase Agreement and any Significant Documents or, if limited to a
specific date, as of the date to which they refer;
(xiv) to the knowledge of the Seller, all written information
and documents or copies of documents furnished to the Purchaser pursuant
to or in connection with this Purchase Agreement and any Significant
Documents are and will be true and correct in all material respects at
the time when made and at all times thereafter under this Purchase
Agreement and any Significant Documents or, if limited to a specific
date, as of the date to which they refer;
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(xv) Immediately after the sale, assignment and transfer to the
Purchaser as herein contemplated, all necessary action will have been
taken to grant a valid and enforceable first priority perfected security
interest in the related Eligible Assets (including the filing or
amendment of financing statements under the Uniform Commercial Code in
all applicable jurisdictions, if necessary) free and clear of all liens
and encumbrances, except for those subsequent liens which, by operation
of law take priority over a previously perfected security interest; and
(xvi) The Seller has not originated title I home improvement
loans during any immediately preceding three consecutive calendar month
period such that such loans represents more than 49% of all loans which
the Seller originated during such three calendar month period,
determined on the basis of the initial principal balances of the loans.
(xvii) all actions necessary to transfer to the Purchaser the
interests in the Mortgage Loans subject to Purchase hereunder have been
or are currently being taken and the Seller has not offered or sold, and
will not offer or sell, any Mortgage Loans in any manner that would
render the issuance and sale of the Mortgage Loans a violation of
Section 5 of the Securities Act of 1933, as amended, or any state
securities or "Blue Sky" laws or require registration pursuant thereto,
nor has it authorized, nor will it authorize, any person to act in such
manner.
(b) The Seller agrees and acknowledges that each of the
representations and warranties set forth in subsection (a) hereof (i) is
material and being relied upon by the Purchaser, (ii) is true in all respects as
of the date of this Purchase Agreement and (iii) shall survive the execution,
termination and expiration of this Purchase Agreement.
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EXHIBIT I
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
(a) The Purchaser hereby makes the following representations and
warranties as of the date of this Purchase Agreement:
(i) the Purchaser has been duly organized and is validly
existing as a limited liability company under the Laws of the State of
Delaware;
(ii) the Purchaser has the requisite power and authority and
legal right to execute and deliver, engage in the transactions
contemplated by, and perform and observe the terms and conditions of,
this Purchase Agreement to be performed by it;
(iii) no consent, approval, authorization or order of,
registration or filing with, or notice to any governmental authority or
court is required under applicable law in connection with the execution
and delivery by the Purchaser of this Purchase Agreement;
(iv) the person or persons signatory to this Purchase
Agreement and any document executed pursuant to it on behalf of the
Purchaser have full power and authority to bind the Purchaser;
(v) this Purchase Agreement is valid, binding and
enforceable against the Purchaser in accordance with its terms; and
(vi) the execution, delivery and performance of this Purchase
Agreement, and the exhibits attached hereto and the other documents
contemplated herein to which the Purchaser is a party, and the
performance by the Purchaser of all transactions contemplated herein and
therein (A) have been duly authorized by all necessary and appropriate
corporate action on the part of the Purchaser, (B) will not violate any
provision of the Articles of Organization of the Purchaser, (C) does not
conflict with any term or provision of any other agreement to which the
Purchaser is a party, and (D) will not cause a breach of any applicable
federal, state or
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municipal governmental law or regulations, or any order, judgment, writ,
award, injunction or decree of any court or governmental instrumentality
which is binding upon the Purchaser.
(b) The Purchaser agrees and acknowledges that each of the
representations and warranties set forth in subsection (a) hereof (i) is
material and being relied upon by the Seller, (ii) is true in all respects as of
the date of this Purchase Agreement and (iii) shall survive the execution and
termination of this Purchase Agreement.
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EXHIBIT J
COVENANTS OF THE SELLER
Affirmative Covenants. The Seller covenants and agrees with the
Purchaser as follows:
(a) the Seller shall timely make any payment of interest or
principal or any other sum, which has become due whether by acceleration or
otherwise, under the terms of this Purchase Agreement and under any document
evidencing or securing indebtedness of the Seller to the Purchaser or any of its
Affiliates;
(b) the Seller will notify the Purchaser in writing of any of
the following within three Business Days after a responsible officer of the
Seller learns of the occurrence thereof, but in no event later than ten Business
Days following the occurrence thereof, describing the same and, if applicable,
further notifying the Purchaser, within four Business Days after learning of the
occurrence thereof, of any remedial steps being taken with respect thereto:
(i) the occurrence or likelihood of occurrence of an Event of
Termination hereunder;
(ii) the institution of any litigation, arbitration
proceeding or governmental proceeding with the amount in contest being
greater than $200,000 in the aggregate;
(iii) the entry of any judgment or decree against the Seller
if the aggregate amount of all judgments and decrees then outstanding
against the Seller exceeds $50,000 after deducting (i) the amount with
respect to which the Seller is insured and with respect to which the
insurer has assumed responsibility in writing, and (ii) the amount for
which the Seller is otherwise indemnified if the terms of such
indemnification are reasonably satisfactory to the Purchaser;
(iv) an event of default under any material agreement of the
Seller if such event of default would materially and adversely affect
the condition (financial
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or otherwise) or the operation of the Seller or its assets or would
materially and adversely affect the performance of its obligations and
duties hereunder; or
(v) any breach of any representation, warranty, covenant or
material obligation under this Purchase and Sale Agreement.
(c) in the event of a filing against the Seller of a petition for
liquidation, reorganization, arrangement or adjudication as a bankrupt or
similar relief under the bankruptcy, insolvency or similar Laws of the United
States or any state or territory thereof or of any foreign jurisdiction or there
shall be appointed a receiver, conservator, liquidator, assignee, custodian,
trustee, sequestrator or other similar official of the Seller or any substantial
part of the property of either or the ordering of the winding-up or liquidation
of either party's affairs, dismissal of such filing, appointment or order shall
be secured within 30 days of such filing;
(d) the Seller shall maintain Consolidated Tangible Equity at an
amount greater than (i) $1,000,000 from the date of execution of this Purchase
Agreement through the calendar year ending on December 31, 1997, (ii) $1,500,000
during the calendar year ending on December 31, 1998, and (iii) $2,000,000 at
all times thereafter;
(e) less than 10% of (i) the aggregate outstanding principal
balance of all loans originated by the Seller or (ii) the aggregate outstanding
principal balance of any pool of mortgage loans purchased by the Seller and
subsequently securitized is contractually delinquent for 91 or more days;
(f) (1) the Seller shall, promptly upon preparation, but in no
event later than 60 days following the end of its first three fiscal quarters,
deliver to the Purchaser its unaudited company-prepared consolidated and
consolidating financial statements as of the end of such fiscal quarter,
prepared in accordance with GAAP consistently applied and certified by the chief
financial officer of the Seller; (2) the Seller shall, promptly upon
preparation, but in no event later than 90 days following the end of its fourth
fiscal quarter, deliver to the Purchaser (A) its audited and certified
consolidated and consolidating financial statements, including the consolidated
and consolidating balance sheets of the Seller and the related statements of
income and cash flows
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and stating in comparative form the figures for the corresponding date and
period in the previous fiscal year, all in reasonable detail and prepared in
accordance with GAAP consistently applied, as of the end of the most recently
ended fiscal year, (B) the annual report, furnished by a firm of independent
public accountants, of the examination, which has been conducted in compliance
with the Uniform Single Audit Program for Mortgage Bankers, of the Seller's
servicing performance and (C) a certificate from the accountants preparing the
Seller's audited financial statements stating that in the course of preparing
the audited financial statements nothing came to their attention indicating that
the Seller was not in compliance with the terms of this Purchase Agreement; (3)
beginning with the audit and certification for the fiscal year ended September
30, 1997, audits and certifications shall each be prepared by a nationally
recognized independent accounting firm and reasonably acceptable to the
Purchaser; (4) in all cases, consolidated and consolidating financial statements
shall include, without limitation, balance sheets, profit and loss statements
and statements of cash flows; and (5) notwithstanding anything in this Purchase
Agreement to the contrary, if (A) the audited and certified financial statements
described in the immediately preceding sentence are not delivered within 90
days, as the case may be, (B) such financial statement delivery delay is through
no fault of the Seller, and (C) the Seller provides the Purchaser with a notice
specifying the reason for the delay and a date, within a reasonable time period
(as determined by the Purchaser), on which such financial statements will be
delivered and they are so delivered; then failure to deliver such financial
statements within 90 days, as the case may be, shall not be deemed to be an
Event of Termination for purposes of this Purchase Agreement;
(g) the Seller shall in writing, promptly upon a responsible
officer of the Seller learning of any breach of any representation, warranty,
covenant or material obligation under this Purchase Agreement, notify the
Purchaser thereof;
(h) as requested by the Purchaser by written notice from time to
time, the Seller shall, promptly upon filing, deliver to the Purchaser such
requested copies of all public filings made by the Seller with any Governmental
Authority or quasi-governmental body;
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(i) the Seller shall comply with all Laws, ordinances,
governmental rules and regulations to which the Seller is subject, and obtain
and keep in force any and all licenses, permits, franchises, or other
governmental authorizations from, give all such notices promptly to, register,
enroll or file promptly all such agreements, instruments or documents required
by applicable Laws with, and promptly take all such other legally required
action with respect to, any Governmental Authority or regulatory authority,
agency or official, as is required under any provision of any applicable Law and
that it is necessary (i) for the continued operation of any of the Seller's
activities or business or the performance by the Seller of any of its agreements
or obligations under this Purchase Agreement or (ii) to ensure the continuing
legality, validity, binding effect or enforceability of this Purchase Agreement
or any of the obligations hereunder of the Seller necessary to the ownership of
its properties or to the conduct of its businesses;
(j) the Seller shall do all things necessary to remain duly
incorporated, validly existing and in good standing as a domestic corporation in
its jurisdiction of incorporation and maintain all requisite authority to
conduct its business in each jurisdiction in which its business is conducted,
except where the failure to maintain such authority would not have a material
adverse effect on the ability of the Seller to conduct its business or to
perform its obligations under the Significant Documents in the reasonable
judgment of the Purchaser;
(k) at all times during which this Purchase Agreement is in
effect, the Seller shall possess sufficient net capital and liquid assets to
satisfy its obligations as they become due in the normal course of business;
(l) upon five days prior written notice, the Seller shall permit
the Purchaser or its accountants, attorneys or other agents access to all of its
books and records for inspection and copying, at the Purchaser's expense, during
normal business hours at all places where the Seller conducts business. During
the term of this Purchase Agreement, the Seller shall furnish the Purchaser such
periodic, special or other reports or information, whether or not provided for
herein, as shall be necessary, reasonable and appropriate in respect of the
purposes of this Purchase Agreement;
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(m) the Seller shall pay and discharge all taxes, assessments
and governmental charges upon it, its income and properties as and when such
taxes, assessments and charges are due and payable, except and to the extent
only that such taxes, assessments and charges are being actively contested in
good faith and by appropriate proceedings, the Seller shall maintain adequate
reserves on its books therefor;
(n) the Seller shall file all federal, state and local tax
returns and other reports that the Seller is required by Law to file and
maintain adequate reserves for the payment of all taxes, assessments,
governmental charges, and levies imposed upon it, its income, or its profits, or
upon any property belonging to it;
(o) the Seller shall maintain thereafter, at its own expense, an
errors and omissions policy of insurance and a blanket fidelity bond with broad
coverage on all officers, directors, employees and agents of the Seller or its
Affiliates with (A) its current insurer, Fidelity Deposit of Maryland (Policy
Number MPP000245700), or (B) responsible companies with a rating of "A" or
better by Best. Any such fidelity bond shall protect the Seller and the
Purchaser against losses, including forgery, theft, embezzlement and fraud of
such persons. The insurance policy and the bond shall each show the Purchaser as
an additional insured and shall provide that the insurers or bonding company
shall give the Purchaser thirty (30) days' written notice prior to any
cancellation. This provision shall not diminish or relieve the Seller from its
duties and obligations as set forth in this Purchase Agreement. The minimum
coverage under (i) any such errors and omissions policy of insurance shall be
three hundred fifty thousand dollars ($350,000), or such greater coverage amount
as FNMA or FHMLC may require for the Seller and (ii) any such fidelity bond
shall be at least equal to three hundred fifty thousand dollars ($350,000), or
such greater coverage amount as FNMA or FHMLC may require for the Seller. The
deductible amount on such errors and omissions policy of insurance and such
fidelity bond shall not exceed $25,000, without the written consent of the
Purchaser;
(p) the Seller shall furnish to the Purchaser, periodically upon
request, good standing certificates and officer's certificates to assure the
Purchaser of the Seller's continued authority to perform the Seller's
obligations under this Purchase Agreement;
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(q) the Seller shall at all times maintain the ratio of its
current assets to its current liabilities at 1.05 or greater (each as determined
by GAAP);
(r) with respect to:
(i) Mortgage Loans other than Wet-Funded Mortgage
Loans and Quick-Funded Mortgage Loans, the Seller shall deliver
to the Custody Agent, no later than 12:00 p.m., Eastern time, on
the Business Day prior to any Purchase Date, the Mortgage Files
relating to the Mortgage Loans to be purchased on such Purchase
Date;
(ii) each Wet-Funded Mortgage Loan, the Seller shall
use its best efforts to deliver the related Mortgage File to the
Custody Agent within one Business Day after the Purchase Date
for such Wet-Funded Mortgage Loan, and such documents shall in
any event be delivered to the Custody Agent on behalf of the
Purchaser within three Business Days after the related Purchase
Date;
(iii) each Quick-Funded Mortgage Loan, the Seller shall
deliver the related original executed Mortgage Note and
Assignment of Mortgage to the Custody Agent on or prior to the
Purchase Date for such Quick-Funded Mortgage Loan; and
(iv) any Quick-Funded Mortgage Loan, the Seller shall
use its best efforts to deliver to the Custody Agent the
documents in the Mortgage File, other than those already
delivered pursuant to clause (iii) hereof, within two Business
Days after the related Purchase Date but in any event not later
than the third Business Day after such Purchase Date.
(s) the Seller shall replace a Mortgage Loan not conforming in
any material respect with the representations and warranties made in Exhibit K
of this Purchase Agreement with a conforming Mortgage Loan of substantially the
same size and type as the non-conforming Mortgage Loan, or repurchase same at
the related Adjusted Tranche Amount plus the related Net Securities Amount;
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(t) with respect to each Eligible Asset, the Seller shall comply
with all document delivery requirements set forth in this Purchase Agreement and
in the Custody Agreement;
(u) the Seller shall permit the Purchaser or its accountants,
attorneys or other agents access to all of its books and records relating to
Eligible Assets purchased and retained by the Purchaser for inspection and
copying during normal business hours at all places where the Seller conducts
business;
(v) the Seller hereby warrants that no Obligor of a Mortgaged
Property underlying any Eligible Asset sold to the Purchaser hereunder is, or
shall become, contractually delinquent with respect to the first payment due on
the mortgage note or other instrument evidencing such Obligor's indebtedness, as
the case may be, pertaining to such Mortgaged Property; and
(w) The Seller hereby warrants that no Obligor of a Mortgaged
Property underlying any Eligible Asset sold to the Purchaser hereunder is, or
shall become, contractually delinquent with respect to any three consecutive
payments due on the mortgage note or other instrument evidencing such Obligor's
indebtedness, as the case may be, pertaining to such Mortgaged Property.
(x) for the six-month period following the date of transition to
this Purchase Agreement as described in (s) above, the Seller shall cause all of
its Mortgage Loans sold under this Purchase Agreement to be reunderwritten by an
independent contract underwriter selected by the Purchaser; thereafter, based on
the experience obtained from such reunderwriting, the Purchaser may reasonably
direct that the Seller continue to have its Mortgage Loans, or some portion
thereof, reunderwritten by an independent contract underwriter for such further
period as the Purchaser may reasonably direct; the Seller shall bear all of the
costs and expenses at such reunderwriting;
(y) the Seller shall prepare annual operating and capital
budgets for its operations, acceptable to the Purchaser, acceptable to the
Purchaser, on at least yearly intervals, or at such other times as the Purchaser
may reasonably request, and the Seller shall promptly furnish copies of such
budgets to the Purchaser;
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(z) the Seller shall take all actions reasonably requested by
the Purchaser, from time to time, as the Purchaser may request in order to
perfect, maintain or release any security interest of the Purchaser;
(aa) the Seller shall take all actions necessary as is requested
by the Purchaser, from time to time to assure that (i) no Wet-Funded Mortgage
Loan remains a Wet-Funded Mortgage Loan under this Purchase Agreement for more
than three days following the related Purchase Date, (ii) no Conforming Mortgage
Loan shall remain a Mortgage Loan under this Purchase Agreement for more than
sixty (60) days from the related Purchase Date, and (iii) no Mortgage Loan shall
remain a Mortgage Loan under this Purchase Agreement for more than (90) days
from the related Purchase Date; and
(bb) the Purchase shall take all actions necessary to merge
Continental Mortgage Group, L.C. into the Purchaser on or before January 31,
1997.
Negative Covenants of the Seller. The Seller covenants and agrees
with the Purchaser as follows:
(a) the Seller shall not (1) assign or attempt to assign this
Purchase Agreement or any rights hereunder, without first obtaining the specific
written consent of the Purchaser, or (2) grant any security interest, lien or
other encumbrance on any Collateral other than (A) to the Purchaser or any of
its Affiliates or (B) with respect to taxes and assessments related thereto
which are not yet due and payable, or which are being contested in good faith;
(b) the Seller shall not commence a voluntary case under any
applicable bankruptcy, insolvency or other similar Law now or hereafter in
effect, or consent to the entry of an order for relief in an involuntary case
under any such Law or to the appointment of or taking possession by a receiver,
liquidator, assignee, trustee, custodian, sequestrator (or other similar
official) of the Seller, or of any substantial part of its property, and the
Seller shall not make any general assignment for the benefit of creditors, or
fail generally to pay debts as such debts become due, and shall not take
corporate action in furtherance of any of the foregoing;
(c) the Seller shall not amend its Articles of Incorporation or
Bylaws, or sell, transfer, or issue any
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capital stock other than pursuant to the exceptions listed in clauses (i)
through (vi) of paragraph (a) of the definition of "Change of Control", without
the prior written consent of the Purchaser;
(d) the Seller shall not suffer any materially adverse change in
its financial condition, operations, business, properties or business plan, or
the existence of any other condition which, in the Purchaser's sole judgement,
constitutes an impairment of such the Seller's ability to perform its
obligations under any of the Significant Documents and which condition is not
remedied within ten days after written notice to the Seller thereof or, if the
condition cannot be fully remedied within said ten days, substantial progress
(which shall be in the Purchaser's sole judgement) has not been made within said
ten days, or such other period as may be mutually agreed upon, toward remedy of
the condition;
(e) the Seller shall not default under any term or provision of
any other agreement between (1) the Seller and (2) the Purchaser or any of its
Affiliates or any third parties, which default shall not have been cured within
an applicable cure period, if any, and which default has, or with the passage of
time will have, a material adverse effect on the Seller or its business. For the
purposes of this subsection, both (x) a final judgement for the payment of money
in excess of $50,000 in the aggregate rendered against the Seller and remaining
in force unpaid, unbonded, undismissed, undischarged and unstayed after the
expiration of the period which is the longer of ten days or the payment plan for
such judgement and (y) the failure to make any payment in excess of $50,000 to a
third party pursuant to the terms of any other agreement, and such failure is
not cured within any applicable cure period, shall be deemed material;
(f) the Seller shall not declare any dividends or redeem any
capital stock without the prior written consent of the Purchaser;
(g) there shall be no Change of Control, and the Seller shall
not merge or consolidate with or into any other entity, without the prior
written consent of the Purchaser;
(h) except for mortgage loans acquired with the intent of sale
(either on a whole-loan or securitization
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basis) and securities issued pursuant to securitizations of the Seller-owned
loans, the Seller shall not purchase, lease or otherwise acquire all or
substantially all of the assets or properties of, or acquire any capital stock,
equity interest, debt or other securities of any other entity without the prior
written consent of the Purchaser, which consent shall not be unreasonably
withheld;
(i) the Seller shall not (1) dissolve or terminate its
existence, (2) enter into any joint venture or become a partner in any
partnership, (3) transfer any assets to any Affiliate except as otherwise
expressly permitted or contemplated hereby, (4) operate any portion of the
business of the Seller under an assumed name or dba, (5) modify or amend the
Stock Option Plan without the consent of the Purchaser, or (6) create any
subsidiary without the prior written consent of the Purchaser;
(j) except for making and purchasing of mortgage loans in the
ordinary course of business, the Seller shall not (i) make or permit to exist
investments in or loans or advances to any other person, entity or Affiliate,
including without limitation, any shareholders of the Seller, or (ii) sell or
transfer 5% or more of the assets of the Seller, except with the prior written
consent of the Purchaser;
(k) the Seller shall not guarantee, endorse or otherwise in any
way become or be responsible for any obligations of any other person, entity or
Affiliate, including without limitation, whether directly or indirectly by
agreement to purchase the indebtedness of any other person or through the
purchase of goods, supplies or services, or maintenance of working capital or
other balance sheet covenants or conditions, or by way of stock purchase,
capital contribution, advance or loan for the purposes of paying or discharging
any indebtedness or obligation of such other person or otherwise; provided,
however, that nothing contained herein shall prevent the Seller from
indemnifying its officers, directors and agents pursuant to its bylaws and its
Certificate of Incorporation;
(l) the Seller shall not, in the aggregate, make or commit to
make capital expenditures in excess of $50,000, with respect to individual
expenditures, or in excess of $200,000 during any fiscal year without the prior
written consent of the Purchaser;
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(m) the Seller will not commit any act in violation of
applicable Laws, or regulations promulgated pursuant thereto that relate to the
Seller or that materially and adversely affect the operations or financial
condition of the Seller;
(n) commencing with January 1, 1997, with respect to any fiscal
year, the aggregate amount of Bonus Compensation (other than any reasonable
production bonus tied to direct production performance) paid to the Seller's
employees, including officers of the Seller, during such year shall not exceed
12?% for the Seller's fiscal years ending September 30, 1997 and September 30,
1998 and 10% thereafter of the net income before taxes after accounting for the
expense related to base salary compensation, excluding Fringe Benefits, for such
year;
(o) in any year the aggregate base salary compensation,
excluding Fringe Benefits, for the Senior Officers shall not exceed the amount
paid to such Senior Officers in the previous year by more than 5%;
(p) during the term of this Purchase Agreement, the Seller shall
not engage in any business other than as a mortgage or consumer loan originator
or as a provider of ancillary services or products;
(q) the Seller shall not enter into any transaction, including,
without limitation, the purchase, sale, or exchange of property or the rendering
of any service, with any Affiliate, except as the Purchaser may otherwise
approve through prior written notice;
(r) the Seller shall not enter into any financing arrangement
with any entity other than the Purchaser or incur any debt to any Person other
than the Purchaser (other than debt which is fully subordinated to any Loan or
payment obligation hereunder), except as the Purchaser may otherwise approve
through prior written notice;
(s) the Seller shall not, without the prior written consent of
the Purchaser, issue, distribute, sell or transfer, or allow the issuance,
distribution, sale or transfer by the Seller or by any Affiliate of the Seller,
including, without limitation, the Controlling Shareholders of the Seller's
capital stock or securities other than (A) the sale of the
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Seller's capital stock to the Purchaser occurring upon the exercise of the
Conversion Privilege, (B) the sale of the Seller's capital stock pursuant to a
firm commitment public offering, (C) the transfer of the Seller's capital stock
for estate planning purposes or pursuant to a domestic relations settlement or
order, (D) the transfer of the Seller's Common Stock pursuant to the Stock
Option Plan for a price greater than or equal to the Share Fair Market Value,
(E) pursuant to a buy/sell agreement solely among the Seller's existing
shareholders, or (F) the sale, transfer or issuance of no more than five (5%)
percent of the Seller's Common Stock which percentage shall be determined on a
cumulative basis together with all other sales, transfers or issuances of the
Seller's Common Stock under this clause (F) from the date of this Agreement) at
a price at least equal to Share Fair Market Value with the prior written consent
of the Purchaser;
(t) with respect to;
(i) Mortgage Loans other than Wet-Funded Mortgage
Loans, the Seller deliver to the Custody Agent on behalf of
Purchaser, no later than 12:00 p.m., Eastern time, on the
Business Day prior to any Purchase Date, the Mortgage Files
relating to the Mortgage Loans to be pledged on such Purchase
Date;
(ii) each Wet-Funded Mortgage Loan, the Seller shall
use its best efforts to deliver the related Mortgage File to the
Custody Agent within one Business Day after the Purchase Date
for such Wet-Funded Mortgage Loan, and such documents shall in
any event be delivered to the Custody Agent on behalf of the
Purchaser within three Business Days after the related Purchase
Date;
(u) the Seller shall deliver Purchase Requests identifying
Mortgage Loans pertaining to the related Purchases sorted and aggregated for
Wet-Funded Mortgage Loans and all other Mortgage Loans; and
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(v) the Seller shall not originate title I home improvement
loans during any immediately preceding three consecutive calendar month period
such that such loans represent more than 49% of all loans which the Seller
originated during such three calendar month period determined on the basis of
the initial principal balances of the loans.
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<PAGE> 81
EXHIBIT K
REPRESENTATIONS AND WARRANTIES REGARDING
INDIVIDUAL MORTGAGE LOANS.
As to each Mortgage Loan, the Seller hereby represents and warrants to the
Purchaser that as of the related Purchase Date with respect to such Mortgage
Loan:
I. (a) The information set forth on the Mortgage Loan Schedule is
complete, true and correct as of the related Cut-off Date.
(b) The Mortgage Note and the Mortgage have not been assigned or pledged
by the Seller to a person other than the Purchaser, and the Seller has good and
marketable title thereto, and the Seller is the sole owner and holder of the
Mortgage Loan free and clear of any and all liens, claims, encumbrances,
participation interests, equities, pledges, charges or security interests of any
nature (collectively, a "Lien"), other than any such Lien released
simultaneously with the sale contemplated herein, and has full right and
authority, subject to no interest or participation of, or agreement with, any
other party, to sell and assign the same, and immediately upon the transfer and
assignment of each Mortgage Loan as herein contemplated, the Purchaser shall
have good title to, and will be the sole legal owner of, each Mortgage Loan free
and clear of any Lien.
(c) The Mortgage is a valid and existing lien on the property therein
described, and the Mortgaged Property is free and clear of all encumbrances and
liens having priority over the lien of the Mortgage, except liens for real
estate taxes and special assessments not yet due and payable, in the case of a
Mortgaged Property that is a condominium or an individual unit in a planned unit
development, liens for common charges permitted by statute, and in the case of a
second Mortgage Loan, the lien securing the related first lien. Any security
agreement, chattel mortgage or equivalent document related to the Mortgage and
delivered to Purchaser establishes in Seller a valid and subsisting lien on the
property described therein, and Seller has full right to sell and assign the
same to Purchaser.
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(d) The terms of the Mortgage Note and the Mortgage have not been
impaired, 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 Purchaser. The substance of any such
alteration or modification is reflected on the Mortgage Loan Schedule.
(e) No instrument of release or waiver has been executed in connection
with the Mortgage Loan, and no Obligor has been released, in whole or in part,
except in connection with an assumption agreement which has been approved by the
primary mortgage guaranty insurer, if any, and which has been delivered to the
Purchaser.
(f) Except with respect to delinquencies described in clause (m) hereof,
no Obligor is in default in complying with the terms of the Mortgage Note or the
Mortgage, and the Seller has not waived any default, breach, violation or event
of acceleration except that the Seller may have accepted late payments, and all
taxes, governmental assessments, insurance premiums, or water, sewer and
municipal charges 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 Obligor,
directly or indirectly, for the payment of any amount required by the Mortgage,
except for interest accruing from the date of the Mortgage Note or date of
disbursement of the Mortgage proceeds, whichever is more recent, to the day
which precedes by one month the due date of the first installment of principal
and interest.
(g) There is no proceeding pending or, to the best of Seller's
knowledge, threatened for the total or partial condemnation of the Mortgaged
Property, nor is such a proceeding currently occurring, and such property is
undamaged by waste, fire, water, 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.
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(h) 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 law
could give rise to such lien) affecting the Mortgaged Property which are, or may
be, liens prior or equal to, or coordinate with, the lien of the Mortgage except
those that are stated in the title insurance policy and for which related losses
are affirmatively insured against by such policy.
(i) All of the improvements that were included for the purpose of
determining the value of the Mortgaged Property lie wholly within the boundaries
and building restriction lines of such property, and no improvements on
adjoining properties encroach upon the Mortgaged Property except those that are
stated in the title insurance policy and for which related losses are
affirmatively insured against by such policy.
(j) There do not exist any circumstances or conditions with respect to
the Mortgage Loan, the Mortgaged Property, the appraisal, the Obligor or the
Obligor's credit standing that can be reasonably expected to cause private
institutional investors who are familiar with and invest in first and second
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.
(k) No improvement located on or being part of the Mortgaged Property is
in violation of any applicable zoning law or regulation unless the appraisal for
such Mortgaged Property notes such violation and assigns such improvement no
value. 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 and the Mortgaged Property is lawfully
occupied under applicable law.
(l) 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) (i) in compliance with any
and all licensing requirements of the United States and of the laws of the state
wherein the Mortgaged Property is located that are applicable to such parties,
subject to exceptions
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which, either individually or in the aggregate, do not adversely affect the
value of the Mortgage Loans, and (ii)(A) organized under the laws of such state,
or (B) qualified to do business in such state or exempt from such qualification
in a manner so as not to affect adversely the enforceability of such Mortgage
Loan, or (C) federal savings and loan associations or national banks having
principal offices in such state, or (D) not doing business in such state.
(m) As of the Cut-off Date, (i) all payments required to be made on each
Mortgage Loan under the terms of the related Mortgage Note have been made except
for 1% of the Mortgage Loans (calculated as a percentage of the aggregate unpaid
principal balance of all the Mortgage Loans) which are 30-59 days Delinquent and
(ii) no payment required to be made on any Mortgage Loan has been more than 30
days Delinquent more than once during the twelve month period immediately
preceding the Cut-off Date.
(n) The Mortgage File contains each of the documents and instruments
specified to be included therein duly executed and in due and proper form and
each such document or instrument is in a form generally acceptable to prudent
institutional mortgage lenders that regularly originate or purchase mortgage
loans comparable to the Mortgage Loans for sale to prudent investors in the
secondary market that invest in mortgage loans such as the Mortgage Loans. Each
appraisal is on forms approved by FNMA and FHLMC (subject to the exclusion of
certain addenda), as the case may be.
(o) The Mortgage Note and the related Mortgage are genuine, and each is
the legal, valid and binding obligation of the maker thereof, enforceable in
accordance with its terms, except as such enforcement may be limited by
bankruptcy, insolvency, reorganization, receivership, moratorium or other
similar laws relating to or affecting the rights of creditors generally, and by
general equity principles (regardless of whether such enforcement is considered
in a proceeding in equity or at law). All parties to the Mortgage Note and the
Mortgage had legal capacity to execute the Mortgage Note and the Mortgage, and
each Mortgage Note and Mortgage have been duly and properly executed by such
parties. The Obligor is a natural person who is a party to the Mortgage Note and
the Mortgage in an individual capacity, and not in the capacity of a trustee or
otherwise.
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(p) 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, and Seller has
and shall maintain in its possession, available for Purchaser's inspection, and
shall deliver to Purchaser upon demand, evidence of compliance with all such
requirements.
(q) The proceeds of the Mortgage Loan have been fully disbursed, there
is no requirement for future advances thereunder and any and all requirements as
to completion of any on-site or off-site improvements and as to disbursements of
any escrow funds therefor have been complied with. All costs, fees and expenses
incurred in making, closing or recording the Mortgage Loan were paid.
(r) 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 reflected on the Mortgage Loan Schedule. The lien of the
mortgage securing the consolidated principal amount is expressly insured as
having first lien priority, except in the case of a Mortgage Loan where such
lien is expressly insured as having second lien priority subject only to the
lien of the related first lien, by a title insurance policy or an endorsement to
the policy insuring the mortgagee's consolidated interest. The consolidated
principal amount does not exceed the original principal amount of the Mortgage
Loan. Seller shall not be obligated to make future advances after the related
Cut-off Date.
(s) Each Mortgage Loan is covered by an American Land Title Association
mortgage title insurance policy, a CLTA mortgage title insurance or equivalent
policy for the jurisdiction in which the related Mortgaged Property is located,
or such other form of policy acceptable to FNMA or FHLMC, issued by and the
valid and binding obligation of TICOR Title, Stewart Title, American Title, Penn
Title, Continental Title, Monroe Title, Security Guarantee Title, First American
Title, Transamerica Title, Commonwealth Title, TRW Title, Chicago Title, Lawyers
Title or Old Republic Title or such other title insurer which is approved in
advance by the Purchaser, such approval not to be unreasonably withheld
(collectively, the "title insurers") and such title insurers
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<PAGE> 86
are qualified to do business in the jurisdiction where the Mortgaged Property is
located, insuring the Seller, its successors and assigns, as to the first
priority lien of the Mortgage in the case of a first Mortgage Loan and the
second priority lien of the Mortgage in the case of a second Mortgage Loan, in
the original principal amount of the Mortgage Loan. Seller is the sole named
insured of such mortgage title insurance policy, the assignment to Purchaser of
Seller's interest in such mortgage title insurance policy does not require the
consent of or notification to the insurer or the same has been obtained, and
such mortgage title insurance policy is in full force and effect and will be in
full force and effect and inure to the benefit of Purchaser upon the
consummation of the transactions contemplated by this Agreement. No claims have
been made under such mortgage title insurance policy and no prior holder of the
related Mortgage, including Seller, has done, by act or omission, anything that
would impair the coverage of such mortgage title insurance policy.
(t) All 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. If the mortgaged property was, at the time of origination of the
related Mortgage Loan, in an area identified on a Flood Hazard Boundary Map or
Flood Hazard Rate Map issued by the Federal Emergency Management Agency as
having special flood hazards (and if the flood insurance policy referenced
herein has been made available), a flood insurance policy is in effect with
respect to such Mortgaged Property with a generally acceptable carrier and in an
acceptable amount. All individual insurance policies (collectively, the "Hazard
Insurance Policy") are the valid and binding obligation of the insurer and
contain a standard mortgagee clause naming Seller, its successors and assigns,
as mortgagee. All premiums thereon have been paid. The Mortgage obligates the
mortgagor thereunder to maintain all such insurance at the Obligor's cost and
expense, and upon the Obligor's failure to do so, authorizes the holder of the
Mortgage to obtain and maintain such insurance at the Obligor's cost and expense
and to seek reimbursement therefor from the Obligor.
(u) The Mortgage Loan is not subject to any right of rescission,
set-off, counterclaim or defense, including the
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<PAGE> 87
defense of usury, nor will the operation of any of the terms of the Mortgage
Note or the Mortgage, or the exercise of any right thereunder, render either the
Mortgage Note or the Mortgage unenforceable, in whole or in part, or subject to
any right of rescission, set-off, counterclaim or defense, including the defense
of usury, and no such right of rescission, set-off, counterclaim or defense has
been asserted with respect thereto.
(v) The Mortgage Loan was originated or purchased and re-underwritten by
the Seller pursuant to, and in compliance with, the Seller's Guidelines.
(w) The Mortgage Loan is a closed-end, residential first Mortgage Loan
or closed-end, residential second Mortgage Loan having an original term of not
more than 30 years to maturity. Except with respect to any balloon Mortgage
Loan, each Mortgage Loan is payable in equal monthly installments of principal
and interest which would be sufficient, in the absence of late payments, to
fully amortize such loan within the term thereof, beginning no later than two
months after disbursement of the proceeds of the Mortgage Loan and bears a fixed
interest rate for the term of the Mortgage Loan.
(x) The Mortgage contains a customary provision for the acceleration of
the payment of the unpaid principal balance of the Mortgage Loan in the event
the related Mortgaged Property is sold without the prior consent of the holder
thereof.
(y) No Mortgage Loan is a construction Loan. Each Mortgaged Property is
lawfully occupied under applicable law.
(z) The Mortgage Note is not and has not been secured by any collateral,
pledged account or other security except the lien of the corresponding Mortgage
and the security interest of any applicable security agreement or chattel
mortgage.
(aa) The Mortgage contains customary and enforceable provisions which
render the rights and remedies of the holder thereof adequate for the
realization against the Mortgaged Property of the benefits of the security,
including, (i) in the case of a Mortgage designated as a deed of trust, by
trustee's sale, and (ii) otherwise by judicial or non-judicial foreclosure.
Other than in the state of Texas there is no homestead or other exemption
available to the Obligor that
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<PAGE> 88
would interfere with the right to sell the Mortgaged Property at a trustee's
sale or the right to foreclose the Mortgage.
(bb) With respect to each Mortgage constituting 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 such Mortgage, and no fees or
expenses are or will become payable by the Purchaser to the trustee under the
deed of trust, except in connection with a trustee's sale after default by the
Obligor which fees and advances shall be reimbursed to the Seller as servicer of
the Mortgage Loans.
(cc) The Mortgaged Property is located in the state identified in the
Mortgage Loan Schedule and consists of a single parcel of real property with a
one family residence erected thereon, or a two- to four-family dwelling, or an
individual condominium unit; provided, however, that, no residence or dwelling
is a co-operative unit or a mobile home.
(dd) No Mortgaged Properties are held under a ground lease unless: (A)
the lease term does not expire until after 5 years beyond term of the related
Mortgage Loan; (B) the sub-lease payments are at least equal to the lease
payments; (C) the lease and sub-lease do not permit increases in the lease
payments that are not specific; (D) the lease must provide for written notice
for lessee to cure default; (E) the lease must permit mortgage encumbrance; (F)
the lease must permit assignment of leasehold estate; and (G) the lease must
grant the leasehold mortgagee (lender) the right to acquire property in its own
name.
(ee) The Loan-to-Value Ratio as of the date of origination of the
Mortgage for each Standard A Loan was not more than ___%; provided that a
Standard A Loan which is a High Loan-to-Value Loan may have a Loan-to-Value
Ratio of up to ___%, the Loan-to-Value Ratio as of the date of origination of
the Mortgage for each Special Program Loan was not more than ___%; provided that
a Special Program Loan which is a High Loan-to-Value Loan may have a
Loan-to-Value Ratio of up to ___% and the Loan-to-Value Ratio as of the date of
origination of the Mortgage for each B/C Loan was not more than ___%; provided
that a B/C Loan which is a High Loan-to-Value Loan may have a Loan-to-Value
Ratio of up to ___%.
(ff) There exist no deficiencies with respect to escrow deposits and
payments, if such are required, for which
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<PAGE> 89
customary arrangements for repayment thereof have not been made, and no escrow
deposits or payments of other charges or payments due the Seller have been
capitalized under the Mortgage or the related Mortgage Note.
(gg) Other than the Standard A Loans no Mortgage Loan was originated
under a buydown plan.
(hh) Other than as provided by this Agreement, there is no obligation on
the part of the Seller or any other party to make payments in addition to those
made by the Obligor.
(ii) The Mortgage Note, the Mortgage, the assignment of mortgage and any
other documents required to be delivered have been delivered to the Purchaser or
to one or more Custody agents as the agent or agents of Purchaser. The Seller is
in possession of a complete Mortgage File, except those documents delivered to
Purchaser or to one or more Custody Agents as the agent or agents of Purchaser
and there are no custodial agreements in effect adversely affecting the right or
ability of Seller to make the document deliveries required hereby. Each original
Mortgage was recorded, and all subsequent assignments of the original Mortgage
prior to the assignment to the Purchaser have been recorded in the appropriate
jurisdictions wherein such recordation is necessary to perfect the lien thereof
as against creditors of the Seller.
(jj) No Mortgage Loan has a shared appreciation or other contingent
interest feature.
(kk) With respect to each second Mortgage Loan:
(i) if the Loan-to-Value Ratio is higher than 55%, either the
related first lien does not provide for a balloon payment or the
maturity date of each second Mortgage Loan with a first lien providing
for a balloon payment occurs at least twelve months prior to the
maturity date of such first lien;
(ii) the related first lien does not provide for negative
amortization;
(iii) at the time of origination of the Mortgage Loan, the
related first lien was at least 6 months old if such first lien was
originated by the Seller;
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<PAGE> 90
(iv) either no consent for the Mortgage Loan is required by
the holder of the related first lien or such consent has been obtained
and is contained in the Mortgage File; and
(v) the combined loan to value does not exceed 80%.
(ll) The Seller has caused or will cause to be performed any and all
acts required to be performed to preserve the rights and remedies of the
Purchaser in any insurance policies applicable to the Mortgage Loans, including,
without limitation, any necessary notifications of insurers, assignments of
policies or interests therein, and establishments of co-insured, joint loss
payee and mortgagee rights in favor of the Purchaser.
(mm) All amounts received on and after the related Cut-off Date with
respect to the Mortgage Loans to which the Seller is not entitled have been
remitted to the Purchaser.
(nn) Each Mortgage Loan has been originated in accordance with the
Seller's underwriting guidelines, including appraisal standards.
(oo) As of the related Cut-off Date, the Seller has no actual knowledge
that there exists on any Mortgaged Property any hazardous substances, hazard
wastes or solid wastes, as such terms are defined in the Comprehensive
Environmental Response Compensation and Liability Act, the Resource Conservation
and Recovery Act of 1976, or other federal, state or local environmental
legislation. For purposes of this clause (ao), actual knowledge of the Seller
means actual knowledge of an officer of the Seller involved in the origination
or servicing of the relevant Mortgage Loan. Actual knowledge of the Seller does
not include knowledge imputable by virtue of the availability of or
accessibility to information relating to environmental or hazardous waste sites
or the locations thereof.
(pp) None of the Mortgage Loans are subject to a bankruptcy plan.
(qq) To the best of the Seller's knowledge, no statement, report or
other document constituting a part of the Mortgage File contains any untrue
statement of fact or omits
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<PAGE> 91
to state a fact necessary to make the statements therein not misleading.
(rr) No duplicate original Mortgage Note was executed by any Obligor.
(ss) As to each Mortgage Loan, and when taken together, all Mortgage
Loans, as the case may be, purchased after the initial Closing Date:
(i) No Mortgage Loan shall be secured by a third lien;
(ii) No Mortgage Loan shall have a maturity in excess of 30
years at origination; and
(iii) No Mortgage Loan shall be contractually Delinquent for
two payments.
(tt) With respect to each Conforming Mortgage Loan, subject to
the rights of the Purchaser, the Seller has contractual rights to sell loans
such as the Mortgage Loan to a third party purchaser, acceptable to the
Purchaser, as evidenced in writing.
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EXHIBIT L
REPRESENTATIONS AND WARRANTIES REGARDING
INDIVIDUAL MORTGAGE LOANS FOR FUTURE SECURITIZATIONS
From time to time the Seller agrees to provide representations and warranties to
the Purchaser as provided in this Exhibit L with respect to a pool of certain
Mortgage Loans previously sold to the Purchaser:
I. In general:
(a) When included with the Mortgage Loans previously purchased by the
Purchaser, no more than ___% of the Mortgage Loans, measured by outstanding
principal balances as of their respective Cut-off Dates, were originated by
independent originators and acquired by the Seller.
(b) Except for Mortgage Loans originated as second homes and non-owner
occupied homes, which will constitute no more than ___% of the aggregate Loan
Balance as of the Cut-off Date, at the time that each Mortgage Loan was
originated the Obligor represented that the Obligor would occupy the related
Mortgaged Property as Obligor's primary residence, and the Seller has no reason
to believe that such representation of the Obligor is no longer true.
(c) When included with the Mortgage Loans previously purchased
hereunder, as of their respective Cut-off Dates, of the aggregate principal
balance of all Mortgage Loans, (i) no more than 25% is secured by real property
improved by two- to four-family dwellings, (ii) no more than ___% is secured by
real property improved by individual condominium or townhouse units, (iii) no
more than ___% of the Mortgage Loans are secured by real property improved by an
individual unit in a planned unit development, (iv) at least ___% is secured by
real property with a detached one family residence erected thereon, (v) no more
than ___% is secured by real property improved by mixed-use units, and (vi) no
more than ___% are occupied by a person other than the owner of the Mortgaged
Property.
(d) The principal balance of such High Loan-to-Value Loan is combined
with the principal balances of all other High Loan-to-Value Loans purchased, the
aggregate principal balance
<PAGE> 93
of the High Loan-to-Value Loans does not represent more than ___% of the
aggregate principal balance of all the Mortgage Loans
(e) No more than ___% of the original aggregate principal balance of all
the Mortgage Loans, including those previously purchased hereunder, is secured
by Mortgaged Properties located within any single zip code area.
(f) The information stated on the Mortgage Loan Schedule and related
Purchase Request is correct as of the related Cut-off Date. No Mortgage Interest
Rate was less than ___%.
(g) As to each Mortgage Loan, and when taken together, all Mortgage
Loans, as the case may be, purchased after the initial Closing Date:
(i) No Mortgage Loan shall be secured by a third lien;
(ii) No more than ___% of the aggregate principal balance of
the Mortgage Loans shall be represented by balloon loans and any balloon
loan shall provide for scheduled monthly payments based on a 30-year
amortization schedule with a balloon payment of the balance due under
such loan at the end of the 15th year from the date of its origination;
(iii) No Mortgage Loan shall have a maturity in excess of 30
years at origination;
(iv) No Mortgage Loan shall be contractually Delinquent for
two payments;
(v) No more than ___% of the aggregate principal balance of
the Mortgage Loans shall be secured by condominiums;
(vi) No more than ___% of the aggregate principal balance of
the Mortgage Loans shall be secured by investor owned property;
(vii) The weighted average Loan-to-Value of the Mortgage Loans
shall not be greater than ___%, and with respect to the second lien
Mortgage Loans, the weighted
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average Combined Loan-to-Value Ratio of the Mortgage Loans shall not be
greater than ___%;
(viii) No second lien Mortgage Loan shall have a Combined
Loan-to-Value Ratio greater than ___%;
(ix) No more than ___% of the aggregate principal balance of
the Mortgage Loans shall have been originated pursuant to the Seller's
stated income program as described in the Seller's Guidelines; and
(x) No more than ___% of the aggregate principal balance of
the Mortgage Loans shall have been originated pursuant to the Seller's
limited documentation program as described in the Seller's Guidelines.
II. With respect to the Securitization Program Mortgage Loans purchased
hereunder which are ARM Loans the Seller shall represent and warrant to the
Purchaser that:
(a) no more than [__%] of the aggregate outstanding
principal balance of such ARM Loans is represented by balloon loans, and
each balloon loan provides for scheduled monthly payments based on a
30-year amortization schedule with a balloon payment of the balance due
under such loan at the end of the 15th or 20th year from the date of its
origination;
(b) no more than [__%] of the aggregate outstanding
principal balance of such ARM Loans has interest accruing at a fixed
rate for the first two or three years after origination and at a
variable rate after the end of such three year period; provided that
such percentage may be reduced by the Purchaser at any time that the
securitization market for such ARM Loans become less viable than the
market for such ARM Loans on the date of this Purchase Agreement;
(c) no more than [__%] of the aggregate outstanding
principal balance of such ARM Loans is secured by Mortgaged Properties
that are condominiums;
(d) no more than [__%] of the aggregate outstanding
principal balance of such ARM Loans is secured by Mortgaged Properties
that are investor owned;
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(e) the weighted average CLTV of such ARM Loans is not
greater than [__%];
(f) no more than [__%] of the aggregate outstanding
principal balance of such ARM Loans is represented by loans made on a no
income verification basis; and
(g) no more than [__%] of the aggregate outstanding
principal balance of such ARM Loan has LTVs above [__%] but less than or
equal to [__%].
III. With respect to the Securitization Program Mortgage Loans purchased
hereunder which are Fixed Rate Mortgage Loans, the Seller hereby represents and
warrants to the Purchaser that:
(a) no more than [__%] of the aggregate outstanding
principal balance of such Fixed Rate Mortgage Loans is represented by
balloon loans, and each balloon loan provides for scheduled monthly
payments based on a 30-year amortization schedule with a balloon payment
of the balance due under such loan at the end of the 15th or 20th year
from the date of its origination;
(b) no more than [__%] of the aggregate outstanding
principal balance of such Fixed Rate Mortgage Loans is secured by
Mortgaged Properties that are condominiums;
(c) no more than [__%] of the aggregate outstanding
principal balance of such Fixed Rate Mortgage Loans is secured by
Mortgaged Properties that are investor owned;
(d) the weighted average CLTV of such Fixed Rate Mortgage
Loans is not greater than [__%];
(e) no more than [__%] of the aggregate outstanding
principal balance of such Fixed Rate Mortgage Loans is represented by
loans made on a no income verification basis; and
(f) no more than [__%] of the aggregate outstanding
principal balance of such Fixed Rate Mortgage Loans secured by a first
lien, has a LTV of greater than [80%] and less than or equal to [__%].
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EXHIBIT M
FORM OF CUSTODY AGENT'S QUICK OR WET CERTIFICATION
[Quick]/[Wet] Certification
ContiTrade Services L.L.C.
277 Park Avenue
New York, NY 10172
Attention: Ms. Susan Romo
Re: Custody Agreement (the "Custody Agreement") dated as of
December 17, 1996, among CMG Funding Corp., Continental
Mortgage Group, L.C., ContiTrade Services L.L.C. and First
Security Bank, N.A.
Gentlemen/Ladies:
In accordance with the provisions of Section 3 of the Custody
Agreement, the undersigned, as Custody Agent, 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 documents delivered to it pursuant to Section 3(b)(1) and (3) of
the Custody Agreement and has determined that (i) all such documents are in its
possession, (ii) such documents have been reviewed by it and have not been
mutilated, damaged, torn or otherwise physically altered and relate to such
Mortgage Loan, (iii) based on its examination, and only as to the foregoing
documents, the information set forth in the Mortgage Loan Schedule (other than
items (i) and (iv)) respecting such Mortgage Loan accurately reflects the
information set forth in the Custody Agent's Mortgage File and (iv) each
Mortgage Note has been endorsed as provided in Section 3 of the Custody
Agreement. The Custody Agent has made no independent examination of such
documents beyond the review specifically required in the above-referenced
Custody Agreement. The Custody Agent makes no representations as to: (i) the
validity, legality, enforceability or genuineness of any such documents
contained in each or any of the Mortgage Loans identified on the Mortgage Loan
Schedule, or (ii) the
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collectability, insurability, effectiveness or suitability of any such Mortgage
Loan.
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Capitalized words and phrases used herein shall have the respective
meanings assigned to them in the above-captioned Custody Agreement.
FIRST SECURITY BANK, N.A.
as Custody Agent
By:___________________________
Name:_________________________
Title:________________________
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EXHIBIT N
FORM OF WET-FUNDING ESCROW AGREEMENT
[Letterhead of CMG Funding Corp.]
VIA FEDEX
[Name/Address of Closing Agent]
- -------------------------------
- -------------------------------
- -------------------------------
- -------------------------------
Dear
In consideration of the fees as may be charged from time to time
by agreement of the parties hereto and the mutual promises exchanged, this
letter agreement shall set forth the responsibilities of [Name of Closing
Agent], as agent (the "Closing Agent") for CMG Funding Corp. ("CMG") in
connection with certain wet fundings of Loans (each a "Loan"), from time to
time, identified on funding instructions relating to particular Loan closings,
substantially in a form similar to Annex B hereto (each a "Funding
Instruction"). CMG shall indicate its intention to utilize the Closing Agent
with respect to a particular wet funding through the transmission of the related
Funding Instruction to the Closing Agent prior to the wiring of funds related
thereto. Until such time as the Closing Agent shall have given CMG five Business
Days prior written notice of its intention not to serve as closing agent with
respect to future funding instructions, each new Funding Instruction transmitted
to the Closing Agent by CMG shall form part of this Escrow Agreement.
Prior to a Loan closing, CMG will wire to the Closing Agent the
Loan proceeds specified in the related Funding Instruction. The Closing Agent
will oversee disbursement of the related Loan proceeds and will take control of
the documentation executed at the related Loan's closing, ensuring that only one
set of original loan documents is signed by the mortgagor and that any
duplicates are clearly labelled "Copy." The Closing Agent will forward the
related original loan documents as described in Annex A hereto via
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overnight mail to CMG within twenty-four (24) hours of the related Loan's
closing. Simultaneous with the related closing, the Closing Agent will transmit
via facsimile to CMG, a copy of the related original fully executed note and
mortgage and the related title commitment.
If a Loan does not fund, close or otherwise record for ANY reason
within 48 hours of the Closing Agent receiving the related Loan proceeds, the
Closing Agent shall notify, by phone, CMG's Funding Supervisor and return such
Loan proceeds to the sender and return the documents to CMG, unless instructed
in writing to do otherwise by CMG.
Any costs associated with the failure of the Closing Agent to
follow the above instructions will be billed to the Closing Agent and shall be
the Closing Agent's responsibility. These costs include interest on the related
Loan proceeds for every day beyond the 48 hours, wire fees, courier fees or any
costs or damages associated with the failure to both notify CMG before 48 hours
and to return the documents.
CMG will look to the Closing Agent for the timely and proper
handling of the related Loan proceeds and the related original loan documents
which come into your possession pursuant to the terms of this Escrow Agreement.
Please sign this notification and return to CMG.
Very truly yours,
CMG FUNDING CORP.
------------------------------------
By:
Title:
AGREED THIS ______ DAY OF
____________, 1997.
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[Name of Closing Agent]
- ----------------------------
- ----------------------------
- ----------------------------
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ANNEX A
The following documents are required in connection with the closing of each
Loan:
1. Mortgage or Deed of Trust ("Mortgage") given by the Mortgagor to the
Originator securing the principal amount of such Loan set forth in the
related Funding Instruction;
2. Mortgage or Deed of Trust Note ("Mortgage Note") given by the Mortgagor
to the Originator in the principal amount of such Loan set forth in the
related Funding Instruction;
3. Assignment of Mortgage from the Originator, with assignee in blank but
otherwise in recordable form, but not recorded;
4. Primary Mortgage Guaranty Insurance Contract, if applicable;
5. List any other documents being forwarded to or prepared by the Closing
Agent in connection with the closing of such Loan.
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ANNEX B
FUNDING INSTRUCTION
This is a Funding Instruction pursuant to the Wet Funding Escrow Agreement dated
__________, ___, 199_, between CMG Funding Corp. and [Closing Agent] (the
"Escrow Agreement"), which relates to the Loan closing described herein and
which forms part of the Escrow Agreement:
1. Loan: [Identification];
2. Borrower: [Name and Address];
3. Loan Proceeds Wired: [$____________];
4. Closing: [Date, Time and Place];
5. Special Instructions: [ ].
Very truly yours,
CMG Funding Corp.
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EXHIBIT O
WET-FUNDING PROCEDURES
PRIOR TO THE PURCHASE DATE:
CMG Funding Corp. (the "Company") procedures:
The Company prepares a Mortgage Loan Schedule sub-listing the loans defined as
Wet-Funded Mortgage Loans. Additionally, the Company prepares the Purchase
Request and the Custody Agent's wiring instructions. The Company must also have
the Escrow Agreements properly executed for each Mortgage Loan listed on the
Mortgage Loan Schedule.
The Company will be required to consolidate all of the funding needs of its
local and out of state branches through a single corporate funding department.
The Custody Agent and the Purchaser will process and fund against only one
Purchase Request each Business Day.
THE BUSINESS DAY PRIOR TO THE PURCHASE DATE:
The Company procedures:
(A) The Company sends the Purchase Request and Mortgage Loan Schedule via fax to
the Purchaser for receipt no later than 2:00 p.m. Mountain Time on the Business
Day prior to the Purchase Date of the related Purchase. At the same time, the
Company will transmit to the Custody Agent a data file containing the
information on the Mortgage Loan Schedule. Additionally, on such Business Day
prior to the Purchase Date, the Company will send by overnight delivery to the
Custody Agent a copy of the Purchase Request and Mortgage Loan Schedule and the
Escrow Agreement for each Mortgage Loan listed on the Mortgage Loan Schedule.
(B) The Company must also have all the Custody Agent's wiring instructions at
least one Business Day prior to the Purchase Date of the related Purchase. The
wiring instructions will direct the Custody Agent to send funds to the
appropriate title/escrow companies for the related Mortgage Loans. If requested
by the Purchaser or the Custody Agent, the Company will send a copy of the
Custody Agent's wiring instructions to the Purchaser or the Custody Agent. The
Company will not
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request a Mortgage Loan to be purchased until the applicable recision period
has expired.
The Company and the Purchaser must approve all the title/escrow companies used
for purchasing Wet-Funded Mortgage Loans. Such companies must meet certain
fidelity bond requirements and be familiar with their requirements under the
procedures for purchasing Wet-Funded Mortgage Loans.
ON THE FUNDING DATE:
The Custody Agent's procedures:
(C) The Custody Agent, upon receipt and review of the Wet-Funded Mortgage Loan
Documents (i.e., the executed Escrow Agreements, Mortgage Loan Schedule and
Purchase Request) will fax to the Purchaser and the Company a Wet-Funded Report
and attached exception report, no later than 1:00 p.m. Mountain time on the
Purchase Date of the related Purchase Request. The Custody Agent shall verify
there are no discrepancies between certain information listed on the Mortgage
Loan Schedule and the information on the related Escrow Agreements and Purchase
Request. Additionally, the Custody Agent will verify the wiring instructions
provided by the Company with the information in the Escrow Agreements. The
Custody Agent will fax to the Purchaser the Wet-Funding Report and attached
exception report prior to the Purchaser authorizing the Custody Agent to
transfer funds to the related title companies for the funding of the individual
Mortgage Loans.
(D) Subject to the funding conditions in paragraphs (C) and (E) herein, the
Custody Agent, within one hour of receipt from the Purchaser of the executed
Wet-Funding Report and related exception report authorizing the Custody Agent to
fund the related Mortgage Loans, will wire the funds in the Purchase Funding
Account per the wiring instructions provided by the Company, to the related
Escrow Agent; the Escrow Agent will pay off the existing lien(s) on the
Mortgaged Property and forward the balance of the loan purchase proceeds, if
any, in accordance with the instructions provided by the Company.
(E) The Custody Agent will fund an individual Wet-Funded Mortgage Loan when the
following conditions are met: (i) the Custody Agent has received and confirmed
that the Escrow Agreement sent by the Company (or the Escrow Agent if
applicable) has been executed and completed and has sent to
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the Purchaser a Wet-Funded Report, (ii) the Custody Agent has received from the
Purchaser authorization, in the form of the related executed Wet-Funded Report
and related exception report, to transfer funds for the Mortgage Loans to the
related title companies and (iii) the Custody Agent has received confirmation
from the Company that the Escrow Agents are ready to receive funds.
Additionally, the Purchaser reserves the right to require that the Escrow Agent
fax to the Custody Agent the executed Mortgage Note on the Purchase Date prior
to the Purchaser authorizing the Custody Agent to wire funds for the related
Mortgage Loan. If such a requirement is adopted, the Custody Agent will
incorporate into these Wet-Funding Procedures the Custody Agent's procedures for
certifying files containing Mortgage Notes.
(F) The Custody Agent, unless otherwise instructed by the Purchaser, will return
to the Purchaser, on the same day as forwarded, funds that have been forwarded
by the Purchaser to the Custody Agent but for whatever reason the loan for which
such advance was made did not fund by 4:00 p.m. Eastern time (i.e., the loan did
not meet the final purchase conditions or the mortgagor rescinded, etc.). Note:
it is likely that over time, the Purchaser will issue standing instructions to
the Custody Agent to retain such funds overnight and utilize such funds for the
next day's funding requirements.
The Purchaser's procedures:
(G) After receiving the information in paragraph (A) on the prior Business Day,
the Purchaser will authorize its bank to wire to the Purchase Funding Account
the amount on the related Purchase Request by 12:00 noon Eastern time (Note: the
Purchaser reserves the right to require receipt of the Wet-Funding Report prior
to authorizing its bank to transfer funds to the Purchase Funding Account). The
Purchaser will receive from the Custody Agent the Wet-Funding Report with the
attached exception report. The Purchaser will cross-out or otherwise identify
loans on the exception report that do not meet the funding requirements. The
Purchaser will authorize the Custody Agent to wire funds for the individual
Mortgage Loans not crossed-out or otherwise identified on such exception report
by executing the related Wet-Funding Report and sending it via fax along with
the related exception report to the Custody Agent and the Company.
The Company's procedures:
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The Company will send via overnight delivery to the Custody Agent, the original
Assignments of Mortgage for all the Wet-Funded Mortgage Loans on the Mortgage
Loan Schedule. To the extent that the Company has not manually endorsed the
Mortgage Note for a Wet-Funded Mortgage Loan contemporaneously with its
origination, the Company shall on the origination day of such Wet-Funded
Mortgage Loan prepare and execute an allonge with respect to the related
Mortgage Note, which properly endorses such Mortgage Note in blank, and shall
deliver such allonge to the Custody Agent via overnight delivery to the Custody
Agent.
(H) If any of the Mortgage Loans listed on a Mortgage Loan Schedule do not fund
on their related Purchase Date, the Company will send via fax or other
acceptable electronic means to the Custody Agent and the Purchaser on the same
day as the related Purchase Date a corrected Mortgage Loan Schedule deleting the
Mortgage Loans that did not fund. The Company will receive information on which
Mortgage Loans did not fund from the related exception report that the Purchaser
will send via fax on the related Purchase Date. Mortgage Loans that did not fund
will have to be added to the next appropriate Mortgage Loan Schedule when they
are ready to fund.
Escrow Agent procedures:
On the Purchase Date, the Escrow Agent shall send via overnight delivery to the
Custody Agent the original executed Mortgage Note and shall fax a copy of such
Mortgage Note to the Company. Additionally the Escrow Agent shall send via
overnight delivery to the Company the remaining loan documents (or certified
copies of such documents, if applicable).
Additionally, on the Purchase Date, the Escrow Agent may be required to fax to
the Custody Agent the executed Mortgage Note prior to the Custody Agent
releasing funds for the related Mortgage Loan to the Escrow Agent or title
company.
THE BUSINESS DAY FOLLOWING THE PURCHASE DATE:
The Custody Agent's procedures:
After receipt and review of the original Mortgage Notes received from the Escrow
Agents and the related Assignments of Mortgage received from the Company, the
Custody Agent shall issue a Wet Certification, and deliver such certification to
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the Purchaser. Additionally, Custody Agent shall notify both the Purchaser and
the Company of any Wet-Funded Mortgage Loan for which it did not receive the
related Mortgage Note or Assignment of Mortgage. Such notification will be in
the form of a daily document status report that the Custody Agent shall fax to
the Purchaser and the Company. Additionally, with regard to original Mortgage
Notes for Wet-Funded Mortgage Loans, to the extent that the Company has endorsed
such Mortgage Note by means of an allonge, the Custody Agent shall match up such
allonge with the related Mortgage Note.
AFTER THE FUNDING DATE:
The Company procedures:
(I) With respect to Wet-Funded Mortgage Loans, the Company will use its best
efforts to deliver to the Custody Agent the balance of the Mortgage Loan File
within one Business Day after the Closing Date of the related Mortgage Loan and
in no case later than three Business Days.
(J) In accordance with paragraph (M) below, if the Company is unable to deliver
to the Custody Agent the required documentation for a Mortgage Loan, such
Mortgage Loan will become a Defaulted Mortgage Loan. The Company will use its
best efforts to deliver to the Custody Agent, at the same time and in a single
group, the balance of the Mortgage Loan Files for Mortgage Loans funded under a
single Purchase. Additionally, the Company will use its best efforts to deliver
complete Mortgage Loan Files which contain all the necessary documentation as
designated herein.
(K) When requested by the Purchaser or the Custody Agent, the Company will send
via fax to the Purchaser, and Custody Agent's trustee department, the daily
account activity of the Purchase Funding Account. Such report will include all
the daily funding activity for Wet-Funded Mortgage Loans and Mortgage Loans with
complete documentation. Such reports shall be generated by the Company.
Custody Agent's procedures:
(L) Upon receipt of the balance the Mortgage Loan Files from the Company, the
Custody Agent will use its best efforts to review such files no later than the
next Business Day. The Company will work to clear up any exceptions regarding
such
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Mortgage Loan Files within five Business Days from the related Purchase Date
(certain minor exceptions may take longer). On the day the Custody Agent reviews
any Mortgage Loan Files it will update the document status report with the
results of such review. The Custody Agent shall fax on a daily basis to the
Purchaser and the Company the daily document status report.
(M) The Custody Agent will issue Trust Receipts, as frequently as daily at the
request of the Purchaser.
Other items:
Covenant: The Company will provide to the Purchaser upon its reasonable request
a report projecting the number and aggregate principal balance of Mortgage Loans
to be funded that will enable the Purchaser to plan for the funding needs of the
Company.
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EXHIBIT P
QUICK-FUNDING PROCEDURES
PRIOR TO THE PURCHASE DATE:
CMG Funding Corp. (the "Company") procedures:
The Company prepares a Mortgage Loan Schedule sub-listing the loans defined as
Quick-Funded Mortgage Loans (together with any other types of loans sub-listed
according to the requirements in the Purchase Request). Additionally, the
Company prepares the Purchase Request and the Custody Agent's wiring
instructions.
The Company under the Purchase Agreement will be required to consolidate all of
the sales of Mortgage Loans of its local and out of state branches through a
single corporate sales department. The Custody Agent and the Purchaser will
process and fund against only one Purchase Request each Business Day.
THE BUSINESS DAY PRIOR TO THE PURCHASE DATE:
The Company procedures:
(A) The Company sends the Purchase Request and Mortgage Loan Schedule via fax to
the Purchaser for receipt no later than 2:00 p.m. Mountain Time on the Business
Day prior to the Purchase Date of the related Purchase. At the same time, the
Company will transmit to the Custody Agent a data file containing the
information on the Mortgage Loan Schedule. Additionally, on such Business Day
prior to the Purchase Date, the Company will send by overnight delivery to the
Custody Agent a copy of the Purchase Request and the Mortgage Loan Schedule, the
original executed Mortgage Note endorsed in blank and the original executed
Assignment of Mortgage endorsed in blank, for each Mortgage Loan listed on the
Mortgage Loan Schedule.
(B) The Company must also have all the Custody Agent's wiring instructions at
least one Business Day prior to the Purchase Date of the related Purchase. The
wiring instructions will direct the Custody Agent to send funds to the
appropriate Escrow Agents for the related Mortgage Loans. If requested by the
Purchaser or the Custody Agent, the Company will send a
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copy of the Custody Agent's wiring instructions to the Purchaser or the Custody
Agent. The Company will not request a Mortgage Loan to be purchased until the
applicable recision period has expired.
ON THE PURCHASE DATE:
The Custody Agent's procedures:
(C) The Custody Agent, upon receipt and review of the executed Mortgage Notes
and Assignments of Mortgage, will issue a "Quick Certification", a form of which
is attached as Exhibit E to the Custody Agreement, no later than 1:00 p.m.
Mountain Time on the Date of the related Purchase Request. The Custody Agent, in
accordance with Section 3 of the Custody Agreement, shall verify there are no
discrepancies between certain information listed on the Mortgage Loan Schedule
and the information on the related Mortgage Notes and Assignments of Mortgage.
Additionally, the Custody Agent will verify the wiring instructions provided by
the Company with the information in the related Mortgage Notes. The Custody
Agent will fax to the Purchaser the Quick Certification prior to the Purchaser
authorizing the Custody Agent to transfer funds to the related Escrow Agent for
the funding of the individual Mortgage Loans.
(D) Subject to the funding conditions in paragraphs (C) and (E) herein, the
Custody Agent, within one hour of receipt from the Purchaser of the executed
Quick Certification and related file exception report authorizing the Custody
Agent to fund the related Mortgage Loan, provided that the Purchaser provides
such executed Quick Certification by 1:00 p.m. Mountain Time, will wire the
funds in the Purchase Funding Account in accordance with the wiring instructions
provided by the Company, to the related Escrow Agent; such Escrow Agent will pay
off the existing lien(s) on the Mortgaged Property and forward the balance of
the Purchase proceeds, if any, in accordance with the instructions provided by
the Company.
(E) The Custody Agent purchase an individual Mortgage Loan when the following
conditions are met: (i) the Custody Agent has received and verified the original
executed Mortgage Note and Assignment of Mortgage sent by the Company (or the
Escrow Agent if applicable) and has sent to the Purchaser a Quick Certification,
(ii) the Custody Agent has received from the Purchaser authorization, in the
form of the executed Quick
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Certification and related file exception report, to transfer funds for the
Mortgage Loans to the related title companies, (iii) the Custody Agent has
received confirmation from the Escrow Agent that it is ready to receive funds
and (iv) the Custody Agent has verified the wiring instructions provided by the
Company with the information in the Mortgage Notes.
(F) The Custody Agent, unless otherwise instructed by the Purchaser, will return
to the Purchaser, on the same day as advanced, funds that have been advanced by
the Purchaser to the Custody Agent but for whatever reason the loan for which
such advance was made did not fund by 4:00 p.m. Eastern Time (i.e. the loan did
not meet the final purchase conditions or the mortgagor rescinded etc.).
The Purchaser's procedures:
(G) After receiving the information in paragraph (A) on the prior Business Day,
the Purchaser will authorize its bank to wire to the Purchase Funding Account
the amount on the related Purchase Request by 12:00 noon Eastern time (Note: the
Purchaser reserves the right to require receipt of the Quick Certification prior
to authorizing its bank to transfer funds to the Purchase Funding Account). The
Purchaser will receive from the Custody Agent the Quick Certification with the
attached file exception report. The Purchaser will cross-out or otherwise
identify loans on the file exception report that do not meet the funding
requirements. The Purchaser will authorize the Custody Agent to wire funds for
the individual Mortgage Loans not crossed-out or otherwise identified on such
file exception report by completing and executing the related Quick
Certification and sending it via fax along with the related file exception
report to the Custody Agent and the Company.
The Company's procedures:
(H) If any of the Mortgage Loans listed on a Mortgage Loan Schedule do not fund
on their related Purchase Date, the Company will send via fax or other
acceptable electronic means to the Custody Agent and the Purchaser on the same
day as the related Purchase Date a corrected Mortgage Loan Schedule deleting the
Mortgage Loans that did not fund. The Company will receive information
concerning the Mortgage Loans which the Custody Agent did not fund from the file
exception report that the Purchaser will fax to the Company on each Purchase
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Date. Mortgage Loans that did not fund will have to be added to the next
appropriate Mortgage Loan Schedule when they are ready to fund.
AFTER THE PURCHASE DATE:
The Company procedures:
(I) With respect to Quick-Funded Mortgage Loans, the Company will use its best
efforts to deliver to the Custody Agent the Mortgage File documents that have
not been previously received by the Custody Agent (the "Quick-Funded Mortgage
File") within two Business Days after the Purchase Date of the related Mortgage
Loan and in no case later than four Business Days. The Company fill use its best
efforts to deliver to the Custody Agent, at the same time and in a single group,
the Quick-Funded Mortgage Files for Mortgage Loans funded under a single
Purchase. Additionally, the Company will use its best efforts to deliver
complete Quick-Funded Mortgage Files which contain all the necessary
documentation.
(J) In accordance with paragraph (M) below, if the Company is unable to deliver
to the Custody Agent the required documentation for a Mortgage Loan, such
Mortgage Loan will become a Defaulted Mortgage Loan.
(K) The Company will send via fax on a daily basis to the Purchaser, and the
Custody Agent, if requested, the daily account activity of the Purchase Funding
Account. Such report will include all the daily funding activity for Wet-Funded
Mortgage Loans, Quick-Funded Mortgage Loans, and Mortgage Loans with complete
documentation. Such reports shall be generated by the Company.
Custody Agent's procedures:
(L) Upon receipt of the Quick-Funded Mortgage Files from the Company, the
Custody Agent will use its best efforts to review such files no later than next
Business Day. The Company will work to clear up any exceptions regarding such
Quick-Funded Mortgage Files within five Business Days from the related Funding
Date (certain minor exceptions may take longer). On the day the Custody Agent
reviews any Quick-Funded Mortgage File it will update the document status report
with the results of such review. The Custody Agent shall fax on a
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daily basis to the Purchaser and the Company the daily document status report.
(M) The Custody Agent will issue trust receipts, in a form acceptable to the
Purchaser, as frequently as daily at the request of the Purchaser. In most
instances and as directed by the Purchaser, a trust receipt will aggregate
Mortgage Loans relating to several Purchase Requests by loan type.
Other Items:
Covenant: The Company will provide to the Purchaser upon its reasonable request
reports projecting the number and aggregate principal balance of Mortgage Loans
to be funded that will enable the Purchaser to plan for the funding needs of the
Company.
If loans are funded in certain states that have additional documentation
requirements for establishing good collateral (i.e. in addition to the Mortgage
Note and Assignment of Mortgage such as a certified copy of the Mortgage) then
the prior to funding requirements for the Company and the Custody Agent will be
adjusted to require such additional documentation.
P-5
<PAGE> 115
EXHIBIT Q
FORM OF CUSTODY AGENT'S CERTIFICATION
Certification
ContiTrade Services L.L.C.
277 Park Avenue
New York, NY 10172
Attention: Ms. Susan Romo
Re: Custody Agreement (the "Custody Agreement") dated as of December 17,
1996, among CMG Funding Corp., Continental Mortgage Group, L.C.,
ContiTrade Services L.L.C. and First Security Bank, N.A.
Gentlemen/Ladies:
In accordance with the provisions of Section 3 of the Custody
Agreement, the undersigned, as Custody Agent, 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 documents delivered to it pursuant to Section 3(b) the Custody
Agreement and has determined that (i) all such documents are in its possession,
(ii) such documents have been reviewed by it and have not been mutilated,
damaged, torn or otherwise physically altered and relate to such Mortgage Loan,
(iii) based on its examination, and only as to the foregoing documents, the
information set forth in the Mortgage Loan Schedule (other than items (i) and
(iv)) respecting such Mortgage Loan accurately reflects the information set
forth in the Custody Agent's Mortgage File and (iv) each Mortgage Note has been
endorsed as provided in Section 3 of the Custody Agreement. The Custody Agent
has made no independent examination of such documents beyond the review
specifically required in the above-referenced Custody Agreement. The Custody
Agent makes no representations as to: (i) the validity, legality, enforceability
or genuineness of any such documents contained in each or any of the Mortgage
Loans identified on the Mortgage Loan Schedule, or (ii) the
Q-1
<PAGE> 116
collectability, insurability, effectiveness or suitability of any such Mortgage
Loan.
Capitalized words and phrases used herein shall have the respective
meanings assigned to them in the above-captioned Custody Agreement.
Q-2
<PAGE> 117
FIRST SECURITY BANK, N.A.
as Custody Agent
By:
---------------------------
Name:
-------------------------
Title:
------------------------
Q-3
<PAGE> 118
SCHEDULE I
Wiring Instructions
[Attached]
<PAGE> 119
SCHEDULE II
WIRING INSTRUCTIONS - PURCHASE FUNDING ACCOUNT
First Security Bank, N.A.
ABA: 124000012
Corporate Trust Services
Acct: 0510922115
RE: ContiFinancial mortgage purchase
date:
<PAGE> 120
EXECUTION COPY
PURCHASE AND SALE AGREEMENT
Among
CMG FUNDING CORP., CONTINENTAL MORTGAGE GROUP, L.C.,
and
CONTITRADE SERVICES L.L.C.
Dated as of December 17, 1996
<PAGE> 121
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I. DEFINITIONS...................................................... 1
"Adjusted Tranche Amount"................................................... 1
"Affiliate"................................................................. 1
"Aggregate Adjusted Tranche Amount"......................................... 1
"Appraised Value"........................................................... 1
"ARM Loan".................................................................. 2
"Assignment of Mortgage".................................................... 2
"Available Amount".......................................................... 2
"B/C Loan".................................................................. 2
"Bonus Compensation"........................................................ 2
"Business Day".............................................................. 2
"CFS"....................................................................... 2
"Change of Control"......................................................... 2
"Closing Date".............................................................. 3
"CLTV"...................................................................... 3
"CMGFC"..................................................................... 3
"Collateral"................................................................ 3
"Conforming Mortgage Loan".................................................. 4
"Conforming Mortgage Loan Underwriting Guidelines".......................... 4
"Consumer Credit Laws"...................................................... 4
"Controlling Shareholders".................................................. 4
"Conversion Privileges"..................................................... 4
"Custody Agent"............................................................. 4
"Custody Agreement"......................................................... 4
"Default Rate".............................................................. 4
"Detailed Mortgage Loan Schedule"........................................... 4
"Eligible Assets"........................................................... 4
"Event of Termination"...................................................... 5
"FHA"....................................................................... 5
"FHLMC"..................................................................... 5
"Fixed Rate Mortgage Loan".................................................. 5
"FNMA"...................................................................... 5
"Forbearance Waiver"........................................................ 5
"Fringe Benefits"........................................................... 5
"GAAP"...................................................................... 5
"Gain Amount"............................................................... 5
"GNMA"...................................................................... 5
"Governmental Approvals".................................................... 5
"Governmental Authority".................................................... 5
</TABLE>
i
<PAGE> 122
<TABLE>
<CAPTION>
Page
----
<S> <C>
"Initial Tranche Amount".................................................... 6
"Investment Banking Services Agreement"..................................... 6
"Law"....................................................................... 6
"Letter Agreement".......................................................... 6
"LIBOR"..................................................................... 6
"LIBOR Reset Date".......................................................... 6
"London Business Day":...................................................... 7
"Losses".................................................................... 7
"LTV" or "Loan-To-Value".................................................... 7
"Market Movement Allowance"................................................. 7
"Market Value".............................................................. 7
"Material Change"........................................................... 7
"Maximum Available Amount".................................................. 7
"Monoline Insurance Company"................................................ 8
"Mortgage".................................................................. 8
"Mortgage File"............................................................. 8
"Mortgage Interest Rate".................................................... 9
"Mortgage Loan"............................................................. 9
"Mortgage Loan Schedule".................................................... 10
"Mortgage Note"............................................................. 10
"Mortgaged Property"........................................................ 10
"Net Securities Amount"..................................................... 10
"Obligor"................................................................... 10
"Person".................................................................... 11
"Preferred Stock"........................................................... 11
"Principal"................................................................. 11
"Proceeds Shortfall"........................................................ 11
"Purchase".................................................................. 11
"Purchase Agreement"........................................................ 11
"Purchase Date"............................................................. 11
"Purchase Price Percentage"................................................. 11
"Purchase Request".......................................................... 11
"Purchaser"................................................................. 12
"Quick Certification"....................................................... 12
"Quick-Funded Mortgage Loan"................................................ 12
"Recourse Amount"........................................................... 12
"Registration Rights Agreement"............................................. 12
"Release Fee"............................................................... 12
"Repurchase Transaction".................................................... 12
"Required Sale Event"....................................................... 12
"Residualholder"............................................................ 12
"SEC"....................................................................... 12
"Securitization"............................................................ 12
"Securitization Program Mortgage Loan"...................................... 13
</TABLE>
ii
<PAGE> 123
<TABLE>
<CAPTION>
Page
----
<S> <C>
"Securitization Program Mortgage Loan Underwriting Guidelines".............. 13
"Seller".................................................................... 13
"Senior Officers"........................................................... 13
"Servicer".................................................................. 13
"Servicing Agreement"....................................................... 13
"Share Fair Market Value"................................................... 13
"Shareholders' Equity"...................................................... 13
"Significant Documents"..................................................... 14
"Special Program Loan"...................................................... 14
"Standard A Loans".......................................................... 14
"Standby Agreement"......................................................... 14
"Stock Option Plan"......................................................... 14
"Subordinated Debt Agreement"............................................... 14
"Taxes"..................................................................... 14
"Termination Date".......................................................... 14
"Tranche"................................................................... 14
"Tranche Period"............................................................ 14
"Tranche Rate".............................................................. 15
"Tranche Selection Notice".................................................. 15
"Tranche Term".............................................................. 15
"Trust Receipt":............................................................ 15
"VA"........................................................................ 15
"Wet Certification"......................................................... 15
"Wet-Funded Mortgage Loan".................................................. 15
"Wet-Funding"............................................................... 15
"Wet-Funding Escrow Agent".................................................. 15
"Wet-Funding Escrow Agreement".............................................. 15
"Wet-Funding Limit"......................................................... 16
ARTICLE II. PROCEDURES FOR PURCHASES OF ELIGIBLE ASSETS; CONDITIONS
PRECEDENT; SETTLEMENTS........................................... 16
Section 2.01 Obligation to Purchase........................................ 16
Section 2.02 Delivery of Documents; Initial Purchase of
Eligible Assets............................................... 16
Section 2.03 Delivery of Documents; Subsequent Purchases of
Eligible Assets............................................... 18
Section 2.04 Purchase Requests............................................. 18
Section 2.05 Tranche Selection............................................. 19
Section 2.06 Survival of Representations................................... 19
Section 2.07 Proceeds of Eligible Assets................................... 20
Section 2.08 Purchase Mechanics............................................ 20
Section 2.09 Retention of Accrued Interest................................. 20
</TABLE>
iii
<PAGE> 124
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE III. DISTRIBUTIONS.................................................... 21
Section 3.01 Distributions................................................. 21
ARTICLE IV. TRANSFERS OF ELIGIBLE ASSETS BY THE PURCHASER.......................... 22
Section 4.01 Purchaser Sale................................................ 22
Section 4.02 Market Value.................................................. 23
Section 4.03 Required Sale Event. ......................................... 23
Section 4.04 Bankruptcy Event.............................................. 24
Section 4.05 Proceeds Shortfall............................................ 24
ARTICLE V. REPRESENTATIONS AND WARRANTIES.......................................... 25
ARTICLE VI. OPERATIVE PROVISIONS.................................................... 25
Section 6.01 Intent of Parties; Security Interest.......................... 25
Section 6.02 Term.......................................................... 26
Section 6.03 Indemnification by the Seller................................. 26
Section 6.04 Securitization................................................ 27
Section 6.05 Remedies...................................................... 28
Section 6.06 Consumer Credit Law Obligations............................... 28
Section 6.07 Grant of Security Interest.................................... 28
Section 6.08 Late Payments................................................. 29
ARTICLE VII. INDEMNITIES AND OTHER COSTS............................................ 29
Section 7.01 Hold Harmless................................................. 29
Section 7.02 Definition of Taxes........................................... 30
Section 7.03 After-Tax Calculation......................................... 30
Section 7.04 Contest, Payment, Interest.................................... 30
Section 7.05 Definition of "After-Tax Basis"; Tax Savings.................. 31
Section 7.06 Facility Fee.................................................. 31
ARTICLE VIII. EVENTS OF TERMINATION......................................... 31
Section 8.01 Failure to Perform............................................ 31
Section 8.02 Failure of Representation or Warranty......................... 32
Section 8.03 Failure of Covenant........................................... 32
Section 8.04 Bankruptcy Event.............................................. 32
</TABLE>
iv
<PAGE> 125
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 8.05 Seller Default................................................ 32
Section 8.06 Material Adverse Change....................................... 32
Section 8.07 Cross-Default................................................. 33
Section 8.08 Non-Closure................................................... 33
ARTICLE IX. GENERAL PROVISIONS..................................................... 33
Section 9.01 Cooperation, Confidentiality, Etc............................. 33
Section 9.02 Waiver of Trial by Jury....................................... 34
Section 9.03 Amendment; Waivers............................................ 34
Section 9.04 Taxes......................................................... 34
Section 9.05 Limited Liability............................................. 34
Section 9.06 Other Transactions............................................ 35
Section 9.07 Opinion of Counsel to the Seller.............................. 35
Section 9.08 Costs and Expenses............................................ 35
Section 9.09 Wiring Instructions........................................... 36
Section 9.10 Power of Attorney............................................. 36
Section 9.11 Right of Set-Off.............................................. 36
Section 9.12 Servicing..................................................... 37
ARTICLE X. CONSTRUCTION........................................................... 37
Section 10.01 Entire Agreement............................................. 37
Section 10.02 Severability Clause.......................................... 37
Section 10.03 Counterparts................................................. 38
Section 10.04 Governing Law; Purchase Agreement Constitutes
Security Agreement; Consent To Forum; Immunities............. 38
Section 10.05 No Agency; No Partnership; No Joint Venture.................. 39
Section 10.06 Judicial Interpretation...................................... 39
Section 10.07 Recitals..................................................... 39
Section 10.08 Rules of Interpretation...................................... 39
Section 10.09 Good Faith................................................... 40
ARTICLE XI. MISCELLANEOUS.......................................................... 40
Section 11.01 Notices...................................................... 40
Section 11.02 Further Agreements........................................... 41
Section 11.03 Third-Party Rights; Assignment............................... 41
Section 11.04 Advice from Independent Counsel.............................. 42
Section 11.05 Summary Judgment............................................. 42
Section 11.06 Reproduction of Documents.................................... 42
</TABLE>
v
<PAGE> 126
EXHIBITS
Exhibit A Securitization Program Mortgage Loan Underwriting Guidelines
Exhibit B Conforming Mortgage Loan Underwriting Guidelines
Exhibit C Form of Receipt, Grant and Assignment
Exhibit D Form of Purchase Request
Exhibit E Form of Opinion of Counsel to the Seller
Exhibit F-1 List of Information to be Provided on a Mortgage Loan
Schedule
Exhibit F-2 List of Information to be Provided on a Detailed Mortgage
Loan Schedule
Exhibit G Form of Officers' Certificate
Exhibit H Representations and Warranties of the Seller
Exhibit I Representations and Warranties of the Purchaser
Exhibit J Covenants of the Seller
Exhibit K Representations and Warranties regarding Individual Mortgage
Loans
Exhibit L Representations and Warranties regarding Individual Mortgage
Loans for Future Securitizations
Exhibit M Form of Quick or Wet Certification
Exhibit N Form of Wet-Funding Escrow Agreement
Exhibit O Wet-Funding Procedures
Exhibit P Quick-Funding Procedures
Exhibit Q Form of Certification
vi
<PAGE> 127
SCHEDULES
Schedule I Wiring Instructions
Schedule II Wiring Instructions - Purchase Funding Account
vii
<PAGE> 128
Execution Copy
AMENDMENT 1 TO
PURCHASE AND SALE AGREEMENT
This Amendment 1, dated October 24, 1997 (the "Amendment"), to
the Purchase and Sale Agreement (the "Purchase Agreement"), dated December 17,
1996, among CMG Funding Corp., and Continental Mortgage Group, L.C. (now
succeeded by CMG Funding Corp.), as Sellers, and ContiTrade Services L.L.C. as
Purchaser.
WHEREAS, the parties hereto have entered into the Purchase
Agreement, as well as a series of other agreements designated as Significant
Documents in the Purchase Agreement; and
WHEREAS, the parties hereto now wish to amend certain provisions
in the Purchase Agreement.
NOW, THEREFORE, in consideration of the promises and agreements
contained herein, the parties hereto agree, pursuant to section 11.02 of the
Purchase Agreement, to amend the Purchase Agreement and restate certain
provisions thereof as follows:
1. Defined Terms Capitalized terms used herein without definition
have the meanings ascribed to them in the Purchase Agreement.
2. Maximum Available Amount. The definition of "Maximum Available
Amount" as set forth in Article 1 of the Purchase Agreement is amended through
the replacement of the value "$ 30,000,000" with "$ 50,000,000".
3. Wet Funding Limit. The definition of "Wet Funding Limit" as
set forth in Article 1 of the Purchase Agreement is amended through the
replacement of the value "$3,000,000" with "$ 5,000,000".
4. Effectiveness. This Amendment, even after due execution by the
parties hereto, will not become effective until each of Amendment 1 to the
Standby and Working Capital Financing Agreement dated October 24, 1997 (the
"Standby Amendment"), the New Letter Agreement, dated October 24, 1997, between
John Fry and ContiFinancial Corporation, Amendment 1 to the Registration Rights
Agreement, dated October 24, 1997, (the "Registration Rights Amendment")and the
amended Secured Note pursuant to Paragraph 8 of the Standby Amendment have also
been duly executed and delivered by the parties thereto.
5. Governing Law. This Amendment shall be governed by and
construed in accordance with the Laws of the State of New York, without regard
to its rules regarding conflict of laws.
<PAGE> 129
IN WITNESS WHEREOF, the parties have executed this Amendment 1 to the Purchase
and Sale Agreement as of the day and year first above written.
CMG FUNDING CORP.
as the Seller
By
------------------------------------------
Name:
Title:
CONTITRADE SERVICES, L.L.C
as Purchaser
By
------------------------------------------
Name:
Title:
By
------------------------------------------
Name:
Title:
2
<PAGE> 130
AMENDMENT 2 TO
PURCHASE AND SALE AGREEMENT
This Amendment 2, dated December 31, 1997 (the "Amendment"), to
the Purchase and Sale Agreement (the "Purchase Agreement"), dated December 17,
1996, among CMG Funding Corp. ("CMG"), and Continental Mortgage Group, L.C. (now
succeeded by CMG Funding Corp.), as Sellers, and ContiTrade Services L.L.C.
("CTS") as Purchaser.
WHEREAS, the parties hereto have entered into the Purchase
Agreement, as well as a series of other agreements designated as Significant
Documents in the Purchase Agreement;
WHEREAS, the parties hereto have entered into Amendment 1 to the
Purchase Agreement dated as of October 24, 1997 ("Amendment"); and
WHEREAS, the parties hereto now wish to amend certain provisions
in the Purchase Agreement.
NOW, THEREFORE, in consideration of the promises and agreements
contained herein, the parties hereto agree, pursuant to section 11.02 of the
Purchase Agreement, to amend the Purchase Agreement and restate certain
provisions thereof as follows:
1. Defined Terms. Capitalized terms used herein without
definition have the meanings ascribed to them in the Purchase Agreement.
2. Amended Definition of "Termination Date". The definition of
"Termination Date" in the Payment Agreement is hereby replaced in its entirety
with the following:
"Termination Date" means January 1, 1999.
3. Effectiveness. This Agreement, even after due execution by the
parties hereto, will not become effective until (i) each of the Conversion
Letter Agreement No. 2 dated as of December 31, 1997 by and between CTS and CMG
(the "Conversion Letter Agreement No. 2"), Amendment 3 to the Registration
Rights Agreement dated as of December 31, 1997, by and between CMG and CTS,
Amendment 2 to the Investment Banking Services Agreement dated December 31, 1997
by and among CTS, CMG and ContiFinancial Services Corporation, Amendment 3 to
the Standby Agreement dated as of December 31, 1997, among CMG and CTS, Warrant
No. 2 issued by CMG to CTS and dated as of December 31, 1997 has been exchanged
for Warrant No. 1 held by CTS, and Warrant No. 3 issued by CMG to CTS and dated
as of December 31, 1997, have each also been duly executed and delivered by the
parties thereto, and (ii) the 410,581 shares of Class A Preferred Stock have
been conveyed to CTS pursuant to Paragraph 2 of the Conversion Letter Agreement
No. 2.
<PAGE> 131
4. Governing Law. This Amendment shall be governed by and
construed in accordance with the Laws of the State of New York, without regard
to its rules regarding conflict of laws.
IN WITNESS WHEREOF, the parties have executed this Amendment 2 to
the Purchase and Sale Agreement as of the day and year first above written.
CMG FUNDING CORP.
as the Seller
By
------------------------------------------
Name:
Title:
CONTITRADE SERVICES, L.L.C
as Purchaser
By
------------------------------------------
Name:
Title:
By
------------------------------------------
Name:
Title:
2
<PAGE> 132
AMENDMENT 3 TO
PURCHASE AND SALE AGREEMENT
This Amendment 3, dated March 6, 1998 (the "Amendment"), to the
Purchase and Sale Agreement (the "Purchase Agreement"), dated December 17, 1996,
among CMG Funding Corp.,and Continental Mortgage Group, L.C. (now succeeded by
CMG Funding Corp.), as Sellers, and ContiTrade Services L.L.C., as Purchaser.
WHEREAS, the parties hereto have entered into the Purchase
Agreement, as well as a series of other agreements designated as Significant
Documents in the Purchase Agreement; and
WHEREAS, the parties hereto have entered into Amendment No. 1 to
the Purchase Agreement dated as of October 24, 1997; and
WHEREAS, the parties hereto have entered into Amendment No. 2 to
the Purchase Agreement dated as of December 31, 1997; and
WHEREAS, the parties hereto now wish to amend certain provisions
in the Purchase Agreement.
NOW, THEREFORE, in consideration of the promises and agreements
contained herein, the parties hereto agree, pursuant to section 11.02 of the
Purchase Agreement, to amend the Purchase Agreement and restate certain
provisions thereof as follows:
1. Defined Terms. Capitalized terms used herein without
definition have the meanings ascribed to them in the Purchase Agreement.
2. Maximum Available Amount. The definition of "Maximum Available
Amount" as set forth in Article 1 of the Purchase Agreement is amended through
the replacement of the value "$50,000,000" with "$53,000,000."
3. Effectiveness. This Amendment shall be effective after due
execution by the parties hereto, and it will continue to be effective until
April 30, 1998. As of May 1, 1998, the definition of "Maximum Available Amount"
as set forth in Article 1 of the Purchase Agreement shall be "$50,000,000."
5. Governing Law. This Amendment shall be governed by and
construed in accordance with the Laws of the State of New York, without regard
to its rules regarding conflict of laws.
IN WITNESS WHEREOF, the parties have executed this Amendment 1 to the Purchase
and Sale Agreement as of the day and year first above written.
<PAGE> 133
CMG FUNDING CORP.
as the Seller
By
--------------------------------------
Name: John D. Fry
Title: President
CONTITRADE SERVICES, L.L.C.
as Purchaser
By
--------------------------------------
Name: Scott M. Mannes
Title: Authorized Signatory
By
--------------------------------------
Name: Jay L. Remis
Title: Authorized Signatory
2
<PAGE> 1
EXHIBIT 10.10
STANDBY AND WORKING CAPITAL FINANCING AGREEMENT
This STANDBY AND WORKING CAPITAL FINANCING AGREEMENT, dated as of
December 17, 1996, among CMG Funding Corp., a Delaware corporation, Continental
Mortgage Group, L.C., a Utah limited liability company, CMG Funding Securities
Corp., a Delaware corporation and ContiTrade Services L.L.C., a Delaware limited
liability company.
WHEREAS, the Borrower wishes to (i) secure a collateralized
standby financing arrangement as a source of liquidity from the Lender and (ii)
obtain a working capital financing arrangement as a source of working capital
from the Lender and the Lender wishes to enter into such a standby financing
arrangement and such a working capital financing arrangement subject to the
terms and conditions set forth herein; and
WHEREAS, the Residualholder is the wholly-owned subsidiary of the
Borrower and may from time to time own various Residual Interests and I/O
Interests; and
WHEREAS, the Borrower intends to pledge the stock of the
Residualholder as well as certain other of its assets from time to time to
secure the standby financing arrangement.
NOW, THEREFORE, in consideration of the foregoing, and for other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, intending to be legally bound, the parties hereto agree as
follows:
ARTICLE I.
DEFINITIONS
Unless otherwise specified, the following terms shall have the
following meanings when used in this Standby Agreement:
"Accrual Period" means, with respect to the initial Accrual Period, the
period commencing on the date of the initial Funding Date and ending on the last
day of the calendar month in which such initial Funding Date occurs and, with
respect to any subsequent Accrual Period, the calendar
<PAGE> 2
month following the calendar month of the prior Accrual Period.
"Advance" means any Collateralized Advance or Working Capital Advance.
"Advance Balance" means, with respect to any Advance and any date of
determination, the sum of (a) the outstanding principal balance of such Advance,
determined as the difference between (i) the sum of all amounts of principal
lent by the Lender to the Borrower with respect to such Advance through the
close of the date of determination and (ii) the sum of all amounts of principal
repaid by the Borrower with respect to such Advance through the close of the
date prior to the date of determination, and (b) the interest accrued and unpaid
on such Advance which is due and payable prior to such date of determination.
"Advance Maturity Date" means, with respect to any Collateralized
Advance, the date agreed upon in writing by the parties, or, in the absence of
such an agreement, the earlier of (a) the first anniversary of the date on which
the first Collateralized Advance is made or (b) the Advance Termination Date;
provided, however, that if the Advance Maturity Date is determined pursuant to
clause (a) above and if on any anniversary each of the conditions set forth in
clauses (b) and (c) of Section 2.02 are satisfied, such Advance Maturity Date
shall be extended for one year; provided, further, however, that in no event
shall the Advance Maturity Date be extended beyond the Advance Termination Date.
"Advance Termination Date" means the earliest to occur of (a) the date
any Change of Control occurs, (b) December 17, 2001, or (c) the date of a
declaration of acceleration by the Lender pursuant to Section 7.02.
"Affiliate" means any Person: (a) which directly or indirectly controls,
or is controlled by, or is under common control with the Borrower; (b) which
directly or indirectly beneficially owns or holds five percent (5%) or more of
the voting stock of the Borrower; or (c) five percent (5%) or more of the voting
stock of which is directly or indirectly beneficially owned or held by the
Borrower. The term control means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies
2
<PAGE> 3
of a Person, whether through the ownership of voting securities, by contract or
otherwise.
"Aggregate Advance Balance" means, with respect to any date of
determination, the aggregate amount of the outstanding Advance Balances, of all
Advances as of such date.
"Aggregate Available Collateralized Advance Amount" means, with respect
to any date of determination, the amount equal to the product of (a) the
Aggregate Financing Value of the Collateral on such date of determination and
(b) the difference between (i) one and (ii) Weighted Average Haircut.
"Aggregate Cashflow" means with respect to any Accrual Period, the
aggregate payments received in respect of all Residual Interests and I/O
Interests owned by the Borrower or the Residualholder and pledged to the Lender
under this Standby Agreement during such Accrual Period.
"Aggregate Collateralized Advance Balance" means, with respect to any
date of determination, the aggregate amount of the outstanding Advance Balances
of all Collateralized Advances at such date.
"Aggregate Financing Value" means the sum of all Financing Values set
forth on the related Financing Value Schedules.
"Aggregate Working Capital Advance Balance" means, with respect to any
date of determination, the aggregate amount of the outstanding Advance Balance
of all Working Capital Advances at such date.
"Bonus Compensation" means with respect to any employee the amount by
which the total compensation, excluding Fringe Benefits, for such employee
during any year exceeds such employee's base salary.
"Borrower" means CMGFC or CMLC.
"Borrower Collateral" has the meaning as set forth Section 5.01.
"Business Day" means any day, other than a Saturday or Sunday, that is
neither a legal holiday, nor a day on which banking institutions are authorized
or required by Law or
3
<PAGE> 4
regulation to close, in the City of New York or the State of Utah.
"Change of Control" means:
(a) without the prior written consent of the Lender, the
issuance, distribution, sale or transfer by the Borrower or by any
Affiliate of the Borrower, including, without limitation, the
Controlling Shareholders of the Borrower's capital stock or securities
other than (i) the sale of the Borrower's common stock to the Lender
occurring upon the exercise of the Conversion Privileges, (ii) the
pledge of the Borrower's capital stock to the Lender, (iii) the transfer
of the Borrower's capital stock for estate planning purposes or pursuant
to a domestic relations settlement or order, (iv) the transfer of the
Borrower's Common Stock pursuant to the Stock Option Plan for a price
greater than or equal to the Share Fair Market Value, (v) pursuant to a
buy/sell agreement solely among the borrower's existing shareholders, or
(vi) the sale, transfer or issuance of no more than five (5%) percent of
the Borrower's Common Stock (which percentage shall be determined on a
cumulative basis together with all other sales, transfers or issuances
of the Borrower's Common Stock under this clause (vi) from the date of
this Agreement) at a price at least equal to Share Fair Market Value
with the prior written consent of the Lender;
(b) a sale or voluntary transfer or, in the aggregate, sales or
voluntary transfers, of more than five per cent (5%) of the Borrower's
assets (as set forth in the Borrower's most recently audited or
unaudited financial statement) other than the sale of loans in the
ordinary course of business, whether on a flow or pool basis; or
(c) the resignation, termination or departure of John D. Fry or
Terry L. Mott from the employ of the Borrower, or the reassignment of
John D. Fry or Terry L. Mott to a position of significantly reduced
responsibility within the Borrower.
"CMGFC" means CMG Funding Corp., a Delaware corporation, or its
successors.
4
<PAGE> 5
"CMLC" means Continental Mortgage Group, L.C., a Utah limited liability
company, or its successors.
"Collateral" means all Pledged Shares, Residual Interests and/or I/O
Interests pledged hereunder, together with any and all proceeds thereof.
"Collateralized Advance" means an amount of funds borrowed by the
Borrower from the Lender pursuant to the provisions of Article II of this
Standby Agreement, for which specific Collateral was pledged by the Borrower as
security therefor.
"Collateralized Loan" means the aggregate of the sums borrowed by the
Borrower from the Lender pursuant to all Collateralized Advances which remain
unpaid, together with accrued and unpaid interest thereon.
"Collection Account" means the account established and maintained by the
Lender in the name of the Lender for the collection of Aggregate Cashflows
pursuant to the terms of this Standby Agreement.
"Common Stock" means shares of the Common Stock of the Borrower, a class
of capital stock of the Borrower which (i) possesses full voting rights, and
(ii) is the sole class which fully participates in the income and value of the
Borrower.
"Consolidated Tangible Equity" means the aggregate "assets" of the
Borrower and its Subsidiaries less the aggregate "liabilities" of the Borrower
and its Subsidiaries and all intangible assets, with the term "asset" having the
meaning ascribed to such term by GAAP and the term "liability" being those
obligations or liabilities of the Borrower and its Subsidiaries which, in
accordance with GAAP, would be included in the liability side of the Borrower's
balance sheet on a consolidated basis.
"Controlling Shareholders" means each of John D. Fry and Terry L. Mott.
"Conversion Privileges" means the rights which the Lender has pursuant
to the terms of (i) the Subordinated Debt Agreement to convert to Preferred
Stock of the Borrower and (ii) the Preferred Stock to convert to Common Stock of
the Borrower.
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"Custodial Agreement" shall have the meaning assigned to it under the
Purchase Agreement.
"Default Rate" means the related Interest Rate plus 4.00%.
"Determination Date" means, with respect to any Accrual Period, the
second Business Day following the end of such Accrual Period.
"Effective Advancing Value" means with respect to each item of
Collateral the product of (a) the Financing Value of such item of Collateral and
(b) the difference between (i) one and (ii) the Haircut related to such item of
Collateral; provided, however, for the purpose of this definition the Financing
Value of an item of Collateral shall be zero with respect to a Residual Interest
or an I/O Interest which was issued more than one year prior to the date of
request of such Advance.
"Event of Default" has the meaning set forth in Article VII hereof.
"FHA" means the Federal Housing Administration.
"FHLMC" means the Federal Home Loan Mortgage Corporation or any
successor thereto.
"Financing Value" means, on any Funding Date, the value of the related
Residual Interests and/or I/O Interests as specified by Lender on the related
Financing Value Schedule executed by the Borrower and the Lender prior to such
Funding Date. On any date other than a Funding Date, "Financing Value" means the
Market Value of the related Residual Interests and/or I/O Interests, as
determined by the Lender in its sole discretion, including, but not limited to,
revisions to the related Financing Value Schedule pursuant to Section 2.08
hereof. Although constituting a part of the Collateral, no independent Advance
shall be made with respect to the Pledged Shares and the Pledged Shares do not
have a Financing Value.
"Financing Value Schedule" means, with respect to the related Residual
Interests and/or I/O Interests, a schedule, substantially in the form attached
hereto as Exhibit B, agreed to by the Borrower and the Lender prior to the
initial Funding
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Date, as such Financing Value Schedule may be amended from time to time by the
Lender pursuant to Section 2.10 hereof, setting forth the Financing Value of the
related Residual Interests and/or I/O Interests.
"FNMA" means The Federal National Mortgage Association or any successor
thereto.
"Fringe Benefits" means the payment of premiums for health insurance,
life insurance, workman's compensation, disability insurance and the payment of
payroll taxes for social security and Medicare.
"Funding Date" means, with respect to any Advance, the date on which
such Advance is made.
"GAAP" means generally accepted accounting principles in the United
States, consistently applied.
"Governmental Authority" means any nation or government, any state or
other political subdivision thereof, and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.
"Haircut" means (a), with respect to any I/O Interest, 0.35, and (b)
with respect to any Residual Interest, 0.35.
"HUD" means the United States Department of Housing and Urban
Development.
"Indemnified Party" has the meaning ascribed thereto in Article 6 of
this Standby Agreement.
"Interest Rate" means, with respect to any Collateralized Advance and
any Accrual Period, LIBOR on the related LIBOR Reset Date plus 5.00%; and with
respect to any Working Capital Advance and any Accrual Period, LIBOR on the
related LIBOR Reset Date plus 4.50%.
"I/O Interest" means the certificate or certificates, rated in one of
the two highest categories by Moody's Investors Service, Inc., Standard and
Poor's Corporation or any other nationally recognized statistical rating agency,
representing the interest-only interest or interests in one or more securitized
mortgage pools of Securitizable Mortgage Loans, with the prior written
permission of the Lender as to
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such interest or interests, originated by the Borrower which shall have been
rated in one of the two highest categories by any of such rating agencies and
sold by, through or to the Lender or one of its Affiliates in a public offering
or private placement.
"Investment Banking Services Agreement" means the Investment Banking
Services Agreement, dated as of December 17, 1996, among the Borrower, the
Lender and ContiFinancial Services Corporation, as may be amended from time to
time pursuant to the terms thereof.
"Law" means any federal, state or local statute, law, rule, regulation,
ordinance, order, code, policy or rule of common law, now or hereafter in
effect, and in each case as amended, and any judicial or administrative
interpretation thereof by a Governmental Authority or otherwise, including any
judicial or administrative order, consent, decree or judgment.
"Lender" means ContiTrade Services L.L.C., a Delaware limited liability
company, its successors in interest and its permitted assigns.
"Letter Agreement" means the Letter Agreement, dated as of December 17,
1996, of the Controlling Shareholders to the Lender.
"LIBOR" means, as of 11:00 a.m. London time on any date of
determination, the 30 day London Interbank Offering Rate as of such date, as
indicated on page number 3750 of the Telerate Service. If LIBOR cannot be so
determined, then LIBOR shall mean the rate so quoted on such date and time by
the London branch of Union Bank of Switzerland.
"LIBOR Reset Date" means, with respect to any Accrual Period, unless
otherwise agreed to, the Business Day immediately preceding the start of such
Accrual Period, provided that if such Business Day is not a London Business Day,
then the London Business Day immediately preceding such Business Day.
"Loan" means any Collateralized Loan or any Working Capital Loan.
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"London Business Day" means any day, other than a Saturday or Sunday,
that is neither a legal holiday, nor a day on which banking institutions are
authorized or required by Law or regulation to close, in The City of London.
"Market Value" means, with respect to any item of Collateral on any date
of determination in respect of an Advance, the market value of the related item
of Collateral, as determined by the Lender in its sole discretion, and taking
into account (a) the performance of such item of Collateral; (b) the performance
of the assets which underlie such item of Collateral; (c) general industry and
overall economic conditions; (d) current interest rates; (e) availability,
likelihood or commitment (if applicable) of purchasers; and (f) such other
considerations as reasonably appropriate in the circumstances.
"Material Change" means, with respect to the Securitizable Mortgage Loan
Underwriting Guidelines, any change to such guidelines other than a change (i)
correcting typographical errors, spelling, grammar or punctuation in such
guidelines or (ii) modifying such guidelines provided that such modification
does not lower the quality of the loans underwritten pursuant thereto.
"Maximum Collateralized Advance Aggregate Amount" means $0 (however,
solely with respect to Working Capital Advances, $400,000) until the Closing of
all of the Significant Documents and $10,000,000 thereafter.
"Maximum Working Capital Advance Aggregate Amount" means $400,000 until
the Closing of all of the Significant Documents, and $2,000,000 thereafter.
"Merger Agreement" means the Merger Agreement and Plan of Reorganization
dated as of December 16, 1996 by and between Continental Mortgage Group, L.C.
and the Borrower.
"Monetary Default" means:
(a) a failure to pay interest due on any Payment Date as required
by Section 2.05 of this Standby Agreement;
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(b) a failure to pay any amount due on any date as required by
Sections 2.06 and 2.07 of this Standby Agreement;
(c) a breach of the covenant set forth in Section 4.01(a),
4.01(b)(i) or 4.01(v) of this Standby Agreement;
(d) a failure by the Borrower to pay any Taxes and a failure to
reimburse the Lender for any losses due to Taxes as required by
Section 8.04 of this Standby Agreement; and/or
(e) a breach of any of the representations or warranties set
forth in Section 3.01 or Section 3.02 herein which causes the
Borrower to be unable to make any payments due under this Standby
Agreement.
"New York UCC" means the Uniform Commercial Code of the State of New
York.
"Non-Monetary Default" means:
(a) a breach of any of the representations and warranties set
forth in Section 3.01 or 3.02 of this Standby Agreement;
(b) a breach of any of the covenants set forth in Section 4.01,
4.02, 4.03 or 4.04 of this Standby Agreement (other than the covenant
set forth in Section 4.01(a), 4.01(b)(i) or 4.01(v); and/or
(c) a breach of any of the representations, warranties or
covenants contained in the Significant Documents other than one which
constitutes a Non-Monetary Default as so defined in clauses (a) or (b)
of the definition thereof under the Subordinated Debt Agreement.
"Payment Date" means, with respect to any Accrual Period, the later to
occur of (a) the fifth calendar day of the month following the month in which
such Accrual Period ends, provided that if such day is not a Business Day, then
the Business Day immediately following such day, or (b) the second Business Day
immediately following the related Determination Date.
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"Person" means an individual, general partnership, limited partnership,
limited liability partnership, corporation, business trust, joint stock company,
limited liability company, trust, unincorporated association, joint venture,
Governmental Authority, or other entity of whatever nature.
"Pledged Shares" means one hundred percent of the outstanding common
stock of the Residualholder.
"Preferred Stock" means shares of the Class A Preferred Stock of the
Borrower, a class of capital stock of the Borrower which (i) possesses full
voting rights, and (ii) is the sole class preferred as to the payment of
dividends and payment upon liquidation.
"Preferred Stock Purchase Agreement" means the Preferred Stock Purchase
Agreement dated as of December 17, 1996, between CMGFC and ContiFinancial
Corporation.
"Purchase Agreement" means the Purchase and Sale Agreement, dated as of
December 17, 1996 between the Lender and CMGFC, as may be amended from time to
time pursuant to the terms thereof.
"Registration Rights Agreement" means the Registration Rights Agreement
dated as of December 17, 1996 between CMGFC and the Lender, as may be amended
from time to time pursuant to the terms thereof.
"REMIC" means Real Estate Mortgage Investment Conduit.
"Residual Interest" means the certificate or certificates representing
the residual interest in a securitized mortgage pool of Securitizable Mortgage
Loans, with the prior written permission of the Lender as to such interest or
interests, originated by the Borrower and at least one class of the certificates
relating to such pool shall have been rated in one of the two highest rating
categories by Moody's Investors Service, Inc., Standard and Poor's Corporation
or any other nationally recognized statistical rating agency and sold by,
through or to the Lender or one of its Affiliates in a public offering or
private placement.
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"Residualholder" means CMG Funding Securities Corp., a Delaware
corporation, and its successors.
"Residualholder Collateral" has the meaning as set forth Section 5.01.
"Secured Note" means any secured promissory note evidencing the related
Loan, in the form attached hereto as Exhibit A-1 or Exhibit A-2.
"Securitizable Mortgage Loan" means a mortgage loan originated pursuant
to, and which complies with, the Securitizable Mortgage Loan Underwriting
Guidelines and is security for a Collateralized Advance hereunder.
"Securitizable Mortgage Loan Underwriting Guidelines" means the
underwriting guidelines for Securitizable Mortgage Loans attached hereto as
Exhibit D, as may be amended from time to time by the Borrower and, with respect
to any Material Changes, after obtaining the Lender's prior written consent
regarding such Material Changes.
"Securitization" means the securitization of mortgages with
ContiFinancial Services Corporation as lead or sole underwriter or placement
agent.
"Senior Officers" means the Chairman of the Board, the Chief Executive
Officer, the Chief Operating Officer, the Chief Financial Officer, the General
Counsel, the Controller, the President, the Executive Vice President, the Senior
Vice President for Administration, the Senior Vice President for Secondary
Marketing, the Senior Vice President for Retail Production, the Senior Vice
President Wholesale Production, and any other Senior Vice President of the
Borrower and any other Person who performs similar policy-making functions for
the Borrower on a regular basis.
"Servicing Agreement" means the Servicing Agreement dated as of December
17, 1996 among CMGFC, ContiMortgage Corporation and Wells Fargo Bank, as may be
amended from time to time pursuant to the terms thereof.
"Share Fair Market Value" means, as of any date of determination, a
price per share of Common Stock determined by dividing (x) the product of (i)
the pretax profits of the Borrower for the twelve (12) month period ended as of
the most
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recent fiscal quarter and (ii) five (5) by (y) the number of shares of Common
Stock outstanding on the date of grant (on a fully diluted basis assuming the
conversion of all convertible securities of the Borrower and the exercise of all
options to purchase the Common Stock or other securities of the Borrower which
have been granted); provided, however in no event shall such price per share be
less than $3.96 per share of Common Stock.
"Significant Documents" means this Standby Agreement, the Purchase
Agreement, the Subordinated Debt Agreement, the Registration Rights Agreement,
the Investment Banking Services Agreement, the Secured Notes under both this
Standby Agreement and the Subordinated Debt Agreement, the Letter Agreement, the
Preferred Stock Purchase Agreement, the Custodial Agreement, the Merger
Agreement and the Servicing Agreement.
"Standby Agreement" means this Standby Financing and Working Capital
Agreement dated as of December 17, 1996 among the Borrower, the Lender and the
Residualholder, as may be amended from time to time pursuant to the terms
hereof.
"Stock Option Plan" means the employee stock option plan of the Borrower
which appears as Exhibit F hereto and which has been approved by the management
of the Borrower and by the Lender.
"Subordinated Debt Agreement" means the Subordinated Debt Agreement
dated as of December 17, 1996 between CMGFC and the Lender, as may be amended
from time to time pursuant to the terms hereof.
"Subsidiaries" means those entities in which any Person has an ownership
interest sufficient to cause the assets and liabilities of such entities to be
consolidated with those of such Person in the preparation of a consolidated
balance sheet of such Person in accordance with GAAP.
"Weighted Average Haircut" means the weighted average of the related
Haircut for all Collateral securing Collateralized Advances financed hereunder
weighted in proportion to the Financing Value of each item of Collateral.
"Working Capital Advance" means an amount of funds borrowed by the
Borrower pursuant to the provisions of Section 2.04 of this Standby Agreement,
which is secured through the
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grant to the Lender by the Borrower of a general security interest in the assets
of the Borrower.
"Working Capital Advance Maturity Date" means, with respect to any
Working Capital Advance, the date agreed upon in writing by the parties, or, in
the absence of such an agreement, the earlier of (a) the first anniversary of
such Working Capital Advance, (b) the Advance Termination Date or (c) the
Working Capital Advance Termination Date.
"Working Capital Advance Termination Date" means the later to occur of
(i) the first anniversary of the date of this Standby Agreement, or (ii) the
second anniversary of the date of this Standby Agreement following the Lender's
most recent notice of renewal of the working capital component of this Standby
Agreement pursuant to Section 2.12 hereof, if any.
"Working Capital Loan" means the aggregate of the sums borrowed by the
Borrower from the Lender pursuant to all Working Capital Advances which remain
unrepaid, together with accrued and unpaid interest thereon.
ARTICLE II.
STANDBY AND WORKING CAPITAL FACILITY
Section 2.01. General Advance Requirements. (a) From time to
time pursuant to the terms of this Standby Agreement, the Borrower may request
to borrow Advances from the Lender. The Borrower hereby acknowledges that,
notwithstanding the fact that the Secured Note is secured by the Collateral, the
Borrower Collateral and the Residualholder Collateral, the obligations of the
Borrower under the Secured Note are recourse obligations of the Borrower. The
Borrower shall not request an Advance from the Lender with an initial Advance
Balance less than $250,000.
(b) The Lender shall be obligated to make each such Advance not
more than five Business Days following the date of receipt by the Lender of a
written notification of such Advance from the Borrower, substantially in the
form of (i) Exhibit E-2 for Working Capital Advances and (ii) Exhibit
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E-1 for Collateralized Advances and satisfaction of the requirements of Section
2.02.
(c) An Advance hereunder may only be requested if the proceeds
thereof are to be used for one or more of the purposes set forth on Schedule I
hereto.
Section 2.02. Advance Conditions Precedent. With respect to each
proposed Advance the following conditions precedent shall have been met as of
the related Funding Date of such Advance:
(a) with respect to the initial Advance made hereunder, the
Borrower shall have executed the Significant Documents;
(b) all of the representations and warranties of the Borrower and
the Residualholder in this Standby Agreement shall be true and correct in all
material respects as of such Funding Date;
(c) neither a Monetary Default nor a Non-Monetary Default shall
have occurred and be continuing and no Event of Default shall have occurred;
(d) the Borrower shall have delivered to the Lender (i) the
certificate or certificates evidencing the Collateral, each with all necessary
stock or bond powers or transfer instruments executed in blank by the
appropriate representatives of the Borrower, (ii) such other documents as the
Lender shall deem necessary or convenient to perfect its first priority security
interest in such Collateral, including, without limitation, the filing or
amendment of all necessary UCC Statements in all applicable jurisdictions and
any signature guarantees and (iii) such other documents as the Lender shall deem
necessary or convenient to perfect its security interest in the Borrower
Collateral and the Residualholder Collateral including, without limitation the
filing or amendment of all necessary UCC Statements in all applicable
jurisdictions and any signature guarantees;
(e) the Borrower has obtained the Lender's prior written approval
of the related servicer and the related trustee employed in the securitization
which issued the Residual Interest or I/O Interest which is to serve as
Collateral for the requested Advance; and
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(f) the Borrower shall have delivered the Pledged Shares together
with appropriate stock powers to the Lender (or the Lender's designee).
Section 2.03.Collateralized Advance Requirements.
(a) the Lender's obligation to make Collateralized Advances to
the Borrower shall terminate on the Advance Termination Date.
(b) In no event shall any Collateralized Advance be made which
would cause the sum of (i) the Aggregate Collateralized Advance Balance and (ii)
the Aggregate Working Capital Advance Balance to exceed the Maximum
Collateralized Advance Aggregate Amount.
(c) Each Collateralized Advance on the related Funding Date shall
be for an amount equal to the lowest of:
(i) the amount requested by the Borrower on such Funding
Date;
(ii) the sum of the Effective Advancing Values for each item
of Collateral pledged to collateralize such Advance; or
(iii) the amount by which (A) Aggregate Available
Collateralized Advance Amount on such Funding Date exceeds (B) the sum
of (x) the Aggregate Collateralized Advance Balance and (y) the
Aggregate Working Capital Advance
Balance, if any.
Section 2.04.Working Capital Advance Requirements.
(a) The Lender's obligation to make Working Capital Advances to
the Borrower shall terminate on the Working Capital Advance Termination Date.
(b) In no event shall any Working Capital Advance be made which
would cause the Aggregate Working Capital Advance Balance to exceed the Maximum
Working Capital Advance Aggregate Amount.
(c) In no event shall any Working Capital Advance be made which
would cause the sum of the (i) the Aggregate Working Capital Advance Balance and
(ii) the Aggregate
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Collateralized Advance Balance to exceed the Maximum Collateralized Advance
Aggregate Amount.
(d) Prior to requesting a Working Capital Request hereunder
during any calendar year, the Borrower shall have delivered to the Lender an
annual operating and capital budget in full compliance with Section 4.01(t) for
such calendar year.
Section 2.05.Interest Payments. (a) Interest shall accrue daily
on each day during each Accrual Period on each Advance from and including the
Funding Date of such Advance at a rate equal to the product of (i) 1/360, (ii)
the related Interest Rate, and (iii) the related Advance Balance for such
Advance on such day. With respect to each Accrual Period, the Lender shall
notify the Borrower on the related Determination Date of the amount of interest
which accrued on the Loan during such Accrual Period and such accrued interest
shall be due and payable on the related Payment Date. The Lender's failure to
notify the Borrower of the accrued interest due on any Determination Date shall
not affect the Borrower's obligation to pay the interest due on the related
Payment Date.
(b) If any payment with respect to any Advance which is due under
the terms of this Standby Agreement is not paid when due, then commencing on the
day such payment is not made and continuing until the day such payment is
finally made, all interest payments under this Standby Agreement shall use the
Default Rate rather than the Interest Rate to calculate the interest which is to
be paid under this Standby Agreement.
(c) It is intended that the rate of interest on any Advance
hereunder shall never exceed the maximum rate, if any, which may be legally
charged on this Loan, and if the provisions for interest hereunder would result
in a rate higher than such maximum rate, interest shall nevertheless be limited
to such maximum rate and any amounts which may be paid toward interest in excess
of such maximum rate shall be applied to the reduction of principal, or, at the
option of the Lender, returned to the Borrower.
Section 2.06.Collateralized Advance Principal Payments. (a) Each
Collateralized Advance shall mature and the related Advance Balance shall be due
and payable, together
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with all interest accrued and unpaid thereon, on the related Advance Maturity
Date.
(b) In the event that any Advance Balance is not repaid in full
on the related Advance Maturity Date, the Aggregate Advance Balance shall
immediately become due and payable and the Lender may exercise all rights and
remedies available to it as the holder of a first perfected security interest
under the New York UCC.
(c) If on any date the amount of (i) the Aggregate Collateralized
Advance Balance is greater than (ii) the Aggregate Available Collateralized
Advance Amount on such date, then the Borrower shall, within two Business Days
after receiving notice thereof from the Lender, prepay the related Loan in an
amount necessary to reduce the amount of the Aggregate Collateralized Advance
Balance to the Aggregate Available Collateralized Advance Amount.
(d) If no Working Capital Advances remain outstanding, the
Borrower may at any time voluntarily prepay all or any part of any
Collateralized Advance from its own funds; provided that if such prepayment is
not made on a Payment Date the amount of prepayment must be $50,000 or greater.
(e) If at any time during the term of this Standby Agreement, the
Borrower shall effect a public sale of any of its capital stock, then within
thirty days of the initial issuance of such capital stock to the public, the
Borrower shall prepay all amounts due hereunder; provided, however, that if the
underwriter of such public sale of capital stock reasonably believes that such
prepayment will make a public sale impossible, then the Borrower shall prepay
the largest amount the underwriter reasonably believes will not adversely affect
such public sale.
Section 2.07. Working Capital Advance Principal Payments. (a)
Each Working Capital Advance shall mature and the related Advance Balance shall
be due and payable, together with all interest accrued and unpaid thereon, on
the related Working Capital Advance Maturity Date.
(b) The Borrower may at any time voluntarily prepay any Working
Capital Advance from its own funds; provided that
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if such prepayment is not made on a Payment Date the amount of prepayment must
be $50,000 or greater.
(c) If at any time during the term of this Standby Agreement, the
Borrower shall effect a public sale of any of its capital stock, then within
thirty days of the initial issuance of such capital stock to the public the
Borrower shall prepay no less than 100% of the outstanding Advance Balance of
all of the Working Capital Advances.
(d) In the event that any Advance Balance of Working Capital
Advance is not repaid in full on the related Working Capital Advance Maturity
Date, the Aggregate Advance Balance shall immediately become due and payable and
the Lender may exercise all rights and remedies available to it as the holder of
a first perfected security interest under the New York UCC.
Section 2.08.Collateral. (a) The Borrower and the Residualholder
shall deliver to the Lender, no later than on the Funding Date of any
Collateralized Advance, the related Collateral, which the Lender shall hold
pursuant to the terms of this Standby Agreement.
(b) The Borrower and the Residualholder each hereby pledges all
of its right, title, and interest in and to, and grants a first lien and
security interest in, the Collateral to the Lender to secure (i) first, the
repayment of principal and interest on any Advance and all other amounts owing
to the Lender pursuant to this Standby Agreement, and (ii) second, the repayment
of any amounts owing to the Lender pursuant to the Purchase Agreement.
(c) As additional security for its obligations hereunder, the
Borrower and the Residualholder hereby assigns to the Lender all its right,
title and interest in any distributions it is entitled to receive in respect of
any Collateral pledged hereunder or pursuant to the Purchase Agreement. The
Borrower and the Residualholder agree to execute any and all documents requested
by the Lender to evidence the assignment of the right to receive such
distributions and to take all actions necessary to effectuate any assignment
made pursuant to this subsection. All amounts received in respect of such
assignment shall be immediately deposited into the Collection Account. With
respect to any Accrual Period, the related Aggregate Cashflow shall be
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applied to make payments on the Loans on the related Payment Date pursuant to
the terms of this Standby Agreement, in the manner described in Section 2.09.
(d) The Borrower hereby authorizes the Lender, at the Borrower's
expense, to file such financing statement or statements relating to the
Collateral without the Borrower's signature thereon as the Lender at its option
may deem appropriate, and appoints the Lender as the Borrower's
attorney-in-fact, without requiring the Lender, to execute any such financing
statement or statements in the Borrower's name and to perform all other acts
which the Lender deems appropriate to perfect and continue the security interest
granted hereby and to protect, preserve and realize upon the Collateral,
including, but not limited to, the right to endorse notes, complete blanks in
documents and sign assignments on behalf of the Borrower as its
attorney-in-fact. This power of attorney is coupled with an interest and is
irrevocable without the Lender's consent. Notwithstanding the foregoing, the
power of attorney hereby granted shall only be effective during the occurrence
and continuance of any Event of Default hereunder.
Section 2.09. Information. The Borrower shall deliver to the
Lender, with respect to each securitized pool of mortgage loans, underlying any
Collateral; (i) any report relating to such pool, including, without limitation,
any trustee's report; (ii) any notice of transfer of servicing; (iii) monthly
reports detailing the delinquency, loss, prepayment and foreclosure experience
of each such pool; (iv) any public document filed with any regulatory body or
agency; and (v) any other such document or information as the Lender may request
from time to time.
Section 2.10. Collateral Valuation. The Lender, in its sole
discretion, shall have the right to change (a) the assumptions with respect to
the valuation of the Collateral, and (b) the valuation of Collateral set forth
on the Financing Value Schedule, in order to reflect actual Collateral
performance and actual changes in facts affecting the Collateral performance and
market value.
Section 2.11. Application of Payments.
Any payment made under this Standby Agreement from funds which
comprise the Aggregate Cashflow shall, unless
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otherwise specified herein, be applied (i) first, to pay any unpaid fees,
costs, expenses or obligations (A) which arise hereunder, (B) which are to be
paid by the Borrower, and (C) which are due and payable, (ii) second, to pay any
accrued and unpaid interest on the related Advances pursuant to Section 2.05
which is due and payable on or prior to the date of such payment, (iii) third,
to make required principal payments on the related Collateralized Advances
pursuant to Section 2.06(c) and (e) which are due and payable on or prior to the
date of such payment, and (iv) fourth, to reduce the outstanding principal
balance of the Working Capital Advances to the date of such payment, and (v)
finally, to reduce the outstanding principal balance of the Collateralized
Advances.
Any payment made under this Standby Agreement from funds other than from the
Aggregate Cashflow shall, unless otherwise specified herein, be applied (i)
first, to pay any unpaid fees, costs, expenses or obligations (A) which arise
hereunder, (B) which are to be paid by the Borrower, and (C) which are due and
payable, (ii) second, to pay any accrued and unpaid interest on the related
Advances pursuant to Section 2.05 which is due and payable on or prior to the
date of such payment, (iii) third, to make required principal payments on the
related Working Capital Advances pursuant to Section 2.07 which are due and
payable on or prior to the date of such payment, (iv) fourth, to make required
principal payments on the related Collateralized Advances pursuant to Section
2.06(c) and (e) which are due and payable on or prior to the date of such
payment, (v) fifth, to reduce the outstanding principal balance of the Working
Capital Advances, and (vi) finally, to reduce the outstanding principal balance
of the Collateralized Advances.
Section 2.12. Renewal Notice. The Lender shall give the Borrower
at least ninety (90) days prior written notice of its respective intention to
renew or not renew the standby facility component or the working capital
component of this Standby Agreement, as the case may be, prior to the scheduled
expiration date of such component. If the standby facility component or the
working capital component of this Standby Agreement are not renewed prior to
their respective scheduled expiration dates, then each such component that was
not renewed shall automatically expire.
ARTICLE III.
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REPRESENTATIONS AND WARRANTIES
Section 3.01. Representations and Warranties of the Borrower. (a) The
Borrower hereby makes the following representations and warranties, as of the
date of this Standby Agreement and as of each Funding Date:
(i) the Borrower has been duly organized and is validly
existing as a corporation under the Laws of the State of Delaware;
(ii) the Borrower is duly licensed where required as a
"Licensee" or is otherwise qualified in each state in which it transacts
business and is not in default of such state's applicable Laws, rules
and regulations;
(iii) the Borrower has the requisite power and authority and
legal right to own and grant a lien on all of its right, title and
interest in and to the Collateral and the Borrower has the requisite
power and authority and legal right to execute and deliver, engage in
the transactions contemplated by, and perform and observe the terms and
conditions of, the Significant Documents;
(iv) the Borrower is able to meet its obligations when they
become due and is not in default (beyond any applicable cure period)
under any mortgage, borrowing agreement or other instrument or agreement
pertaining to indebtedness for borrowed money, and the execution and
delivery by the Borrower of the Significant Documents will not result in
any violation of any such mortgage, instrument or agreement to which the
Borrower is a party or by which its property is bound;
(v) (A) all audited and unaudited financial statements,
budgets and certificates of the Borrower or any of its officers
furnished to the Lender are true and complete and do not omit to
disclose any material liabilities, contingent or otherwise, or other
facts relevant to the condition of the Borrower; and (B) all such
audited financial statements have been prepared in accordance with GAAP;
(vi) no consent, approval, authorization or order of,
registration or filing with, or notice to any Governmental Authority or
court is required under
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applicable Law in connection with the execution, delivery and performance
by the Borrower of the Significant Documents;
(vii) there is no action, proceeding or investigation pending
or, to the best knowledge of the Borrower, threatened against it before
any court, administrative agency or other tribunal (A) asserting the
invalidity of any of the Significant Documents, (B) seeking to prevent
the consummation of any of the transactions contemplated by any of the
Significant Documents, or (C) which might materially and adversely
affect the performance by the Borrower of its obligations under, or the
validity or enforceability of, any of the Significant Documents;
(viii) since the date of this Standby Agreement, there has been
no material adverse change in the business, operations, financial
condition, properties or business plan of the Borrower, taken as a
whole;
(ix) the information provided by the Borrower in each
Financing Value Schedule is true and complete as of the date of the
related Advance;
(x) the person or persons signatory to this Standby
Agreement and any document executed pursuant to it on behalf of the
Borrower have full power and authority to bind the Borrower;
(xi) each of the Significant Documents has been duly
authorized and executed by the Borrower and is a legal, valid and
binding agreement and is enforceable against the Borrower in accordance
with its terms;
(xii) the execution, delivery and performance of any of the
Significant Documents, and the exhibits attached thereto, if any, and
the other documents contemplated herein, and the performance by it of
all transactions contemplated herein and therein, (A) have been duly
authorized by all necessary and appropriate corporate action on the part
of the Borrower, (B) will not violate any provision of the Certificate
of Incorporation or Bylaws of the Borrower, (C) does not conflict with
any term or provision of any other agreement to which the Borrower is a
party, and (D) will
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not cause a breach of any applicable federal, state or municipal
governmental Law or regulations, or any order, judgment, writ, award,
injunction or decree of any court or Governmental Authority which is
binding upon the Borrower;
(xiii) the Borrower has not pledged any of its capital stock to
any entity or person;
(xiv) neither the Borrower nor any Affiliate of the Borrower
is involved in the day-to-day management of the Residualholder;
(xv) there has been no (A) filing against the Borrower of a
petition for liquidation, reorganization, arrangement or adjudication as
a bankrupt or similar relief under the bankruptcy, insolvency or similar
laws of the United States or any state or territory thereof or of any
foreign jurisdiction as to which the Borrower fails to secure dismissal
within 60 days of such filing, or (B) commencement by the Borrower of a
voluntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, or the consent by the Borrower
to the entry of an order for relief in an involuntary case under any
such law or to the appointment of or taking possession by a receiver,
liquidator, assignee, trustee, custodian, sequestrator (or other similar
official) of the Borrower or of any substantial part of its property, or
the making by the Borrower of any general assignment for the benefit of
creditors, or the failure of the Borrower generally to pay its debts as
such debts become due, or the taking of corporate action by the Borrower
in furtherance of any of the foregoing.
(xvi) neither the Borrower nor any Affiliate of the Borrower
(A) pays the Residualholder's expenses; (B) guarantees the
Residualholder's obligations, or (C) advances funds to the
Residualholder for the payment of expenses or otherwise (other than
additional contributions of capital);
(xvii) all business correspondence of the Borrower and other
communications are conducted in the Borrower's own name, on its own
stationery and through a separately-listed telephone number;
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(xviii) the Borrower does not act as agent for the
Residualholder, but instead presents itself to the public as a
corporation separate from the Residualholder;
(xix) all representations and warranties made pursuant to this
Standby Agreement and any Significant Documents are and will be true and
correct at the time when made and at all times thereafter under this
Standby Agreement and any Significant Documents or, if limited to a
specific date, as of the date to which they refer;
(xx) to the knowledge of the Borrower, all written information
and documents or copies of documents furnished to the Lender pursuant to
or in connection with this Standby Agreement and any Significant
Documents are and will be true and correct in all material respects at
the time when made and at all times thereafter under this Standby
Agreement and any Significant Documents or, if limited to a specific
date, as of the date to which they refer;
(xxi) Immediately after the pledge, assignment and transfer to
the Lender as herein contemplated, all necessary action will have been
taken to grant a valid and enforceable first priority perfected security
interest in the Collateral, the Borrower Collateral, and the
Residualholder Collateral (including the filing or amendment of UCC
Statements in all applicable jurisdictions, if necessary) free and clear
of all liens and encumbrances, except for those subsequent liens which,
by operation of law take priority over a previously perfected security
interest; and
(xxii) The Borrower has not originated title I home improvement
loans during any immediately preceding three consecutive calendar month
period such that such loans represents more than 49% of all loans which
the Borrower originated during such three calendar month period,
determined on the basis of the initial principal balances of the loans.
(b) The Borrower agrees and acknowledges that each of the
representations and warranties set forth in subsection (a) hereof and Section
3.02(a) below (i) is material and being relied upon by the Lender, (ii) is true
in all respects as of the date of this Standby Agreement, and (iii) shall
survive
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the execution, termination and expiration of this Standby Agreement.
Section 3.02. Representations and Warranties of the Residualholder. (a)
the Residualholder hereby makes the following representations and warranties as
of the date of this Standby Agreement:
(i) the Residualholder has been duly organized and is
validly existing as a corporation under the Laws of the State of
Delaware;
(ii) the Residualholder has the requisite power and authority
and legal right to execute and deliver, engage in the transactions
contemplated by, and perform and observe the terms and conditions of,
this Standby Agreement to be performed by it;
(iii) no consent, approval, authorization or order of,
registration or filing with, or notice to any Governmental Authority or
court is required under applicable Law in connection with the execution
and delivery by the Residualholder of this Standby Agreement;
(iv) the person or persons signatory to this Standby
Agreement and any document executed pursuant to it on behalf of the
Residualholder have full power and authority to bind the Residualholder;
(v) this Standby Agreement is valid, binding and enforceable
against the Residualholder in accordance with its terms;
(vi) the execution, delivery and performance of this Standby
Agreement, and the exhibits attached hereto and the other documents
contemplated herein to which the Residualholder is a party, and the
performance by the Residualholder of all transactions contemplated
herein and therein (A) have been duly authorized by all necessary and
appropriate corporate action on the part of the Residualholder, (B) will
not violate any provision of the Certificate of Incorporation or Bylaws
of the Residualholder, and (C) will not cause a breach of any applicable
federal, state or municipal governmental Law or regulations, or any
order, judgment, writ, award,
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injunction or decree of any court or Governmental Authority which is
binding upon the Residualholder;
(vii) the Residualholder is a limited purpose corporation
whose activities are restricted in its Certificate of Incorporation;
(viii) the Residualholder shall at all times have at least one
independent director and officer, both of which positions may be held by
the same person.
(ix) the Residualholder is not involved in the day-to-day
management of the Borrower;
(x) other than the payment of dividends, the return of
capital and additional contributions to capital by the Borrower, the
Residualholder engages in no intercorporate transactions with the
Borrower or any Affiliate of the Borrower;
(xi) the financial statements and books and records of the
Residualholder and the Borrower reflect the separate corporate existence
of the Residualholder;
(xii) the Residualholder maintains separate corporate records
and books of account from the Borrower, holds regular corporate meetings
and otherwise observes corporate formalities and has a separate business
office from the Borrower;
(xiii) the Residualholder maintains its assets separately from
the assets of the Borrower and any Affiliate of the Borrower (including
through the maintenance of separate bank accounts), the Residualholder's
funds and assets, and records relating thereto, have not been and are
not commingled with those of the Borrower or any Affiliate of the
Borrower and the separate creditors of the Residualholder are entitled
to be satisfied out of the Residualholder's assets prior to any value in
the Residualholder becoming available to the Residualholder's
equityholders;
(xiv) the Residualholder does not (A) pay the expenses of the
Borrower or any Affiliate of the Borrower, (B) guarantee the obligations
of any other
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Person, or (C) advance funds to the Borrower or any Affiliate of the
Borrower;
(xv) all business correspondence of the Residualholder and
other communications are conducted in the Residualholder's own name, on
its own stationery and through a separately-listed telephone number;
(xvi) the Residualholder does not act as agent for the
Borrower, but instead presents itself to the public as a corporation
separate from the Borrower;
(xvii) the Residualholder has no debt and has not and will not
incur any indebtedness, except for operating expenses and dividends
declared and unpaid;
(xviii) Immediately after the pledge, assignment and transfer to
the Lender as herein contemplated, all necessary action will have been
taken to grant a valid and enforceable first priority perfected security
interest in the Collateral (including the filing or amendment of UCC
Statements in all applicable jurisdictions, if necessary) free and clear
of all liens and encumbrances, except for those subsequent liens which,
by operation of law take priority over a previously perfected security
interest;
(xix) all representations and warranties made pursuant to this
Standby Agreement and any Significant Documents are and will be true and
correct at the time when made and at all times thereafter under this
Standby Agreement and any Significant Documents or if limited to a
specific date, as of the date to which they refer; and
(xx) to the knowledge of the Residualholder, all written
information and documents or copies of documents furnished to the Lender
pursuant to or in connection with this Standby Agreement and any
Significant Documents are and will be true and correct in all material
respects at the time when made and at all times thereafter under this
Standby Agreement and any Significant Documents or, if limited to a
specific date, as of the date to which they refer.
(b) the Residualholder agrees and acknowledges that each of the
representations and warranties set forth in
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subsection (a) hereof (i) is material and being relied upon by the Lender, (ii)
is true in all respects as of the date of this Standby Agreement, and (iii)
shall survive the execution, termination and expiration of this Standby
Agreement.
Section 3.03. Representations and Warranties of the Lender. (a) The
Lender hereby makes the following representations and warranties as of the date
of this Standby Agreement:
(i) the Lender has been duly organized and is validly
existing as a limited liability company under the Laws of the State of
Delaware;
(ii) the Lender has the requisite power and authority and
legal right to execute and deliver, engage in the transactions
contemplated by, and perform and observe the terms and conditions of,
this Standby Agreement to be performed by it;
(iii) no consent, approval, authorization or order of,
registration or filing with, or notice to any Governmental Authority or
court is required under applicable Law in connection with the execution
and delivery by the Lender of this Standby Agreement;
(iv) the person or persons signatory to this Standby
Agreement and any document executed pursuant to it on behalf of the
Lender have full power and authority to bind the Lender;
(v) this Standby Agreement is valid, binding and enforceable
against the Lender in accordance with its terms; and
(vi) the execution, delivery and performance of this Standby
Agreement, and the exhibits attached hereto and the other documents
contemplated herein to which the Lender is a party, and the performance
by the Lender of all transactions contemplated herein and therein (A)
have been duly authorized by all necessary and appropriate corporate
action on the part of the Lender, (B) will not violate any provision of
the Articles of Organization of the Lender, (C) does not conflict with
any term or provision of any other agreement to which the Lender is a
party, and (D) will not cause a breach of any
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applicable federal, state or municipal governmental Law or regulations,
or any order, judgment, writ, award, injunction or decree of any court
or Governmental Authority which is binding upon the Lender.
(b) The Lender agrees and acknowledges that each of the
representations and warranties set forth in subsection (a) hereof (i) is
material and being relied upon by the Borrower, (ii) is true in all respects as
of the date of this Standby Agreement, and (iii) shall survive the execution and
termination of this Standby Agreement.
ARTICLE IV.
COVENANTS OF THE BORROWER
Section 4.01.Affirmative Covenants of the Borrower. The Borrower
covenants and agrees with the Lender as follows:
(a) the Borrower shall timely make any payment of interest or
principal or any other sum, which has become due whether by acceleration or
otherwise (including the failure to make a mandatory prepayment), under the
terms of this Standby Agreement and the Secured Note and under any other
document evidencing or securing indebtedness of the Borrower to the Lender or
any of its Affiliates;
(b) The Borrower shall on each Payment Date, as long as any
principal or interest amount is outstanding on the Loans, (i) make a prepayment
on the Loans to the extent of the funds available from the Aggregate Cashflow
for the immediately preceding Accrual Period in accordance with the provisions
of Sections 2.06(c) and 2.11 and (ii) deliver a completed certificate, executed
by the President of the Borrower which states the current assets to current
liabilities ratio of the Borrower under GAAP for such month;
(c) the Borrower will notify the Lender in writing of any of the
following within three Business Days after a responsible officer of the Borrower
learns of the occurrence thereof, but in no event later than ten Business Days
following the occurrence thereof, describing the same and, if applicable,
further notifying the Lender, within four Business
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Days after learning of the occurrence thereof, of any remedial steps being taken
with respect thereto:
(i) the occurrence or likelihood of occurrence of an Event of
Default hereunder;
(ii) the institution of any litigation, arbitration
proceeding or governmental proceeding with the amount in contest being
greater than $200,000 in the aggregate;
(iii) the entry of any judgment or decree against the Borrower
if the aggregate amount of all judgments and decrees then outstanding
against the Borrower exceeds $50,000 after deducting (i) the amount with
respect to which the Borrower is insured and with respect to which the
insurer has assumed responsibility in writing, and (ii) the amount for
which the Borrower is otherwise indemnified if the terms of such
indemnification are reasonably satisfactory to the Lender; or
(iv) an event of default under any material agreement of the
Borrower if such event of default would materially and adversely affect
the condition (financial or otherwise) or the operation of the Borrower
or its assets or would materially and adversely affect the performance
of its obligations and duties hereunder;
(d) in the event of a filing against the Borrower of a petition
for liquidation, reorganization, arrangement or adjudication as a bankrupt or
similar relief under the bankruptcy, insolvency or similar Laws of the United
States or any state or territory thereof or of any foreign jurisdiction or there
shall be appointed a receiver, conservator, liquidator, assignee, custodian,
trustee, sequestrator or other similar official of the Borrower or any
substantial part of the property of either or the ordering of the winding-up or
liquidation of either party's affairs, dismissal of such filing, appointment or
order shall be secured within 30 days of such filing;
(e) the Borrower shall maintain Consolidated Tangible Equity at
an amount greater than (i) $1,000,000 from the date of execution of this Standby
Agreement through the calendar year ending on December 31, 1997, (ii) $1,500,000
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during the calendar year ending on December 31, 1998, and (iii) $2,000,000 at
all times thereafter;
(f) less than 10% of (i) the aggregate outstanding principal
balance of all loans serviced by the Borrower or (ii) the aggregate outstanding
principal balance of any pool of mortgage loans originated and/or purchased by
the Borrower and subsequently securitized is contractually delinquent for 91 or
more days;
(g) (i) the Borrower shall, promptly upon preparation, but in no
event later than 60 days following the end of its first three fiscal quarters,
deliver to the Lender its unaudited company-prepared consolidated and
consolidating financial statements as of the end of such fiscal quarter,
prepared in accordance with GAAP consistently applied and certified by the chief
financial officer of the Borrower; (ii) the Borrower shall, promptly upon
preparation, but in no event later than 90 days following the end of its fourth
fiscal quarter, deliver to the Lender (A) its audited and certified consolidated
and consolidating financial statements, including the consolidated and
consolidating balance sheets of the Borrower and the related statements of
income and cash flows and stating in comparative form the figures for the
corresponding date and period in the previous fiscal year, all in reasonable
detail and prepared in accordance with GAAP consistently applied, as of the end
of the most recently ended fiscal year, (B) the annual report, furnished by a
firm of independent public accountants, of the examination, which has been
conducted in compliance with the Uniform Single Audit Program for Mortgage
Bankers, of the Borrower's servicing performance and (C) a certificate from the
accountants preparing the Borrower's audited financial statements stating that
in the course of preparing the audited financial statements nothing came to
their attention indicating that the Borrower was not in compliance with the
terms of this Standby Agreement; (iii) beginning with the audit and
certification for the fiscal year ended September 30, 1997, audits and
certifications shall each be prepared by a nationally recognized independent
accounting firm and reasonably acceptable to the Lender; (iv) in all cases,
consolidated and consolidating financial statements shall include, without
limitation, balance sheets, profit and loss statements and statements of cash
flows; and (v) notwithstanding anything in this Standby Agreement to the
contrary, if (A) the audited and certified financial statements described in the
immediately
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preceding sentence are not delivered within 90 days, as the case may
be, (B) such financial statement delivery delay is through no fault of the
Borrower, and (C) the Borrower provides the Lender with a notice specifying the
reason for the delay and a date, within a reasonable time period (as determined
by the Lender), on which such financial statements will be delivered and they
are so delivered; then failure to deliver such financial statements within 90
days, as the case may be, shall not be deemed to be an Event of Default for
purposes of this Standby Agreement;
(h) the Borrower shall in writing, promptly upon a responsible
officer of the Borrower learning of any breach of any representation, warranty,
covenant or material obligation under this Standby Agreement, notify the Lender
thereof;
(i) as requested by the Lender by written notice from time to
time, the Borrower shall, promptly upon filing, deliver to the Lender such
requested copies of all public filings made by the Borrower with any
Governmental Authority or quasi-governmental body;
(j) the Borrower shall comply with all Laws, ordinances,
governmental rules and regulations to which the Borrower is subject, and obtain
and keep in force any and all licenses, permits, franchises, or other
governmental authorizations from, give all such notices promptly to, register,
enroll or file promptly all such agreements, instruments or documents required
by applicable Laws with, and promptly take all such other legally required
action with respect to, any Governmental Authority or regulatory authority,
agency or official, as is required under any provision of any applicable Law and
that it is necessary (i) for the continued operation of any of the Borrower's
activities or business or the performance by the Borrower of any of its
agreements or obligations under this Standby Agreement or (ii) to ensure the
continuing legality, validity, binding effect or enforceability of this Standby
Agreement or any of the obligations hereunder of the Borrower necessary to the
ownership of its properties or to the conduct of its businesses;
(k) the Borrower shall do all things necessary to remain duly
incorporated, validly existing and in good standing as a domestic corporation,
as to CMGFC, or a limited liability company as to CMLC in its jurisdiction of
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incorporation and maintain all requisite authority to conduct its business in
each jurisdiction in which its business is conducted, except where the failure
to maintain such authority would not have a material adverse effect on the
ability of the Borrower to conduct its business or to perform its obligations
under the Significant Documents in the reasonable judgment of the Lender;
(l) at all times during which this Standby Agreement is in
effect, the Borrower shall possess sufficient net capital and liquid assets to
satisfy its obligations as they become due in the normal course of business;
(m) upon five days prior written notice, the Borrower shall
permit the Lender or its accountants, attorneys or other agents access to all of
its books and records for inspection and copying, at the Lender's expense,
during normal business hours at all places where the Borrower conducts business.
During the term of this Standby Agreement, the Borrower shall furnish the Lender
such periodic, special or other reports or information, whether or not provided
for herein, as shall be necessary, reasonable and appropriate in respect of the
purposes of this Standby Agreement;
(n) the Borrower shall pay and discharge all taxes, assessments
and governmental charges upon it, its income and properties as and when such
taxes, assessments and charges are due and payable, except and to the extent
only that such taxes, assessments and charges are being actively contested in
good faith and by appropriate proceedings, the Borrower shall maintain adequate
reserves on its books therefor;
(o) the Borrower shall file all federal, state and local tax
returns and other reports that the Borrower is required by Law to file and
maintain adequate reserves for the payment of all taxes, assessments,
governmental charges, and levies imposed upon it, its income, or its profits, or
upon any property belonging to it;
(p) the Borrower shall maintain thereafter, at its own expense,
an errors and omissions policy of insurance and a blanket fidelity bond with
broad coverage on all officers, directors, employees and agents of the Borrower
or its Affiliates with (A) its current insurer, Fidelity Deposit of Maryland
(Policy Number MPP000245700), or (B) responsible companies with a rating of "A"
or better by Best. Any such
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fidelity bond shall protect the Borrower and the Lender against losses,
including forgery, theft, embezzlement and fraud of such persons. The insurance
policy and the bond shall each show the Lender as an additional insured and
shall provide that the insurers or bonding company shall give the Lender thirty
(30) days written notice prior to any cancellation. This provision shall not
diminish or relieve the Borrower from its duties and obligations as set forth in
this Standby Agreement. The minimum coverage under (i) any such errors and
omissions policy of insurance shall be three hundred fifty thousand dollars
($350,000), or such greater coverage amount as FNMA or FHMLC may require for the
Borrower and (ii) any such fidelity bond shall be at least equal to three
hundred fifty thousand dollars ($350,000), or such greater coverage amount as
FNMA or FHMLC may require for the Borrower. The deductible amount on such errors
and omissions policy of insurance and such fidelity bond shall not exceed
$25,000, without the written consent of the Lender;
(q) the Borrower shall furnish to the Lender, periodically upon
request, good standing certificates and officer's certificates to assure the
Lender of the Borrower's continued authority to perform the Borrower's
obligations under this Standby Agreement;
(r) the Borrower shall at all times maintain the ratio of its
current assets to its current liabilities at 1.05 or greater (each as determined
by GAAP);
(s) the Borrower shall subordinate any other debt (the
"Subordinated Debt") to all Advances, either individually or collectively, so
long as any Advances are outstanding. The Borrower shall not make any payments
of principal with respect to any Subordinated Debt so long as any Advances are
outstanding;
(t) the Borrower shall prepare annual operating and capital
budgets for its operations, acceptable to the Lender, on at least yearly
intervals, or at such other times as the Lender may reasonably request, and the
Borrower shall promptly furnish copies of such budgets to the Lender;
(u) the Borrower shall take all actions reasonably requested by
the Lender, from time to time, as the Lender may request in order to perfect,
maintain or release any security interest of the Lender; and
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(v) the Borrower shall take all actions necessary to merge CMLC
into CMGFC on or before January 31, 1997.
Section 4.02.Negative Covenants of the Borrower. The Borrower
covenants and agrees with the Lender as follows:
(a) the Borrower shall not (i) assign or attempt to assign this
Standby Agreement or any rights hereunder, without first obtaining the specific
written consent of the Lender, or (ii) grant any security interest, lien or
other encumbrance on any Collateral other than (A) to the Lender or any of its
Affiliates or (B) with respect to taxes and assessments related thereto which
are not yet due and payable, or which are being contested in good faith;
(b) the Borrower shall not commence a voluntary case under any
applicable bankruptcy, insolvency or other similar Law now or hereafter in
effect, or consent to the entry of an order for relief in an involuntary case
under any such Law or to the appointment of or taking possession by a receiver,
liquidator, assignee, trustee, custodian, sequestrator (or other similar
official) of the Borrower, or of any substantial part of its property, and the
Borrower shall not make any general assignment for the benefit of creditors, or
fail generally to pay debts as such debts become due, and shall not take
corporate action in furtherance of any of the foregoing;
(c) the Borrower shall not amend its Certificate of Incorporation
or Bylaws, or sell, transfer, or issue any capital stock other than pursuant to
the exceptions listed in clauses (i) through (vi) of paragraph (a) of the
definition of "Change of Control", without the prior written consent of the
Lender;
(d) the Borrower shall not suffer any materially adverse change
in its financial condition, operations, business, properties or business plan,
or the existence of any other condition which, in the Lender's sole judgement,
constitutes an impairment of the Borrower's ability to perform its obligations
under any of the Significant Documents and which condition is not remedied
within ten days after written notice to the Borrower thereof or, if the
condition cannot be fully remedied within said ten days, substantial progress
(which shall be in the Lender's sole judgement) has not been
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made within said ten days, or such other period as may be mutually agreed upon,
toward remedy of the condition;
(e) the Borrower shall not default under any term or provision of
any other agreement between (i) the Borrower and (ii) the Lender or any of its
Affiliates or any third parties, which default shall not have been cured within
an applicable cure period, if any, and which default has, or with the passage of
time will have, a material adverse effect on the Borrower or its business. For
the purposes of this subsection, both (x) a final judgement for the payment of
money in excess of $50,000 in the aggregate rendered against the Borrower and
remaining in force unpaid, unbonded, undismissed, undischarged and unstayed
after the expiration of the period which is the longer of ten days or the
payment plan for such judgement and (y) the failure to make any payment in
excess of $50,000 to a third party pursuant to the terms of any other agreement,
and such failure is not cured within any applicable cure period, shall be deemed
material;
(f) the Borrower shall not declare any dividends or redeem any
capital stock without the prior written consent of the Lender;
(g) there shall be no Change of Control, and the Borrower shall
not merge or consolidate with or into, any other entity without the prior
written consent of the Lender;
(h) except for mortgage loans acquired with the intent of sale
(either on a whole-loan or securitization basis) and securities issued pursuant
to securitizations of the Borrower-owned loans, the Borrower shall not purchase,
lease or otherwise acquire all or substantially all of the assets or properties
of, or acquire any capital stock, equity interest, debt or other securities of
any other entity without the prior written consent of the Lender, which consent
shall not be unreasonably withheld;
(i) the Borrower shall not (i) dissolve or terminate its
existence, (ii) enter into any joint venture or become a partner in any
partnership, (iii) transfer any assets to any Affiliate except as otherwise
expressly permitted or contemplated hereby, (iv) operate any portion of the
business of the Borrower under an assumed name or doing business as (v) modify
or amend the Stock Option Plan without the consent of
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the Lender, or (vi) create any subsidiary without the prior written consent of
the Lender;
(j) except for making and purchasing of mortgage loans in the
ordinary course of business, the Borrower shall not (i) make or permit to exist
investments in or loans or advances to any other person, entity or Affiliate,
including without limitation, any shareholders of the Borrower, or (ii) sell or
transfer 5% or more of the assets of the Borrower, except with the prior written
consent of the Lender;
(k) the Borrower shall not guarantee, endorse or otherwise in any
way become or be responsible for any obligations of any other person, entity or
Affiliate, including without limitation, whether directly or indirectly by
agreement to purchase the indebtedness of any other person or through the
purchase of goods, supplies or services, or maintenance of working capital or
other balance sheet covenants or conditions, or by way of stock purchase,
capital contribution, advance or loan for the purposes of paying or discharging
any indebtedness or obligation of such other person or otherwise; provided,
however, that nothing contained herein shall prevent the Borrower from
indemnifying its officers, directors and agents pursuant to its bylaws and its
articles of incorporation;
(l) the Borrower shall not, in the aggregate, make or commit to
make capital expenditures in excess of $50,000, with respect to individual
expenditures, or in excess of $200,000 during any fiscal year without the prior
written consent of the Lender;
(m) the Borrower will not commit any act in violation of
applicable Laws, or regulations promulgated pursuant thereto that relate to the
Borrower or that materially and adversely affect the operations or financial
condition of the Borrower;
(n) commencing with January 1, 1997, with respect to any fiscal
year, the aggregate amount of Bonus Compensation (other than any reasonable
production bonus tied to direct production performance) paid to the Borrower's
employees, including officers of the Borrower, during such year shall not exceed
12?% for the Borrower's fiscal years ending September 30, 1997 and September 30,
1998 and 10% thereafter of the net income before taxes after accounting for the
expense related to
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base salary compensation, excluding Fringe Benefits, for such year;
(o) in any year the aggregate base salary compensation, excluding
Fringe Benefits, for the Senior Officers shall not exceed the amount paid to
such Senior Officers in the previous year by more than 5%;
(p) the Borrower shall not pledge or transfer any of the Pledged
Shares other than to the Lender;
(q) during the term of this Standby Agreement, the Borrower shall
not engage in any business other than as a mortgage or consumer loan originator
or as a provider of ancillary services or products;
(r) the Borrower shall not enter into any transaction, including,
without limitation, the purchase, sale, or exchange of property or the rendering
of any service, with any Affiliate, except as the Lender may otherwise approve
through prior written notice;
(s) the Borrower shall not enter into any financing arrangement
with any entity other than the Lender or incur any debt to any Person other than
the Lender (other than debt which is fully subordinated to any Loan or payment
obligation hereunder), except as the Lender may otherwise approve through prior
written notice;
(t) the Borrower shall not, without the prior written consent of
the Lender, issue, distribute, sell or transfer, or allow the issuance,
distribution, sale or transfer by the Borrower or by any Affiliate of the
Borrower, including, without limitation, the Controlling Shareholders of the
Borrower's capital stock or securities other than (A) the sale of the Borrower's
capital stock to the Lender occurring upon the exercise of the Conversion
Privilege, (B) the sale of the Borrower's capital stock pursuant to a firm
commitment public offering, (C) the transfer of the Borrower's capital stock for
estate planning purposes or pursuant to a domestic relations settlement or
order, (D) the transfer of the Borrower's Common Stock pursuant to the Stock
Option Plan (for a price greater than or equal to the Share Fair Market Value),
(E) pursuant to a buy/sell agreement solely among the borrower's existing
shareholders or (F) the sale, transfer or issuance of no more than five (5%)
percent of the Borrower's
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Common Stock (which percentage shall be determined on a cumulative basis
together with all other sales, transfers or issuances of the Borrower's Common
Stock under this clause (F) from the date of this Agreement) at a price at least
equal to Share Fair Market Value with the prior written consent of the Lender;
(u) the Borrower shall not exercise any voting rights including,
without limitation, any rights to a clean-up call or any other similar provision
under any Securitization without the prior written consent of the Lender; and
(v) the Borrower shall not originate title I home improvement
loans during any immediately preceding three consecutive calendar month period
such that such loans represent more than 49% of all loans which the Borrower
originated during such three calendar month period determined on the basis of
the initial principal balances of the loans.
Section 4.03. Affirmative Covenants of the Residualholder.
(a) The Residualholder shall pay and discharge all taxes,
assessments and governmental charges upon it, its income and properties as and
when such taxes, assessments and charges are due and payable, except and to the
extent only that such taxes, assessments and charges are being actively
contested in good faith and by appropriate proceedings, and the Borrower shall
maintain adequate reserves on its books therefor;
(b) The Borrower shall file all federal, state and local tax
returns and other reports that the Borrower is required by law to file and
maintain adequate reserves for the payment of all taxes, assessments,
governmental charges and levies imposed upon it, its income, or its profits, or
upon any property belonging to it.
Section 4.04. Negative Covenants of the Residualholder. The
Residualholder covenants and agrees with the Lender as follows:
(a) the Residualholder shall not grant any security interest,
lien or other encumbrance on any Collateral or Residual Interests other than to
the Lender or any of its Affiliates;
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(b) the Residualholder shall not commence a voluntary case under
any applicable bankruptcy, insolvency or other similar Law now or hereafter in
effect, or consent to the entry of an order for relief in an involuntary case
under any such Law or to the appointment of or taking possession by a receiver,
liquidator, assignee, trustee, custodian, sequestrator (or other similar
official) of the Residualholder, or of any substantial part of its property, and
the Residualholder shall not make any general assignment for the benefit of
creditors, or fail generally to pay debts as such debts become due, and shall
not take corporate action in furtherance of any of the foregoing;
(c) the Residualholder shall not amend its Certificate of
Incorporation or Bylaws, or issue any capital stock, without the prior written
consent of the Lender;
(d) the Residualholder shall not suffer any adverse change in its
financial condition (other than due to the change in market value of the
Residual Interests held by the Residualholder), operations, business, properties
or prospects, or the existence of any other condition which, in the Lender's
sole discretion, constitutes an impairment of the Residualholder's ability to
perform its obligations under any of the Significant Documents and which
condition is not remedied within ten days after written notice to the
Residualholder thereof or, if the condition cannot be fully remedied within said
ten days, substantial progress (which shall be in the Lender's reasonable
judgment) has not been made within said ten days, or such other period as may be
mutually agreed upon, toward remedy of the condition;
(e) the Residualholder shall not declare any dividends or redeem
any capital stock;
(f) there shall be no transfer of the assets of the
Residualholder other than in the ordinary course of business and no sale or
transfer of stock of the Residualholder, and the Residualholder shall not merge
or consolidate with or into, any other entity without the prior written consent
of the Lender;
(g) the Residualholder shall not (i) dissolve or terminate its
existence, (ii) enter into any joint venture or become a partner in any
partnership, (iii) transfer any assets to any Affiliate except as otherwise
expressly permitted or
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contemplated hereby, or (iv) issue or distribute any securities or create any
subsidiary without the prior written consent of the Lender;
(h) except for purchasing Residual Interests or I/O Interests,
the Residualholder shall not make or permit to exist investments in or loans to
any other person, entity or Affiliate, including without limitation, any
shareholders of the Residualholder; and
(i) the Residualholder shall not guarantee, endorse or otherwise
in any way become or be responsible for any obligations of any other person,
entity or Affiliate, including without limitation, whether directly or
indirectly by agreement to purchase the indebtedness of any other person or
through the purchase of goods, supplies or services, or maintenance of working
capital or other balance sheet covenants or conditions, or by way of stock
purchase, capital contribution, advance or loan for the purposes of paying or
discharging any indebtedness or obligation of such other person or otherwise;
provided, however, that nothing contained herein shall prevent the
Residualholder from indemnifying its officers, directors and agents pursuant to
its bylaws and its articles of incorporation.
ARTICLE V.
SECURITY AGREEMENT
Section 5.01. Grant of Security Interest. The Borrower and the
Residualholder (together "CMG") each hereby grants a security interest to the
Lender, in all of the CMG's right, title and interest in all assets, including
the following, whether now owned or hereafter acquired or existing (all of the
following in paragraphs (a)-(i), with respect to the Borrower the "Borrower
Collateral" and with respect to the Residualholder, the "Residualholder
Collateral"):
(a) all mortgage loans, home equity line of credit loans, and
other loans originated or purchased by the Borrower;
(b) all rights to service or subservice mortgage loans, home
equity line of credit loans, and other loans;
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(c) all certificates, residual or otherwise, issued to CMG in
connection with any securitization, including, without limitation, any
securitization involving a REMIC;
(d) all securities held by the Borrower, including, without
limitation, the securities of any subsidiary of the Borrower, including
the Residualholder and all securities held by the Residualholder;
(e) all equipment in all of its forms, wherever located,
including, without limitation, all furniture, furnishings, fixtures,
office supplies and all other similar types of tangible personal
property and all parts thereof and all accessions thereto, together with
all parts, fittings, alterations, substitutions, additions, accessories,
replacements and accessions thereto (any and all such equipment, parts
and accessions being the "Equipment");
(f) all approvals, permits, licenses, franchises, certificates
that are, by their terms or pursuant to applicable Law, assignable
without the consent of the Governmental Authority or the counterparty
thereto, as the case may be;
(g) all contracts or agreements to which the Borrower is a party
or to which the Residualholder is a party;
(h) all general intangibles, including but not limited to,
goodwill and tax refunds;
(i) all bank accounts now or hereafter held by the Borrower or
the Residualholder and all funds in such accounts together with all
monies (other than monies used to pay taxes), proceeds or sums due or to
become due thereon or therefrom (all such bank accounts, the "Bank
Accounts"), and all documents or instruments (including, but not limited
to, passbooks, certificates of deposit and receipts necessary to be
presented to withdraw funds or investments held in the Bank Accounts
(the "Account Documents"); and
(j) all proceeds of any and all of the foregoing Borrower
Collateral or Residualholder Collateral (including, without limitation,
proceeds which constitute
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property of the types described in any of the paragraphs of this Section
5.01 and, to the extent not otherwise included, all payments under
insurance (whether or not the Lender is the loss payee thereof), or any
indemnity, warranty or guaranty, payable by reason of loss or damage to
or otherwise with respect to any of the foregoing Borrower Collateral or
Residualholder Collateral.
Section 5.02. Security for the Borrower's Loans. Pursuant to this
Standby Agreement, the Borrower Collateral and the Residualholder Collateral
secures the prompt and complete payment when due of any Advances outstanding
under this Standby Agreement, payment obligations of the Borrower under this
Standby Agreement related thereto and the repayment of any amounts owing to the
Lender under the Purchase Agreement.
Section 5.03. Intention of Parties. This Standby Agreement is
intended by the parties hereto to constitute a security agreement within the
meaning of the New York UCC.
ARTICLE VI.
INDEMNIFICATION
Section 6.01. Indemnification by the Borrower. (a) If, in
connection with the matters that are the subject of this Standby Agreement, the
Lender becomes involved in any capacity in any action or legal proceeding
involving claims by any third party, the Borrower agrees to reimburse the
Lender, its Affiliates and their respective directors, officers, employees,
agents and controlling persons (each, an "Indemnified Party") promptly upon
request for all reasonable expenses (including the fees and disbursements of
legal counsel, the allocated costs of in-house counsel, and the cost of
investigation and preparation) as they are incurred, regardless of whether such
actions or proceedings are brought by the Borrower, its Affiliates or third
parties. The Borrower also agrees to indemnify and hold each Indemnified Party
harmless against all losses, claims, damages or liabilities of any kind, joint
or several, which such Indemnified Party may become subject to in connection
with, or relating to, or arising out of this Standby Agreement or the Secured
Notes, or any transactions contemplated hereby; provided, however, that the
Borrower shall not be liable under
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the foregoing indemnity agreement in respect of any loss, claim, damage or
liability to the extent that a court having jurisdiction shall have determined
by a final judgment (not subject to further appeal) that such loss, claim,
damage or liability resulted primarily and directly from the willful misconduct
or gross negligence of such Indemnified Party.
(b) The agreements of the Borrower in this Article 6 shall be in
addition to any liabilities that the Borrower may otherwise have and shall apply
whether or not the Lender or any other Indemnified Party is a formal party to
any lawsuit, claim or other proceeding. Solely for purposes of enforcing such
agreements, the Borrower hereby consents to personal jurisdiction, service and
venue in any court in which any claim or proceeding which relates to the
services or matters that are the subject of this Standby Agreement is brought
against the Lender or other Indemnified Party.
Section 6.02. Indemnification by the Lender. If, in connection
with the matters that are the subject of the breach by the Lender of its
representation and warranty set forth in Section 3.03(a)(vi)(C) of this Standby
Agreement, the Borrower becomes involved in any capacity in any action or legal
proceeding involving claims by any third party, the Lender agrees to reimburse
the Borrower, its Subsidiaries and its Affiliates and their respective
directors, officers, employees, agents and controlling persons (each, a
"Borrower Indemnified Party") promptly upon request for all reasonable expenses
(including the fees and disbursements of legal counsel, the allocated costs of
in-house counsel, and the cost of investigation and preparation) as they are
incurred, regardless of whether such actions or proceedings are brought by the
Lender, its Affiliates or third parties. The Lender also agrees to indemnify and
hold each Borrower Indemnified Party harmless against all losses, claims,
damages or liabilities of any kind, joint or several, which such Borrower
Indemnified Party may become subject to in connection with, or relating to, or
arising out of the breach by the lender of its representation and warranty set
forth in Section 3.03(a)(vi)(C) of this Standby Agreement; provided, however,
that the Lender shall not be liable under the foregoing indemnity agreement in
respect of any loss, claim, damage or liability to the extent that a court
having jurisdiction shall have determined by a final judgment (not subject to
further appeal) that such loss, claim, damage or liability resulted
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primarily and directly from the willful misconduct or gross negligence of such
Borrower Indemnified Party.
ARTICLE VII.
EVENTS OF DEFAULT
Section 7.01. Occurrence of an Event of Default. An "Event of
Default" shall occur:
(a) immediately upon the occurrence of a Monetary Default;
provided, however, that if the Borrower fails to pay the interest due on
any Payment Date, an "Event of Default" shall occur only if the Borrower
has not paid such interest within two Business Days following such
Payment Date;
(b) ten days after the occurrence of a Non-Monetary Default;
provided, however, that an "Event of Default" will not occur until ten
days after the occurrence of a Non-Monetary Default if the ability to
cure, and substantial effort towards curing, such Non-Monetary Default
can be demonstrated in writing satisfactory to the Lender in its sole
discretion; provided, further, that if it is not possible or practicable
within 20 Business Days to cure a Non-Monetary Default, an "Event of
Default" shall be deemed to have occurred immediately upon the
occurrence of such Non-Monetary Default;
(c) five days after the occurrence of an event of default or
material breach under (i) any of the Significant Documents other than
this Standby Agreement, (ii) any other material agreement, including,
but not limited to, any warehouse agreement, credit agreement or
financing agreement in which the Borrower is a party, (iii) the
Warehouse Agreement dated as of March 27, 1996 (the "RFC Warehouse
Agreement") between the Borrower and RFC ("RFC"), or any agreement which
replaces the RFC Agreement, whether with RFC or another lender; the
Warehouse Agreement dated as of August 20, 1996, (the "ContiMortgage
Warehouse Corporation Agreement") between CMLC and ContiMortgage
("ContiMortgage") or any agreement which replaces the ContiMortgage
Warehouse Agreement, whether with ContiMortgage or another lender; the
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Warehouse Agreement dated as of April 9, 1996 (the "Pacific Warehouse
Agreement") between CMLC and Pacific South West Bank ("Pacific") or any
agreement which replaces Pacific or another lender or the Warehouse
Agreement dated as of May 30, 1996 (the "First Collateral Warehouse
Agreement") between CMLC and Associates Commercial Corporation doing
business as First Collateral Services ("First Collateral") or any
agreement which replaces the First Collateral Warehouse Agreement,
whether with First Collateral or another lender; provided, however, that
an "Event of Default" will not occur until ten days after the occurrence
of such event of default or material breach if the ability to cure, and
substantial effort towards curing, such event of default or material
breach can be demonstrated in writing satisfactory to the Lender in its
sole discretion; provided, further, that if it is not possible or
practicable within 20 Business Days to cure such event of default or
material breach, an "Event of Default" shall be deemed to have occurred
immediately upon the occurrence of such event of default or material
breach; or
(d) if (i) the Merger Agreement has not closed or (ii) all
of the Significant Documents have not been executed and closed by March
31, 1997.
Section 7.02. Effect of an Event of Default. Upon the
occurrence of an Event of Default:
(a) the Lender may declare the principal of each Secured
Note then outstanding, together with all interest accrued thereon and
any other amounts accruing under this Standby Agreement to be
immediately due and payable, and all such amounts shall become
immediately due and payable without presentation, demand or further
notice of any kind to the Borrower;
(b) the Lender shall have the right to obtain physical
possession of all files of the Borrower relating to the Collateral and
all documents relating to the Collateral which are then or may
thereafter come into the possession of the Borrower or any third party
acting for the Borrower and the Lender shall be entitled to specific
performance of all agreements of the Borrower contained in this Standby
Agreement; and
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(c) the Lender shall have the right to collect and receive
all further payments made on the Collateral and, if any such payments
are received by the Borrower, the Borrower shall not commingle the
amounts received with other funds and shall promptly pay them over to
the Lender. The Lender shall have the right to dispose of the Collateral
as provided herein, or as provided in the other documents executed in
connection herewith, or in any commercially reasonable manner, or as
provided by Law. Once the Lender has been reimbursed for all principal
and interest on the Loan and any related expenses, any amounts remaining
shall be transferred to the Borrower.
ARTICLE VIII.
GENERAL PROVISIONS
Section 8.01. Cooperation, Confidentiality, Etc..
(a) Upon reasonable notice the Borrower shall furnish, and shall
use its best efforts to cause other relevant parties to furnish, the Lender with
all information and data reasonably requested by the Lender in connection with
its activities on the Borrower's behalf to carry out the terms of this Standby
Agreement, and shall provide the Lender reasonable access to the Borrower's
officers, directors, employees and professional advisers.
(b) The Borrower recognizes and confirms that the Lender in
acting pursuant to this Standby Agreement may use information in reports and
other information provided by others, including, without limitation, information
provided by the Borrower and the Residualholder, and that the Lender does not
assume responsibility for and may rely, without independent verification, on the
accuracy and completeness of any such reports and information. The Borrower
agrees that any advice or information rendered by the Lender in connection with
this Standby Agreement is for the confidential use of the Borrower only and,
except as otherwise required by Law, the Borrower will not, and will not permit
any third party to, disclose such advice or information to others or summarize
or refer to such advice or information or to the Lender's engagement hereunder
without, in each case, the Lender's prior written consent. The Lender agrees to
keep confidential any
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information furnished to it by the Borrower which is clearly labelled as
proprietary to the Borrower, is not otherwise publicly available to the Lender
and the disclosure of which is not required by applicable Law or judicial or
administrative process.
(c) Neither the Lender nor the Borrower may place public
announcements or advertisements describing this or any part of this Standby
Agreement without the prior written consent of the other party.
Section 8.02. Waiver of Trial by Jury. Each party hereto
waives the right to trial by jury in any action, suit, proceeding or
counterclaim of any kind arising out of or related to this Standby Agreement. In
the event of litigation, this Standby Agreement may be filed as a written
consent to a trial by the court.
Section 8.03. Amendment; Waivers. This Standby Agreement may
be amended from time to time only by written agreement of the parties. No
failure on the part of the Lender to exercise, and no delay in exercising, any
right, power, or remedy under this Standby Agreement shall operate as a waiver
thereof; nor shall any single or partial exercise of any right under this
Standby Agreement preclude any other or further exercise thereof or the exercise
of any other right. No term or provision of this Standby 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 8.04. Taxes. All payments made by the Borrower to the
Lender on account of any Loan which are due hereunder shall be made free and
clear of, and without reduction by reason of, any taxes, levies, imposts,
deductions, charges or withholdings of any nature, including, without
limitation, any withholding taxes (but excluding any taxes imposed on the
overall net income of the Lender) and all liabilities with respect thereto (all
such taxes, levies, imposts, deductions, charges, withholding and liabilities
being hereinafter referred to as "Taxes"). If the Borrower shall be required by
Law to deduct any Taxes from or in respect of any sum payable hereunder or under
any Secured Note, the sum payable shall be increased as may be necessary so that
after making all required deductions (including as applicable to additional sums
payable under this subsection)
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the Lender receives an amount equal to the sum it would have received had no
such deductions been made.
Section 8.05. Limited Liability. No recourse under any
Significant Documents shall be had against, and no personal liability shall
attach to, any officer, employee, director, affiliate or shareholder of any
party hereto, as such, by the enforcement of any assessment or by any legal or
equitable proceeding, by virtue of any statute or otherwise in respect of any of
the Significant Documents, it being expressly agreed and understood that each
Significant Document is solely a corporate obligation of each party hereto, and
that any and all personal liability, either at common law or in equity, or by
statute or constitution, of every such officer, employee, director, affiliate or
shareholder for breaches by any party hereto of any obligations under any
Significant Document is hereby expressly waived as a condition of and in
consideration for the execution and delivery of this Standby Agreement.
Section 8.06. Other Transactions. The Borrower acknowledges
that the Lender and its Affiliates compete, directly and indirectly in the
business in which the Borrower engages and proposes to engage; provided,
however, that the Lender shall not compete with respect to any transaction, the
terms of which are revealed to the Lender by the Borrower in connection with
seeking the services of the Lender and assuming that neither the Lender nor any
of its Affiliates has prior knowledge of such transaction. The Borrower
acknowledges that the Lender and its Affiliates have and will in the future have
business dealings with parties other than the Borrower, which parties compete,
directly or indirectly with the Borrower. Although the Lender and its Affiliates
may, in their normal course of business, acquire information about the
securitization market, particular transactions or such other parties, the Lender
shall have no obligation to disclose such information to the Borrower. The
Borrower acknowledges that the Lender and its Affiliates may engage in their
businesses and otherwise compete with the Borrower without regard to their
relationship to the Borrower hereunder.
Section 8.07. Opinion of Counsel to the Borrower. Upon the
execution of this Standby Agreement, the Borrower shall deliver to the Lender a
legal opinion from their special counsel in the form attached hereto as Exhibit
C, together
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with such other certificates and documents as the Lender shall require.
Section 8.08. Costs and Expenses. (a) The Lender and the
Borrower will each be solely responsible for and bear all of their own
respective expenses (other than the expenses of legal counsel), including,
without limitation, accountants and other advisers, incurred at any time in
connection with pursuing or consummating the Significant Documents and the
transactions contemplated thereby. In addition, the Borrower shall be solely
responsible for (i) all accountant fees incurred in connection with the review
of the Borrower's June 30, 1996 financial statements and (ii) any fees incurred
by an independent contract underwriter.
(b) The Borrower will be responsible for and bear 50% of all the
fees and expenses of legal counsel for the Lender in connection with the
preparation, negotiation, and execution of the Significant Documents and the
transactions contemplated thereby; however the Borrower shall not bear more than
$75,000 under this clause (b). The Lender will be responsible for and bear all
the remaining fees and expenses of legal counsel for Lender in connection with
the preparation, negotiation, and execution of the Significant Documents and the
transactions contemplated thereby.
(c) The Lender will be responsible for and bear 50% of all the
fees and expenses of legal counsel for the Borrower in connection with the
preparation, negotiation, and execution of the Significant Documents and the
transactions contemplated thereby; however the Lender shall not bear more than
$35,000 under this clause (c). The Borrower will be responsible for and bear all
the remaining fees and expenses of legal counsel for the Borrower in connection
with the preparation, negotiation, and execution of the Significant Documents
and the transactions contemplated thereby.
ARTICLE IX.
CONSTRUCTION
Section 9.01. Entire Agreement. This Standby Agreement, together
with the Significant Documents, including the Exhibits and the Schedules
thereto, contains the entire agreement of the parties with respect to the
subject matters
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hereto, and supersedes all prior agreements between them, whether oral or
written, of any nature whatsoever with respect to the subject matter hereof.
Section 9.02. Severability Clause. Any part or provision of this
Standby Agreement that is prohibited or that 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 or provision of
this Standby Agreement that 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 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 that prohibits
or renders void or unenforceable any provision hereof. If the invalidity of any
part or provision of this Standby Agreement shall deprive any party of the
economic benefit intended to be conferred by this Standby 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 Standby Agreement,
without regard to such invalidity.
Section 9.03. Counterparts. This Standby 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 9.04. Governing Law; Standby Agreement Constitutes
Security Agreement; Consent To Forum; Immunities. This Standby Agreement has
been negotiated, executed and delivered at and shall be deemed to have been made
in New York, New York. This Standby Agreement shall be governed by and construed
in accordance with the Laws of the State of New York, without giving effect to
the conflict of laws rules therein, and shall constitute a security agreement
within the meaning of the New York UCC. The parties hereto hereby consent and
agree that the Supreme Court of New York County, New York or, at the Lender's
option, the United States District Court for the Southern District of New York,
shall have exclusive jurisdiction to hear and determine any claims or disputes
between the parties hereto pertaining to this
52
<PAGE> 53
Standby Agreement or to any matter arising out of or related to this Standby
Agreement. The parties hereto expressly submit and consent in advance to such
jurisdiction in any action or suit commenced in any such court, and hereby waive
any objection which it may have based upon lack of personal jurisdiction,
improper venue or forum non conveniens and hereby consent to the granting for
such legal or equitable relief as is deemed appropriate by such court. Each
party hereto irrevocably consents to the service of process by registered or
certified mail, postage prepaid, to it at its address given pursuant to Section
10.01 hereof. Nothing in this Standby Agreement shall be deemed or operate to
affect the right of the Lender to serve legal process in any other manner
permitted by Law, or to preclude the enforcement by the Lender of any judgement
or order obtained in such forum or the taking of any action under this Standby
Agreement to enforce same in any other appropriate forum or jurisdiction.
To the extent that the Borrower has or may hereafter acquire any
immunity from the jurisdiction of any court or from any legal process (whether
through service or notice, attachment prior to judgement, attachment in aid of
execution, execution or otherwise) with respect to the Borrower or the
Borrower's property, the Borrower hereby irrevocably waives such immunity in
respect of its obligations under this Standby Agreement.
Section 9.05. No Agency; No Partnership; No Joint Venture.
Neither the Lender nor the Borrower is the agent or representative of the other,
and nothing in this Standby Agreement shall be construed to make either the
Lender or the Borrower liable to any third party for services performed by such
third party or for debts or claims accruing to such third party against either
the Lender or the Borrower. It is the parties' intention that this Standby
Agreement creates a debtor/creditor relationship for all purposes and nothing
contained herein nor the acts of the parties hereto shall be construed to create
a partnership, agency or joint venture between the Lender and the Borrower.
Section 9.06. Judicial Interpretation. Should any provision of
this Standby Agreement or any of the other Significant Documents require
judicial interpretation, it is agreed that a court interpreting or construing
the same shall not apply a presumption that the terms hereof shall be more
strictly construed against any Person by reason of the rule of
53
<PAGE> 54
construction that a document is to be construed more strictly against the Person
who itself or through its agent prepared the same, it being agreed that all the
parties hereto have participated in the preparation of this Standby Agreement.
Section 9.07. Recitals. The recitals of this Standby Agreement
are not intended to constitute substantive provisions hereof.
Section 9.08. Rules of Interpretation. Except as otherwise
expressly provided in this Standby Agreement, the following rules shall apply
hereto:
(a) the singular includes the plural and the plural includes the
singular;
(b) "or" is not exclusive and "include" and "including" are not
limiting;
(c) a reference to any agreement or other contract includes
permitted supplements, amendments and other modifications;
(d) a reference to a law (or Law) includes any amendment or
modification of such law (or Law) and the rules or regulations issued
thereunder;
(e) a reference to a Person includes its permitted successors and
assigns in the applicable capacity;
(f) a reference in this Standby Agreement to an Article, Section,
clause, recital or Exhibit is to the Article, Section, clause, recital
or Exhibit of this Standby Agreement unless otherwise expressly
provided;
(g) words such as "hereunder", "hereto", "hereof", and "herein"
and other words of like import shall, unless the context clearly
indicates to the contrary, refer to the whole of this Standby Agreement
and not to any particular Article, Section or clause hereof;
(h) all obligations under this Standby Agreement are continuing
obligations throughout the term of this Standby Agreement;
54
<PAGE> 55
(i) any right in this Standby Agreement may be exercised at any
time and from time to time;
(j) the headings of the Articles and Sections are for convenience
and shall not affect the meaning of this Standby Agreement; and
(k) time is of the essence in performing all obligations.
Section 9.09. Good Faith. The Borrower and the Lender shall
implement the terms and provisions of this Standby Agreement in good faith in
accordance with applicable Law.
ARTICLE X.
MISCELLANEOUS
Section 10.01. Notices. All demands, notices, requests for
consent and other communications hereunder shall be in writing and personally
delivered, mailed by certified mail, return receipt requested, and telecopied,
and shall be deemed to have been duly given upon receipt;
if to the Borrower:
CMG Funding Corp.
5295 Commerce Drive, Suite 400
Salt Lake City, Utah 84107
Attention: John Fry
Telephone Number: (801) 261-1097
Telecopier Number: (801) 261-3879
Continental Mortgage Group, L.C.
5295 Commerce Drive, Suite 400
Salt Lake City, Utah 84107
Attention: John Fry
Telephone Number: (801) 261-1097
Telecopier Number: (801) 261-3879
with a copy to:
Christopher A. Wilson, Esq.
Jeffers, Wilson & Shaff
18881 Von Karman Avenue, Suite 1400
55
<PAGE> 56
Irvine, California 92715
Telephone Number: (714) 660-7700
Telecopier Number: (714) 660-7799
if to the Residualholder:
CMG Funding Securities Corp.
107 South Matterhorn Drive
Alpine, Utah 87004
Attention: John Fry
Telephone Number: (801) 763-7834
Telecopier Number: (801) 763-7834
if to the Lender:
ContiTrade Services L.L.C.
277 Park Avenue
New York, New York 10172
Attention: Chief Counsel
Telephone Number: (212) 207-2822
Telecopier Number: (212) 207-2935
with a copy to:
ContiTrade Services L.L.C.
277 Park Avenue
New York, New York 10172
Attention: Jay Remis
Telephone Number: (212) 207-2887
Telecopier Number: (212) 207-5251
or, as to any party, at such other address or telecopy number as shall be
designated by such party in a written notice to each other party.
Section 10.02. Further Agreements. The Borrower and the Lender
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 Standby Agreement.
Section 10.03. Third-Party Rights; Assignment. This Standby
Agreement is for the exclusive benefit of the parties hereto and their
respective successors and assigns and shall not be deemed to give any legal or
equitable right to any other Person. The Borrower may neither assign its rights
nor
56
<PAGE> 57
delegate its obligations under this Standby Agreement without the prior written
consent of the Lender. The Lender may assign its rights and/or delegate its
obligations under this Standby Agreement to an Affiliate without the consent of
the Borrower.
Section 10.04. Advice from Independent Counsel. The parties
hereto understand that this Standby Agreement and each of the other Significant
Documents to which either of them is a party are legally binding agreements that
may affect such party's rights. Each party represents to the other that it has
received legal advice from counsel of its choice regarding the meaning and legal
significance of this Standby Agreement and each of the other Significant
Documents to which it is a party and that it is satisfied with its legal counsel
and the advice received from it.
Section 10.05. Summary Judgment. The Borrower hereby acknowledges
and agrees that any enforcement action relating to this Standby Agreement or any
Secured Note may be brought by motion for summary judgment in lieu of a
complaint pursuant to Section 3213 of the New York Civil Practice Law and Rules.
Section 10.06. Reproduction of Documents. This Standby 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 10.07. Right of Set-Off. Upon the occurrence of any event
or circumstance which requires the Borrower to make a payment hereunder, the
Lender is hereby authorized then or at any time or times thereafter, without
notice to the Borrower (any such notice being expressly waived
57
<PAGE> 58
by the Borrower), to set-off and apply any and all deposits (general or special,
time or demand, provisional or final) at any time held and other indebtedness at
any time owing by the Lender to or for the credit or the account of the Borrower
against any and all of the obligations of the Borrower now or hereafter existing
hereunder, irrespective of whether or not the Lender shall have made any demand
hereunder. The Lender agrees promptly to notify the Borrower after any such
set-off and application made by the Lender; provided that the failure to give
such notice shall not affect the validity of such set-off and application. The
rights of the Lender under this Section 10.07 are in addition to other rights
and remedies which the Lender may have.
[Remainder of Page Intentionally Left Blank]
58
<PAGE> 59
IN WITNESS WHEREOF, each of the parties has caused its duly
authorized representative to set his hand as of the date first above written.
CMG FUNDING CORP.
By:
Name:
Title:
CONTINENTAL MORTGAGE GROUP, L.C.
By:
---------------------------------------
Name:
Title:
CONTITRADE SERVICES L.L.C.
By:
---------------------------------------
Name:
Title: Authorized Signatory
By:
---------------------------------------
Name:
Title: Authorized Signatory
CMG FUNDING SECURITIES CORP.
By:
---------------------------------------
Name:
Title: Authorized Signatory
<PAGE> 60
[Signature Page to Standby and Working Capital
Financing Agreement]
60
<PAGE> 61
EXHIBIT A-1
SECURED NOTE
$10,000,000
December 17, 1996
FOR VALUE RECEIVED, the undersigned, CMG FUNDING CORP., a
Delaware corporation and CONTINENTAL MORTGAGE GROUP, L.C. a Utah limited
liability company, each having their address at 5295 Commerce Drive, Suite 400,
Salt Lake City, Utah (collectively, the "Borrower"), promises to pay to the
order of CONTITRADE SERVICES L.L.C., a Delaware limited liability company, whose
address is 277 Park Avenue, New York, New York 10172 (the "Lender") on or before
the Advance Maturity Date (as defined herein), in lawful money of the United
States of America, (a)(i) $10,000,000 or (ii) if less the principal sums set
forth on the Schedule of Advances attached hereto plus (b) interest at the times
and in the amounts and manner as provided in the Standby Agreement.
MAXIMUM RATE OF INTEREST: It is intended that the rate of
interest hereon shall never exceed the maximum rate, if any, which may be
legally charged on this Loan evidenced by this Secured Note ("Maximum Rate"),
and if the provisions for interest contained in this Secured Note would result
in a rate higher than the Maximum Rate, interest shall nevertheless be limited
to the Maximum Rate and any amounts which may be paid toward interest in excess
of the Maximum Rate shall be applied to the reduction of principal, or, at the
option of the Lender, returned to the Borrower.
DUE DATE: All indebtedness evidenced hereby not paid before the
Advance Maturity Date shall be due and payable on the Advance Maturity Date.
PLACE OF PAYMENT: All payments hereon shall be made, and all
notices to the Lender required or authorized hereby shall be given, at the
office of the Lender at the address designated in the heading of this Secured
Note, or to such other place as the Lender may from time to time direct by
written notice to the Borrower.
A-1-1
<PAGE> 62
PAYMENT AND EXPENSES OF COLLECTION: All amounts payable hereunder
are payable by wire transfer in immediately available funds to the account
number specified by the Lender, in lawful money of the United States. Payments
remitted by the Borrower via wire transfer initiated after 2:00 p.m. New York
City shall be deemed to be received on the next business day. The Borrower
agrees to pay all costs of collection when incurred, including, without limiting
the generality of the foregoing, reasonable attorneys' fees through appellate
proceedings and allocated cost of in-house counsel, and to perform and comply
with each of the covenants, conditions, provisions and agreements contained in
every instrument now evidencing or securing said indebtedness. If any suit or
action be instituted to enforce this Secured Note, the Borrower promises to pay,
in addition to the cost and disbursements otherwise allowed by Law, such sums as
the court may adjudge reasonable attorneys' fees in such suit or action.
SECURITY: This Secured Note is issued pursuant to that certain
Standby and Working Capital Financing Agreement, dated as of December 17, 1996
(the "Standby Agreement") among the Lender, the Residualholder and the Borrower,
and is secured by a pledge of the Collateral described therein. Notwithstanding
the pledge of the Collateral, Borrower hereby acknowledges, admits and agrees
that Borrower's obligations under this Secured Note are recourse obligations of
the Borrower to which the Borrower pledges its full faith and credit. Any
capitalized term used herein and not otherwise defined herein shall have the
meaning for such term set forth in the Standby Agreement.
DEFAULTS: Upon the happening of an Event of Default (as defined
in the Standby Agreement), the Lender shall have all rights and remedies set
forth in the Standby Agreement.
The failure to exercise any of the rights and remedies set forth
in the Standby Agreement shall not constitute a waiver of the right to exercise
the same or any other option at any subsequent time in respect of the same event
or any other event. The acceptance by the Lender of any payment hereunder which
is less than payment in full of all amounts due and payable at the time of such
payment shall not constitute a waiver of the right to exercise any of the
foregoing rights and remedies at that time or at any subsequent time or nullify
any prior exercise of any such
A-1-2
<PAGE> 63
rights and remedies without the express consent of Lender, except as and to the
extent otherwise provided by Law.
WAIVERS: The Borrower waives diligence, presentment, protest and
demand and also notice of protest, demand, dishonor and nonpayment of this
Secured Note, and expressly agrees that this Secured Note, or any payment
hereunder, may be extended from time to time, and consent to the acceptance of
further Collateral, the release of any Collateral for this Secured Note, the
release of any party primarily or secondarily liable hereon, and that it will
not be necessary for the Lender, in order to enforce payment of this Secured
Note, to first institute or exhaust Lender's remedies against the Borrower or
any other party liable hereon or against any collateral for this Secured Note.
None of the foregoing shall affect the liability of the Borrower and any
indorsers or guarantors hereof. No extension of time for the payment of this
Secured Note, or any installment hereof, made by agreement by the Lender with
any person now or hereafter liable for the payment of this Secured Note, shall
affect the liability under this Secured Note of the Borrower, even if the
Borrower is not a party to such agreement; provided, however, the Lender and the
Borrower, by written agreement between them, may affect the liability of the
Borrower.
TERMINOLOGY: Any reference herein to the Lender shall be deemed
to include and apply to every subsequent holder of this Secured Note. Words of
masculine or neuter import shall be read as if written in the neuter or
masculine or feminine when appropriate.
SUMMARY JUDGEMENT: The Borrower hereby acknowledges and agrees
that any enforcement action relating to this Secured Note or any Secured Note
may be brought by motion for summary judgment in lieu of a complaint pursuant to
Section 3213 of the New York Civil Practice Law and Rules.
STANDBY AGREEMENT: Reference is made to the Standby Agreement for
provisions as to payments, collateral and acceleration.
THIS SECURED NOTE IS GOVERNED BY THE PROVISIONS OF THE STANDBY AGREEMENT WHICH
IS INCORPORATED HEREIN BY REFERENCE, AND IN THE EVENT ANY TERMS OF THIS SECURED
NOTE ARE INCONSISTENT WITH THE TERMS OF THE STANDBY AGREEMENT, THE TERMS OF THE
STANDBY AGREEMENT SHALL GOVERN THIS SECURED NOTE. NOTWITHSTANDING THE
A-1-3
<PAGE> 64
FOREGOING SENTENCE, NO REFERENCE HEREIN TO THE STANDBY AGREEMENT AND NO
PROVISION OF THIS SECURED NOTE OR OF THE STANDBY AGREEMENT SHALL ALTER OR IMPAIR
THE OBLIGATION OF THE BORROWER, WHICH IS ABSOLUTE AND UNCONDITIONAL, TO PAY THE
PRINCIPAL OF AND INTEREST ON THIS SECURED NOTE AT THE RESPECTIVE TIMES AND AT
THE RATES HEREIN PRESCRIBED.
APPLICABLE LAW: This Secured Note has been negotiated, executed
and delivered at and shall be deemed to have been made in New York, New York.
This Secured Note shall be governed by and construed in accordance with the Laws
of the State of New York, without giving effect to the conflict of laws rules
therein. The parties hereto hereby consent and agree that the Supreme Court of
New York County, New York or, at the Lender's option, the United States District
Court for the Southern District of New York, shall have exclusive jurisdiction
to hear and determine any claims or disputes between the parties hereto
pertaining to this Secured Note or to any matter arising out of or related to
this Secured Note. The parties hereto expressly submit and consent in advance to
such jurisdiction in any action or suit commenced in any such court, and hereby
waive any objection which it may have based upon lack of personal jurisdiction,
improper venue or forum non conveniens and hereby consent to the granting for
such legal or equitable relief as is deemed appropriate by such court. Each
party hereto irrevocably consents to the service of process by registered or
certified mail, postage prepaid, to it at its address given pursuant to Section
10.01 of the Standby Agreement. Nothing in this Secured Note shall be deemed or
operate to affect the right of the Lender to serve legal process in any other
manner permitted by Law, or to preclude the enforcement by the Lender of any
judgement or order obtained in such forum or the taking of any action under this
Secured Note to enforce same in any other appropriate forum or jurisdiction.
To the extent that the Borrower has or may hereafter acquire any
immunity from the jurisdiction of any court or from any legal process (whether
through service or notice, attachment prior to judgement, attachment in aid of
execution, execution or otherwise) with respect to the Borrower or the
Borrower's property, the Borrower hereby irrevocably waives such immunity in
respect of its obligations under this Secured Note.
A-1-4
<PAGE> 65
Each party hereto waives the right to trial by jury in any
action, suit, proceeding or counterclaim of any kind arising out of or related
to this Secured Note. In the event of litigation, this Secured Note may be filed
as a written consent to a trial by the court.
CMG FUNDING CORP.
By:
---------------------------------
Name:
Title: President
CONTINENTAL MORTGAGE GROUP, L.C.
By:
---------------------------------
Name:
Title: President
A-1-5
<PAGE> 66
Schedule of Advances
Interest
Date Amount Rate
- ---- ------ ----
__________________ $_________________ LIBOR + 5.00%
acknowledged by the __________________
Borrower
__________________ $_________________ LIBOR + 5.00%
acknowledged by the __________________
Borrower
__________________ $_________________ LIBOR + 5.00%
acknowledged by the __________________
Borrower
__________________ $_________________ LIBOR + 5.00%
acknowledged by the __________________
Borrower
__________________ $_________________ LIBOR + 5.00%
acknowledged by the __________________
Borrower
__________________ $_________________ LIBOR + 5.00%
acknowledged by the __________________
Borrower
__________________ $_________________ LIBOR + 5.00%
acknowledged by the __________________
Borrower
A-1-6
<PAGE> 67
__________________ $_________________ LIBOR + 5.00%
acknowledged by the __________________
Borrower
A-1-7
<PAGE> 68
EXHIBIT A-2
SECURED NOTE
$2,000,000 December 17, 1996
FOR VALUE RECEIVED, the undersigned, CMG FUNDING CORP., a
Delaware corporation and CONTINENTAL MORTGAGE GROUP, L.C., A Utah limited
liability company, each having their address at 5295 Commerce Drive, Suite 400,
Salt Lake City, Utah (collectively, the "Borrower"), promises to pay to the
order of CONTITRADE SERVICES L.L.C., a Delaware limited liability company, whose
address is 277 Park Avenue, New York, New York 10172 (the "Lender") on or before
the Advance Maturity Date (as defined herein), in lawful money of the United
States of America, (a)(i) $2,000,000 or (ii) if less, the principal sums set
forth on the Schedule of Advances attached hereto plus (b) interest at the times
and in the amounts and manner as provided in the Standby Agreement.
MAXIMUM RATE OF INTEREST: It is intended that the rate of
interest hereon shall never exceed the maximum rate, if any, which may be
legally charged on this Loan evidenced by this Secured Note ("Maximum Rate"),
and if the provisions for interest contained in this Secured Note would result
in a rate higher than the Maximum Rate, interest shall nevertheless be limited
to the Maximum Rate and any amounts which may be paid toward interest in excess
of the Maximum Rate shall be applied to the reduction of principal, or, at the
option of the Lender, returned to the Borrower.
DUE DATE: All indebtedness evidenced hereby not paid before the
Working Capital Advance Maturity Date shall be due and payable on the Working
Capital Advance Maturity Date.
PLACE OF PAYMENT: All payments hereon shall be made, and all
notices to the Lender required or authorized hereby shall be given, at the
office of the Lender at the address designated in the heading of this Secured
Note, or to such other place as the Lender may from time to time direct by
written notice to the Borrower.
A-2-1
<PAGE> 69
PAYMENT AND EXPENSES OF COLLECTION: All amounts payable hereunder
are payable by wire transfer in immediately available funds to the account
number specified by the Lender, in lawful money of the United States. Payments
remitted by the Borrower via wire transfer initiated after 2:00 p.m. New York
City shall be deemed to be received on the next business day. The Borrower
agrees to pay all costs of collection when incurred, including, without limiting
the generality of the foregoing, reasonable attorneys' fees through appellate
proceedings and allocated cost of in-house counsel, and to perform and comply
with each of the covenants, conditions, provisions and agreements contained in
every instrument now evidencing or securing said indebtedness. If any suit or
action be instituted to enforce this Secured Note, the Borrower promises to pay,
in addition to the cost and disbursements otherwise allowed by Law, such sums as
the court may adjudge reasonable attorneys' fees in such suit or action.
SECURITY: This Secured Note is issued pursuant to that certain
Standby and Working Capital Financing Agreement, dated as of December 17, 1996
(the "Standby Agreement") among the Lender, the Residualholder and the Borrower,
and is secured by a pledge of the Collateral described therein. Notwithstanding
the pledge of the Collateral, Borrower hereby acknowledges, admits and agrees
that Borrower's obligations under this Secured Note are recourse obligations of
the Borrower to which the Borrower pledges its full faith and credit. Any
capitalized term used herein and not otherwise defined herein shall have the
meaning for such term set forth in the Standby Agreement.
DEFAULTS: Upon the happening of an Event of Default (as defined
in the Standby Agreement), the Lender shall have all rights and remedies set
forth in the Standby Agreement.
The failure to exercise any of the rights and remedies set forth
in the Standby Agreement shall not constitute a waiver of the right to exercise
the same or any other option at any subsequent time in respect of the same event
or any other event. The acceptance by the Lender of any payment hereunder which
is less than payment in full of all amounts due and payable at the time of such
payment shall not constitute a waiver of the right to exercise any of the
foregoing rights and remedies at that time or at any subsequent time or nullify
any prior exercise of any such rights and remedies without the express consent
of Lender, except as and to the extent otherwise provided by Law.
A-2-2
<PAGE> 70
WAIVERS: The Borrower waives diligence, presentment, protest and
demand and also notice of protest, demand, dishonor and nonpayment of this
Secured Note, and expressly agrees that this Secured Note, or any payment
hereunder, may be extended from time to time, and consent to the acceptance of
further Collateral, the release of any Collateral for this Secured Note, the
release of any party primarily or secondarily liable hereon, and that it will
not be necessary for the Lender, in order to enforce payment of this Secured
Note, to first institute or exhaust Lender's remedies against the Borrower or
any other party liable hereon or against any collateral for this Secured Note.
None of the foregoing shall affect the liability of the Borrower and any
indorsers or guarantors hereof. No extension of time for the payment of this
Secured Note, or any installment hereof, made by agreement by the Lender with
any person now or hereafter liable for the payment of this Secured Note, shall
affect the liability under this Secured Note of the Borrower, even if the
Borrower is not a party to such agreement; provided, however, the Lender and the
Borrower, by written agreement between them, may affect the liability of the
Borrower.
TERMINOLOGY: Any reference herein to the Lender shall be deemed
to include and apply to every subsequent holder of this Secured Note. Words of
masculine or neuter import shall be read as if written in the neuter or
masculine or feminine when appropriate.
SUMMARY JUDGEMENT: The Borrower hereby acknowledges and agrees
that any enforcement action relating to this Secured Note or any Secured Note
may be brought by motion for summary judgment in lieu of a complaint pursuant to
Section 3213 of the New York Civil Practice Law and Rules.
STANDBY AGREEMENT: Reference is made to the Standby Agreement for
provisions as to payments, collateral and acceleration.
THIS SECURED NOTE IS GOVERNED BY THE PROVISIONS OF THE STANDBY AGREEMENT WHICH
IS INCORPORATED HEREIN BY REFERENCE, AND IN THE EVENT ANY TERMS OF THIS SECURED
NOTE ARE INCONSISTENT WITH THE TERMS OF THE STANDBY AGREEMENT, THE TERMS OF THE
STANDBY AGREEMENT SHALL GOVERN THIS SECURED NOTE. NOTWITHSTANDING THE FOREGOING
SENTENCE, NO REFERENCE HEREIN TO THE STANDBY AGREEMENT AND NO PROVISION OF THIS
SECURED NOTE OR OF THE STANDBY AGREEMENT SHALL ALTER OR IMPAIR THE OBLIGATION OF
THE BORROWER, WHICH IS ABSOLUTE AND UNCONDITIONAL, TO PAY THE PRINCIPAL OF AND
INTEREST ON THIS
A-2-3
<PAGE> 71
SECURED NOTE AT THE RESPECTIVE TIMES AND AT THE RATES HEREIN PRESCRIBED.
APPLICABLE LAW: This Secured Note has been negotiated, executed
and delivered at and shall be deemed to have been made in New York, New York.
This Secured Note shall be governed by and construed in accordance with the Laws
of the State of New York, without giving effect to the conflict of laws rules
therein. The parties hereto hereby consent and agree that the Supreme Court of
New York County, New York or, at the Lender's option, the United States District
Court for the Southern District of New York, shall have exclusive jurisdiction
to hear and determine any claims or disputes between the parties hereto
pertaining to this Secured Note or to any matter arising out of or related to
this Secured Note. The parties hereto expressly submit and consent in advance to
such jurisdiction in any action or suit commenced in any such court, and hereby
waive any objection which it may have based upon lack of personal jurisdiction,
improper venue or forum non conveniens and hereby consent to the granting for
such legal or equitable relief as is deemed appropriate by such court. Each
party hereto irrevocably consents to the service of process by registered or
certified mail, postage prepaid, to it at its address given pursuant to Section
10.01 of the Standby Agreement. Nothing in this Secured Note shall be deemed or
operate to affect the right of the Lender to serve legal process in any other
manner permitted by Law, or to preclude the enforcement by the Lender of any
judgement or order obtained in such forum or the taking of any action under this
Secured Note to enforce same in any other appropriate forum or jurisdiction.
To the extent that the Borrower has or may hereafter acquire any
immunity from the jurisdiction of any court or from any legal process (whether
through service or notice, attachment prior to judgement, attachment in aid of
execution, execution or otherwise) with respect to the Borrower or the
Borrower's property, the Borrower hereby irrevocably waives such immunity in
respect of its obligations under this Secured Note.
Each party hereto waives the right to trial by jury in any
action, suit, proceeding or counterclaim of any kind arising out of or related
to this Secured Note. In the event of litigation, this Secured Note may be filed
as a written consent to a trial by the court.
CMG FUNDING CORP.
A-2-4
<PAGE> 72
By:
---------------------------------
Name:
Title: President
CONTINENTAL MORTGAGE, L.C.
By:
---------------------------------
Name:
Title: President
A-2-5
<PAGE> 73
Schedule of Advances
Interest
Date Amount Rate
- ---- ------ ----
__________________ $_________________ LIBOR + 4.50%
acknowledged by
the Borrower __________________
__________________ $_________________ LIBOR + 4.50%
acknowledged by
the Borrower __________________
__________________ $_________________ LIBOR + 4.50%
acknowledged by
the Borrower __________________
__________________ $_________________ LIBOR + 4.50%
acknowledged by
the Borrower __________________
__________________ $_________________ LIBOR + 4.50%
acknowledged by
the Borrower __________________
__________________ $_________________ LIBOR + 4.50%
acknowledged by
the Borrower __________________
__________________ $_________________ LIBOR + 4.50%
acknowledged by
the Borrower __________________
A-2-6
<PAGE> 74
__________________ $_________________ LIBOR + 4.50%
acknowledged by
the Borrower __________________
A-2-7
<PAGE> 75
EXHIBIT B
FINANCING VALUE SCHEDULE
<PAGE> 76
EXHIBIT C
FORM OF BORROWER'S COUNSEL OPINION
December 17, 1996
ContiTrade Services L.L.C.
277 Park Avenue
New York, NY 10172
Re: Standby and Working Capital Financing Agreement
Gentlemen:
I am General Counsel to CMG FUNDING CORP. and CONTINENTAL
MORTGAGE GROUP, L.C. (collectively, the "Borrower"). In my capacity as General
Counsel to Borrower, I have served as counsel to Borrower, and I have examined
an executed copy of the Standby and Working Capital Financing Agreement, among
the Borrower, CMG Funding Securities Corp. and you, dated as of December 17,
1996 (the "Standby Agreement").
Capitalized terms used herein, but not defined, shall have the
meanings assigned to them in the Standby Agreement.
I have further examined original, photostatic or certified copies
of all such corporate records of Borrower, and such certificates of public
officials, certificates of corporate officers, and other documents, and such
questions of law, as I have deemed relevant and necessary as a basis for the
opinions hereinafter expressed. In making my examinations and rendering the
opinions herein expressed, I have made the following assumptions:
(1) The parties to the Standby Agreement (other than Borrower)
have the power to enter into and perform all of their
obligations thereunder;
(2) The due authorization, execution and delivery of the
Standby Agreement by the parties thereto (other than
Borrower), and the validity and
C-1
<PAGE> 77
binding effect on the parties thereto (other than
Borrower) of the Standby Agreement;
(3) The genuineness of all signatures;
(4) The authenticity of all documents submitted to me as
originals and the conformity to originals of all documents
submitted to me as copies.
The opinions expressed in numbered paragraph 2 below with respect
to the enforceability of the Standby Agreement are subject to the following
additional qualifications:
(a) The effect of bankruptcy, insolvency, reorganization,
moratorium, receivership, or other similar laws of general
applicability relating to or affecting creditors' rights
generally; and
(b) The application of general principles of equity,
including, but not limited to, the right to specific
performance (regardless of whether enforceability is
considered in a proceeding in equity or at law).
Based upon the foregoing and subject to the last paragraph
hereof, I am of the opinion that:
(1) Borrower has been duly organized and is validly existing
as a corporation in good standing under the laws of the
state of Delaware and is qualified to do business in each
state necessary to enable it to perform its obligations
under the Standby Agreement. Borrower has the requisite
power and authority to execute and deliver, engage in the
transactions contemplated by, and perform and observe the
conditions of, the Standby Agreement.
(2) The Standby Agreement has been duly and validly
authorized, executed and delivered by Borrower, all
requisite corporate action has been taken with respect
thereto, and the Standby Agreement constitutes valid,
legal and binding agreement of Borrower enforceable
against Borrower in accordance with its terms.
C-2
<PAGE> 78
(3) The execution, delivery or performance by Borrower of the
Standby Agreement does not conflict or will not conflict
with or result in a breach of, or does not constitute or
will not constitute a default under (i) any term or
provision of the certificate of incorporation or bylaws of
Borrower; (ii) any term or provision of any agreement,
contract, instrument or indenture, to which Borrower is a
party or is bound; or (iii) any order, judgment, writ,
injunction or decree of any court or governmental agency
or body or other tribunal having jurisdiction over
Borrower.
(4) No consent, approval, authorization or order of,
registration or filing with, or notice to, any court,
governmental agency or body or other tribunal is required
for the execution, delivery and performance by Borrower of
the Standby Agreement or the consummation of any other
transaction contemplated by the Standby Agreement, except
such which have been obtained.
(5) There are no actions, proceedings or investigations
pending or, to my knowledge, threatened against Borrower
before any court, governmental agency or body or other
tribunal asserting the invalidity of the Standby Agreement
which would materially and adversely affect the
performance by Borrower of its obligations under, or the
validity or enforceability of, the Standby Agreement.
This Opinion is furnished solely for the benefit of the addressee
hereof. It may not be relied upon by or distributed to any other person or for
any other purpose without my prior written consent.
Very truly yours,
C-3
<PAGE> 79
EXHIBIT D
SECURITIZABLE MORTGAGE LOAN UNDERWRITING GUIDELINES
<PAGE> 80
EXHIBIT E-1
FORM OF COLLATERALIZED ADVANCE REQUEST
ContiTrade Services L.L.C.
277 Park Avenue
New York, New York 10172
Attention: Robert Carlock
ContiTrade Services L.L.C.
277 Park Avenue
New York, New York 10172
Attention: Jay Remis
Pursuant to the Standby and Working Capital Financing Agreement,
dated as of December 17, 1996 among ContiTrade Services L.L.C. (the "Lender"),
CMG Funding Securities Corp. and the undersigned (as amended from time to time,
the "Standby Agreement"), the undersigned hereby gives notice of its election to
borrow from the Lender a Collateralized Advance and in connection therewith,
sets forth below the following information and other information in the attached
schedule(s) (each capitalized term used herein shall have the meaning specified
therefor in the Standby Agreement):
1. The Residual Interests and/or I/O Interests to be pledged as
collateral are listed on the attached schedule(s).
2. The Funding Date of this Collateralized Advance shall be
________, 199_.
3. The amount of this Collateralized Advance shall be
$_____________.
<PAGE> 81
The undersigned hereby certifies that each of the conditions
precedent to a Collateralized Advance listed in Sections 2.01, 2.02 and 2.03 of
the Standby Agreement are true and correct on the date hereof and shall be true
and correct on the date of the Collateralized Advance requested herein, before
and after giving effect thereto.
CMG FUNDING CORP.
By:
----------------------------------------------
Name:
Title:
Date: _____________, 199_
CONTINENTAL MORTGAGE GROUP, L.C.
By:
----------------------------------------------
Name:
Title:
Date: _____________
ACKNOWLEDGED:
CONTITRADE SERVICES L.L.C.
By:
--------------------------------
Name:
Title: Authorized Signatory
Date:
By:
--------------------------------
Name:
Title: Authorized Signatory
Date:
<PAGE> 82
EXHIBIT E-2
FORM OF WORKING CAPITAL ADVANCE REQUEST
ContiTrade Services L.L.C.
277 Park Avenue
New York, New York 10172
Attention: Robert Carlock
ContiTrade Services L.L.C.
277 Park Avenue
New York, New York 10172
Attention: Jay Remis
Pursuant to the Standby and Working Capital Financing Agreement,
dated as of December 17, 1996 among ContiTrade Services L.L.C. (the "Lender"),
CMG Funding Securities Corp. and the undersigned (as amended from time to time,
the "Standby Agreement"), the undersigned hereby gives notice of its election to
borrow from the Lender a Working Capital Advance and in connection therewith,
sets forth below the following information and other information in the attached
schedule(s) (each capitalized term used herein shall have the meaning specified
therefor in the Standby Agreement):
1. The Funding Date of this Working Capital Advance shall be
________, 199_.
2. The amount of this Working Capital Advance shall be
$_____________.
<PAGE> 83
The undersigned hereby certifies that each of the conditions
precedent to a Working Capital Advance listed in Sections 2.01, 2.02 and 2.04 of
the Standby Agreement are true and correct on the date hereof and shall be true
and correct on the date of the Working Capital Advance requested herein, before
and after giving effect thereto.
CMG FUNDING CORP.
By:
----------------------------------------------
Name:
Title:
Date: _____________, 199_
CONTINENTAL MORTGAGE GROUP, L.C.
By:
----------------------------------------------
Name:
Title:
Date: _____________, 199_
ACKNOWLEDGED:
CONTITRADE SERVICES L.L.C.
By:
-----------------------------
Name:
Title: Authorized Signatory
Date:
By:
----------------------------
Name:
Title: Authorized Signatory
Date:
<PAGE> 84
EXHIBIT F
STOCK OPTION PLAN
<PAGE> 85
Schedule I
PERMISSIBLE USES OF PROCEEDS FROM ADVANCES
The proceeds from Advances drawn under the Standby Agreement
shall be used (i) to support the working capital needs of the Borrower, (ii) to
provide liquidity for the day-to-day business operations of the Borrower,
including, without limitation, services, supplies, utilities and postal
expenses, (iii) to provide financing for capital expenditures by the Borrower as
set forth in the annual budget of the Borrower as approved from time to time by
the Lender, or as otherwise permitted hereunder, and (iv) to provide for the
fees, costs and expenses of Securitizations conducted pursuant to the Investment
Banking Services Agreement.
<PAGE> 86
Execution Copy
STANDBY AND WORKING CAPITAL FINANCING AGREEMENT
among
CONTITRADE SERVICES L.L.C.,
as the Lender,
and
CMG FUNDING CORP.
and
CONTINENTAL MORTGAGE GROUP, L.C.
as the Borrower,
and
CMG FUNDING SECURITIES CORP.
as the Residualholder
<PAGE> 87
Dated as of December 17, 1996
<PAGE> 88
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I. DEFINITIONS............................................. 1
ARTICLE II. STANDBY AND WORKING CAPITAL FACILITY.................... 12
Section 2.01. General Advance Requirements........................... 12
Section 2.02. Advance Conditions Precedent........................... 13
Section 2.03. Collateralized Advance Requirements.................... 14
Section 2.04. Working Capital Advance Requirements................... 14
Section 2.05. Interest Payments...................................... 15
Section 2.06. Collateralized Advance Principal Payments.............. 15
Section 2.08. Collateral............................................. 16
Section 2.09. Information............................................ 17
Section 2.10. Collateral Valuation................................... 18
Section 2.11. Application of Payments................................ 18
ARTICLE III. REPRESENTATIONS AND WARRANTIES.......................... 19
Section 3.01. Representations and Warranties of the Borrower......... 19
Section 3.02. Representations and Warranties of the Residualholder... 22
Section 3.03. Representations and Warranties of the Lender........... 25
ARTICLE IV. COVENANTS OF THE BORROWER............................... 26
Section 4.01. Affirmative Covenants of the Borrower.................. 26
Section 4.02. Negative Covenants of the Borrower..................... 31
Section 4.03. Affirmative Covenants of the Residualholder............ 35
Section 4.04. Negative Covenants of the Residualholder............... 35
ARTICLE V. SECURITY AGREEMENT...................................... 37
Section 5.01. Grant of Security Interest............................. 37
Section 5.02. Security for the Borrower's Loans...................... 38
Section 5.03. Intention of Parties................................... 38
</TABLE>
i
<PAGE> 89
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE VI. INDEMNIFICATION......................................... 38
Section 6.01. Indemnification by the Borrower........................ 38
Section 6.02. Indemnification by the Lender.......................... 39
ARTICLE VII. EVENTS OF DEFAULT....................................... 40
Section 7.01. Occurrence of an Event of Default...................... 40
Section 7.02. Effect of an Event of Default.......................... 41
ARTICLE VIII. GENERAL PROVISIONS...................................... 42
Section 8.01. Cooperation, Confidentiality, Etc...................... 42
Section 8.02. Waiver of Trial by Jury................................ 42
Section 8.03. Amendment; Waivers..................................... 42
Section 8.04. Taxes.................................................. 43
Section 8.05. Limited Liability...................................... 43
Section 8.06. Other Transactions..................................... 43
Section 8.07. Opinion of Counsel to the Borrower..................... 44
Section 8.08. Costs and Expenses..................................... 44
ARTICLE IX. CONSTRUCTION............................................ 45
Section 9.01. Entire Agreement....................................... 45
Section 9.02. Severability Clause.................................... 45
Section 9.03. Counterparts........................................... 45
Section 9.04. Governing Law; Standby Agreement Constitutes Security
Agreement; Consent To Forum; Immunities................ 45
Section 9.05. No Agency; No Partnership; No Joint Venture............ 46
Section 9.06. Judicial Interpretation................................ 46
Section 9.07. Recitals............................................... 47
Section 9.08. Rules of Interpretation................................ 47
Section 9.09. Good Faith............................................. 47
ARTICLE X. MISCELLANEOUS........................................... 48
Section 10.01. Notices................................................ 48
Section 10.02. Further Agreements..................................... 49
Section 10.03. Third-Party Rights; Assignment......................... 49
Section 10.04. Advice from Independent Counsel........................ 49
Section 10.05. Summary Judgment....................................... 49
Section 10.06. Reproduction of Documents.............................. 50
Section 10.07. Right of Set-Off....................................... 50
</TABLE>
ii
<PAGE> 90
EXHIBITS
Exhibit A-1 - Secured Note (Collateralized Advances)
Exhibit A-2 - Secured Note (Working Capital Advances)
Exhibit B - Financing Value Schedule
Exhibit C - Form of Borrower's Counsel Opinion
Exhibit D - Securitizable Mortgage Loan Underwriting Guidelines
Exhibit E-1 - Form of Collateralized Advance Request
Exhibit E-2 - Form of Working Capital Advance Request
Exhibit F - Stock Option Plan
SCHEDULES
Schedule I - Permissible Uses of Proceeds from Advances
iii
<PAGE> 91
Execution Copy
AMENDMENT 1 TO
STANDBY AND WORKING CAPITAL FINANCING AGREEMENT
This Amendment 1, dated October 24, 1997 (the "Amendment"), to
the Standby and Working Capital Financing Agreement (the "Standby Agreement"),
dated December 17, 1996, among CMG Funding Corp., and Continental Mortgage
Group, L.C. (now succeeded by CMG Funding Corp.), as Borrowers, ContiTrade
Services L.L.C. as Lender, and CMG Funding Securities Corp. as Residualholder.
WHEREAS, the parties hereto have entered into the Standby
Agreement, as well as a series of other agreements designated as Significant
Documents in the Standby Agreement; and
WHEREAS, the parties hereto now wish to amend the certain
provisions in the Standby Agreement.
NOW, THEREFORE, in consideration of the promises and agreements
contained herein, the parties hereto agree, pursuant to section 10.02 of the
Standby Agreement, to amend the Standby Agreement and restate certain provisions
thereof as follows:
1. Defined Terms. Capitalized terms used herein without
definition have the meanings ascribed to them in the Standby Agreement.
2. Maximum Collateralized Advance Aggregate Amount. The
definition of "Maximum Collateralized Advance Aggregate Amount" as set forth in
Article 1 of the Standby Agreement is replaced in its entirety with "'Maximum
Collateralized Advance Aggregate Amount' means $0."
3. Maximum Working Capital Advance Aggregate Amount. The
definition of "Maximum Working Capital Advance Aggregate Amount" as set forth in
Article 1 of the Standby Agreement is replaced in its entirety with "Maximum
Working Capital Advance Aggregate Amount" means $4,000,000.
4. Section 2.04(c) of the Agreement. Section 2.04(c) of the
Standby Agreement is hereby deleted in its entirety and replaced with
"[RESERVED]".
5. Exhibit A-1 of the Agreement. The Amounts twice specified as
"$10,000,000" in the Form of the Secured Note appended to the Standby Agreement
as Exhibit A-1, is hereby changed to "$0" in each instance.
6. Secured Note Cancellation. The Secured Note in the form of
Exhibit A-1, executed pursuant to Section 2.02(a) of the Standby Agreement is
hereby cancelled.
<PAGE> 92
7. Exhibit A-2 of the Agreement. The Amount twice specified as
"$2,000,000" in the Form of the Secured Note appended to the Standby Agreement
as Exhibit A-2, is hereby changed to "$4,000,000", in each instance.
8. Re-issuance of Secured Note. The Secured Note in the form of
Exhibit A-2, executed pursuant to Section 2.02(a) of the Standby Agreement is
hereby cancelled and replaced with an amended Secured Note in the amount of $
4,000,000.
9. Consequences of Failing to Terminate the Working Capital
Facility. In the event that (a) the outstanding balance on the Secured Note with
respect to the working capital facility under the Standby Agreement has not been
paid down to a level of $2,000,000 or less by February 28, 1998, or (b) CMG
Funding Corp. has not taken, by February 28, 1998, all actions to amend such
working capital facility and the Standby Agreement so that the Maximum Working
Capital Advance Aggregate Amount is thereafter no more than $2,000,000, John D.
Fry, on behalf of CMG Funding Corp. agrees, pursuant to the Letter Agreement
dated as of October 24, 1997, between John D. Fry as shareholder of CMG Funding
Corp. and ContiTrade Services L.L.C., (the "New Letter Agreement") to transfer
to ContiFinancial Corporation an amount of Class A Preferred Stock of CMG
Funding Corp. representing 10% of the outstanding equity of CMG Funding Corp. on
a fully diluted basis as consideration for the continued availability for use of
such facility at the expanded capacity level by CMG Funding Corp., as well as
the receipt by each of CMG Funding Corp. and John D. Fry of $ 1 from ContiTrade
Services L.L.C. as additional consideration. The payment of the Class A
Preferred Stock shall not reduce in any manner the obligation of CMG Funding
Corp. to repay all its outstanding obligations under the related Secured Note.
10. Consequences of Breaching the New Letter Agreement. In the
event that John D. Fry fails to perform his obligation under the New Letter
Agreement, CMG Funding Corp. hereby agrees that it shall issue such shares of
Class A Preferred Stock as required by the New Letter Agreement, and such
additional shares to put ContiFinancial Corporation in the same economic
position it would have been in had John D. Fry honored his obligation under the
New Letter Agreement.
11. Termination upon REIT Election or Stock or Unit Issuance. In
the event that CMG Funding Corp. proposes to (i) elect REIT status; (ii) issue
any additional amounts of its stock by private placement; or (iii) issue Units
consisting in part of such stock, on or prior to the earlier of such REIT
election or issuance of such Stock or Units, CMG Funding Corp. shall have (a)
paid off in full the outstanding balance of the Secured Note with respect to the
working capital facility under the Standby Agreement, as well as paid all
interest accrued theron, and (b) taken all action necessary to terminate such
working capital facility and the Standby Agreement.
12. Effectiveness. This Amendment, even after due execution by
the parties hereto, will not become effective until each of Amendment 1 to the
Purchase and Sale Agreement, the New Letter Agreement, Amendment 1 to the
Registration Rights Agreement, dated October 24, 1997, and the amended Secured
Note, pursuant to Paragraph 8 hereof, have also been duly executed and delivered
by the parties thereto.
2
<PAGE> 93
13. Governing Law. This Amendment shall be governed by and
construed in accordance with the Laws of the State of New York, without regard
to its rules regarding conflict of laws.
3
<PAGE> 94
IN WITNESS WHEREOF, the parties have executed this Amendment 1 to
the Standby and Working Capital Financing Agreement as of the day and year first
above written.
CMG Funding Corp.
As Borrower
By:
--------------------------
Name: John D. Fry
Title:
ContiTrade Services, L.L.C.
As Lender
By:
--------------------------
Name:
Title:
By:
--------------------------
Name:
Title:
CMG Funding Securities Corp.
As Residualholder
By:
--------------------------
Name:
Title:
4
<PAGE> 95
Execution Copy
AMENDMENT 2 TO
STANDBY AND WORKING CAPITAL FINANCING AGREEMENT
This Amendment 2, dated as of November 18, 1997 (this
"Amendment"), to the Standby and Working Capital Financing Agreement as amended
(the "Standby Agreement"), dated as of December 17, 1996, among CMG Funding
Corp., ("CMG") and Continental Mortgage Group, L.C. (now succeeded by CMG
Funding Corp.), as Borrowers, ContiTrade Services L.L.C. ("CTS") as Lender, and
CMG Funding Securities Corp. as Residualholder.
WHEREAS, the parties hereto have entered into the Standby
Agreement, as well as a series of other agreements designated as Significant
Documents in the Standby Agreement;
WHEREAS, the parties hereto have entered into Amendment 1 to the
Standby Agreement dated as of October 24, 1997 ("Amendment 1"); and
WHEREAS, the parties hereto now wish to further amend the certain
provisions in the Standby Agreement.
NOW, THEREFORE, in consideration of the promises and agreements
contained herein, the parties hereto agree, pursuant to section 10.02 of the
Standby Agreement, to further amend the Standby Agreement and restate certain
provisions thereof as follows:
1. Defined Terms. Capitalized terms used herein without
definition have the meanings ascribed to them in the Standby Agreement.
2. Amended Definition of "Working Capital Advance Termination
Date" The definition of "Working Capital Advance Termination Date" in the
Standby Agreement is hereby replaced in its entirety with the following:
"Working Capital Advance Termination Date" means the earlier to
occur of (a) the later to occur of (i) the first anniversary of the date of this
Standby Agreement, or (ii) the second anniversary of the date of this Standby
Agreement following the Lender's most recent notice of renewal of the working
capital component of this Standby Agreement pursuant to Section 2.12 hereof, if
any, or (b) August 1, 1998.'
3. Amended Definition of "Interest Rate" The definition of
"Interest Rate" in the Standby Agreement is hereby replaced in its entirety with
the following:
"Interest Rate" means (a) with respect to any Collateralized
Advance and any Accrual Period, LIBOR on the related LIBOR Reset Date plus
5.00%; and (b) with respect to any Working Capital Advance and any Accrual
Period, (i) prior to
<PAGE> 96
March 1, 1998, LIBOR on the related LIBOR Reset Date plus 4.50%; and (ii) on or
after March 1, 1998, LIBOR on the related LIBOR Reset Date plus 8.50%.'
4. Amendment to Section 9 of Amendment 1. The parties hereto
agree that Section 9 of Amendment 1 is hereby revoked in its entirety and shall
be without any force or effect whatsoever.
5. Amendment to Section 10 of Amendment 1. The parties hereto
agree that Section 10 of Amendment 1 is hereby revoked in its entirety and shall
be without any force or effect whatsoever.
6. Effectiveness. This Agreement, even after due execution by the
parties hereto, will not become effective until (i) each of the Conversion
Letter Agreement dated as of November 18, 1997 by and between CTS and CMG (the
"Conversion Letter Agreement"), the Termination Letter dated as of November 18,
1997, by and between CTS and John Fry as Shareholder of CMG, Amendment 2 to the
Registration Rights Agreement dated as of November 18, 1997, by and between CMG
and CTS, Amendment 1 to the Investment Banking Services Agreement dated November
18, 1997 by and among CTS, CMG and ContiFinancial Services Corporation, and
Warrant No. 1 issued by CMG to CTS and dated as of November 18, 1997, have each
also been duly executed and delivered by the parties thereto, and (ii) the
546,883 shares of Common Stock have been conveyed to CTS pursuant to Paragraph 2
of the Conversion Letter Agreement.
7. Governing Law. This Amendment shall be governed by and
construed in accordance with the Laws of the State of New York, without regard
to its rules regarding conflict of laws.
2
<PAGE> 97
IN WITNESS WHEREOF, the parties have executed this Amendment 1 to
the Standby and Working Capital Financing Agreement as of the day and year first
above written.
CMG Funding Corp.
As Borrower
By:
--------------------------
Name: John D. Fry
Title:
ContiTrade Services, L.L.C.
As Lender
By:
--------------------------
Name:
Title:
By:
--------------------------
Name:
Title:
CMG Funding Securities Corp.
As Residualholder
By:
--------------------------
Name:
Title:
3
<PAGE> 98
AMENDMENT 3 TO
STANDBY AND WORKING CAPITAL FINANCING AGREEMENT
This Amendment 3, dated as of December 31, 1997 (this
"Amendment"), to the Standby and Working Capital Financing Agreement as amended
(the "Standby Agreement"), dated as of December 17, 1996, among CMG Funding
Corp., ("CMG") and Continental Mortgage Group, L.C. (now succeeded by CMG
Funding Corp.), as Borrowers, ContiTrade Services L.L.C. ("CTS") as Lender, and
CMG Funding Securities Corp. as Residualholder.
WHEREAS, the parties hereto have entered into the Standby
Agreement, as well as a series of other agreements designated as Significant
Documents in the Standby Agreement;
WHEREAS, the parties hereto have entered into Amendment 1 to the
Standby Agreement dated as of October 24, 1997 ("Amendment 1") and Amendment 2
to the Standby Agreement dated as of November 18, 1997 ("Amendment 2"); and
WHEREAS, the parties hereto now wish to further amend the certain
provisions in the Standby Agreement.
NOW, THEREFORE, in consideration of the promises and agreements
contained herein, the parties hereto agree, pursuant to section 10.02 of the
Standby Agreement, to further amend the Standby Agreement and restate certain
provisions thereof as follows:
1. Defined Terms. Capitalized terms used herein without
definition have the meanings ascribed to them in the Standby Agreement.
2. Amended Definition of "Working Capital Advance Termination
Date" The definition of "Working Capital Advance Termination Date" in
the Standby Agreement is hereby replaced in its entirety with the
following:
"Working Capital Advance Termination Date" means January 1, 1999.
3. Maximum Working Capital Advance Aggregate Amount. The
definition of "Maximum Working Capital Advance Aggregate Amount" as set
<PAGE> 99
forth in Article 1 of the Standby Agreement is replaced in its entirety
with "Maximum Working Capital Advance Aggregate Amount" means
$2,000,000.
4. There is hereby added to Article II of the Standby Agreement a
new Section, Section 2.11, "Conversion Privilege", to read in its
entirety as follows:
Section 2.11. Conversion Privilege. The Lender with respect to
the Working Capital Loan, or any portion thereof, shall have the following
Conversion Privileges hereunder:
(a) Each $4.87115 of the Working Capital Loan shall be
convertible to one (1) share of Class A Preferred Stock at the option of the
Lender, at any time after the related Funding Date at the principal office of
the Borrower (or such other office or agency of the Borrower as the Borrower may
designate), in effect on the date notice of such request is received by the
Borrower. It is the intention of the parties, that as of the Closing Date
(without giving effect to any common stock issuances pursuant to clauses (iv) or
(vi) of the definition of "Change of Control") upon the full exercise of the
Conversion Privilege with respect to the Working Capital Loan that the Lender
would thereupon possess 10% of the combined voting rights of all the issued and
outstanding shares of Capital Stock of the Borrower (on a fully diluted basis)
solely with respect to the conversion of the Working Capital Loan.
(b) In the event that the Borrower at any time or from time to
time after the Lender exercises its Conversion Privilege hereunder but prior to
the issuance of the related Preferred Stock shall declare or pay, without
consideration, any dividend on the Capital Stock payable in Capital Stock or in
any right to acquire Capital Stock for nominal consideration, or shall effect a
subdivision of the outstanding shares of Capital Stock into a greater number of
shares of Capital Stock (by stock split, reclassification or otherwise than by
payment of a dividend in Capital Stock or in any right to acquire Capital
Stock), or in the event the outstanding shares of Capital Stock shall be
combined or consolidated, by reclassification or otherwise, into a lesser number
of shares of Capital Stock, then the Borrower shall pay to the Lender a dividend
payable in such Capital Stock in an amount of shares equal to the additional
number of shares of such Capital Stock necessary to restore the percentage
ownership interest of the Lender by virtue of the conversion of the Loan, or any
portion thereof, to that upon exercise of such rights to acquire Preferred
Stock.
(c) If the Preferred Stock issuable upon conversion of the
Working Capital Loan, or any portion thereof, shall be changed into the same or
a different number of shares of any other class or classes of stock, whether by
capital reorganization, reclassification or otherwise (other than a subdivision
or combination of shares provided for in Section 2.11(b) above) or a merger,
consolidation or other corporate reorganization which shall not be in connection
with a plan of liquidation, dissolution or winding up of the Borrower then the
Working Capital Loan, or any portion thereof, shall be convertible
2
<PAGE> 100
into, in lieu of the number of shares of Preferred Stock which the Lender would
otherwise have been entitled to receive, a number of shares of such other class
or classes of stock equivalent to the number of shares of Preferred Stock that
would have been subject to receipt by the Lender upon conversion of the Working
Capital Loan, or any portion thereof, immediately before that change.
(d) The Borrower shall pay any and all issue and other taxes that
may be payable in respect of any issue or delivery of shares of Preferred Stock
on conversion of the Working Capital Loan, or any portion thereof, pursuant
hereto.
(e) The Borrower shall at all times reserve and keep out of its
authorized but unissued shares of Preferred Stock, solely for the purpose of
effecting the conversion of the Working Capital Loan, such number of its shares
of Preferred Stock as shall from time to time be sufficient to effect the
conversion of up to $2,000,000 of the Working Capital Loan; and if at any time
the number of authorized but unissued shares of Preferred Stock shall not be
sufficient to effect such conversion, the Borrower will take such corporate
action as may, in the opinion of its counsel, be necessary to increase the
number of shares of its authorized but unissued shares of Preferred Stock to
such number of shares as shall be sufficient for such purpose, including,
without limitation, engaging in all reasonable efforts to obtain the requisite
shareholder approval of any necessary amendment to the Certificate of
Incorporation.
(f) No fractional shares shall be issued upon the conversion of
the Working Capital Loan, or any portion thereof.
(g) In the event that:
(i) the Borrower shall propose at any time:
(A) to declare any dividend or distribution upon its
Capital Stock, whether in cash, property, stock or other securities, whether or
not a regular cash dividend and whether or not out of earnings or earned
surplus;
(B) to offer for subscription pro rata to the holders of
any class or series of its Capital Stock any additional shares of Capital Stock
of any class or series or other rights;
(C) to effect any reclassification or recapitalization
of its Capital Stock outstanding involving a change in the Capital Stock; or
(D) to merge or consolidate with or into any other
corporation, or sell, lease or convey all or substantially all its property,
assets or business, or to liquidate, dissolve or wind up;
3
<PAGE> 101
then,
(ii) in connection with such event, the Borrower shall
send to the Lender:
(A) at least ten (10) days' prior written notice of the
date on which a record shall be taken for such dividend, distribution or
subscription rights (and specifying the date on which the holders of Capital
Stock shall be entitled thereto) or for determining rights to vote in respect of
the matters referred to in clause (i)(C) or (D) above; and
(B) in the case of the matters referred to in (C) and
(D) above, at least twenty (20) days' prior written notice of the date when the
same shall take place (and specifying the date on which the holders of Capital
Stock shall be entitled to exchange their Capital Stock for securities, cash or
other property deliverable upon the occurrence of such event or such earlier
date, if any, on which a record shall be taken of the holders of Capital Stock
who shall be entitled to exchange their Capital Stock); and
(iii) if, prior to the date on which the Borrower receives the
proceeds of the REIT Issuance (as defined in Amendment 2 to The Investment
Banking Services Agreement) the Borrower proposes to issue Capital Stock, and
such issuance would not give rise to the Lender's anti-dilution rights under
Section 2.11 (b) or (c), then with respect to such issuance the Lender shall
have a right of first refusal for a period, commencing with the Lender's receipt
of written notice from the Borrower of such issuance, and continuing for fifteen
days thereafter, to purchase such Capital Stock, on the same terms and at the
same purchase price paid, or to be paid, by the other purchasers, so as to
maintain the Lender's interest as described in the last sentence of Section
2.11(a) hereof.
(h) Upon 60 days prior written notice to the Lender of a proposed
assignment, the rights of the Lender set forth in this Section 2.11 are freely
assignable by the Lender and its assigns and will travel with the Working
Capital Loan and the related Preferred Stock, respectively.
(i) The Borrower shall pay to the Lender any accrued and unpaid
interest on the Working Capital Loan through the date of conversion upon the
exercise of the Conversion Privileges.
5. Exhibit A-2 of the Agreement. The Amount twice specified as
$4,000,000" in the Form of the Secured Note appended to the Standby
Agreement as Exhibit A-2, as amended, is hereby changed to $2,000,000",
in each instance.
6. Re-issuance of Secured Note. The Secured Note in the form of
Exhibit A-2, executed pursuant to Section 2.02(a) of the Standby
Agreement is hereby cancelled and replaced with an amended Secured Note
in the amount of $2,000,000.
4
<PAGE> 102
7. Effectiveness. This Agreement, even after due execution by the
parties hereto, will not become effective until (i) each of the
Conversion Letter Agreement No. 2 dated as of December 31, 1997 by and
between CTS and CMG (the "Conversion Letter Agreement No. 2"), Amendment
3 to the Registration Rights Agreement dated as of December 31, 1997, by
and between CMG and CTS, Amendment 2 to the Investment Banking Services
Agreement dated December 31, 1997 by and among CTS, CMG and
ContiFinancial Services Corporation, Amendment 2 to the Purchase and
Sale Agreement dated as of December 31, 1997, among CMG and CTS, Warrant
No. 2 issued by CMG to CTS and dated as of December 31, 1997 has been
exchanged for Warrant No. 1 held by CTS, and Warrant No. 3 issued by CMG
to CFC, as designee of CTS, and dated as of December 31, 1997, have each
also been duly executed and delivered by the parties thereto, and (ii)
the 410,581 shares of Class A Preferred Stock shares have been conveyed
to CTS pursuant to Paragraph 2 of the Conversion Letter Agreement No. 2.
8. Governing Law. This Amendment shall be governed by and construed
in accordance with the Laws of the State of New York, without regard to
its rules regarding conflict of laws.
5
<PAGE> 103
IN WITNESS WHEREOF, the parties have executed this Amendment 3 to
the Standby and Working Capital Financing Agreement as of the day and year first
above written.
CMG Funding Corp.
As Borrower
By:
--------------------------------
Name: John D. Fry
Title:
ContiTrade Services, L.L.C.
As Lender
By:
--------------------------------
Name:
Title:
By:
--------------------------------
Name:
Title:
CMG Funding Securities Corp.
As Residualholder
By:
--------------------------------
Name:
Title:
6
<PAGE> 1
EXHIBIT 10.11
Execution Copy
CONVERSION LETTER AGREEMENT
as of November 18, 1997
John D. Fry
CMG Funding Corp.
2855 East Cottonwood Parkway, Suite 500
Salt Lake City, Utah 84121
Re: Strategic Alliance between ContiTrade Services L.L.C. and
CMG Funding Corp.
Sir:
This conversion letter agreement (the "Agreement") sets out certain
agreements between CMG Funding Corp. (the "Company" or "CMG"), and ContiTrade
Services L.L.C., its successors and assigns ("CTS") related to matters arising
from the transactions contemplated by (i) the Standby and Working Capital
Financing Agreement, dated as of December 17, 1996, together with Amendment 1
thereto dated as of October 24, 1997, and Amendment 2 thereto dated as of
November 18, 1997, among the Company, Continental Mortgage Group L.C, since
succeeded by the Company, ("CMLC"), CMG Funding Securities Corporation and CTS;
( the "Standby Agreement"); (ii) the Investment Banking Services Agreement,
dated as of December 17, 1996, and Amendment 1 thereto dated as of November 18,
1997, among the Company, CMLC, CTS, and ContiFinancial Services Corporation (the
"Investment Banking Services Agreement"); (iii) the Purchase and Sale Agreement,
dated as of December 17, 1996, and Amendment 1 thereto dated as of October 24,
1997, (the "Purchase Agreement") among the Company, CMLC and CTS; (iv) the
Subordinated Debt Agreement, dated as of December 17, 1996 between the Company
and CTS (the "Subordinated Debt Agreement"); (v) the Preferred Stock Purchase
Agreement, dated as of December 17, 1996 between the Company and ContiFinancial
Corporation ("CFC"), a Delaware Corporation, (the "Preferred Stock Purchase
Agreement" ); (vi) the Registration Rights Agreement, dated as of December 17,
1996, between CTS and CMG together with Amendment 1 thereto, dated as of October
24, 1997, and Amendment 2 thereto dated as of November 18, 1997 (the
"Registration Rights Agreement") (The Standby Agreement, the Investment Banking
Services Agreement, the Purchase Agreement, the Subordinated Debt Agreement, the
Preferred Stock Purchase Agreement and the Registration Rights Agreement,
collectively the "Significant Documents") (Amendments 1 and 2 to the Standby
Agreement, Amendment 1 to the Purchase Agreement, Amendment 1 to the Investment
Banking Services Agreement and Amendments 1 and 2 to the Registration Rights
Agreement, collectively the "Amendments").
<PAGE> 2
Capitalized terms used but not otherwise defined hereinshall have
the meanings set forth in the Significant Documents.
1. CTS hereby exercises its option under Section 2.07(a) of the
Subordinated Debt Agreement to convert $850,000 of existing subordinated debt
into equity of the Company pursuant to the terms and conditions set forth in
said Section 2.07(a).
2. Notwithstanding the provisions of Section 2.07 of the
Subordinated Debt Agreement, CTS shall receive from the Company 546,883 shares
of Common Stock of the Company in consideration of (i) the exercise by CTS of
the option described in Paragraph 1 hereof, and (ii) the sum of $1. Therefore as
a consequence of the stock acquired by CFC pursuant to the Preferred Stock
Purchase Agreement as well as the above described conversion of subordinated
debt and without regard to any interest obtained pursuant to the Warrant (as
hereinafter defined), CFC and CTS, in the aggregate, will own stock of the
Company representing 32% of the total equity of the Company on a fully diluted
basis.
3. Contemporaneous with the conveyance of the Common Stock
pursuant to Paragraph 2 hereof, the Company shall certify to CTS that such
conveyance has been duly made.
4. This Agreement, even after due execution by the parties
hereto, will not become effective until (i) each of Amendment 2 to the Standby
and Working Capital Financing Agreement , dated as of November 18, 1997 by and
among CMG. as Borrower, CTS as Lender and CMG Funding Securities Corp. as
Residualholder, the Termination Letter dated as of November 18, 1997, by and
between CTS and John Fry as Shareholder of CMG, Amendment 2 to the Registration
Rights Agreement dated as of November 18, 1997, by and between CMG and CTS,
Amendment 1 to the Investment Banking Services Agreement dated as of November
18, 1997 by and among CTS, CMG and ContiFinancial Services Corporation and
Warrant No. 1 (the "Warrant") issued by CMG to CTS and dated as of November 18,
1997, have each also been duly executed and delivered by the parties thereto,
and (ii) The 546,883 shares of Common Stock have been conveyed to CTS pursuant
to Paragraph 2 hereof.
5. This Agreement shall be construed in accordance with the laws
of the State of New York, without regard to the principles of conflict of law,
and the rights and remedies of the parties hereunder shall be determined in
accordance with such laws. Any right to trial by jury with respect to any claim
or action arising out of or relating to the matters that are the subject of this
Agreement is hereby waived. The parties hereto irrevocably consent in connection
with any legal proceeding arising hereunderto the exclusive jurisdiction of
federal or New York state courts located in New York, New York. Each provision
of this Agreement is severable, and the invalidity or inapplicability of one or
more provisions in whole or in part, shall not affect any other provision. The
parties hereby acknowledge and agree that any enforcement action may be brought
by motion for summary judgment in lieu of a complaint pursuant to section 3213
of the New
2
<PAGE> 3
York Civil Practice Law and Rules. The parties hereto agree that, in the event
of default of the terms of this Agreement, damages alone are not an adequate
remedy and that in addition to any other remedies which CTS may have, CTS may
seek specific performance of the terms of this Agreement from a court with
proper jurisdiction.
Very truly yours,
CONTITRADE SERVICES L.L.C.
By:
---------------------------
Name:
Title:
By:
---------------------------
Name:
Title:
CONFIRMED AND ACCEPTED
as of the date first written above:
- ---------------------
Name: John D. Fry
Title: Shareholder
<PAGE> 1
EXHIBIT 10.12
CONVERSION LETTER AGREEMENT NO. 2
as of December 31, 1997
John D. Fry
CMG Funding Corp.
2855 East Cottonwood Parkway, Suite 500
Salt Lake City, Utah 84121
Re: Strategic Alliance between ContiTrade Services L.L.C.
and CMG Funding Corp.
Dear Mr. Fry:
This Conversion Letter Agreement No. 2 (the "Agreement") sets out
certain agreements between CMG Funding Corp. (the "Company" or "CMG"), and
ContiTrade Services L.L.C., its successors and assigns ("CTS") related to
matters arising from the transactions contemplated by:
(i) the Standby and Working Capital Financing Agreement, dated as
of December 17, 1996, together with Amendment 1 thereto dated as of
October 24, 1997, Amendment 2 thereto dated as of November 18, 1997 and
Amendment 3 thereto dated as of December 31, 1997, among the Company,
Continental Mortgage Group L.C, since succeeded by the Company,
("CMLC"), CMG Funding Securities Corporation and CTS; ( the "Standby
Agreement");
(ii) the Investment Banking Services Agreement, dated as of
December 17, 1996, together with Amendment 1 thereto dated as of
November 18, 1997 and Amendment 2 thereto dated as of December 31, 1997,
among the Company, CMLC, CTS, and ContiFinancial Services Corporation
(the "Investment Banking Services Agreement");
(iii) the Purchase and Sale Agreement, dated as of December 17,
1996, and Amendment 1 thereto dated as of October 24, 1997, (the
"Purchase Agreement") among the Company, CMLC and CTS;
(iv) the Preferred Stock Purchase Agreement, dated as of December
17, 1996 between the Company and ContiFinancial Corporation ("CFC"), a
Delaware Corporation, (the "Preferred Stock Purchase Agreement" );
(v) the Registration Rights Agreement, dated as of December 17,
1996, between CTS and CMG together with Amendment 1 thereto, dated as of
October 24, 1997, and Amendment 2 thereto dated as of November 18, 1997
and
<PAGE> 2
Amendment 3 thereto dated as of December 31, 1997 (the "Registration
Rights Agreement");
(vi) the Conversion Letter Agreement dated as of November 18,
1997, between the Company and CTS (the "Prior Conversion Agreement");
(vii) Warrant No. 2 issued by CMG to CTS and dated as of December
31, 1997, in the form of Exhibit A hereto ("Warrant No. 2") in exchange
for Warrant No. 1 issued on November 18, 1997; and
(viii) the Warrant issued by CMG to CTS and dated as of December
31, 1997, in the form of Exhibit B hereto (the "Warrant No. 3").
The Standby Agreement, the Investment Banking Services Agreement,
the Purchase Agreement, the Preferred Stock Purchase Agreement, the Registration
Rights Agreement; the Prior Conversion Agreement, Warrant No. 2 and Warrant No.
3, as amended to the extent described above, are hereinafter, collectively
referred to as the "Significant Documents".
Capitalized terms used but not otherwise defined herein shall
have the meanings set forth in the Significant Documents.
1. Exercise of Conversion Option. CTS hereby exercises its option
under Section 2.11(a) of the Standby Agreement to convert $2,000,000 principal
amount of the existing Working Capital Loan into Class A Preferred Stock of the
Company pursuant to the terms and conditions set forth in said Section 2.11(a).
2. As a result of its exercise of its conversion option under
Section 1 above, Standby Agreement, CTS's designee, CFC shall receive from the
Company 410,581 shares of Class A Preferred Stock of the Company on the date
hereof. Therefore, as a consequence of the stock previously acquired by CFC
pursuant to the Preferred Stock Purchase Agreement, the stock acquired by CTS
pursuant to the Prior Conversion Agreement as well as the above described
conversion of a portion of the Working Capital Loan and without regard to any
interest obtained pursuant to Warrant No. 2 and Warrant No. 3 (as hereinafter
defined), CFC and CTS, in the aggregate, will own stock (including Class A
Preferred Stock) of the Company representing (or, in the case of the Class A
Preferred Stock, convertible into) 42.00% of the total equity of the Company on
a fully diluted basis.
3. Contemporaneous with the conveyance of the Class A Preferred
Stock pursuant to Paragraph 2 hereof, the Company shall certify to CTS that such
conveyance has been duly made.
4. Contemporaneous with the conveyance of the Class A Preferred
Stock pursuant to Paragraph 2 hereof CMG shall deliver to CTS (a) Warrant No. 2
in exchange for the delivery to CMG of Warrant No. 1 previously issued to CTS,
and (b) Warrant No. 3. Warrant No. 1 shall then be cancelled.
2
<PAGE> 3
5. CMG agrees to repurchase 100% of the Class A Preferred Stock
described in paragraph 2 above (or any securities into which such Class A
Preferred Stock has been converted), at a repurchase price equal to the sum of
(x) $2,000,000 plus (y) all accrued and previously undistributed dividends
thereon, on the date on which CMG receives the proceeds of the REIT Issuance (as
defined in Amendment 2 of the Investment Banking Services Agreement).
6. CTS hereby agrees to waive its right to convert the Class A
Preferred Stock issued pursuant to Section 2 above into Common Stock of CMG
until the REIT Issuance, if such Class A Preferred Stock is still outstanding on
such date.
7. This Agreement, even after due execution by the parties
hereto, will not become effective until (i) each of Amendment 3 to the Standby
and Working Capital Financing Agreement, dated as of December 31, 1997 by and
among CMG, as Borrower, CTS as Lender and CMG Funding Securities Corp. as
Residualholder, Amendment 3 to the Registration Rights Agreement dated as of
December 31, 1997, by and between CMG and CTS, Amendment 2 to the Investment
Banking Services Agreement dated as of December 31, 1997 by and among CTS, CMG
and ContiFinancial Services Corporation, Amendment 2 to the Purchase and Sale
Agreement dated as of December 31, 1997, among CMG and CTS, and Warrant No. 3
issued by CMG to CTS and dated as of December 31, 1997, have each also been duly
executed and delivered by the parties thereto, (ii) the 410,581 shares of Class
A Preferred Stock have been conveyed to CTS pursuant to Paragraph 2 hereof,
(iii) Warrant No. 2 has been delivered to CTS in exchange for Warrant No. 1 and
(iv) Warrant No. 3 has been delivered to CTS.
8. This Agreement shall be construed in accordance with the laws
of the State of New York, without regard to the principles of conflict of law,
and the rights and remedies of the parties hereunder shall be determined in
accordance with such laws. Any right to trial by jury with respect to any claim
or action arising out of or relating to the matters that are the subject of this
Agreement is hereby waived. The parties hereto irrevocably consent in connection
with any legal proceeding arising hereunderto the exclusive jurisdiction of
federal or New York state courts located in New York, New York. Each provision
of this Agreement is severable, and the invalidity or inapplicability of one or
more provisions in whole or in part, shall not affect any other provision. The
parties hereby acknowledge and agree that any enforcement action may be brought
by motion for summary judgment in lieu of a complaint pursuant to section 3213
of the New York Civil Practice Law and Rules. The parties hereto agree that, in
the event of default of the terms of this Agreement, damages alone are not an
adequate remedy and that in addition to any other remedies which CTS may have,
CTS may seek specific performance of the terms of this Agreement from a court
with proper jurisdiction.
3
<PAGE> 4
Very truly yours,
CONTITRADE SERVICES L.L.C.
By:
--------------------------
Name:
Title:
By:
--------------------------
Name:
Title:
CONFIRMED AND ACCEPTED
as of the date first written above:
CMG FUNDING CORP.
By:
---------------------------
Name: John D. Fry
Title: President
4
<PAGE> 5
Schedule A
Warrant No. 2
PLEASE SEE TAB EXHIBIT 4.8
5
<PAGE> 6
Schedule B
Warrant No. 3
PLEASE SEE TAB EXHIBIT 4.9
6
<PAGE> 1
EXHIBIT 10.13
Execution Copy
As of December 17, 1996
CMG Funding Corp.
5295 Commerce Drive
Suite 400
Salt Lake City, Utah 88107
Re: Registration Rights Agreement
Ladies and Gentlemen:
This letter (the "Registration Rights Agreement") hereby confirms that CMG
Funding Corp. ("CMGFC"), in consideration of (i) ContiTrade Services L.L.C.
("CTS") providing a mortgage loan purchase facility to CMGFC pursuant to the
Purchase and Sale Agreement dated as of December 17, 1996 (the "Purchase
Agreement") among CMGFC, ("CMLC") and CTS, (ii) CTS providing a standby
financing facility to CMGFC pursuant to the Standby Financing Agreement dated as
of December 17, 1996 among CTS, CMGFC, ("CMLC") Continental Mortgage Group,
L.C., CMLC and its successors, and CMG Funding Securities Corp., (iii) CTS
providing subordinated debt financing (the "Subordinated Debt") pursuant to the
Subordinated Debt Agreement dated as of December 17, 1996 (the "Subordinated
Debt Agreement") between CMGFC and CTS, (iv) ContiFinancial Corporation, a
Delaware corporation ("CFC") investing in CMGFC through the purchase of its
Class A preferred stock (the "Preferred Stock") pursuant to the Preferred Stock
Purchase Agreement, dated as of December 17, 1996, between CFC and CMGFC, (v)
the mutual promises and other valuable consideration described herein, grants to
CTS or its registered assigns (the "Holder"), in connection with the conversion
privileges under the (x) Subordinated Debt Agreement which permits CTS to
convert the Subordinated Debt into Preferred Stock, or any portion thereof, and
(y) the Certificate of Incorporation of CMGFC, which permits CTS and CFC, as
applicable, to convert their Preferred Stock, or any portion thereof, into
shares of CMGFC's common stock (the "Common Stock") pursuant to their respective
terms (the "Conversion Shares"), the right to register the Conversion
<PAGE> 2
Shares pursuant to the Securities Act of 1933, as amended (the "Act") according
to the terms hereof and thereof. Capitalized terms used but not defined herein
shall have the meanings assigned to them in the Purchase Agreement.
1. Term. The term established hereby shall be in effect for the
period commencing on the date hereof and expiring upon the date ten years after
the date of this Registration Rights Agreement.
2. Amendment and Termination. Except as specifically provided for
herein, neither CMGFC nor CTS shall have the right to amend, modify or terminate
this Registration Rights Agreement without the written consent of the other
party hereto; provided, that CMGFC's obligations under Sections 3, 4 and 5 shall
survive any termination of this Registration Rights Agreement.
3. Registration Rights. (a) (i) Subject to the provisions of
paragraph (v) of this Section 3(a), the Holder may at any time from the
date hereof request in writing that CMGFC register Conversion Shares
under the Act for sale at any time following the initial public offering
of CMGFC's Common Stock in the manner specified in such notice;
provided, that CMGFC shall have no obligation to register Conversion
Shares pursuant to this paragraph (i) unless the number of Conversion
Shares for which registration has been requested constitutes at least
five percent (5%) of CMGFC's Common Stock then outstanding; and provided
further, that CMGFC shall not be obligated to register Conversion Shares
pursuant to this paragraph (i) on more than three occasions.
(ii) Following receipt of any notice delivered in compliance with
paragraph (i) of this Section 3(a) (a "Demand"), CMGFC shall within 10
days thereafter deliver written notice of the Demand to all holders of
Conversion Shares from whom a Demand has not been received and shall use
its best efforts to register under the Act, for public sale in
accordance with the method of disposition specified in such Demand, the
number of Conversion Shares specified in such Demand (and in all written
requests for inclusion of additional Conversion Shares from such other
Holders of Conversion Shares received by CMGFC within 20 days after
notice of the Demand to such other holders). The
2
<PAGE> 3
holder(s) of a majority of the Conversion Shares for which registration
is requested in a Demand may designate the managing underwriter or
underwriters, subject to the approval of CMGFC, which approval shall not
be unreasonably withheld or delayed, if such managing underwriter or
underwriters are not nationally recognized. CMGFC shall be deemed to
have satisfied an obligation to register Conversion Shares pursuant to a
Demand only when a registration statement covering the Conversion Shares
specified in the Demand and any written requests delivered under this
paragraph (ii), for sale in accordance with the method of disposition
specified in the Demand, shall have become effective and the period of
distribution of the Conversion Shares contemplated thereby shall have
been completed (determined as hereinafter provided).
(iii) CMGFC shall be entitled to include in any registration
statement filed in response to a Demand made in accordance with this
Section 3(a), for sale in accordance with the method of disposition
specified by the requesting holders in such Demand, shares of Common
Stock to be sold by CMGFC for its own account, except as and to the
extent that, in the opinion of the managing underwriter(s), such
inclusion would adversely affect the marketing of the Conversion Shares
for which registration has been requested in connection with such
Demand. Except for registration statements on Form S-4, S-8 or any
successor forms thereto, CMGFC will not file with the Securities and
Exchange Commission (the "Commission") any other registration statement
with respect to its securities, whether for its own account or that of
other security holders, from the date of receipt of a Demand pursuant to
this Section 3(a) until 90 days following the completion of the period
of distribution of the Conversion Shares contemplated thereby
(determined as hereinafter provided).
(iv) CMGFC may at its option elect that any requested
registration pursuant to this Section 3(a) be delayed for a period not
in excess of 180 days from the date of such Demand; provided, that such
right to delay a Demand may not be exercised by CMGFC pursuant to this
Section 3(a) either (A) in connection with an initial public offering or
(B) more than once in any twelve-month period (so that no such election
by CMGFC may be
3
<PAGE> 4
made within twelve months of a previous election by CMGFC under this
paragraph (iv)).
(v) Notwithstanding anything to the contrary contained in
paragraph (i) of this Section 3(a), no Demand may be made under this
Section 3(a) within 180 days after the effective date of a registration
statement filed by CMGFC covering a firm commitment underwritten public
offering in which the holders of Conversion Shares shall have been
entitled to join pursuant to Section 3(b) and in which there shall have
been effectively registered all Conversion Shares as to which
registration shall have been requested in accordance with Section 3(b).
(b) Each time that CMGFC proposes to file under the Act a
registration statement relating, in whole or in part, to any of its equity
securities (except for registration statements on Form S-4, S-8, or any
successor forms thereto), CMGFC shall at least forty-five (45) days prior to
such filing give written notice of such proposed filing to each holder of
outstanding Subordinated Debt, Preferred Shares or Conversion Shares not
theretofore registered under the Act. CMGFC shall designate the managing
underwriter or underwriters with respect to any registration initiated by CMGFC,
subject to the approval of the Holder. Upon receipt by CMGFC not more than
thirty (30) days thereafter of a written request from any such holder for
registration of Conversion Shares under this subsection, subject to the
provisions of the succeeding sentence, CMGFC shall include in such filing and
shall use its best efforts to register the Conversion Shares as to which such
holder requested registration; provided, however, if at any time after giving
written notice of its intention to register any equity securities and prior to
the effective date of the registration statement filed in connection with such
registration, CMGFC shall determine for any reason not to register such equity
securities, CMGFC may, at its election, give written notice of such
determination to each holder of the Subordinated Debt or the Preferred Stock
and/or Conversion Shares and, thereupon, shall be relieved from its obligation
with such registration (but not from its obligation to pay the registration
expenses in connection therewith). If the managing or principal underwriters
named in the registration statement shall advise CMGFC and the Holders which
have requested Conversion Shares to be registered pursuant thereto that, in the
good faith judgment
4
<PAGE> 5
of such managing or principal underwriters, the number of shares of Common Stock
which such Holders, CMGFC and all other shareholders have requested be included
in such registration statement exceed the number of shares it is advisable to
offer and to sell at such time, then the number of shares of Common Stock to be
registered and sold pursuant to such registration statement shall be
appropriately reduced. In such case, the number of shares of Common Stock to be
sold after such reduction shall be allocated to CMGFC, and the amount of shares
remaining to be registered and sold after such allocation to CMGFC shall be
ratably allocated among the Holders and such other shareholders in the same
proportion as the original number of shares requested by such Person to be
registered bears to a fraction, the numerator of which is the aggregate number
of shares to be registered requested by such Person and the denominator of which
is the aggregate number of shares requested to be registered by all such
Persons.
(c) In connection with any registration pursuant to this Section
3:
(i) Upon the request of one or more holders of Conversion Shares
then being registered, CMGFC will cooperate with any underwriters (as
defined in the Act) for the requesting party, including, without
limitation, providing such information, certificates, comfort letters of
accountants and opinions of counsel as may be reasonably requested by
such underwriters.
(ii) CMGFC will furnish to the holders of the Conversion Shares
being registered, at CMGFC's sole cost and expense, such number of
prospectuses conforming to the requirements of the Act, and the rules
and regulations thereunder, relating to the Conversion Shares subject
thereto as may from time to time be reasonably requested by such
holders.
(iii) All fees, disbursements and expenses in connection with the
registration, other than any underwriting discount or commissions which
shall be paid from the proceeds of the sale of the shares of stock of
CMGFC being registered, shall be borne by CMGFC, including, without
limitation, all registration and filing fees, printing expenses, fees
and disbursements of counsel for CMGFC and expenses of complying with
applicable securities or Blue Sky laws.
5
<PAGE> 6
(iv) CMGFC agrees at its own expense to effect and to keep
effective, for at least 270 days after the date of effectiveness,
necessary registrations or qualifications under the securities or Blue
Sky laws of such jurisdictions as may be reasonably requested by any of
the holders of the Conversion Shares or by any underwriters for such
holders so as to permit the disposition of the Conversion Shares being
registered.
(v) Each Holder agrees to provide in an expeditious manner
whatever information and undertakings are reasonably requested by CMGFC
in order to comply with the requirements of the Act and of the
Securities Exchange Act of 1934, as amended, the rules and regulations
thereunder and the guides and other pronouncements of the Commission in
connection with the registration of such Holder's Conversion Shares.
Each Holder will have the opportunity to review and correct any portions
of any disclosure materials pertaining to such Holder prior to their
filing or use in such disclosure materials.
(vi) CMGFC will indemnify and hold harmless each holder of
Conversion Shares, and such holder's officers, employees, directors and
agents and any underwriter (as defined in the Act) who participates in
such registration for such holder and each person, if any, who controls
such holder or any such underwriter against any losses, claims, damages
or liabilities, joint or severally, or actions in respect thereof to
which such holder or any such underwriter or controlling person may
become subject under the Act, or otherwise, insofar as such losses,
claims damages, liabilities or actions in respect thereof arise out of,
or are based upon, any untrue statement or alleged untrue statement of
any material fact contained in any registration statement under which
such Conversion Shares were registered under the Act, any preliminary
prospectus or final prospectus contained therein, or any amendment or
supplement thereto, or arise out of, or are based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and
will reimburse such holder or any such underwriter or controlling person
for any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such
6
<PAGE> 7
loss, claim, damage, liability or action; provided that to the extent
that any such loss, claim, damage or liability arises out of, or is
based upon, an untrue statement or alleged untrue statement or omission
or alleged omission made in said registration statement, said
preliminary prospectus or said final prospectus or any said amendment or
supplement in reliance upon, and in conformity with, written information
furnished to CMGFC by any Holder or by any underwriter for such Holder
specifically for use in the preparation thereof, CMGFC will not be so
liable to such Holder or such controlling person or underwriter.
(vii) The Holder shall not be required to (A) make any
representations and warranties to CMGFC or the underwriters other than
representations and warranties regarding the Holder, the Conversion
Shares and the Holder's intended method of distribution and any other
representation and warranty required by law and (B) provide
indemnification to CMGFC or the underwriters in connection with the
offering.
(viii) Each Holder will indemnify and hold harmless CMGFC, and
CMGFC's officers, employees, directors and agents and any underwriter
(as defined in the Act) who participates in such disclosure for CMGFC
and each person, if any, who controls CMGFC or any such underwriter
against any losses, claims, damages or liabilities, joint or severally,
or actions in respect thereof to which CMGFC or any such underwriter or
controlling person may become subject under the Act, or otherwise,
insofar as such losses, claims damages, liabilities or actions in
respect thereof arise out of, or are based upon, any untrue statement or
alleged untrue statement of any material fact pertaining to such Holder
and furnished by such Holder in writing specifically for inclusion in,
and contained in, any registration statement under which such Conversion
Shares were registered under the Act, any preliminary prospectus or
final prospectus contained therein, and will reimburse CMGFC or any such
underwriter or controlling person for any legal or other expenses
reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action; provided
that to the extent that any such loss, claim, damage or liability arises
out of, or is based upon, an untrue statement or
7
<PAGE> 8
alleged untrue statement made in said registration statement, said
preliminary prospectus or said final prospectus or any said amendment or
supplement in reliance upon, and in conformity with, written information
furnished to such Holder by CMGFC or by any such underwriter for CMGFC
specifically for use in the preparation thereof, such Holder will not be
so liable to CMGFC or such controlling person or underwriter.
4. GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF TRIAL BY
JURY. THIS REGISTRATION RIGHTS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICT OF
LAWS RULES APPLIED IN THE STATE OF NEW YORK. WITH RESPECT TO ANY CLAIM ARISING
OUT OF THIS REGISTRATION RIGHTS AGREEMENT (A) EACH PARTY IRREVOCABLY SUBMITS TO
THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND THE UNITED
STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, AND (B) EACH PARTY
IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY HAVE AT ANY TIME TO THE LAYING OF
VENUE OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING HERETO
BROUGHT IN ANY SUCH COURT, IRREVOCABLY WAIVES ANY CLAIM THAT ANY SUCH SUIT,
ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM AND FURTHER IRREVOCABLY WAIVES THE RIGHT TO OBJECT, WITH
RESPECT TO SUCH CLAIM, SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT,
THAT SUCH COURT DOES NOT HAVE JURISDICTION OVER SUCH PARTY. TO THE EXTENT
PERMITTED BY APPLICABLE LAW, CFS, CTS AND CMGFC EACH IRREVOCABLY WAIVES ALL
RIGHT OF TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF
OR IN CONNECTION WITH THIS REGISTRATION RIGHTS AGREEMENT OR ANY MATTER ARISING
HEREUNDER.
5. "Market Stand-Off" Agreement. If requested by CMGFC and an
underwriter of Common Stock of CMGFC, the Holder shall not sell or otherwise
transfer or dispose of any Common Stock of CMGFC held by the Holder (other than
(i) those included in the registration, (ii) to an affiliate of the Holder or
(iii) in connection with the sale or transfer of substantially all of the assets
or common stock of the Holder)) during the ninety (90) day period following the
effective date of a registration statement of CMGFC filed under the Act.
6. Representation by Counsel. CMGFC hereby acknowledges to CTS
that it has been represented by counsel
8
<PAGE> 9
of its choice during the course of the negotiation of this Registration Rights
Agreement.
9
<PAGE> 10
If you agree to the foregoing terms and conditions, please so
indicate by executing the acknowledgment on the enclosed copy of this
Registration Rights Agreement and returning it to us.
Very truly yours,
CONTITRADE SERVICES L.L.C.
By:
------------------------------------------
Name:
Title: Authorized Signatory
By:
------------------------------------------
Name:
Title: Authorized Signatory
Accepted and agreed by:
CMG FUNDING CORP.
By:
----------------------------
Name: John Fry
Title: President
[Signature Page to Registration Rights Agreement]
<PAGE> 11
Execution Copy
AMENDMENT 1 TO
REGISTRATION RIGHTS AGREEMENT
This Amendment 1, dated October 24, 1997 (the "Amendment"), to
the Registration Rights Agreement (the "Registration Rights Agreement"), dated
December 17, 1996, between CMG Funding Corp., ("CMG"), and ContiTrade Services
L.L.C ("CTS").
WHEREAS, the parties hereto have entered into the Registration
Agreement, dated as of December 17, 1996, and now wish to amend certain
provisions in the Registration Rights Agreement.
NOW, THEREFORE, in consideration of the promises and agreements
contained herein, the parties hereto agree to amend the Registration Rights
Agreement and restate certain provisions thereof as follows:
1. Defined Terms. Capitalized terms used herein without
definition have the meanings ascribed to them in the Registration Rights
Agreement.
2. New Registration Rights. Clause (y) of the initial paragraph
of the Registration Rights Agreement, which reads, "the Certificate of
Incorporation of CMGFC, which permits CTS and CFC, as applicable, to convert
their Preferred Stock, or any portion thereof," shall be amended to read as
follows: "the Certificate of Incorporation of CMGFC, which permits CTS and CFC,
as applicable, to convert their Preferred Stock, or any portion thereof
(including, without limitation, Class A Preferred Stock of CMG acquired under
Paragraph 1 of the New Letter Agreement dated October 24, 1997, between CTS and
John D. Fry, or under Paragraph 10 of Amendment 1, dated October 24, 1997, to
the Standby and Working Capital Financing Agreement, dated December 17, 1996,
the former among CMG, CTS and CMG Funding Securities Corporation ("CMGFSC"), and
the latter among CMG, CTS, CMGFSC and Continental Mortgage Group, L.C., since
succeeded by CMG),".
3. Effectiveness. This Amendment, even after due execution by the
parties hereto, will not become effective until each of Amendment 1 to the
Standby and Working Capital Financing Agreement , dated October 24, 1997 (the
"Standby Amendment"), and Amendment 1 to the Purchase and Sale Agreement, dated
October 24, 1997, as well as the New Letter Agreement, dated October 24, 1997,
between John Fry and ContiFinancial Corporation, , and the amended Secured Note
as set forth in Paragraph 8 of the Standby Amendment have also been duly
executed and delivered by the parties thereto.
4. Governing Law. This Amendment shall be governed by and
construed in accordance with the Laws of the State of New York, without regard
to its rules regarding conflict of laws.
<PAGE> 12
IN WITNESS WHEREOF, the parties have executed this Amendment 1 to
the Registration Rights Agreement as of the day and year first above written.
CMG FUNDING CORP.
By:
--------------------------
Name:
Title:
CONTITRADE SERVICES, L.L.C
By:
--------------------------
Name:
Title:
By:
--------------------------
Name:
Title:
2
<PAGE> 13
Execution Copy
AMENDMENT 2 TO
REGISTRATION RIGHTS AGREEMENT
This Amendment 2, dated November 18, 1997 (the "Amendment"), to
the Registration Rights Agreement as amended (the "Registration Rights
Agreement"), dated as of December 17, 1996, between CMG Funding Corp., ("CMG"),
and ContiTrade Services L.L.C ("CTS").
WHEREAS, the parties hereto have entered into the Registration
Rights Agreement, dated as of December 17, 1996;
WHEREAS, the parties hereto have entered into Amendment 1 to the
Registration Rights Agreement dated as of October 24, 1997 ("Amendment 1"); and
WHEREAS, the parties hereto now wish to further amend the certain
provisions in the Registration Rights Agreement.
NOW, THEREFORE, in consideration of the promises and agreements
contained herein, the parties hereto agree to amend the Registration Rights
Agreement and restate certain provisions thereof as follows:
1. Defined Terms. Capitalized terms used herein without
definition have the meanings ascribed to them in the Registration Rights
Agreement.
2. Amendment to New Registration Rights. The parties hereto agree
that Section 2 of Amendment 1 entitled New Registration Rights is hereby revoked
and shall have no force or effect whatsoever.
3. Amended Registration Rights. Clause (y) of the initial
paragraph of the Registration Rights Agreement, which reads, "the Certificate of
Incorporation of CMGFC, which permits CTS and CFC, as applicable, to convert
their Preferred Stock, or any portion thereof, into shares of CMG's common stock
(the "Common Stock")", shall be amended to read as follows: "the Certificate of
Incorporation of CMGFC, which permits CTS and CFC, as applicable, to convert
their Preferred Stock, or any portion thereof into shares of CMG's common stock,
together with (i) the CMG common stock acquired under Warrant No. 1 issued by
CMG to CTS and dated as of November 18, 1997, and (ii) the additional amount of
CMG common stock acquired under paragraph 2 of the Conversion Letter Agreement
by and between CTS and CMG and dated as of November 18, 1997 (the "Common
Stock"),"
4. Effectiveness. This Agreement, even after due execution by the
parties hereto, will not become effective until (i) each of the Conversion
Letter Agreement dated as of November 18, 1997 by and between CTS and CMG (the
"Conversion Letter Agreement"), the Termination Letter dated as of November 18,
1997, by and between CTS and John Fry as Shareholder of CMG, Amendment 2 to the
Standby and Working Capital Financing Agreement dated as of November 18, 1997 by
and among CMG as
<PAGE> 14
Borrower, CTS as Lender and CMG Funding Securities Corp. as Residualholder,
Amendment 1 to the Investment Banking Services Agreement dated as of November
18, 1997 by and among CTS, CMG and ContiFinancial Services Corporation and
Warrant No. 1 issued by CMG to CTS and dated as of November 18, 1997, have each
also been duly executed and delivered by the parties thereto, and (ii) the
546,883 shares of Common Stock have been conveyed to CTS pursuant to Paragraph 2
of the Conversion Letter Agreement.
5. Governing Law. This Amendment shall be governed by and
construed in accordance with the Laws of the State of New York, without regard
to its rules regarding conflict of laws.
2
<PAGE> 15
IN WITNESS WHEREOF, the parties have executed this Amendment 2 to
the Registration Rights Agreement as of the day and year first above written.
CMG FUNDING CORP.
By:
--------------------------
Name:
Title:
CONTITRADE SERVICES, L.L.C
By:
--------------------------
Name:
Title:
By:
--------------------------
Name:
Title:
3
<PAGE> 16
AMENDMENT 3 TO
REGISTRATION RIGHTS AGREEMENT
This Amendment 3, dated December 31, 1997 (the "Amendment"), to
the Registration Rights Agreement as amended (the "Registration Rights
Agreement"), dated as of December 17, 1996, between CMG Funding Corp., ("CMG"),
and ContiTrade Services L.L.C ("CTS").
WHEREAS, the parties hereto have entered into the Registration
Rights Agreement, dated as of December 17, 1996;
WHEREAS, the parties hereto have entered into Amendment 1 to the
Registration Rights Agreement dated as of October 24, 1997 ("Amendment 1") and
Amendment 2 to the Registration Rights Agreement dated as of November 18, 1997
("Amendment 2"); and
WHEREAS, the parties hereto now wish to further amend the certain
provisions in the Registration Rights Agreement.
NOW, THEREFORE, in consideration of the promises and agreements
contained herein, the parties hereto agree to amend the Registration Rights
Agreement and restate certain provisions thereof as follows:
1. Defined Terms. Capitalized terms used herein without
definition have the meanings ascribed to them in the Registration Rights
Agreement.
2. Amended Registration Rights. Clause (y) of the initial
paragraph of the Registration Rights Agreement, as amended, which reads, "the
Certificate of Incorporation of CMGFC, which permits CTS and CFC, as applicable,
to convert their Preferred Stock, or any portion thereof, into shares of CMG's
common stock, together with the additional amount of CMG common stock acquired
under paragraph 2 of the Conversion Letter Agreement by and between CTS and CMG
and dated as of November 18, 1997 (the "Common Stock")", shall be amended to
read as follows: "the Certificate of Incorporation of CMGFC, which permits CTS
and CFC, as applicable, to convert their Preferred Stock, or any portion thereof
(including, without limitation, Class A preferred stock acquired in accordance
with Standby Agreement Amendment 3 (as defined below) into shares of CMG's
common stock, together with (i) the CMG common stock acquired under Warrant 2 or
Warrant No. 3, each issued by CMG to CTS and dated as of December 31, 1997, and
(ii) the additional amount of CMG common stock acquired under paragraph 2 of the
Conversion Letter Agreement by and between CTS and CMG and dated as of November
18, 1997 (the "Common Stock"),"
3. Effectiveness. This Agreement, even after due execution by the
parties hereto, will not become effective until (i) each of the Conversion
Letter Agreement No. 2 dated as of December 31, 1997 by and between CTS and CMG
(the "Conversion Letter Agreement No. 2"), Amendment 3 to the Standby and
Working
<PAGE> 17
Capital Financing Agreement dated as of December 31, 1997 by and among CMG as
Borrower, CTS as Lender and CMG Funding Securities Corp. as Residualholder
("Standby Agreement Amendment 3"), Amendment 2 to the Investment Banking
Services Agreement dated as of December 31, 1997 by and among CTS, CMG and
ContiFinancial Services Corporation, Amendment 2 to the Purchase and Sale
Agreement dated as of December 31, 1997, among CMG and CTS, Warrant No. 2 issued
by CMG to CTS and dated as of December 31, 1997 has been exchanged for Warrant
No. 1 held by CTS, and Warrant No. 3 issued by CMG to CTS and dated as of
December 31, 1997, have each also been duly executed and delivered by the
parties thereto, and (ii) the 410,581 shares of Class A Preferred Stock have
been conveyed to CTS pursuant to Paragraph 2 of the Conversion Letter Agreement
No. 2.
4. Governing Law. This Amendment shall be governed by and
construed in accordance with the Laws of the State of New York, without regard
to its rules regarding conflict of laws.
2
<PAGE> 18
IN WITNESS WHEREOF, the parties have executed this Amendment 3 to
the Registration Rights Agreement as of the day and year first above written.
CMG FUNDING CORP.
By:
--------------------------
Name:
Title:
CONTITRADE SERVICES, L.L.C
By:
--------------------------
Name:
Title:
By:
--------------------------
Name:
Title:
3
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES
(None)
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
CMG Funding Corp.
(Formerly Continental Mortgage Group, L.C.)
We consent to the use of our report included herein and to the reference to our
firm under the headings "Experts" and "Selected Financial Data of Real Trust
Asset Corporation and CMG Funding Corp." in the prospectus.
KPMG PEAT MARWICK LLP
Salt Lake City, Utah
May 11, 1998
<PAGE> 2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Real Trust Asset Corporation
We consent to the use of our report included herein and to the reference to our
firm under the headings "Experts" and "Selected Financial Data of Real Trust
Asset Corporation and CMG Funding Corp." in the prospectus.
KPMG PEAT MARWICK LLP
Salt Lake City, Utah
May 11, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT TO APPOINTMENT AS DIRECTOR
The undersigned hereby consents to serve as a director of RealTrust
Asset Corporation, a Maryland corporation, to commence upon closing of that
certain public offering of Units (comprised of Common Stock and Common Stock
Purchase Warrants). I hereby consent to the inclusion of my name and
biographical information in the Registration Statement on Form S-11 (file no.
333-48653) and the prospectus included therein.
/s/JEFF K. THREDGOLD
-------------------------------
Jeff K. Thredgold
<PAGE> 2
CONSENT TO APPOINTMENT AS DIRECTOR
The undersigned hereby consents to serve as a director of RealTrust
Asset Corporation, a Maryland corporation, to commence upon closing of that
certain public offering of Units (comprised of Common Stock and Common Stock
Purchase Warrants). I hereby consent to the inclusion of my name and
biographical information in the Registration Statement on Form S-11 (file no.
333-48653) and the prospectus included therein.
/s/DANIEL W. CAMPBELL
-------------------------------
Daniel W. Campbell
<TABLE> <S> <C>
<ARTICLE> CT
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> APR-01-1998
<TOTAL-ASSETS> 1,000
0
0
<COMMON> 1,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<TOTAL-REVENUES> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
