<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 10, 1999
REGISTRATION NO. 333-74945
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
E-LOAN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 6162 77-0460084
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
5875 ARNOLD ROAD, SUITE 100
DUBLIN, CA 94568
(925) 241-2400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
CHRIS LARSEN, CHIEF EXECUTIVE OFFICER
JANINA PAWLOWSKI, PRESIDENT
E-LOAN, INC.
5875 ARNOLD ROAD, SUITE 100
DUBLIN, CA 94568
(925) 241-2400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
PLEASE SEND COPIES OF ALL COMMUNICATIONS TO:
<TABLE>
<S> <C>
MARIO M. ROSATI, ESQ. DONALD M. KELLER, JR., ESQ.
ISSAC J. VAUGHN, ESQ. JON E. GAVENMAN, ESQ.
WILSON SONSINI GOODRICH & ROSATI, P.C. VENTURE LAW GROUP
650 PAGE MILL ROAD A PROFESSIONAL CORPORATION
PALO ALTO, CA 94304 2800 SAND HILL ROAD
(650) 493-9300 MENLO PARK, CA 94025
(650) 854-4488
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------
If the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), please check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If 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,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE> 2
The information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold until the registration statement filed
with the Securities and Exchange Commission is effective. This preliminary
prospectus is not an offer to sell nor does it seek an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION. DATED JUNE 10, 1999.
3,500,000 Shares
E-LOAN, INC.
Common Stock
E-Loan Logo
----------------------
This is an initial public offering of shares of common stock of E-LOAN,
Inc. Of the 3,500,000 shares of common stock being offered, 3,495,000 shares are
being sold by E-LOAN and 5,000 shares are being sold by a selling stockholder,
the E-LOAN Foundation, a charitable foundation established by E-LOAN and
administered by the Community Foundation Silicon Valley. See "Principal and
Selling Stockholders". E-LOAN will not receive any of the proceeds from the sale
of the shares being sold by the selling stockholder.
Immediately following and conditioned upon the closing of the initial
public offering, E-LOAN will sell to Forum Holdings, Inc. in a private placement
additional shares of common stock valued at $12,500,000 based on the initial
public offering price less the underwriting discount.
At the request of E-LOAN, the underwriters have reserved, at the initial
public offering price, up to 300,000 shares of common stock for sale to
individuals designated by E-LOAN who have expressed an interest in purchasing
shares in the offering.
Prior to the offering, there has been no market for the common stock. It is
currently estimated that the initial public offering price per share will be
between $9.00 and $11.00 per share. The shares of common stock have been
approved for quotation on the Nasdaq National Market under the symbol "EELN",
subject to official notice of issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 4 TO READ ABOUT CERTAIN FACTORS YOU
SHOULD CONSIDER BEFORE BUYING SHARES OF THE COMMON STOCK.
----------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
----------------------
<TABLE>
<CAPTION>
Per
Share Total
-------- --------
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to E-LOAN........................ $ $
Proceeds to selling stockholder............................. $ $
</TABLE>
The underwriters may, under the terms of the underwriting agreement,
purchase up to an additional 525,000 shares from E-LOAN at the initial public
offering price less the underwriting discount.
The underwriters expect to deliver the shares against payment in New York,
New York on , 1999.
----------------------
GOLDMAN, SACHS & CO. DONALDSON, LUFKIN & JENRETTE
HAMBRECHT & QUIST DLJDIRECT INC.
----------------------
Prospectus dated , 1999.
<PAGE> 3
DESCRIPTION OF ARTWORK
[Picture of three screen shots of E-LOAN's Internet home page and interior
pages with the heading, "Changing the Mortgage Process."]
Text at the bottom of the page:
Traditionally, getting a mortgage has been a frustrating experience for
many consumers. Now, E-LOAN envisions a better way. Founded by two mortgage
brokers, E-LOAN uses the Internet to provide access to thousands of loan
products and detailed comparisons, and to allow customers the convenience of
applying for and tracking their loans online. And, E-LOAN eliminates the loan
agent's commission to save customers money. E-LOAN believes that its technology
and customer service add up to a better way to get a loan. [E-LOAN LOGO]
E-LOAN is a registered trademark of E-LOAN. All other brand names or
trademarks appearing in this prospectus are the property of their respective
holders.
The gatefold includes a graphic illustrating the typical customer's path
through the E-LOAN loan process, from the initial search for interest rates
through analyzing and comparing loans, applying for a loan online, tracking the
loan online, closing the loan, and monitoring the loan to determine the optimum
time for refinancing. The graphic is overlaid on a screenshot of E-LOAN's home
page.
Heading for the graphic: [E-LOAN logo] Changing the mortgage process.
Text: E-LOAN's vision is to offer customers the best loans at the lowest
cost -- and to help them manage their mortgage as they do their investments. As
the largest part of most consumers' balance sheets, the home mortgage can be
leveraged to lower the overall cost of capital in an individual's portfolio.
E-LOAN's online tools allow customers to compare different types of loans,
forecast their performance in various interest rate scenarios, and create
personalized financial profiles that all combine to help them choose the right
loan. After the loan is closed, they can continue to track the market and
receive automatic notification of savings opportunities through refinancing.
[The graphical representation begins with a screenshot of E-LOAN's home
page pointing to a screenshot of the Rate Watch function. Each specific function
in the loan process is represented by a screen shot, with captions describing
the functions, which flow around a counterclockwise circle representing the
entire consumer loan process through E-LOAN. The functions and associated
descriptions, aligned next to the screen shots around the circle, are as
follows]:
Rate Watch: Customers can set up a customized account and be automatically
notified when the product they want is available. [Rate Watch then points to the
next screenshot representing Search for Rates, which marks the customer's entry
point into the circular loan process]:
Search for Rates: Our rate search delivers the most competitive products
from over 50,000 in our database, in seconds. Or, we can recommend a loan based
on a customer's financial profile. [Search for rates then points to a set of
screen shots moving counterclockwise around the loan process circle]:
Search Results- Review Costs-Compare Loans: Our web site offers access to
over 70 lenders through brokerage sourcing and direct loan sourcing from capital
markets. Detailed
<PAGE> 4
analyses show which loan is right for an individual's situation [round the
circle to Apply for Loan screenshot]:
Apply for Loan: Customers complete our easy application entirely online
[around the circle to Lock Through E-Track screenshot]:
Lock Through E-Track: Through an E-Track account, customers can review all
of their costs prior to closing [around the circle to Close Loan. In the
interior of the circle, connecting the Apply for Loan and Closed Loan screen
shots, is a curved line representing E-LOAN's internal processes. These are
bulleted and labeled in order: Automated Underwriting, Decision Within 24 Hours,
Document Collection/Verification, Appraisal, Funding.]
[Also in the interior of the circle is a screen shot representing the
E-Track function and a photograph captioned, Julie O., Loan Consultant. The
caption text for this combined graphic reads as follows]: With a personal loan
consultant and a password protected E-Track account, customers can get
up-to-date status on their loan applications anytime.
[The Close Loan screenshot leads around the circle to a Monitor Mortgage
screenshot, which leads to the final screenshot in the circle, Refinance. The
caption for Refinance is as follows]:
To help manage a customer's mortgage, E-LOAN automatically notifies them of
opportunities to save money on refinancing. [The circle forms into an arrow
leading from the Refinance screenshot into the Search for Rates screenshot,
indicating that when it is time to refinance, the customer begins a new rate
search and starts around the circle again].
<PAGE> 5
PROSPECTUS SUMMARY
This summary may not contain all of the information that you should
consider before investing in our common stock. You should read the following
summary together with the more detailed information regarding E-LOAN and the
common stock being sold in this offering and our financial statements and notes
to those statements appearing elsewhere in this prospectus. Except as described
in the financial statements or as otherwise specified in this prospectus, all
information in this prospectus: (1) assumes no exercise of the underwriters'
over-allotment option; (2) reflects a three-for-one split of the outstanding
shares of common stock completed in May 1999; (3) reflects the conversion of all
of our outstanding preferred stock into common stock upon the effectiveness of
the registration statement related to this offering; and (4) reflects the
issuance of 1,250,000 shares of common stock in a private placement to close at
the same time as this offering at an assumed public offering price of $10.00.
See "Description of Capital Stock" and "Underwriting".
E-LOAN, INC.
E-LOAN is a leading online provider of mortgages, offering consumers the
ability to obtain the most suitable mortgages from a wide array of lenders at
substantial savings. E-LOAN's easy-to-use website enables borrowers to search
through over 50,000 products provided by over 70 lending sources to find the
most competitively priced loans that match the borrowers' criteria. Borrowers
can analyze and compare loans online as well as receive unbiased loan
recommendations based on their personal criteria and financial characteristics.
E-LOAN offers origination cost savings of over 50% compared to obtaining a
mortgage through traditional mortgage brokers or single source lenders. E-LOAN
achieves these savings primarily by eliminating the commissioned loan agent, who
typically charges an origination fee of 1.25% to 1.5% of the loan amount. By
contrast, E-LOAN's origination fee is 0.625% of the loan amount. E-LOAN provides
complete transaction fulfillment and a high level of service through customer
service representatives assigned to each borrower and the proprietary E-Track
loan monitoring service. E-LOAN is the exclusive mortgage provider for loan
centers that E-LOAN has established with leading websites including Yahoo!,
E*Trade, DLJdirect,Telebank and CBS MarketWatch. In 1998 and the first quarter
of 1999, E-LOAN was the leader in the online mortgage market with approximately
$1 billion and $490 million in closed loans originated, respectively, including
E-LOAN's estimate of closed loan volume from referrals. During these periods,
E-LOAN incurred losses of $11.2 million and $11.4 million, respectively.
THE E-LOAN MARKET OPPORTUNITY
E-LOAN believes that the traditional mortgage origination process is highly
inefficient, which is the result of a fragmented, broker-dominated industry,
paper-intensive processes and a baffling array of mortgage products. This
inefficient process has made obtaining a mortgage a time-consuming, expensive,
inconvenient and unpleasant experience for many consumers. E-LOAN believes an
Internet-based distribution model reduces or eliminates many of these
shortcomings and provides a significant opportunity for an open, centralized and
easy-to-use service with a compelling consumer value proposition. Forrester
Research projects the market for online mortgage originations will grow from
$18.7 billion in 1999 to over $91.2 billion in 2003, representing an increase in
online penetration of the existing market from 1.5% in 1999 to 9.6% in 2003.
E-LOAN's website enables customers to efficiently search, analyze and
compare mortgage products offered by multiple lenders and apply for, qualify for
and obtain the mortgage that is most compatible with their individual financial
characteristics and borrowing requirements. By offering a large selection of
products from leading lenders, eliminating agent commissions and passing those
savings on to customers, and providing personalized customer service, E-LOAN
provides customers a more streamlined and efficient way to get a home loan.
E-LOAN plans to
1
<PAGE> 6
execute on its strategy of becoming the leading Internet-based provider of
mortgages and debt management services for customers by continuing to build
brand awareness, using technology to bring borrowers and capital markets closer
together and helping customers monitor and manage their debt.
E-LOAN FOUNDATION
In May 1999, E-LOAN established the E-LOAN Foundation, a charitable fund
which is administered by the Community Foundation Silicon Valley. The Community
Foundation Silicon Valley is a third party organization not affiliated with
E-LOAN and no officers or directors of E-LOAN will be involved in the
administration of the E-LOAN Foundation. To capitalize the E-LOAN Foundation,
E-LOAN donated 75,000 shares of common stock to the Community Foundation Silicon
Valley on behalf of the E-LOAN Foundation. All decisions with respect to the
voting of these shares shall be made by the Community Foundation Silicon Valley.
The estimated value of the shares at the time they were donated to the E-LOAN
Foundation was $900,000. E-LOAN has made no other charitable donations. The
E-LOAN Foundation is selling 5,000 shares of common stock in this offering.
Through the Community Foundation Silicon Valley, the E-LOAN Foundation will make
grants to charitable organizations.
CORPORATE INFORMATION
We were incorporated in California in August 1996 and we reincorporated in
Delaware in March 1999. Our principal executive offices are located at 5875
Arnold Road, Suite 100, Dublin, California 94568 and our phone number is (925)
241-2400. Our Internet address is www.eloan.com. The information on our website
is not part of this prospectus.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by E-LOAN.......... 3,495,000 shares
Common stock offered by the selling
stockholder on behalf of the E-LOAN
Foundation............................ 5,000 shares
Common stock offered in a private
placement to be closed at the same
time as this offering................. 1,250,000 shares
Common stock to be outstanding after
this offering......................... 38,482,403 shares
Use of proceeds......................... Working capital and general corporate purposes,
including capital expenditures. See "Use of
Proceeds".
Proposed Nasdaq National Market
symbol................................ "EELN"
</TABLE>
In addition to the 38,482,403 shares of common stock to be outstanding
after the offering, as of the date of this prospectus, E-LOAN has authorized the
issuance of 11,384,994 additional shares of common stock under its 1997 Stock
Option Plan and 1999 Employee Stock Purchase Plan.
RECENT SALES OF SECURITIES
Pursuant to a private transaction with 25 of our stockholders on March 23,
1999, Softbank America Inc. purchased an aggregate of 972,732 shares of common
and preferred stock at a per share price of $16.00.
2
<PAGE> 7
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, THREE MONTHS ENDED (UNAUDITED)
------------------------- -------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1997 1998 1998 1998 1998 1998 1999
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues........................ $ 1,043 $ 6,832 $ 527 $ 1,233 $ 2,051 $ 3,021 $ 4,802
Operating expenses:
Operations.................... 1,319 7,626 779 1,077 2,127 3,643 4,104
Sales and marketing........... 470 5,642 513 874 2,174 2,081 3,657
Technology.................... 102 1,248 163 371 284 430 481
General and
administrative.............. 524 2,410 379 436 711 884 1,423
Amortization of unearned
compensation................ -- 1,251 44 211 296 700 6,554
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses.... 2,415 18,177 1,878 2,969 5,592 7,738 16,219
----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss from operations............ (1,372) (11,345) (1,351) (1,736) (3,541) (4,717) (11,417)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Other income, net............... (2) 173 20 29 26 98 36
Net loss........................ $ (1,374) $ (11,172) $ (1,331) $ (1,707) $ (3,515) $ (4,619) $ (11,381)
=========== =========== =========== =========== =========== =========== ===========
Net loss per share(1):
Basic and diluted............. $ (0.12) $ (0.98) $ (0.12) $ (0.15) $ (0.30) $ (0.41) $ (0.94)
=========== =========== =========== =========== =========== =========== ===========
Weighted average number of
shares outstanding -- basic
and diluted................... 12,262,032 12,400,284 12,323,258 12,367,871 12,421,801 12,485,599 12,598,378
=========== =========== =========== =========== =========== =========== ===========
Pro forma net loss per
share(2)...................... $ (0.41) $ (0.06) $ (0.07) $ (0.12) $ (0.14) $ (0.36)
Pro forma weighted average
number of shares
outstanding(2)................ 27,153,122 22,743,817 23,314,274 29,035,490 33,021,508 33,100,579
</TABLE>
<TABLE>
<CAPTION>
OPERATING DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Closed loan volume (dollars)
E-LOAN closed.............................. $ 835,318 $ 104,943 $ 172,108 $ 219,232 $ 339,035 $ 469,817
Referral closed(3)......................... 146,880 135 37,530 56,565 52,650 19,710
----------- ----------- ----------- ----------- ----------- -----------
Total...................................... $ 982,198 $ 105,078 $ 209,638 $ 275,797 $ 391,685 $ 489,527
=========== =========== =========== =========== =========== ===========
Closed loan volume (loans)
E-LOAN closed.............................. 3,865 447 779 1,004 1,635 2,371
Referral closed(3)......................... 1,086 1 278 418 389 146
----------- ----------- ----------- ----------- ----------- -----------
Total...................................... 4,951 448 1,057 1,422 2,024 2,517
=========== =========== =========== =========== =========== ===========
</TABLE>
The following table provides a summary of our balance sheet as of March 31,
1999. The pro forma column gives effect to the conversion of all outstanding
shares of preferred stock into 20,493,921 shares of common stock and the
exercise and conversion of a warrant for 53,996 shares of Series D preferred
stock into 161,988 shares of common stock upon the closing of this offering. The
as-adjusted column reflects the issuance of 75,000 shares of common stock to the
selling stockholder, the issuance of 1,250,000 shares of common stock in a
private placement to be closed at the same time as this offering, and the sale
of 3,495,000 shares of common stock in this offering by E-LOAN at an assumed
initial public offering price of $10.00 per share, after deducting the estimated
underwriting discount and offering expenses payable by E-LOAN. See "Use of
Proceeds" and "Capitalization".
<TABLE>
<CAPTION>
MARCH 31, 1999 (UNAUDITED)
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Mortgage loans held-for-sale (pledged)...................... $ 63,729 $63,729 $ 63,729
Cash and cash equivalents................................... 3,565 4,065 46,974
Total assets................................................ 72,962 73,462 116,191
Warehouse lines payable..................................... 60,256 60,256 60,256
Long term obligations....................................... 1,301 1,301 1,301
Mandatorily redeemable preferred stock...................... 22,760 -- --
Total stockholders' equity (deficit)........................ (16,505) 6,755 49,484
</TABLE>
- ---------------
(1) Net loss per share includes the accretion for the Series C and Series D
mandatorily redeemable convertible preferred stock.
(2) Pro forma net loss per share has been computed by dividing net loss by the
pro forma weighted average number of shares outstanding. The pro forma
weighted average number of shares outstanding includes the pro forma effects
of the automatic conversion on a weighted average basis of E-LOAN's
preferred stock, and the exercise and conversion of a warrant for 53,996
shares of Series D preferred stock into 161,988 shares of common stock as if
the conversion occurred on January 1, 1998 or at the date of issuance, if
later.
(3) Computed based on E-LOAN's estimate of the percentage of referred loans
closed.
3
<PAGE> 8
RISK FACTORS
You should carefully consider the risks described below before making a
decision to buy our common stock. The risks and uncertainties described below
are not the only ones we face. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations.
If any of the following risks actually occur, our business, financial
condition or results of operations could be adversely affected, the trading
price of our common stock could decline, and you could lose all or part of your
investment. You should also refer to the other information set forth in this
prospectus, including our financial statements and the related notes.
WE HAVE A HISTORY OF LOSSES, WE EXPECT LOSSES TO CONTINUE AND WE MAY NOT ACHIEVE
OR MAINTAIN PROFITABILITY
We have not achieved profitability and expect to continue to incur
operating losses for the foreseeable future. We incurred net losses of $11.2
million for the year ended December 31, 1998. As of March 31, 1999, our
accumulated deficit was $24.0 million. Given that we expect to continue to incur
significant sales and marketing expenses, we will need to generate significant
revenues to achieve and maintain profitability. Although our revenues have grown
in recent quarters, we may not achieve sufficient revenues for profitability.
Even if we achieve profitability, we may not sustain or increase profitability
on a quarterly or annual basis in the future. If revenues grow slower than we
anticipate, or if operating expenses exceed our expectations or cannot be
adjusted accordingly, our business, results of operations and financial
condition will be adversely affected. See "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
WE HAVE A LIMITED OPERATING HISTORY AND CONSEQUENTLY FACE SIGNIFICANT RISKS AND
UNCERTAINTIES
We were incorporated in August 1996 and initiated our online mortgage
operations in June 1997. As a result of our limited operating history and our
recent growth, it will be necessary to implement new and expanded operational,
financial and administrative systems and control procedures to enable us to
expand, train and manage our employees and coordinate the efforts of our
underwriting, accounting, finance, marketing, and operations departments. In the
past, we have experienced difficulties summarizing and preparing accurate
financial information on a timely basis. If we experience these difficulties in
the future, we may be unable to produce accurate and timely financial
statements, which could limit our ability to conduct loan origination and sale
operations and adversely affect the liquidity and price of our common stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview".
OUR QUARTERLY FINANCIAL RESULTS ARE VULNERABLE TO SIGNIFICANT FLUCTUATIONS AND
SEASONALITY BECAUSE OF MANY FACTORS, ANY OF WHICH COULD ADVERSELY AFFECT OUR
STOCK PRICE
Due to rising interest rates and other factors, we expect our revenues in
the quarter ended June 30, 1999 to be flat or below the prior quarter's revenue.
It is possible that in some future periods our operating results may be below
the expectations of public market analysts and investors. In this event, the
price of our common stock may fall. Our revenues and operating results may vary
significantly from quarter to quarter due to a number of factors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for detailed information on our quarterly operating results. As a
result, we believe that quarter-to-quarter comparisons of our operating results
are not a good indication of our future performance.
4
<PAGE> 9
INTEREST RATE FLUCTUATIONS COULD ADVERSELY AFFECT OUR BUSINESS
A high percentage of our customers use our services to refinance existing
mortgages and are motivated to do so primarily when interest rates fall below
the rates of their existing mortgages. In the event interest rates significantly
increase, consumers' incentive to refinance will be greatly reduced and the
number of loans that we originate could significantly decline. For example, we
believe our loan volume will decline in the quarter ended June 30, 1999 below
the prior quarter's volume, partly based on a recent increase in interest rates.
Our failure to successfully reduce this dependence on refinancings and increase
the volume of our business derived from home purchases could have an adverse
effect on our business.
Our ability to engage in profitable secondary sales of loans may also be
adversely affected by increases in interest rates. The mortgage loan purchase
commitments we obtain are contingent upon our delivery of the relevant loans to
the purchasers within specified periods. To the extent that we are unable to
deliver the loans within the specified periods and interest rates increase, we
may experience no gain or even a loss on the sale of these loans. In addition,
any increase in interest rates will increase the cost of maintaining our
warehouse and repurchase lines of credit which we depend on to fund the loans we
originate. We currently do not use derivative financial instruments to hedge
these risks and are therefore exposed to losses caused by fluctuations in
interest rates.
A sharp decrease in interest rates over a short period may cause customers
who have interest rates on mortgages committed through E-LOAN to either delay
closing their loans or refinance with another lender. If this occurs in
significant numbers, it may have an adverse effect on our business or quarterly
results of operations.
UNCERTAINTY WITH RESPECT TO THE TIME IT TAKES TO CLOSE LOANS CAN LEAD TO
UNPREDICTABLE REVENUE AND PROFITABILITY
The time between the date an application is received from a customer on our
website and the date the loan closes has typically been lengthy and
unpredictable. For instance, in April 1999 approximately 9.5% of our loans were
funded after the loan commitment period had expired. The loan application and
approval process is often delayed due to factors over which we have little or no
control, including the timing of the customer's decision to commit to an
available interest rate, the close of escrow date for purchase loans, the
timeliness of appraisals and the adequacy of the customer's own disclosure
documentation. This uncertain timetable can have a direct impact on our revenue
and profitability for any given period. We may expend substantial funds and
management resources supporting the loan completion process and never generate
revenue from closed loans. Therefore, our results of operations for a particular
period may be adversely affected if the loans applied for during that period do
not close in a timely manner or at all. For example, we have experienced a
significant increase in purchase loan applications during the current quarter
ending June 30, 1999. Purchase loan applications generally take longer to close
than refinancing applications as they are tied to the close of escrow date. We
expect our loan volumes will decline in the quarter ended June 30, 1999 below
the prior quarter's volume, partly based on the extended time it takes to close
a purchase loan.
WE HAVE ONLY OPERATED DURING PERIODS OF GROWTH IN THE HOME MORTGAGE MARKET AND
CONSEQUENTLY FACE SIGNIFICANT RISKS AND UNCERTAINTIES
All of our operations have occurred during a period in which the home
mortgage market has experienced rapid growth. Since we began our online mortgage
operations, we have never operated during a downturn in the mortgage business
and we cannot assure you that we will be able to operate successfully if a
downturn occurs. We have generated limited revenues and have never operated
profitably.
5
<PAGE> 10
WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN OUR BUSINESS IN RECENT PERIODS, AND IF
WE ARE UNABLE TO MANAGE THIS GROWTH, OUR BUSINESS WILL BE ADVERSELY AFFECTED
We have experienced periods of significant growth, which have placed a
strain on our resources and will continue to do so in the future. If we do not
manage this growth effectively, it could adversely affect our business. We may
not be successful in managing or expanding our operations or maintaining
adequate management, financial and operating systems and controls. Our headcount
has grown substantially. At December 31, 1997, we had a total of 40 full-time
employees and at March 31, 1999, we had a total of 237 full-time employees.
Several members of our senior management joined us within the last eight
months, including Frank Siskowski, Chief Financial Officer; Harold "Pete"
Bonnikson, Senior Vice President of Operations; and Joseph Kennedy, Senior Vice
President of Marketing and Business Development. These individuals have not
previously worked together and they may not work together effectively.
IF ONLINE MORTGAGES AND OUR SERVICE OFFERINGS DO NOT ACHIEVE WIDESPREAD CONSUMER
ACCEPTANCE, OUR BUSINESS WILL BE ADVERSELY AFFECTED
Our success will depend in large part on widespread consumer acceptance of
purchasing mortgages online. The development of an online market for mortgage
loans has only recently begun, is rapidly evolving and likely will be
characterized by an increasing number of market entrants. Our future growth, if
any, will depend on the following critical factors:
- the growth of the Internet as a commerce medium generally, and as a
market for consumer financial products and services specifically;
- our ability to successfully and cost-effectively market our services to a
sufficiently large number of customers; and
- our ability to overcome a perception among many real estate market
participants that obtaining mortgages online is risky for consumers.
There can be no assurance that the market for our services will develop,
that our services will be adopted or that consumers will significantly increase
their use of the Internet for obtaining mortgage loans. If the online market for
mortgage loans fails to develop, or develops more slowly than expected, or if
our services do not achieve widespread market acceptance, our business, results
of operations and financial condition would be adversely affected.
BECAUSE A HIGH CONCENTRATION OF OUR BUSINESS IS IN CALIFORNIA, WE ARE
PARTICULARLY VULNERABLE TO ECONOMIC AND OTHER FACTORS AFFECTING CALIFORNIA
Approximately 84% and 69% of the loans we closed in the year ended December
31, 1998 and the quarter ended March 31, 1999, respectively, were from borrowers
located in California. No other state generated more than 10% of our closed
loans during these periods. We are more likely to originate a significant amount
of our loans in California for the foreseeable future because we are located
there, we have advertised more heavily in California than in other states to
date, and we believe that California consumers are more likely to be comfortable
with using the Internet to purchase mortgages. There have been times in the
past, most recently in 1991 - 1992, when the California economy has suffered a
recession disproportionate with the rest of the country. Should a similar
recession happen again in California, our business would be adversely affected.
In addition, California historically has been vulnerable to natural
disasters, including earthquakes and mudslides, which are not typically covered
by standard hazard insurance policies maintained by borrowers. Uninsured
disasters may adversely impact borrowers' ability to repay mortgage loans we
originate and any sustained period of increased delinquencies or defaults could
adversely affect the pricing of our future secondary loan sales and our overall
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<PAGE> 11
ability to sell loans. The occurrence of natural disasters in California could
have an adverse effect on our business, results of operations and financial
condition.
THE LOSS OF ONE OR MORE OF OUR SIGNIFICANT DISTRIBUTION PARTNERS WOULD ADVERSELY
AFFECT OUR BUSINESS
We rely on Internet distribution partners to direct a significant number of
our prospective customers to our website. If we lose any of our significant
distribution partners, we will likely fail to meet our growth objectives, both
in terms of additional borrowers and increased brand awareness. We consider our
distribution partnerships with Yahoo!, E*Trade and DLJdirect to be the most
critical to our success. During the year ended December 1998, approximately 13%
of our closed loans were derived from a website that we operate with Yahoo!, and
during the first quarter of 1999, approximately 14%, 2% and 1% of our closed
loans were derived from the websites we operate with Yahoo!, E*Trade and
DLJdirect, respectively. In the aggregate, approximately 18% and 22% of our
closed loans were derived from the websites of our distribution partners in 1998
and the first quarter of 1999. Our agreements with our distribution partners are
typically short-term, from one to three years in length, and can be terminated
for any reason upon 30 to 60 days prior written notice. We cannot assure you
that any or all of these agreements will not be terminated or will be renewed or
extended past their current expiration dates. If any of these agreements were to
be terminated or were to lapse without extension, we could lose a considerable
number of loan applications and our business would be adversely affected.
THE TERMINATION OF ONE OR MORE OF OUR FUNDING PARTNERSHIPS WOULD ADVERSELY
AFFECT OUR BUSINESS
We depend on GE Capital Mortgage Services, Inc. and Bank United to finance
our internal loan funding activities through the warehouse credit facilities
provided by each of these lenders. We also depend on Greenwich Capital Financial
Products, Inc. to finance portions of our mortgage loan inventory pending
ultimate sale to mortgage loan purchasers. If either of our warehouse credit
facilities becomes unavailable or our relationship with Greenwich Capital is
terminated, our business would be adversely affected. Under our agreements with
each of these partners, we make extensive representations, warranties and
various operating and financial covenants. A material breach of these
representations, warranties or covenants could result in the termination of our
agreements and an obligation to repay all amounts outstanding at the time of
termination. In the past, we have had to obtain waivers from Greenwich Capital
and GE Capital as a result of our failure to comply with covenants regarding the
issuance of capital stock, excess asset purchases and the breach of financial
ratios.
Our agreement with Greenwich Capital expires in April 2000, our agreement
with GE Capital expires in April 2000 and our agreement with Bank United expires
in February 2000. Our agreement with GE Capital can be terminated at any time on
120 days prior written notice. We are continually seeking to obtain additional
warehouse lending resources, but we may not be successful in this regard.
WE DEPEND ON THE TIMELY AND COMPETENT SERVICES OF VARIOUS COMPANIES INVOLVED IN
THE MORTGAGE PROCESS; IF THESE COMPANIES FAIL TO TIMELY AND COMPETENTLY DELIVER
THESE SERVICES, OUR BUSINESS AND REPUTATION WILL BE DIRECTLY AND ADVERSELY
AFFECTED
We rely on other companies to perform services related to the loan
underwriting process, including appraisals, credit reporting and title searches.
Any interruptions or delays in the provision of these services may cause delays
in the processing and closing of loans for our customers. If we are unsuccessful
in managing the timely delivery of these services we will likely experience
increased customer dissatisfaction and our business could be adversely affected.
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<PAGE> 12
WE DEPEND ON OUR AGREEMENTS WITH THIRD PARTIES TO FUND MORTGAGE LOANS OR FULFILL
LOAN TRANSACTION PROCESSING IN 16 STATES; IF THESE AGREEMENTS ARE TERMINATED,
OUR BUSINESS COULD BE ADVERSELY AFFECTED
E-LOAN licenses its mortgage loan origination systems and proprietary marks
to NetB@nk to enable NetB@nk to fund mortgage loans under the E-LOAN brand in
eleven states, and has agreements with PHH Mortgage Services Corporation and
Prism Mortgage Company relating to the fulfillment of all aspects of loan
transaction processing following origination in five states. Each of these
agreements may be terminated by either party upon 30 days prior written notice.
The termination of any or all of these agreements could have a material adverse
effect on our business.
THE LOSS OF OUR RELATIONSHIP WITH FANNIE MAE OR ANY OTHER SIGNIFICANT PROVIDER
OF AUTOMATED UNDERWRITING WOULD HAVE AN ADVERSE AFFECT ON OUR BUSINESS
We expect to depend on automated underwriting and other services offered by
government sponsored and other mortgage investors, including Fannie Mae and
Freddie Mac, to help ensure that our mortgage services can be offered
efficiently and on a timely basis. We currently have an agreement with Fannie
Mae that authorizes our use of their automated underwriting services and enables
us to sell qualified first mortgages to Fannie Mae. We cannot assure you that we
will remain in good standing with Fannie Mae or that Fannie Mae will not
terminate our relationship. We expect to process a significant portion of our
conforming loans using the Fannie Mae system until we are able to obtain
automated underwriting services from other providers. Our agreement with Fannie
Mae can be terminated by either party. The termination of our agreement with
Fannie Mae would adversely impact our business by reducing our ability to
streamline the mortgage origination process. Additionally, we may not be able to
successfully implement the automated underwriting services of Fannie Mae or
other automated underwriting providers in a manner that will lead to substantial
processing efficiencies.
WE MAY INCUR LOSSES ON LOANS IF WE BREACH REPRESENTATIONS OR WARRANTIES TO
MORTGAGE LOAN PURCHASERS
In connection with the sale and exchange of loans, we make customary
representations and warranties to mortgage loan purchasers relating to, among
other things, compliance with laws and origination practices. In the event we
breach any of these representations and warranties, we may be required to
repurchase or substitute these mortgage loans and bear any subsequent losses on
the repurchased loans. We may also be required to indemnify mortgage loan
purchasers for these losses and claims with respect to mortgage loans for which
there was a breach of representations and warranties. In addition, many of our
agreements with mortgage loan purchasers prohibit our solicitation of borrowers
with respect to the refinancing of loans we originate and sell. The mortgage
loan purchasers under these agreements may construe our Mortgage Monitor service
as violating these non-solicitation provisions, in which case they may elect to
terminate their agreements with us or may seek recovery from us for damages
sustained by them. Many of our agreements with mortgage loan purchasers prohibit
us from refinancing mortgage loans for specified time periods, unless we pay
penalties to the mortgage loan purchasers or obtain their consent. These
agreements also require us to return any premiums paid by a mortgage loan
purchaser if the mortgage loans purchased are prepaid in full during periods of
up to 12 months following the date the mortgage loan is purchased.
THE MORTGAGE LENDING INDUSTRY IS INTENSELY COMPETITIVE, AND IF WE FAIL TO
SUCCESSFULLY COMPETE IN THIS INDUSTRY, OUR MARKET SHARE AND BUSINESS WILL BE
ADVERSELY AFFECTED
To compete successfully, we must respond promptly and effectively to the
challenges of technological change, evolving standards and our competitors'
innovations by continuing to enhance and expand our services, as well as our
sales and marketing channels. Increased
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competition, particularly online competition, could result in price reductions,
reduced margins or loss of market share, any of which could adversely affect our
business. We may not be able to compete successfully in our market environment
and our failure to do so could have an adverse effect on our business, results
of operations and financial condition. See "Business -- Competition".
IF WE FAIL TO COMPLY WITH THE NUMEROUS LAWS AND REGULATIONS THAT GOVERN OUR
INDUSTRY, OUR BUSINESS COULD BE ADVERSELY AFFECTED
Our business must comply with extensive and complex rules and regulations
of, and licensing and examination by, various federal, state and local
government authorities. These rules impose obligations and restrictions on our
residential loan brokering and lending activities. In particular, these rules
limit the broker fees, interest rates, finance charges and other fees we may
assess, require extensive disclosure to our customers, prohibit discrimination
and impose on us multiple qualification and licensing obligations. We may not
always have been and may not always be in compliance with these requirements.
Failure to comply with these requirements may result in, among other things,
revocation of required licenses or registrations, loss of approved status,
voiding of loan contracts or security interests, indemnification liability or
the obligation to repurchase mortgage loans sold to mortgage loan purchasers,
rescission of mortgage loans, class action lawsuits, administrative enforcement
actions and civil and criminal liability. See "Business -- Regulation of
Mortgage Brokers and Lenders".
ANY ACQUISITIONS THAT WE UNDERTAKE COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR
BUSINESS, DILUTE STOCKHOLDER VALUE AND ADVERSELY AFFECT OUR OPERATING RESULTS
We may acquire or make investments in complementary businesses,
technologies, services or products. These acquisitions and investments could
disrupt our ongoing business, distract our management and employees and increase
our expenses. We have had discussions with companies regarding our acquiring, or
investing in, their businesses, products, services or technologies. If we
acquire a company, we could have difficulty in assimilating that company's
personnel, operations, technology and software. In addition, the key personnel
of the acquired company may decide not to work for us. We could also have
difficulty in integrating the acquired products, services or technologies into
our operations and we may incur indebtedness or issue equity securities to pay
for any future acquisitions. The issuance of equity securities could be dilutive
to our existing stockholders.
THE LOSS OF ANY OF OUR EXECUTIVE OFFICERS OR KEY PERSONNEL WOULD LIKELY HAVE AN
ADVERSE EFFECT ON OUR BUSINESS
Our future success depends to a significant extent on the continued
services of our senior management and other key personnel, particularly
co-founders Chris Larsen, Chief Executive Officer, and Janina Pawlowski,
President. Ms. Pawlowski, a licensed real estate broker, is responsible for all
of our activities in California and several other states. If Ms. Pawlowski were
to terminate her relationship with us for any reason we would not be able to
conduct business in these states until a replacement is found. The loss of the
services of Mr. Larsen, Ms. Pawlowski or other key employees, would also likely
have an adverse effect on our business, results of operations and financial
condition. We have not entered into employment agreements with any of our
executives, except Joseph Kennedy, Senior Vice President, Marketing and Business
Development, and do not maintain "key person" life insurance for any of our
personnel. See "Management" for detailed information on our key personnel.
WE MAY NOT BE ABLE TO RECRUIT AND RETAIN THE PERSONNEL WE NEED TO SUCCEED
Competition for personnel throughout our industry is intense. We may be
unable to retain our key employees or attract, assimilate or retain other highly
qualified employees in the future. Our
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future success depends on our continuing to attract, retain and motivate highly
skilled employees, particularly with respect to our loan processing functions.
We have in the past experienced, and we expect to continue to experience in the
future, difficulty in hiring and retaining employees with appropriate
qualifications. If we do not succeed in attracting new personnel or retaining
and motivating our current personnel, our business will be adversely affected.
OUR BUSINESS WILL BE IMPAIRED IF CONSUMERS DO NOT CONTINUE TO USE THE INTERNET
Our business will be adversely affected if Internet usage does not continue
to grow, particularly by homebuyers. A number of factors may inhibit Internet
usage by consumers, including inadequate network infrastructure, security
concerns, inconsistent quality of service, and lack of availability of
cost-effective, high-speed service. If Internet usage grows, the Internet
infrastructure may not be able to support the demands placed on it by this
growth and its performance and reliability may decline. In addition, many
websites have experienced service interruptions as a result of outages and other
delays occurring throughout the Internet infrastructure. If these outages or
delays frequently occur in the future, Internet usage, as well as the usage of
our website, could grow more slowly or decline.
OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO EXPAND AND PROMOTE OUR BRAND
RECOGNITION
Establishing and maintaining our brand is critical to attracting and
expanding our customer base, solidifying our business relationships and
successfully implementing our business strategy. We cannot assure you that our
brand will be positively accepted by the market or that our reputation will be
strong.
Promotion and enhancement of our brand will also depend, in part, on our
success in providing a high-quality customer experience. We cannot assure you
that we will be successful in achieving this goal. To date we are aware of
numerous customer complaints regarding the quality of our service. If these
complaints persist they may significantly damage our reputation and offset the
efforts we make in promoting and enhancing our brand and could have an adverse
effect on our business, results of operations and financial condition. If
visitors to our website do not perceive our existing services to be of high
quality or if we alter or modify our brand image, introduce new services or
enter into new business ventures that are not favorably received, the value of
our brand could be diluted, thereby decreasing the attractiveness of our service
to potential customers.
OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO ADAPT TO THE RAPID TECHNOLOGICAL
CHANGE THAT CHARACTERIZES OUR INDUSTRY
Our future success will depend on our ability to adapt to rapidly changing
technologies by continually improving the performance features and reliability
of our services. We rely on third party software products and services,
including software related to automated underwriting functions which will enable
us to realize processing efficiencies that are central to our operations. If we
are unable to integrate this software in a fully functional manner, we may
experience difficulties that could delay or prevent the successful development,
introduction or marketing of new products and services. In addition,
enhancements of our products and services must meet the requirements of our
current and prospective customers and must achieve significant market
acceptance. We could also incur substantial costs if we need to modify our
services or infrastructure to adapt to these changes.
ANY FAILURES OF, OR CAPACITY CONSTRAINTS IN, OUR SYSTEMS OR THE SYSTEMS OF THIRD
PARTIES ON WHICH WE RELY COULD ADVERSELY AFFECT OUR BUSINESS
Our communications hardware and certain of our other computer hardware
operations are located at the facilities of Exodus Communications, Inc. in Santa
Clara, California and Jersey City, New Jersey. The hardware for our internal
loan and product database, as well as our loan
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processing operations is maintained in our Dublin, California facility. Fires,
floods, earthquakes, power losses, telecommunications failures, break-ins and
similar events could damage these systems. Computer viruses, electronic
break-ins or other similar disruptive problems could also adversely affect our
website. Our business could be adversely affected if our systems were affected
by any of these occurrences. Our insurance policies may not adequately
compensate us for any losses that may occur due to any failures or interruptions
in our systems.
ANY OUTGAGES, DELAYS OR OTHER DIFFICULTIES EXPERIENCED BY THE INTERNET SERVICE
PROVIDERS, ONLINE SERVICE PROVIDERS OR OTHER WEBSITE OPERATORS ON WHICH OUR
USERS DEPEND COULD ADVERSELY AFFECT OR BUSINESS
Our website has in the past and may in the future experience slower
response times or decreased traffic for a variety of reasons. In addition, our
users depend on Internet service providers, online service providers and other
website operators for access to our websites. Many of them have experienced
significant outages in the past, and could experience outages, delays and other
difficulties due to system failures unrelated to our systems. Additionally, the
Internet infrastructure may not be able to support continued growth in its use.
Any of these problems could adversely affect our business.
OUR BUSINESS WILL BE ADVERSELY AFFECTED IF WE ARE UNABLE TO SAFEGUARD THE
SECURITY AND PRIVACY OF OUR CUSTOMERS' FINANCIAL DATA
Internet usage could decline if any well-publicized compromise of security
occurred. We may incur significant costs to protect against the threat of
security breaches or to alleviate problems caused by any breaches that occur. We
also retain on our premises personal financial documents that we receive from
prospective borrowers in connection with their loan applications. These
documents are highly sensitive and if a third party were to misappropriate our
customers' personal information, customers could possibly bring legal claims
against us. We cannot assure you that our privacy policy will be deemed
sufficient by our prospective customers or any federal or state laws governing
privacy which may be adopted in the future.
OUR BUSINESS WILL BE ADVERSELY AFFECTED IF WE ARE UNABLE TO PROTECT OUR
INTELLECTUAL PROPERTY RIGHTS FROM THIRD PARTY CHALLENGES OR IF WE ARE INVOLVED
IN LITIGATION
Trademarks and other proprietary rights are important to our success and
our competitive position. Although we seek to protect our trademarks and other
proprietary rights through a variety of means, we cannot assure you that the
actions we have taken are adequate to protect these rights. We may also license
content from third parties in the future and it is possible that we could face
infringement actions based upon the content licensed from these third parties.
Any claims brought against us, regardless of their merit, could result in costly
litigation and the diversion of our financial resources and technical and
management personnel. Further, if any of these claims are proved valid, through
litigation or otherwise, we may be required to change our trademarks and pay
financial damages, which could adversely affect our business.
IF OUR INTERNAL SYSTEMS, OR THE INTERNAL SYSTEMS OF OUR SUPPLIERS, ARE NOT YEAR
2000 COMPLIANT, OUR BUSINESS COULD BE SERIOUSLY DISRUPTED
Many currently installed computer systems and software products only accept
two digits to identify the year in any date. Thus, the year 2000 will appear as
"00", which the system might consider to be the year 1900 rather than the year
2000. This could result in system failures, delays or miscalculations. Computer
systems and software that have not been developed or enhanced recently may need
to be upgraded or replaced to comply with Year 2000 requirements.
We believe that each of our software systems on a stand-alone basis is
currently Year 2000 compliant. However, we rely on software components acquired
from third parties which may not
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be Year 2000 compliant. The Internet operations of many of our customers and
suppliers may also be affected by Year 2000 complications. The failure of our
customers or suppliers to ensure that their systems are Year 2000 compliant
could have an adverse effect on our customers and suppliers, resulting in
decreased Internet usage or our inability to obtain necessary data communication
and telecommunication capacity, which in turn could have an adverse effect on
our business, results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000".
THERE HAS BEEN NO PRIOR MARKET FOR OUR COMMON STOCK AND AN ACTIVE TRADING MARKET
MAY NOT DEVELOP FOLLOWING THIS OFFERING
Before this offering, there has not been a public market for our common
stock and the trading market price for our common stock may decline below the
initial public offering price. We cannot predict the extent to which a market
will develop or how liquid that market might become. The initial public offering
price for the shares of our common stock will be determined by negotiations
between us and the representatives of the underwriters and may not be indicative
of prices that will prevail in the trading market. See "Underwriting" for a
discussion of the factors considered in determining the initial public offering
price.
OUR STOCK PRICE COULD BE VOLATILE AND COULD DECLINE FOLLOWING THIS OFFERING
The stock market has experienced significant price and volume fluctuations,
and the market prices of technology companies, particularly Internet-related
companies, have been highly volatile. Investors may not be able to resell their
shares at or above the initial public offering price. See "Underwriting". In the
past, securities class action litigation has often been instituted against
companies following periods of volatility in the market price of their
securities. This type of litigation could result in substantial costs and a
diversion of management's attention and resources.
PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS WILL RETAIN SUBSTANTIAL
CONTROL OVER OUR BUSINESS AFTER THE OFFERING AND MAY MAKE DECISIONS THAT ARE NOT
IN THE BEST INTEREST OF ALL STOCKHOLDERS
Upon completion of this offering, our executive officers, directors and
greater than 5% stockholders, and related entities controlled by them, will, in
the aggregate, own approximately 74.5% of our outstanding common stock. As a
result, these persons, acting together, will have the ability to substantially
influence all matters submitted to the stockholders for approval, including the
election and removal of directors and any merger, consolidation or sale of all
or substantially all of our assets, and to control our management and affairs.
Accordingly, this concentration of ownership may have the effect of delaying,
deferring or preventing a change in control, impeding a merger, consolidation,
takeover or other business combination involving us or discouraging a potential
acquirer from making a tender offer or otherwise attempting to obtain control of
our business, even if the transaction would be beneficial to other stockholders.
See "Principal and Selling Stockholders".
FUTURE SALES OF OUR COMMON STOCK MAY CAUSE OUR STOCK PRICE TO DECLINE
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could decline. Based on shares outstanding as of May 18, 1999, upon completion
of this offering we will have outstanding 38,482,403 shares of common stock,
assuming no exercise of the underwriters' over-allotment option. Of these
shares, the 3,500,000 shares of common stock sold in this offering will be
freely tradeable, without restriction, in the public market. After the
agreements not to sell shares after this offering expire, 180 days from the date
of this prospectus, an additional 32,235,684 shares will be eligible for sale in
the public market.
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In addition, 5,784,432 shares under outstanding options and warrants and
5,909,082 shares reserved for future issuance under our stock option and
purchase plans will be eligible for sale in the public market subject to vesting
and the expiration of agreements not to sell shares after the offering.
FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. We use the words "anticipates," "believes," "plans," "expects,"
"future," "intends" and similar expressions to identify forward-looking
statements. This prospectus also contains forward-looking statements attributed
to certain third parties relating to their estimates regarding the growth of
e-commerce and mortgage loan markets. Our actual results could differ materially
from those anticipated in these forward-looking statements for many reasons,
including the risks faced by us described in "Risk Factors" and elsewhere in
this prospectus.
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USE OF PROCEEDS
The net proceeds to us from the sale of the 3,495,000 shares of common
stock offered by us and from a private placement of 1,250,000 shares of common
stock that will close at the same time as this offering are estimated to be
approximately $42.7 million, at an assumed initial public offering price of
$10.00 per share, after deducting the underwriting discount, estimated offering
expenses and assuming no exercise of the underwriters' over-allotment option to
purchase 525,000 additional shares of common stock from us. We are conducting
this offering primarily to increase our equity capital, create a public market
for our common stock and to facilitate future access to public equity markets.
We expect to use the majority of these proceeds for working capital and general
corporate purposes. E-LOAN will not receive any proceeds from the sale of common
stock by the selling stockholder. It is our intent to focus our operating
efforts on increasing client satisfaction with the E-LOAN experience by further
streamlining the mortgage process. This focused effort will include expenditures
on technology and system upgrades, corporate training, and recruitment of key
management and personnel to improve our operating and customer service
practices. In addition, we may use a portion of the net proceeds to acquire
complementary products, technologies or businesses; however, we currently have
no commitments or agreements and are not involved in any negotiations to do so.
We intend to invest the net proceeds of this offering in interest-bearing,
investment-grade securities pending their use.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. The covenants made by us under our existing line of credit
prohibit the payment of dividends.
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CAPITALIZATION
The following table sets forth the following information:
- the actual capitalization of E-LOAN as of March 31, 1999;
- the pro forma capitalization of E-LOAN after giving effect to the
conversion of all outstanding shares of convertible preferred stock and a
warrant to purchase Series D preferred stock into an aggregate of
20,655,909 shares of common stock upon the closing of this offering; and
- the pro forma as-adjusted capitalization after giving effect to the
issuance of 75,000 shares of common stock to the selling stockholder, the
issuance of 1,250,000 shares of common stock in a private placement that
will close at the same time as this offering and the sale of 3,495,000
shares of common stock in this offering by E-LOAN at an assumed initial
public offering price of $10.00 per share, less underwriting discounts
and commissions and estimated offering expenses payable by E-LOAN.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999 (UNAUDITED)
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C> <C>
Lease obligations, long-term portion........................ $ 686 $ 686 $ 686
Notes payable, long-term.................................... 614 614 614
Mandatorily redeemable convertible preferred stock:
Series C, 4,467,912 shares authorized; 4,269,936 shares
issued and outstanding, actual (aggregate liquidation
preference $5,245,702); no shares issued and
outstanding, pro forma as adjusted...................... 6,135 -- --
Series C-1, 4,467,912 shares authorized; no shares issued
and outstanding, actual (liquidation preference $1.22852
per share); no shares issued and outstanding, pro forma
as adjusted............................................. -- -- --
Series D, 1,950,000 shares authorized; 1,702,529 shares
issued and outstanding, actual (aggregate liquidation
preference $15,770,526); no shares issued and
outstanding, pro forma as adjusted...................... 16,625 -- --
-------- -------- --------
Stockholders' deficit:
Convertible preferred stock:
Series A, 428,635 shares authorized; 428,635 shares
issued and outstanding, actual (aggregate liquidation
preference $94,300) no shares issued and outstanding,
pro forma and as adjusted............................. 91 -- --
Series B, 450,708 shares authorized; 430,207 shares
issued and outstanding, actual (aggregate liquidation
preference $412,999); no shares issued and
outstanding, pro forma as adjusted.................... 411 -- --
Preferred stock; no shares authorized, actual; 5,000,000
shares authorized, pro forma as adjusted, no shares
issued and outstanding, actual, pro forma as adjusted... -- -- --
Common stock; 50,000,000 shares authorized and 12,742,974
shares issued and outstanding, actual; 70,000,000
authorized, 33,398,883 shares issued and outstanding,
pro forma, 38,218,883 shares issued and outstanding, pro
forma as adjusted....................................... 50 23,812 66,542
Less: subscription receivable............................. (4) (4) (4)
Unearned compensation..................................... (34,488) (34,488) (34,488)
Additional paid-in capital................................ 41,414 41,414 42,314
Accumulated deficit....................................... (23,979) (23,979) (24,880)
-------- -------- --------
Total stockholders' equity (deficit)............... $(16,505) $ 6,755 $ 49,484
-------- -------- --------
Total mandatorily redeemable convertible stock and
stockholders' equity............................. $ 6,255 $ 6,755 $ 49,484
-------- -------- --------
Total capitalization........................................ $ 7,555 $ 8,055 $ 50,784
======== ======== ========
</TABLE>
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This table excludes the following shares:
- 10,148,514 shares issuable upon the exercise of options under E-LOAN's
1997 Stock Option Plan consisting of:
- 5,739,432 shares underlying options outstanding at a weighted average
exercise price of $1.17 per share, of which 237,195 are exercisable as
of March 31, 1999;
- 4,409,082 shares underlying options available for future grants;
- 1,500,000 shares issuable under E-LOAN's 1999 Employee Stock Purchase
Plan; and
- 45,000 shares underlying a warrant that may be exercised and converted
into these shares at a price of $0.67 per share.
See "Management -- Stock Plans", "Description of Capital Stock" and Notes
11, 12 and 16 of Notes to Financial Statements.
16
<PAGE> 21
DILUTION
The pro forma net tangible book value of our common stock on March 31, 1999
was $6.8 million, or approximately $0.20 per share. Pro forma net tangible book
value per share represents the amount of our total tangible assets less total
liabilities, divided by the 33,398,883 pro forma number of shares of common
stock outstanding (assuming the conversion of all outstanding shares of
convertible preferred stock and the exercise and conversion of a warrant to
purchase Series D preferred stock into an aggregate of 20,655,909 shares of
common stock upon the closing of this offering). Dilution in net tangible book
value per share represents the difference between the amount per share paid by
purchasers of shares of our common stock in this offering and the net tangible
book value per share of our common stock immediately after the offering. After
giving effect to the issuance of 1,250,000 shares of common stock in a private
placement that will close at the same time as this offering and our sale of
3,495,000 shares of common stock and after deducting the underwriting discounts
and commissions and estimated offering expenses payable by E-LOAN, E-LOAN's net
tangible book value would have been $49.5 million or approximately $1.30 per
share. This represents an immediate increase in net tangible book value of $1.10
per share to existing stockholders and an immediate dilution in net tangible
book value of $8.70 per share to new investors. The following table illustrates
this per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $10.00
Pro forma net tangible book value per share as of March
31, 1999............................................... $0.20
Increase per share attributable to new investors.......... $1.10
-----
Pro forma net tangible book value per share after the
offering.................................................. $ 1.30
------
Dilution in pro forma net tangible book value per share to
new investors............................................. $ 8.70
======
</TABLE>
The following table shows, as of March 31, 1999, the number of shares of
common stock purchased from E-LOAN by existing stockholders and by the new
investors together with the total price and average price per share paid by each
of these groups. The information presented is based upon an assumed initial
public offering price of $10.00 per share, before deducting underwriting
discounts and commissions and estimated offering expenses payable by E-LOAN.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 33,398,883 88% $22,240,403 32% $ 0.67
New investors............... 4,745,000 12% 47,450,000 68% $10.00
---------- --- ----------- ---
Total..................... 38,143,883 100% $69,690,403 100%
========== === =========== ===
</TABLE>
The information set forth above is based upon the number of shares of
common stock outstanding on March 31, 1999 and gives effect to the conversion of
all outstanding shares of E-LOAN's convertible preferred stock, the exercise and
conversion of a warrant to purchase Series D preferred stock into shares of
common stock and the issuance of 1,250,000 shares of common stock in the private
placement that will occur upon the closing of this offering. This information
excludes:
- 10,148,514 shares issuable upon the exercise of options under E-LOAN's
1997 Stock Option Plan consisting of:
- 5,739,432 shares underlying options outstanding at a weighted average
exercise price of $1.17 per share, of which 237,195 are exercisable as
of March 31, 1999;
- 4,409,082 shares underlying options available for future grants;
- 1,500,000 shares issuable under E-LOAN's 1999 Employee Stock Purchase
Plan;
- 45,000 shares underlying a warrant that may be exercised and converted
into these shares at a price of $0.67 per share.
See "Management -- Stock Plans", "Description of Capital Stock" and Notes
11, 12 and 16 of Notes to Financial Statements.
17
<PAGE> 22
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected financial data below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and is qualified by reference to the Financial Statements and Notes
thereto appearing elsewhere in this prospectus. The balance sheet data as of
December 31, 1997 and 1998 and the income statement data for each of the three
years in the period ended December 31, 1998 are derived from, and are qualified
by reference to, the audited financial statements of E-LOAN included elsewhere
in this prospectus. The balance sheet data as of March 31, 1999 and the income
statement data for the three months ended March 31, 1999 are derived from the
unaudited financial results included elsewhere in this prospectus. The balance
sheet data as of December 31, 1995 and 1996 and the income statement data for
the year ended December 31, 1995 are derived from the unaudited financial
statements of E-LOAN not included herein. The balance sheet amounts for December
31, 1994 related to PAFG, the predecessor company, are de minimis and the income
statement amounts for the year ended December 31, 1994 are not available. The
historical results are not necessarily indicative of results to be expected for
any future period.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------------------- MARCH 31,
1995 1996 1997 1998 1999
----------- ----------- ------- -------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues...................................... $ 1,603 $ 893 $ 1,043 $ 6,832 $ 4,802
Operating expenses:
Operations.................................. 1,368 903 1,319 7,626 4,104
Sales and marketing......................... -- -- 470 5,642 3,657
Technology.................................. -- -- 102 1,248 481
General and administrative.................. 152 97 524 2,410 1,423
Amortization of unearned compensation....... -- -- -- 1,251 6,554
-------- -------- ------- -------- --------
Total operating expenses.................. 1,520 1,000 2,415 18,177 16,219
-------- -------- ------- -------- --------
Loss from operations.................... 83 (107) (1,372) (11,345) (11,417)
Other income, net............................. -- (3) (2) 173 36
-------- -------- ------- -------- --------
Net income (loss)............................. $ 83 $ (110) $(1,374) $(11,172) $(11,381)
======== ======== ======= ======== ========
Net loss per share:
Basic and diluted......................... $ .01 $ (0.01) $ (0.12) $ (0.98) $ (0.94)
======== ======== ======= ======== ========
BALANCE SHEET DATA (AT END OF PERIOD): (UNAUDITED) (UNAUDITED) (UNAUDITED)
Mortgage loans held-for-sale (pledged)...... $ -- $ -- $ -- $ 42,154 $ 63,729
Cash and cash equivalents................... 47 2 4,218 9,141 3,565
Total assets................................ 81 40 4,680 55,523 72,962
Warehouse lines payable..................... -- -- -- 41,046 60,256
Long term obligations....................... -- -- -- 1,290 1,301
Mandatorily redeemable preferred stock...... -- -- 5,049 21,393 22,760
Total stockholders' equity (deficit)........ 58 (52) (966) (11,184) (16,505)
</TABLE>
18
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with E-LOAN's
Financial Statements and Notes thereto and the other financial information
appearing elsewhere in this prospectus. In addition to historical information,
the following discussion and other parts of this prospectus contain
forward-looking information that involves risks and uncertainties. E-LOAN's
actual results could differ materially from those anticipated by the
forward-looking information due to competitive factors, risks associated with
E-LOAN's expansion plans and other factors discussed under "Risk Factors" and
elsewhere in this prospectus.
OVERVIEW
E-LOAN is a leading online provider of mortgages and is engaged in the
brokerage, origination and sale of mortgage loans secured by residential real
estate.
E-LOAN was incorporated in August 1996 and began marketing its services and
initiated online mortgage brokerage operations in June 1997. E-LOAN first
derived revenues from the origination and sale of mortgage loans in June 1998.
In December 1997, E-LOAN merged with Palo Alto Funding Group (PAFG), a
traditional mortgage brokerage firm established in 1992, and suspended PAFG's
operations. In compliance with applicable reporting requirements, the results of
PAFG have been included in E-LOAN's financial statements as a predecessor
company beginning in 1995. However, E-LOAN believes that reported results prior
to 1998, which are primarily composed of PAFG results, are not indicative of
E-LOAN's current business operations.
E-LOAN's revenues are derived from the brokering of loans and the
origination and sale of loans. Brokered loans are funded through lending
partners and E-LOAN never takes title to the mortgage. Brokerage revenues are
comprised of the mark-up to the lending partner's loan price, and processing and
credit reporting fees. These revenues are recognized at the time a loan is
closed. Originated and sold loans are loans that are funded through E-LOAN's own
warehouse lines of credit and sold to mortgage loan purchasers. Loan origination
and sale revenues consist of proceeds in excess of the carrying value of the
loan, origination fees less certain direct origination costs, other processing
fees and interest paid by borrowers on loans that E-LOAN holds for sale. These
revenues are recognized at the time the loan is sold or, for interest income, as
earned during the period from funding to sale. E-LOAN earns additional revenue
from its loan origination and sale operations as compared to brokered loan
operations because the sale of loans includes a service release premium.
E-LOAN's loan origination and sale operations were initiated in June 1998
and represented 35% and 64% of total revenues for the year ended December 31,
1998 and for the three months ended March 31, 1999, respectively. E-LOAN expects
revenues derived from its loan origination and sale operations to continue to
increase as a percentage of total revenues.
In generating revenues, E-LOAN relies on a number of strategic Internet
distribution partners to direct a significant number of prospective customers to
its website. E-LOAN considers its distribution partnerships with Yahoo!, E*Trade
and DLJdirect to be the most critical to its ability to generate revenues. Both
Yahoo! and E*Trade have made equity investments in E-LOAN. See "Certain
Transactions" and "Risk Factors -- The loss of one or more of our significant
distribution partners would adversely affect our business".
As a result of our limited operating history and our recent growth, it will
be necessary to implement new and expanded operational, financial and
administrative systems and control procedures to enable us to expand, train and
manage our employees and coordinate the efforts of our underwriting, accounting,
finance, marketing, and operations departments. For example,
19
<PAGE> 24
we intend to implement both a new financial reporting system and a loan
production system by the end of 1999.
Historically, our efforts were focused primarily on developing and growing
our online mortgage operations and less on implementing internal accounting
controls, financial and operational reporting systems and expanding the size and
capabilities of our financial staff.
In the fourth quarter of 1998, we hired a Chief Financial Officer and in
1999, we hired a Director of Finance and two other accounting managers as well
as additional full time and temporary financial personnel. We have also
documented and are in the process of enhancing our procedures and controls to
address the deficiencies in our financial reporting and loan production system.
See "Risk Factors -- We have a limited operating history and consequently face
significant risks and uncertainties".
E-LOAN FOUNDATION STOCK ISSUANCE
In May 1999, E-LOAN donated 75,000 shares of common stock in connection
with its establishment of a charitable foundation. The shares donated had an
estimated fair value of $900,000, and E-LOAN expects to record this as a general
and administrative expense in the three month period ending June 30, 1999.
AMORTIZATION OF UNEARNED COMPENSATION
Certain stock options granted in the years ended December 31, 1997 and
1998, and in the three months ended March 31, 1999 have been considered to be
compensatory. Additionally, an issuance of Series D preferred stock to an
officer in the three months ended March 31, 1999 has been considered to be
compensatory. Unearned compensation associated with stock options for the years
ended December 31, 1997 and 1998 amounted to $0 and $5.7 million, respectively.
Of these amounts $0 and $1.25 million have amortized for the years ended
December 31, 1997 and 1998, respectively. The remainder will be amortized over
the respective stock option vesting periods.
Stock options granted in the three months ended March 31, 1999 resulted in
unearned compensation of $35.0 million. Additionally, in February 1999 E-LOAN
issued shares of Series D preferred stock to an officer which resulted in a one
time compensation charge of $1.6 million. The total unearned compensation charge
resulting from these transactions was $36.6 million. Of this amount $6.6 million
was amortized during the three months ended March 31, 1999. The remainder will
be amortized over the respective stock option vesting periods.
20
<PAGE> 25
QUARTERLY RESULTS
The following table sets forth the results of operations for E-LOAN on a
quarterly basis and expressed as a percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1998 1998 1998 1998 1999
-------- -------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................. $ 527 $ 1,233 $ 2,051 $ 3,021 $ 4,802
Operating expenses:
Operations......................... 779 1,077 2,127 3,643 4,104
Sales and marketing................ 513 874 2,174 2,081 3,657
Technology......................... 163 371 284 430 481
General and administrative......... 379 436 711 884 1,423
Amortization of unearned
compensation.................... 44 211 296 700 6,554
------- ------- ------- ------- --------
Total operating expenses........ 1,878 2,969 5,592 7,738 16,219
------- ------- ------- ------- --------
Loss from operations................. (1,351) (1,736) (3,541) (4,717) (11,417)
Other income, net.................... 20 29 26 98 36
------- ------- ------- ------- --------
Net loss............................. $(1,331) $(1,707) $(3,515) $(4,619) $(11,381)
======= ======= ======= ======= ========
AS A PERCENTAGE OF REVENUES:
Revenues............................. 100% 100% 100% 100% 100%
Operating expenses:
Operations......................... 148 87 104 121 85
Sales and marketing................ 97 71 106 69 76
Technology......................... 31 30 14 14 10
General and administrative......... 72 35 35 29 30
Amortization of unearned
compensation.................... 8 17 14 23 136
Total operating expenses........ 356 241 273 256 338
Loss from operations................. (256) (141) (173) (156) (238)
Other income, net.................... 4 2 1 3 1
Net loss............................. (253)% (138)% (171)% (153)% (237)%
======= ======= ======= ======= ========
</TABLE>
REVENUES
Revenues increased sequentially each quarter throughout 1998 from $0.5
million to $3.0 million and increased $1.8 million from the fourth quarter to
$4.8 million for the three months ended March 31, 1999. Substantially all of
these increases resulted from growth in the number of loans closed and the
initiation of E-LOAN's loan origination and sale operations in June 1998. E-LOAN
did not significantly change its pricing during 1998 or the first quarter of
1999. E-LOAN expects that the rate of its revenue growth in future periods will
decline from the rates of revenue growth experienced in recent quarters. In
particular, E-LOAN expects that its revenues for the quarter ending June 30,
1999 will be lower than or flat relative to the first quarter of 1999. Recent
increases in interest rates have reduced the number of refinancing applications
received by E-LOAN, which has reduced the number of loans E-LOAN expects to
originate. In addition, a significant increase in the number of purchase loan
applications, which take substantially longer to close relative to refinancing
loan applications, also will contribute to lower loan volumes and, therefore,
lower revenues in the quarter ending June 30, 1999, as compared to the first
quarter of 1999. E-LOAN expects revenues derived from its loan origination and
sale operations to continue to increase as a percentage of its total revenues.
21
<PAGE> 26
OPERATING EXPENSES
OPERATIONS. Operations expense is comprised of both fixed and variable
expenses, including salaries, benefits and expenses associated with the
brokering, and the origination and sale of mortgage loans, and interest expense
paid by E-LOAN under the warehouse facilities it uses to fund loans held for
sale. Operations expense increased sequentially from the first quarter to the
fourth quarter of 1998 from $0.8 million to $3.6 million and increased $0.5
million from the fourth quarter of 1998 to $4.1 million for the three months
ended March 31, 1999. Operations expense decreased as a percentage of revenues
from 148% for the first quarter to 121% for the fourth quarter of 1998 and
decreased from 121% for the fourth quarter of 1998 to 85% for the three months
ended March 31, 1999. The increase in absolute dollars was primarily
attributable to an operations headcount increase necessary to support the growth
in E-LOAN's total closed loan volume. In addition, E-LOAN established its loan
origination and sale business in the last two quarters, which resulted in
additional headcount and an increase in interest expense due to an increase in
the number of loans held for sale. The decrease in operations expense as a
percentage of total revenue between the first and second quarter is due to
revenue growth exceeding growth in operations expense with an increase in the
third and fourth quarter from the establishment of the loan origination and sale
business. E-LOAN expects operations expense to increase in absolute dollars over
the next two years and intends to increase operations capacity in anticipation
of an increase in the number of loans funded, particularly purchase loans.
Purchase loan applications take longer to close and require greater interaction
between the borrower, the Realtor and other parties performing services related
to the transaction.
SALES AND MARKETING. Sales and marketing expense is primarily comprised of
salaries, benefits and other expenses related to advertising, promotion and
distribution partnerships. Sales and marketing expense increased from the first
quarter to the fourth quarter of 1998 from $0.5 million to $2.1 million and
increased $1.6 million from the fourth quarter of 1998 to $3.7 million for the
three months ended March 31, 1999. Sales and marketing expense decreased as a
percentage of revenues from 97% for the first quarter to 69% for the fourth
quarter of 1998 and increased from 69% for the fourth quarter of 1998 to 76% for
the three months ended March 31, 1999. Sales and marketing expense increased in
absolute dollars due to increases in compensation associated with additional
headcount and a substantial increase in expenses for advertising, promotion and
distribution partnerships beginning in the third quarter of 1998 and continuing
through the first quarter of 1999. Sales and marketing decreased between the
first and second quarters of 1998 as a percentage of revenues due to revenue
growth exceeding growth in sales and marketing expense, with an increase in the
third quarter of 1998 due to the initiation of a major advertising campaign.
E-LOAN intends to significantly increase absolute dollar spending in sales and
marketing activities over the next two years in an effort to drive origination
volume and increase overall brand awareness.
TECHNOLOGY. Technology expense includes salary, benefits and consulting
fees related to website development, the introduction of new technologies and
the support of E-LOAN's existing technological infrastructure. Technology
expense increased from the first quarter of 1998 to the fourth quarter of 1998,
from $0.2 million to $0.4 million and increased $0.1 million from the fourth
quarter of 1998 to $0.5 million for the three months ended March 31, 1999.
Technology expense decreased as a percentage of revenues from 31% to 14% from
the first quarter of 1998 to the fourth quarter of 1998 and decreased from 14%
in the fourth quarter of 1998 to 10% for the three months ended March 31, 1999.
Aside from a decrease from the second to third quarters of 1998 as a result of
higher recruitment costs in the second quarter of 1998, technology expense
increased in absolute dollars sequentially in each quarter throughout 1998 into
1999. The absolute dollar increases were primarily the result of the growth in
engineering and management information systems personnel to support the
expansion of online operations. Technology expense decreased sequentially as a
percentage of revenues due to revenue growth exceeding growth in technology
expense. E-LOAN intends to significantly increase absolute dollar spending
22
<PAGE> 27
on technology over the next two years in an effort to further improve the online
mortgage origination process.
GENERAL AND ADMINISTRATIVE. General and administrative expense is primarily
comprised of salary, benefits, rent and depreciation and amortization. General
and administrative expense increased sequentially from the first quarter to the
fourth quarter of 1998 from $0.4 million to $0.9 million and increased $0.5
million from the fourth quarter of 1998 to $1.4 million for the three months
ended March 31, 1999. General and administrative expense decreased as a
percentage of revenues from 72% in the first quarter of 1998 to 29% in the
fourth quarter of 1998 and increased from 29% in the fourth quarter of 1998 to
30% for the three months ended March 31, 1999. On an absolute dollar basis,
general and administrative expense increased sequentially throughout 1998 and
the three months ended March 31, 1999 primarily as a result of:
- the addition of general and administrative headcount;
- increase in professional services fees;
- increase in rent and building expense resulting from the fourth quarter
move into a new facility; and
- growth in depreciation and amortization expense on computer equipment and
leasehold improvements.
General and administrative expense increased significantly in the first
quarter of 1999 due to the addition of accounting and finance personnel. General
and administrative expenses are expected to increase in absolute dollars over
the next two years. In particular, E-LOAN expects to record an expense of
approximately $900,000 in the three months ending June 30, 1999 in connection
with its donation of 75,000 shares of common stock to a charitable foundation in
May 1999.
AMORTIZATION OF UNEARNED COMPENSATION. Amortization of unearned
compensation increased sequentially from $44,000 to $0.7 million from the first
to the fourth quarter of 1998 and increased to $6.6 million for the three months
ended March 31, 1999.
OTHER INCOME, NET
Other income, net, is comprised of interest income on non-warehouse
facility borrowings. Other income, net, increased sequentially from $20,000 to
$0.1 million from the first to the fourth quarter of 1998 primarily due to an
increase of cash from the sale of equity securities. Other income, net,
decreased to $36,000 in the first quarter of 1999 due to a decrease in the
amount of cash.
23
<PAGE> 28
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1998 AND THREE MONTHS ENDED
MARCH 31, 1998 AND 1999
The following table sets forth the results of operations for E-LOAN and
these results expressed as a percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
-------------------- -------------------
1997 1998 1998 1999
------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues....................................... $ 1,043 $ 6,832 $ 527 $ 4,802
Operating expenses:
Operations................................... 1,319 7,626 779 4,104
Sales and marketing.......................... 470 5,642 513 3,657
Technology................................... 102 1,248 163 481
General and administrative................... 524 2,410 379 1,423
Amortization of unearned compensation........ -- 1,251 44 6,554
------- -------- ------- --------
Total operating expenses.................. 2,415 18,177 1,878 16,219
Loss from operations........................... (1,372) (11,345) (1,351) (11,417)
Other income, net............................ (2) 173 20 36
------- -------- ------- --------
Net loss....................................... $(1,374) $(11,172) $(1,331) $(11,381)
======= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
------------- --------------
1997 1998 1998 1999
---- ---- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL REVENUES:
Revenues............................................... 100% 100% 100% 100%
Operating expenses:
Operations........................................... 126 112 148 85
Sales and marketing.................................. 45 83 97 76
Technology........................................... 10 18 31 10
General and administrative........................... 50 35 72 30
Amortization of unearned compensation................ 0 18 8 136
Total operating expenses.......................... 232 266 356 338
Loss from operations................................... (132) (166) (256) (238)
Other income, net.................................... 0 3 4 1
Net loss............................................... (132)% (164)% (253)% (237)%
==== ==== ==== ====
</TABLE>
REVENUES
Revenues for the year ended December 31, 1998 increased $5.8 million to
$6.8 million as compared to $1.0 million for the same period in 1997 and from
$0.5 million in the first three months of 1998 to $4.8 million in the first
three months of 1999. This increase resulted primarily from growth in the number
of loans closed and the initiation of E-LOAN's loan origination and sale
operations in June 1998. E-LOAN expects that the rate of its revenue growth in
future periods will decline from the rates of revenue growth experienced in
recent quarters.
24
<PAGE> 29
OPERATING EXPENSES
OPERATIONS. Operations expense increased $6.3 million to $7.6 million for
the year ended December 31, 1998 as compared to $1.3 million in 1997 and
decreased as a percentage of revenues from 126% to 112% for the same period. The
absolute dollar increase was attributable to an operations headcount increase to
187 as of December 31, 1998 from 27 as of December 31, 1997. This increase was
primarily necessary to support the growth in E-LOAN's origination volume and to
establish its loan origination and sale operations. The decrease as a percentage
of revenues was primarily due to revenues growing much faster than operations
expense.
Operations expense increased $3.3 million to $4.1 million in the first
three months of 1999 as compared to $0.8 million in the first three months of
1998 and decreased as a percentage of revenues from 148% to 85% for the same
period. The absolute dollar increase is primarily due to the increase in
operations headcount, including the addition of a Senior Vice President of
Operations. Operations expense as a percentage of revenues decreased from the
first quarter of 1998 to the first quarter of 1999 due to increased revenues
compared to the growth of expenses as well as efficiencies obtained from the
implementation of new policies and procedures.
SALES AND MARKETING. Sales and marketing expense increased $5.1 million to
$5.6 million for 1998, as compared to $0.5 million for 1997 and increased as a
percentage of revenues from 45% to 83% for the same period. These increases were
primarily attributable to:
- the initiation of a major advertising campaign in 1998;
- increased costs related to third party distribution partnership
agreements; and
- the addition of sales and marketing personnel.
Sales and marketing headcount increased to six as of December 31, 1998 from
three as of December 31, 1997.
Sales and marketing expense increased $3.2 million to $3.7 million in the
first three months of 1999 as compared to $0.5 million in the first three months
of 1998 and decreased as a percentage of revenues from 97% to 76% for the same
period. The absolute dollar increase is primarily due to the increased costs
related to third party distribution partnership agreements as well as the
continued increase in advertising expenditures. Sales and marketing expense
decreased as a percentage of revenues, from the first quarter of 1998 to the
first quarter of 1999 due to a more rapid increase in revenue growth compared to
the increase in expenses.
TECHNOLOGY. Technology expense increased $1.1 million to $1.2 million for
1998, as compared to $0.1 million for 1997 and increased as a percentage of
revenues from 10% to 18% for the same period. These increases were primarily the
result of the growth in engineering and management information systems personnel
to 14 as of December 31, 1998 from two as of December 31, 1997 to support the
initiation of online operations in June 1997.
Technology expense increased to $0.5 million in the first three months of
1999 as compared to $0.2 million in the first three months of 1998 and decreased
as a percentage of revenues from 31% to 10% for the same period. Technology
expenses increased in absolute dollars due to the addition of engineering
headcount. Technology expenses decreased as a percentage of revenue from the
first quarter of 1998 to the first quarter of 1999 due to a more rapid increase
in revenues compared to the increase in expenses.
GENERAL AND ADMINISTRATIVE. General and administrative expense increased
$1.9 million to $2.4 million for 1998, as compared to $0.5 million for 1997 and
decreased as a percentage of
25
<PAGE> 30
revenues from 50% to 35% for the same period. The absolute dollar increase is
primarily attributable to:
- the addition of general and administrative headcount;
- increase in rent and building expense resulting from the move into a new
facility; and
- growth in depreciation and amortization expense on computer equipment and
leasehold improvements.
General and administrative headcount increased to 15 as of December 31,
1998 from eight as of December 31, 1997. The decrease as a percentage of
revenues was primarily due to revenues growing much faster than general and
administrative expense.
General and administrative expense increased $1.0 million to $1.4 million
in the first three months of 1999 as compared to $0.4 million in the first three
months of 1998 and decreased as a percentage of revenues from 72% to 30% for the
same period. The absolute dollar increase is primarily due to an increase in
payroll and related expenses, increased facility costs and increased
depreciation associated with the purchase of capital assets. General and
administrative expense decreased as a percentage of revenues from the first
quarter of 1999 to the first quarter of 1999 due to a more rapid increase in
revenues compared to expenses.
AMORTIZATION OF UNEARNED COMPENSATION. Amortization of unearned
compensation increased from zero to $1.3 million for the year ended December 31,
1998. Amortization of unearned compensation increased from $44,000 to $6.6
million for the three months ended March 31, 1998 compared to the same period in
1999.
OTHER INCOME, NET
Other income, net, increased from an expense of $2,000 in 1997 to income of
$0.2 million for the year ended December 31, 1998. The increase is attributable
to interest income on cash proceeds from sale of equity partially offset by
interest expense on non-warehouse facility borrowings.
Other income, net, increased from $20,000 in the first quarter of 1998 to
$36,000 in the first quarter of 1999 due to interest income on cash and cash
equivalents, partially offset by interest expense on non-warehouse facility
borrowings.
INCOME TAXES
As of December 31, 1998 and March 31, 1999, E-LOAN had approximately $10.5
million and $14.0 million, respectively, of federal and state net operating loss
carryforwards for tax reporting purposes available to offset future taxable
income. E-LOAN's federal net operating loss carryforwards begin to expire in
2011. Certain future changes in share ownership of E-LOAN, as defined in the Tax
Reform Act of 1986, may restrict the utilization of carryforwards. A valuation
allowance has been recorded for the entire deferred tax asset at December 31,
1999 and March 31, 1999 as a result of uncertainties regarding the realization
of the asset due to the lack of E-LOAN's earnings history.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, E-LOAN has financed its operations primarily through
private placements of convertible preferred stock and borrowings under warehouse
lines of credit and other credit facilities. As of December 31, 1998 and March
31, 1999, E-LOAN had approximately $9.1 million and $3.6 million in cash and
cash equivalents, respectively.
E-LOAN's sources of cash flow include cash from the sale of mortgage loans,
borrowings under warehouse lines of credit and other credit facilities,
brokerage fees, interest income, and the sale of equity securities. E-LOAN's
uses of cash include the funding of mortgage loans,
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repayment of amounts borrowed under warehouse lines of credit, operating
expenses, payment of interest, and capital expenditures primarily comprised of
furniture, fixtures, computer equipment, software and leasehold improvements.
Net cash used in operating activities was ($1.2), ($50.4) and ($25.4) million in
1997, 1998 and the first three months of 1999, respectively. Net cash used in
operating activities was primarily due to an increase in net losses and increase
in mortgage loans held for sale.
Net cash used in investing activities was $0.2, $1.6 and $.4 million in
1997, 1998, and the first three months of 1999, respectively. Net cash used in
investing activities during these periods was primarily for the purchase of
furniture and equipment.
Net cash provided by financing activities was $5.5, $56.9 and $20.2 million
in 1997, 1998 and the first three months of 1999, respectively. Net cash
provided in these periods was primarily from the sale of preferred stock and
borrowings under E-LOAN's warehouse lines of credit and other credit facilities,
partially offset by repayments of warehouse lines of credit.
At December 31, 1998, E-LOAN had a warehouse line of credit for borrowings
up to approximately $18.8 million, including a temporary overdraft limit of
approximately $3.8 million for interim financing of mortgage loans. The interest
rate charged on borrowings against the warehouse line of credit was 2.0% over
the 30 day commercial paper rate of the lender. Borrowings are collateralized by
the mortgage loans held for sale. The warehouse line of credit expires on June
30, 1999. Upon expiration, management believes that it will either renew its
existing line or obtain sufficient additional lines. At December 31, 1998 and
March 31, 1999, approximately $15.0 million and $19.9 million was outstanding
under this warehouse line of credit. On April 23, 1999, the amount of the
warehouse line of credit was increased to $25.0 million and the expiration date
was extended to April 20, 2000.
At December 31, 1998, E-LOAN had a commitment from a third party to finance
up to $35 million of E-LOAN's mortgage loan inventory. The funds borrowed
pursuant to this commitment are secured by the related mortgage loans and accrue
interest at LIBOR plus 1.25%. This agreement includes various non-financial
negative and affirmative covenants. Either E-LOAN or the lender can terminate
the agreement at any time. At December 31, 1998 and March 31, 1999,
approximately $26.1 million and $17.1 million was outstanding under this
financing commitment, respectively. In May 1999, the amount of the warehouse
line of credit was increased to $100 million committed funds and an additional
$100 million uncommitted funds after the closing of the initial public offering.
The line expires May 20, 2000.
As of December 31, 1998 and March 31, 1999 the principal source of
liquidity for E-LOAN was $9.1 million and $3.6 million in cash and cash
equivalents and $4.4 million and $9.2 million in unused credit facilities. In
December 1998, E-LOAN entered into two credit facilities for working capital and
equipment financing in the aggregate amount of $5.0 million. The first credit
facility in the amount of $1.5 million has an interest rate of prime plus 0.5%.
This facility expires in one year. The second credit facility is a $3.5 million
term loan with an interest rate of prime plus 0.5%. As of December 31, 1998,
$642,000 was outstanding under these two credit facilities. In January 1999,
E-LOAN entered into a warehouse line of credit agreement for borrowings of up to
$40 million for interim financing of mortgage loans. The interest rate charged
on borrowings under the line of credit is equal to 1.85% per annum over the
monthly average LIBOR rate. The line of credit expires in January 2000. At March
31, 1999, approximately $15 million was outstanding under this line. In March
1999, E-LOAN entered into an agreement for a revolving line of credit in the
amount of $5.0 million with an interest rate based on the prime rate. The line
expires at the earlier of March 2000 or the closing of E-LOAN's initial public
offering and is guaranteed by two of our founding stockholders. There were no
amounts outstanding on this line at March 31, 1999.
E-LOAN has entered into several marketing service agreements with third
parties. Under these agreements, the third parties display E-LOAN's logo and
loan information on their websites
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and provide related marketing services. E-LOAN pays for these services in
minimum monthly and quarterly installments plus, in some cases, a per view
charge for each time the information is displayed. Future minimum payments under
these agreements are $5.5 million in 1999, $2.3 million in 2000 and $212,000 in
2001.
E-LOAN believes that its existing cash and cash equivalents, the net
proceeds from this offering and existing and available credit facilities will be
sufficient to fund its operating activities, capital expenditures and other
obligations for the foreseeable future. However, if during that period or
thereafter E-LOAN is not successful in generating sufficient cash flow from
operations, or in raising additional capital when required in sufficient amounts
and on terms acceptable to E-LOAN, these failures could have a material adverse
affect on E-LOAN's business, results of operations and financial condition. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of its then-current stockholders would be reduced.
DISCLOSURE ABOUT MARKET RISK
Interest rate movements significantly impact E-LOAN's volume of closed
loans and represent the primary component of market risk to E-LOAN. In a higher
interest rate environment, consumer demand for mortgage loans, particularly
refinancing of existing mortgages, declines. Interest rate movements affect the
interest income earned on loans held for sale, interest expense on the warehouse
lines payable, the value of mortgage loans held for sale and ultimately the gain
on sale of mortgage loans. In addition, in an increasing interest rate
environment, E-LOAN's mortgage loan brokerage volume is adversely affected.
E-LOAN originates mortgage loans and manages the market risk related to
these loans by pre-selling them on a best efforts basis to the anticipated
purchaser at the same time that E-LOAN establishes the borrowers' interest
rates. If E-LOAN can process loans within the applicable purchasers' commitment
timeframes E-LOAN has no interest rate risk exposure on the loans. However, if
E-LOAN cannot process the loan within this timeframe and interest rates
increase, E-LOAN may experience a reduced gain or may even incur a loss on the
sale of the loan. See "Risk Factors -- Uncertainty with respect to the time it
takes to close loans can lead to unpredictable revenue and profitability".
With the exception of pre-selling loans through best-efforts commitments,
E-LOAN currently does not engage in any hedging activities.
E-LOAN currently does not maintain a trading portfolio. As a result, E-LOAN
is not exposed to market risk as it relates to trading activities. The majority
of E-LOAN's portfolio is held for sale which requires E-LOAN to perform market
valuations of its pipeline, its mortgage portfolio held for sale and related
forward sale commitments in order to properly record the portfolio and the
pipeline at the lower of cost or market. Therefore, E-LOAN monitors the interest
rates of its loan portfolio as compared to prevailing interest rates in the
market.
Because E-LOAN pre-sells its mortgage loan commitments forward, E-LOAN
believes that a 100 basis point increase or decrease in long-term rates would
not have a significant adverse effect on E-LOAN's earnings from its interest
rate sensitive assets. E-LOAN pays off the warehouse lines payable when the loan
is sold and consequently would not be expected to incur significant losses from
an increase in interest rates on the line due to the short timeframe that the
line is drawn down. However, since a high percentage of E-LOAN's closed loan
volume is from refinancings, E-LOAN's future operating results are more
sensitive to interest rate movements than a mortgage lender who has a lower
proportion of refinancings.
In the future, if E-LOAN does not pre-sell the mortgage commitments, its
market risk could change significantly.
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RECENT ACCOUNTING PRONOUNCEMENTS
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS No. 133). SFAS No. 133 is effective for
all fiscal quarters of all fiscal years beginning after June 15, 1999 (January
1, 2000 for E-LOAN). SFAS No. 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. E-LOAN is in the
process of evaluating the impact of SFAS No. 133 on its financial statements.
In October 1998, the Financial Accounting Standards Board issued SFAS No.
134, Accounting for Mortgage-Backed Securities Retained after the Securitization
of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise. SFAS No. 134
amends SFAS No. 65, Accounting for Certain Mortgage Backed Securities, to
require that after an entity that is engaged in mortgage banking activities has
securitized mortgage loans that are held for sale, it must classify the
resulting retained mortgage-backed securities or other retained interests based
on its ability and intent to sell or hold those investments. This statement is
effective for the first fiscal quarter beginning after December 15, 1998, with
earlier application encouraged. At this time, E-LOAN does not anticipate any
impact from the adoption of this standard.
The American Institute of Certified Public Accountants issued Statement of
Position ("SOP") No. 98-1, "Software for Internal Use," which provides guidance
on accounting for the cost of computer software developed or obtained for
internal use. SOP No. 98-1 is effective for financial statements for fiscal
years beginning after December 15, 1998. SOP No. 98-1 did not have a material
impact on E-LOAN's March 31, 1999 financial statements.
YEAR 2000
Many currently installed computer systems and software products only accept
two digits to identify the year in any date. Thus, the year 2000 will appear as
"00", which the system might consider to be the year 1900 rather than the year
2000. This could result in system failures, delays or miscalculations. Computer
systems and software that have not been developed or enhanced recently may need
to be upgraded or replaced to comply with Year 2000 requirements.
We use multiple software systems and products developed by third party
vendors, including systems and products used in operations and finance, and
systems that operate our facilities. We are currently in the process of
requesting compliance certificates from these vendors to certify their Year 2000
readiness. We have received compliance certificates from substantially all of
these vendors.
Our Year 2000 testing is complete and found to be compliant by an outside
testing agency, Valencia Software Systems. We tested our computer systems,
website and loan processing systems during March and April 1999. Our tests
focused on date boundary crossing problems, in particular from December 31, 1999
through January 2, 2000. All systems operated as expected and without incident.
Procedures are in place to review all future changes to ensure that Year 2000
problems are not introduced with system upgrades.
The Internet operations of many of our customers and suppliers may be
affected by Year 2000 complications. The failure of our customers or suppliers
to ensure that their systems are Year 2000 compliant could have an adverse
effect on our customers and suppliers, resulting in decreased Internet usage or
our inability to obtain necessary data communication and telecommunication
capacity, which in turn could have an adverse effect on our business, results of
operations and financial condition.
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The potential worst case scenario includes:
- slowdown in online applications due to a general failure of the Internet;
- corruption of data in our internal information systems;
- delays in our processing capabilities that depend on third-party systems;
- financial losses associated with delays in closing loans; and
- failure of infrastructure services provided by third parties, including
public utilities and Internet service providers.
We have not incurred significant costs to date complying with Year 2000
requirements, and we do not believe that we will incur significant costs for
this purpose in the foreseeable future. If we discover any Year 2000 errors or
defects in our internal systems, we could incur substantial costs in making
repairs. The resulting disruption of our operations could seriously damage our
business.
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BUSINESS
E-LOAN is a leading online provider of mortgages, offering consumers the
ability to obtain the most suitable mortgages from a wide array of lenders at
substantial savings. E-LOAN's easy-to-use website enables borrowers to search
through over 50,000 products provided by over 70 lending sources to find the
most competitively priced loans that match the borrowers' criteria. Borrowers
can analyze and compare loans online as well as receive unbiased loan
recommendations based on their personal criteria and financial characteristics.
E-LOAN offers origination cost savings of over 50% compared to obtaining a
mortgage through traditional mortgage brokers or single source lenders. E-LOAN
provides complete transaction fulfillment and a high level of service through
customer service representatives assigned to each borrower and the proprietary
E-Track loan monitoring service. E-LOAN is the exclusive mortgage provider for
co-branded loan centers that E-LOAN has established with leading websites,
including Yahoo!, E*Trade, DLJdirect, Telebank and CBS MarketWatch. In 1998 and
the first quarter of 1999, E-LOAN was the leader in the online mortgage market
with approximately $1 billion and $490 million in closed loans originated,
respectively, including E-LOAN's estimate of closed loan volume from referrals.
INDUSTRY BACKGROUND
ELECTRONIC COMMERCE
The Internet has emerged as a global medium for communication, information
and commerce. International Data Corporation estimates that there were 97
million Internet users worldwide at the end of 1998 and anticipates this number
will grow to approximately 320 million users by the end of 2002. The Internet
possesses a number of unique characteristics that differentiate it from
traditional media and methods of commerce, including:
- users communicate or access information without geographic or temporal
limitations;
- companies can reach and serve a large and global group of customers
electronically from a central location;
- companies can provide personalized, low-cost and real-time customer
interaction;
- users enjoy greater privacy and face less sales pressure; and
- users have an enormous diversity of easily accessible content and
commerce offerings.
As a result of these unique characteristics and the Internet's growing
adoption rate, businesses have an enormous opportunity to conduct commerce over
the Internet. International Data Corporation estimates that commerce over the
Internet will increase from approximately $32 billion worldwide in 1998 to
approximately $130 billion worldwide in 2000. While many companies initially
focused on facilitating and conducting transactions between businesses over the
Internet, more recently there has been a proliferation of companies focused on a
wide variety of consumer transactions. These companies have typically offered
products and services that do not necessarily require the customer's physical
presence to purchase, including books, CDs, videocassettes, automobiles,
mortgages, airline tickets and online banking and stock trading. The Internet
gives these companies the opportunity to develop one-to-one relationships with
customers worldwide without having to make the significant investments to build
and manage a local market presence or develop the printing and mailing
capabilities associated with traditional direct marketing activities.
TRADITIONAL UNITED STATES MORTGAGE MARKET
The Mortgage Bankers Association estimates the United States mortgage
market to total over $4.3 trillion in terms of loans outstanding and projects
mortgage originations of new mortgage loans to be $1.2 trillion in 1999.
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The mortgage industry is divided broadly into four major segments today:
- mortgage origination -- sourcing, verification and documentation of
mortgage loans, typically done by mortgage brokers and single-source
lenders;
- mortgage funding -- underwriting, funding and selling closed loans to
mortgage loan purchasers;
- securitization -- aggregating loans for sale into the secondary market;
and
- servicing -- ongoing billing, collection and foreclosure/collateral
management.
Over the past two decades, the mortgage industry has evolved dramatically.
Until the late 1970s, retail banks and savings and loan institutions originated
loans through their branches, underwrote and closed loans internally, funded
loans from their own customer deposits and then serviced the loans themselves.
This internal chain of production was broken by the emergence of the pure
mortgage bank that could buy mortgages from mortgage brokers and sell to
government sponsored mortgage investors, most significantly Fannie Mae and
Freddie Mac, and the development of a large, liquid secondary funding and
trading market for mortgage debt. This efficient new market for mortgage funding
made it viable for the first time to uncouple from the large retail banks both
the front-end functions of mortgage origination and mortgage funding and the
back-end function of servicing.
A significant transformation of the mortgage origination, banking and
servicing businesses into specialized functions conducted primarily by
independent companies has also occurred during the last two decades. This
transformation has created both a large, concentrated and efficient secondary
mortgage market and a large, fragmented and inefficient mortgage origination and
banking market. There are approximately 20,000 mortgage brokerage operations in
the United States, according to the National Association of Mortgage Brokers.
However, there is no multi-lender originator that operates nationally and enjoys
a widely recognized consumer brand. In 1997, no mortgage originator had over 7%
market share. While increased competition at all levels of the industry has
resulted in tremendous innovation in the mortgage choices available to
consumers, the level of complexity associated with these loans has also
increased. In addition, the underwriting and lending processes remain paper and
time-intensive, with little visibility into the process for consumers. As a
result, we believe that the traditional mortgage lending process causes many
consumers to feel:
- uncertain that their single source lenders and brokers are providing
unbiased advice and recommending the most suitable mortgage products;
- skeptical that rates initially quoted will ultimately be available;
- intimidated by the number and variety of mortgage products available;
- pressured to commit to a particular product before they have researched
and compared products to their satisfaction;
- frustrated with the amount and types of fees they are required to pay;
and
- overwhelmed by the substantial time and effort that it takes to get a
mortgage loan.
Many borrowers receive little ongoing assistance in managing their debt
after the loan is closed. Many direct lenders who also engage in mortgage
servicing are not committed to proactive monitoring of their customers' loans
because they risk losing servicing fees if customers refinance with other
lenders. Multi-lender brokers have the incentive to pursue refinancing
opportunities, but typically lack the technological capability to proactively
monitor for large customer bases the market changes of thousands of loan
products in real time.
MARKET OPPORTUNITY FOR ONLINE MORTGAGE ORIGINATION
According to Forrester Research, the market for online mortgage
originations is expected to grow from an estimated $18.7 billion in 1999 to over
$91.2 billion in 2003, representing an
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increase in online penetration of the existing market from 1.5% in 1999 to 9.6%
in 2003. Mortgage origination is well suited to an Internet-based distribution
model for a number of reasons, including:
- mortgages are information products that need no physical delivery or
warehousing;
- complex mortgage products can be made more understandable through the use
of graphical and dynamic real-time presentations, including explanation
of terminology and ready access to detailed supporting information;
- borrower data can be efficiently captured through a website, allowing
real time automated underwriting and streamlined overall processing; and
- costly local offices or brokers and the expensive fee structure
associated with the traditional distribution model are not required.
Many companies have attempted to address this significant market
opportunity. Existing mortgage banks have created websites to sell their loans
directly online as an alternative front end to the traditional process. These
sources, however, do not offer the consumer a multi-lender selection or
comparison of products and may be reluctant to reduce fees due to the risk of
cannibalizing their traditional distribution channels.
A number of websites have been created that act as multi-lender
distribution channels for mortgage banks. While many of these referral sites
offer a selection of lenders, they do not offer complete transaction fulfillment
for the consumer and, therefore, do not control the entire mortgage process.
Because these websites do not eliminate the services of commissioned loan
agents, they are unable to substantially reduce the cost to the consumer of
securing a mortgage.
As a result of the shortcomings inherent in these and other online
approaches to mortgage origination, we believe there exists a significant market
opportunity for a centralized, globally accessible and easy-to-use online
service with a broad selection of lenders, a compelling value proposition based
upon saving borrowers money, time and effort, and an open, integrated service
that provides complete transaction fulfillment.
THE E-LOAN SOLUTION
E-LOAN is a leading online provider of mortgages offering consumers the
ability to obtain the most suitable mortgage from a wide array of lenders at
substantial savings. Utilizing E-LOAN's website, borrowers can efficiently
search, analyze and compare mortgage products offered by multiple lenders and
apply for, qualify for and obtain the mortgage product that is most compatible
with their individual financial characteristics and borrowing requirements.
E-LOAN also enables borrowers to track online the status of their mortgage
applications from submission through closing and to monitor their mortgages on
an ongoing basis after closing. E-LOAN recognizes the importance to borrowers of
selecting the right mortgage product and performing ongoing debt management
given that mortgages typically represent the single largest debt component of an
individual's financial portfolio. To assist borrowers in this regard, E-LOAN
provides unbiased recommendations as well as an array of online analytical and
product comparison tools. E-LOAN also provides a high level of customer service
designed to make the mortgage process significantly more streamlined,
transparent to the borrower and efficient. In 1998 and the first quarter of
1999, E-LOAN was the leader in the online mortgage market with approximately $1
billion and $490 million in closed loans originated, respectively, including
E-LOAN's estimate of closed loan volume from referrals.
The E-LOAN solution provides the following key advantages to its customers:
LARGE SELECTION OF MORTGAGE PRODUCTS. E-LOAN offers mortgages from over 70
lending sources, including nationally-recognized institutions. Each customer
inquiry triggers a proprietary rate search algorithm that sorts through over
50,000 products updated in real time. The result,
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delivered in seconds, is a set of the most competitively priced loans that best
match the customer's criteria. E-LOAN believes this large selection of lenders
and loans available in a single destination saves borrowers time and effort in
searching for and obtaining the most suitable mortgage.
SIGNIFICANT CUSTOMER SAVINGS. E-LOAN offers savings of over 50% on the
origination costs of obtaining mortgages from traditional mortgage brokers or
single source lenders. These savings are possible because of the elimination of
the commissioned loan agent, who typically charges an origination fee of 1.25%
to 1.5% of the loan. E-LOAN's origination fee, by contrast, is 0.625% of the
loan, or just half of the lower end of the typical commission range. Because the
origination fee is the single largest nonrecurring fee, accounting for
approximately 40% of the total nonrecurring loan fees, a reduction of 50% or
more in that fee provides substantial customer savings in the overall
transaction. Other nonrecurring loan expenses include underwriting, appraisal,
insurance and closing fees.
UNBIASED LOAN RECOMMENDATIONS. E-LOAN provides the borrower with unbiased
recommendations regarding available loan products. E-LOAN formulates its
recommendations by using powerful, comparative and analytical tools designed to
assist the borrower in determining the most suitable mortgage. These
recommendations are based solely upon borrower-provided information and
criteria. This approach differs substantially from that of traditional brokers,
who often recommend and promote mortgage products based on associated
commissions, which can vary by lender. By contrast, E-LOAN charges the same
brokerage fee regardless of whether the loans are funded internally or through
other lenders.
EASY-TO-USE SERVICE WITH VALUE-ADDED FEATURES. E-LOAN's website enables
borrowers to easily and efficiently search, analyze and compare mortgage
products offered by multiple lenders in complete privacy, on their own time and
free from the sales pressures typically experienced offline. Prospective
borrowers can also determine online which mortgage products they qualify for
based on their individual financial characteristics and borrowing requirements
and ultimately apply for and obtain the selected mortgage product. E-LOAN offers
a number of value-added features designed to further promote a more open and
borrower-oriented loan process. For example, E-LOAN's unique E-Track service
enables borrowers to monitor the status of their loans at every stage of the
lending process in real time, removing much of the uncertainty and inconvenience
that has tended to reduce borrowers' comfort in obtaining a loan.
HIGH LEVEL OF CUSTOMER SERVICE. E-LOAN is committed to providing a high
level of customer service, as evidenced by referrals received from satisfied
customers. Because customer service is a strategic priority, E-LOAN bases the
compensation of its loan production personnel in part on their contribution to
improving customer satisfaction. E-LOAN implements its customer service
objectives by:
- providing consumer resources through its information rich website, which
includes a comprehensive guide to every aspect of the mortgage process;
- working with the customer throughout the entire transaction process, in
contrast to many online websites which refer customers to third party
lenders;
- assigning a personal customer service representative to each borrower to
serve as a single point of contact and support throughout the entire loan
process;
- providing borrowers with a real time window into every stage of the
lending process through its proprietary E-Track service; and
- maintaining a call center to respond promptly to phone and e-mail
inquiries.
ONGOING MORTGAGE MONITORING. E-LOAN enables customers to optimize refinance
decisions by continuously comparing their existing loan to new products
available in the market and alerting them to opportunities to save money over
the life of their loan. E-LOAN's monitoring algorithm takes into account the
borrower's investment objectives, prospective hold period, risk
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profile and marginal tax rate. E-LOAN's monitoring capability promotes long-term
relationships with its customers.
THE E-LOAN STRATEGY
The E-LOAN strategy is to be the leading Internet-based provider of
mortgages and debt management services for consumers worldwide. Key elements of
the E-LOAN strategy include:
GROW CORE CONSUMER MORTGAGE BUSINESS. E-LOAN intends to become a leading
originator of single family mortgage loans, capturing market share from
traditional funding sources by delivering to its customers significant cost
savings, unparalleled product choice and unbiased advice and assistance. E-LOAN
believes that its Internet-based business model will continue to reduce the
costs and inefficiencies in mortgage origination and increase the productivity
of its mortgage operation through reduced brokerage commissions and ongoing
process improvements. In addition, E-LOAN's ability to control the entire loan
fulfillment process will provide a more efficient and consistent customer
experience. Over time, E-LOAN expects to enhance its product offerings,
capitalizing on its customer base, brand name and fulfillment capabilities by
expanding into additional activities customers may need as part of their ongoing
debt management efforts. As part of an alliance with Stater BV, E-LOAN has
established an online mortgage origination subsidiary to serve the European
market. Additionally, under a joint venture agreement with Softbank Corp.,
E-LOAN holds a minority interest in E-LOAN Japan, a Japanese corporation that
will develop, market and provide an online mortgage marketplace to serve
consumers in Japan and the Republic of Korea. E-LOAN intends to continue to
expand into other key international markets in the future.
EXPAND MULTI-SOURCE LENDING CAPABILITIES. E-LOAN believes that its ability
to satisfy customers' specific borrowing requirements by offering the most
comprehensive selection of mortgages available nationwide is one of its greatest
competitive advantages. Accordingly, E-LOAN intends to continue to broaden the
number and variety of its mortgage products and lending sources.
USE TECHNOLOGY TO BRING BORROWERS AND CAPITAL MARKETS CLOSER
TOGETHER. E-LOAN intends to continue to streamline and automate mortgage
origination and underwriting processes in order to enable borrowers to more
directly benefit from the cost, speed and convenience of highly efficient
secondary mortgage markets. By continually incorporating and upgrading automated
underwriting techniques and technologies into our service, E-LOAN will increase
its ability to match borrowers with lenders earlier in the process, resulting in
reduced documentation requirements, faster approval and lower pricing. E-LOAN
believes these techniques and technologies will enable it to provide the most
cost-effective and tailored mortgage solutions for its customers.
ENHANCE BRAND AWARENESS AND CUSTOMER LOYALTY. E-LOAN intends to become the
first national multi-source lender with a widely recognized consumer brand name.
E-LOAN uses both traditional and online marketing strategies to maximize
customer awareness and enhance brand recognition. Through its advertising and
promotional activities, E-LOAN targets prospective homebuyers, homeowners and
Realtors interested in efficient, easy and economical mortgage origination.
Traditional advertising efforts include a mix of radio, television, outdoor and
print campaigns aimed at building brand awareness nationwide. E-LOAN also
partners with many leading financial services-related online companies,
including Yahoo!, E*Trade, DLJdirect, Telebank and CBS MarketWatch. Online
partnering arrangements include placing a mortgage center on partners' websites,
placing links and banner advertisements on those sites and establishing mortgage
monitoring services for those partners' customers. In addition, E-LOAN will
continue to focus on promoting customer loyalty and maximizing the lifetime
value of its customer relationships through the implementation of superior
personalization features and the continuous enhancement of its customer service
offerings. E-LOAN also intends to extend its
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traditional and online marketing strategies to international markets to develop
brand recognition abroad as it expands into foreign markets.
HELP CONSUMERS MONITOR AND MANAGE THEIR DEBT. By assisting consumers in
monitoring and managing their mortgages, E-LOAN intends to transform what have
traditionally been single origination transactions into long-term, mutually
beneficial relationships. Since mortgages typically comprise the single largest
consumer liability, E-LOAN has a unique opportunity to build valuable ongoing
relationships with its customers. E-LOAN's services include continuous loan
monitoring that provide customers with unbiased assistance in refinancing
decisions and promotes long-term customer relationships. Recognizing that
mortgage and mortgage-related financing represent the lowest cost, most tax
efficient capital for consumers, E-LOAN intends to further develop its services
and product offerings to assist customers in managing their overall debt
portfolio, with the objective of maintaining the lowest overall cost of debt.
PRODUCTS AND SERVICES
E-LOAN is an online service that offers first mortgages to homebuyers and
homeowners seeking to refinance, along with second mortgages and home equity
lines of credit. E-LOAN handles all aspects of loan origination, including
quoting rates, collecting and verifying borrower data, locking the rate,
pre-underwriting the loan package, communicating with the lender and arranging
for appraisal and settlement services for the borrower. In addition, E-LOAN can
provide complete transaction fulfillment, including underwriting, funding and
packaging loans for sale to the secondary markets. Through its easy to use
website, E-LOAN offers:
LOAN PRODUCTS. E-LOAN has relationships with over 70 lending sources who
are eligible to quote product rates on E-LOAN's website. E-LOAN's website
currently offers a wide array of loan products, including 30-year and 15-year
fixed rate loans, a variety of adjustable rate mortgages (ARMs),
fixed/adjustable products, products with balloon payments, second mortgages and
home equity lines of credit.
RATE SEARCH. E-LOAN's database contains rates for over 50,000 loan products
at any given time and is updated multiple times daily. Prospective borrowers can
quickly obtain customized rate quotes for multiple loan types and amounts in a
single search by completing a brief questionnaire. E-LOAN's search function
features an algorithm that identifies the most competitive products available
based on individual borrower information and the total costs of the various
products, including applicable interest rates, points and fees. Borrowers can
click on a link to see even more loans of those types if they so choose.
LOAN COMPARISON. Borrowers can compare loans returned from a rate search. A
basic comparison shows how any two loans differ on rate, points, prepayment
penalties, interest rate costs over time, and, for ARMs, life cap, index type,
margin and periodic adjustments. An advanced comparison allows borrowers to
forecast how the loans would perform based on various interest rate scenarios
and taking into account debt objectives, hold periods, return on other
investments and marginal tax rates.
LOAN RECOMMENDATIONS. To help borrowers find the most suitable loan among
the broad array of available products, E-LOAN provides a recommendation feature.
This feature consists of a brief questionnaire that enables borrowers to
describe their investment objectives and prospective hold period, select an
interest rate scenario and indicate the loan amount sought. E-LOAN's proprietary
algorithm uses this information to deliver a set of suitable loan products.
Borrowers can then adjust various parameters, such as the hold period or
interest-rate scenario, to see how that recommendation might change.
E-TRACK. E-LOAN has developed a proprietary online tracking system,
E-Track, in order to make the mortgage process more open and convenient for
consumers. E-Track allows borrowers to track the progress of their loan
application as well as the amount of anticipated closing costs
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from preliminary estimate to final settlement. E-LOAN establishes an E-Track
account for each borrower at the time an application is completed online. Each
E-Track account is personalized and password-protected, and contains:
- a timeline of the loan application and approval process;
- an updated list of estimated closing costs, including explanations of all
disclosure terms;
- a product details page explaining all of the terms of the loan;
- a list of the documents required by the lender in order to approve the
application;
- an area where a borrower can request an interest rate commitment online;
- contact information, status and results of appraisal; and
- contact information for designated customer service representatives.
All of these items are updated in real time as the loan application is
processed, thereby enabling borrowers to keep close track of their progress
anytime.
RATE WATCH. The Rate Watch service allows prospective borrowers to input a
target interest rate for the desired loan type. E-LOAN searches its database of
over 50,000 loan products on a daily basis to determine if a product has become
available that meets the borrower's criteria. If a suitable product is found,
the borrower receives an e-mail alert inviting them to visit E-LOAN's website
and apply for the loan.
MORTGAGE MONITOR. The Mortgage Monitor service allows the prospective
borrower to input the terms for an existing mortgage and immediately compare
that loan to all other suitable products available through E-LOAN. In addition,
the prospective borrower can choose to receive an e-mail alert whenever a
product becomes available that can beat that rate. All E-LOAN customers are
automatically enrolled in the Mortgage Monitor service once their loan closes.
PRE-QUALIFICATION/PRE-APPROVAL SERVICES. E-LOAN assists prospective
borrowers in making their home buying decisions by enabling them to determine
the exact amount of the loan they are qualified to obtain through its online
pre-qualification and pre-approval services.
INFORMATION FOR BORROWERS. E-LOAN's website hosts a rich array of
information on the home buying and refinancing processes, including articles
about how to evaluate loan products, maximizing your home buying power, timing a
refinance and a glossary of mortgage terms. Detailed explanations of the overall
process of obtaining a loan is also available.
REALTOR INFORMATION AND SERVICES. Realtors can use the E-LOAN website to
help their clients calculate the loan amount they can afford, generate a
pre-qualification letter or obtain a pre-approval before selecting a property,
search for rates and educate them on the mortgage process and terms. In
addition, E-LOAN's website offers Realtors a free service allowing them to
generate custom flyers to advertise their listings.
INTERNATIONAL MORTGAGES. Under E-LOAN's alliance with Stater BV, E-LOAN and
Stater BV will cooperate to support E-LOAN's online mortgage origination
subsidiary in establishing and operating a service that offers residential
mortgage loans through the Internet directly to consumers in the European Union,
other than the United Kingdom. The initial term of the alliance is five years.
E-LOAN expects to begin launching European services in the third quarter of
1999. In addition, under a joint venture agreement with Softbank Corp., E-LOAN
holds a minority interest in E-LOAN Japan, a Japanese corporation that will
develop, market and provide an online mortgage marketplace to serve consumers in
Japan and the Republic of Korea. E-LOAN intends to continue to expand into other
key international markets in the future.
MORTGAGE OPERATIONS
E-LOAN is engaged in the mortgage loan origination business as a
multi-source lender. E-LOAN originates, underwrites, funds and sells mortgage
loans. Originations are funded either
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through lending partners or through E-LOAN's own warehouse lines of credit.
E-LOAN's loan originations are principally prime credit quality first-lien
mortgage loans secured by single family residences. E-LOAN also offers second
mortgages and home equity lines of credit in many states. All loans are
underwritten pursuant to standards established by E-LOAN and conform to the
underwriting standards of the ultimate purchasers of the loans.
Principal sources of income are loan origination fees, gains from the sale
of loans, if any, and interest earned on mortgage loans during the period that
they are held pending sale, net of interest paid on borrowed funds. Since
E-LOAN's policy is to sell all loans that it originates, E-LOAN does not perform
loan servicing functions and therefore does not generate ongoing servicing
revenues that are customarily earned by traditional mortgage lenders.
In 34 states and the District of Columbia, E-LOAN is licensed as a mortgage
broker and/or mortgage banker, or is exempt from licensing requirements, and can
fund all of the loans that it originates. E-LOAN licenses its mortgage loan
origination systems and proprietary marks to NetB@nk to enable NetB@nk to fund
mortgage loans under the E-LOAN brand in eleven of the remaining 16 states, and
has agreements with PHH Mortgage Services Corporation and Prism Mortgage Company
relating to the fulfillment of all aspects of loan transaction processing
following origination in the other five remaining states.
OBTAINING AN E-LOAN LOAN. The loan origination process begins when the
customer completes a loan application online through the E-LOAN website. Once
the application is submitted, E-LOAN initiates a series of steps to efficiently
underwrite and process the loan while providing a consistent level of customer
service. Within two days of submitting an application, customers receive a
welcome package from E-LOAN in the mail which is designed to further brand the
E-LOAN experience and contains the necessary disclosure documents mandated by
governmental authorities.
An E-Track account is created at the time a loan application is received
and serves as the customer's primary communication system with E-LOAN throughout
the loan process. Customers are invited to visit their E-Track account
frequently to review key steps in the loan process, receive updated information
regarding their loan product, closing costs, and interest rate lock, and view
the progress of their loan approval.
Although the E-Track account is available 24 hours a day, seven days a
week, E-LOAN believes that a more personalized touch from a customer service
perspective is necessary to truly brand the E-LOAN experience and build customer
loyalty. Therefore, assigned customer service representatives maintain telephone
contact with borrowers throughout the loan process to communicate major events
and answer questions. Customer service contact begins once the online
application has been received, continues through approval and funding, and is
available until loan monitoring account preferences have been established.
Loan packages are pre-underwritten upon E-LOAN's receipt of completed
paperwork along with a nominal check to cover the cost of obtaining credit
reports and utilizing automated underwriting systems, if applicable. All
conforming loans are underwritten utilizing an automated system such as Fannie
Mae's Desktop Underwriter (DU). Loans that do not immediately qualify for
automated underwriting are underwritten using standard manual processes.
As additional loan documentation is received, data provided by the customer
at the time of initial origination is validated. Appraisals, credit reports, and
title and survey documents are ordered and reviewed by the designated
underwriting teams.
Once the underwriting process is completed, customers are invited to
request interest rate commitments for their selected loan through their E-Track
accounts. E-LOAN then confirms that this request can be obtained from mortgage
loan purchasers or lending sources. Once the requested rate has been confirmed,
customers are notified and provided with all relevant product and execution
conditions.
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Final loan approval is secured once all critical data elements have been
validated and have been confirmed to satisfy the guidelines of the lending
program sought by the borrower. If a borrower's loan does not satisfy lender
guidelines, the designated service team will research additional lenders for the
customer. For more complex situations, customers will be referred to an E-LOAN
loan specialist for special assistance. If a product cannot be secured for the
customer, the customer will receive a denial letter stating the reasons that a
loan could not be obtained.
After loans have been approved and all relevant conditions have been met,
E-LOAN will either prepare or request preparation of loan documents to be signed
by the borrower. The assigned customer service representative will work with the
borrower to obtain the necessary signatures for funding and schedule the closing
of the loan. Once the borrower has signed all documentation, the loan file is
reviewed to identify any missing requirements. The loan is then funded and
recorded as closed.
A quality control review of E-LOAN sourced and funded loans is performed
prior to forwarding the loan documentation to the final mortgage loan purchaser
or its designated custodian. An accounting audit is also performed to reconcile
settlement information provided by escrow/attorney settlement agents with
E-LOAN's internal information. Loan documentation relating to closed loans is
then shipped to the mortgage loan purchaser or its designated custodian, and
documentation is maintained to satisfy regulatory and company record retention
requirements.
E-LOAN then establishes ongoing loan monitoring accounts for all closed
loans to ensure that its customers remain in the most suitable loan products
based on their specified personal financial requirements. E-LOAN also solicits
customer feedback regarding the loan process to measure overall E-LOAN customer
loyalty and to utilize in developing future product and service enhancements
that are responsive to customer concerns.
LOAN PRODUCTION. E-LOAN originates conventional mortgage loans (conforming
and jumbo loans) and home equity lines of credit, a high percentage of which
were refinancings of existing mortgages in 1998. A majority of the conventional
loans originated are conforming loans, which are eligible for sale in programs
sponsored by Fannie Mae or Freddie Mac. While E-LOAN does not currently sell
directly to Fannie Mae or Freddie Mac, the conforming loans E-LOAN originates
are ultimately eligible for sale in the secondary markets supported by these
organizations.
The remainder of the conventional loans are non-conforming loans. These
include loans with an original balance in excess of $240,000 that otherwise meet
all other Fannie Mae or Freddie Mac guidelines (jumbo loans), and other loans
that do not meet those guidelines. As part of E-LOAN's multi-source lending
activities, E-LOAN originates loans with original balances of up to $2 million.
E-LOAN offers the following categories of loan products:
- long term adjustable rate mortgages;
- intermediate term adjustable rate mortgages;
- fixed rate mortgages;
- balloons;
- home equity lines of credit; and
- no cost loans.
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Based on the best information available to E-LOAN, the following table sets
forth the number and dollar amount of the various types of loan products sold to
customers for the periods indicated.
TOTAL NUMBER OF CLOSED LOANS BY PRODUCT
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------------------------------------------------
Q1 Q2 Q3 Q4
---------------------------- ---------------------------- ---------------------------- --------
LOAN % OF LOAN % OF LOAN % OF
DOLLAR TOTAL DOLLAR TOTAL DOLLAR TOTAL
NUMBER VOLUME DOLLAR NUMBER VOLUME DOLLAR NUMBER VOLUME DOLLAR NUMBER
TYPE OF LOAN OF LOANS ($ MILL) VOLUME OF LOANS ($ MILL) VOLUME OF LOANS ($ MILL) VOLUME OF LOANS
------------ -------- -------- ------ -------- -------- ------ -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
30 Year Fixed........ 233 $ 53.4 51% 447 $ 93.7 54% 704 $153.0 70% 1,033
15 Year Fixed........ 143 $ 29.1 28% 201 $ 41.8 24% 238 $ 47.1 21% 391
30 Year ARM.......... 71 $ 22.4 21% 126 $ 36.2 21% 56 $ 17.1 8% 199
Other Products....... 0 $ 0.0 0% 5 $ 0.4 0% 6 $ 1.9 1% 12
----- ------ --- ----- ------ --- ----- ------ --- -----
Total............. 447 $104.9 100% 779 $172.1 100% 1,004 $219.1 100% 1,635
<CAPTION>
1998 1999
----------------- ----------------------------
Q4 Q1
----------------- ----------------------------
LOAN % OF LOAN % OF
DOLLAR TOTAL DOLLAR TOTAL
VOLUME DOLLAR NUMBER VOLUME DOLLAR
TYPE OF LOAN ($ MILL) VOLUME OF LOANS ($ MILL) VOLUME
------------ -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C>
30 Year Fixed........ $188.3 56% 1,280 $254.5 54%
15 Year Fixed........ $ 77.9 23% 806 $130.7 28%
30 Year ARM.......... $ 69.9 21% 254 $ 78.3 17%
Other Products....... $ 2.9 1% 31 $ 6.3 1%
------ --- ----- ------ ---
Total............. $339.0 100% 2,371 $469.8 100%
</TABLE>
AUTOMATED UNDERWRITING. Automated underwriting (AU) is expected to
contribute significantly to E-LOAN's goal of increasing the efficiency of
multi-source lending by providing customers faster, more cost-efficient credit
reviews and decisions. AU may further offer efficiency enhancements through
reduced costs in property appraisals. In addition, E-LOAN believes customers
will also value the less onerous and time-consuming nature of AU relative to
more traditional underwriting processes. E-LOAN will continue to seek to enhance
its AU capabilities and incorporate as many techniques and technologies as are
warranted by its business needs and the needs of its major business partners.
E-LOAN has recently been approved by Fannie Mae to be an originator under
Fannie Mae's Desktop Originator and Desktop Underwriter system (DU). DU is
expected to help automate the lending process for all conforming loans and loans
aimed at low-and moderate-income borrowers. The goal of DU is to reduce the time
and expense of property appraisals. The DU system is expected to enable E-LOAN
to implement a comprehensive, integrated point-of-sale solution providing
expedited loan decisions. E-LOAN is the largest exclusive online originator
approved to use the DU system. E-LOAN also expects to implement additional AU
systems, including Freddie Mac's Loan Prospector and GECMC's Good Decisions.
LOAN UNDERWRITING. E-LOAN's guidelines for underwriting conventional
conforming loans comply with the underwriting criteria employed by Fannie Mae
and/or Freddie Mac. E-LOAN's underwriting guidelines and property standards for
all other conventional non-conforming loans are based on the underwriting
standards employed by the secondary mortgage loan purchasers.
E-LOAN considers the following general underwriting criteria in determining
whether to approve a loan application:
- employment and income;
- credit history;
- property value and characteristics;
- borrower characteristics; and
- available assets.
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GEOGRAPHIC DISTRIBUTION. Based on the best information available to E-LOAN,
the following table sets forth the geographic distribution by state of E-LOAN's
loan originations for the periods indicated.
DISTRIBUTION BY STATE OF E-LOAN'S LOAN ORIGINATIONS
<TABLE>
<CAPTION>
1998 FIRST QUARTER 1999
------------------------------- -------------------------------
NUMBER OF PERCENT OF TOTAL NUMBER OF PERCENT OF TOTAL
STATE CLOSED LOANS CLOSED LOANS CLOSED LOANS CLOSED LOANS
----- ------------ ---------------- ------------ ----------------
<S> <C> <C> <C> <C>
California........... 3,223 83% 1,636 69%
Washington........... 218 6% 140 6%
Texas................ 86 3% 94 4%
Colorado............. 64 2% 61 3%
All Others........... 274 6% 440 18%
----- --- ----- ---
Total...... 3,865 100% 2,371 100%
</TABLE>
We are more likely to originate a significant amount of our loans in
California for the foreseeable future because we are located there, we have
advertised more heavily in California than in other states to date, and we
believe that California consumers are more likely to be comfortable with using
the Internet to purchase mortgages. E-LOAN has initiated advertising campaigns
in other major markets outside California in an effort to generate more loan
applications from other states. Based on the best information available to
E-LOAN, the following table sets forth the distribution by county of E-LOAN's
California loan originations for the periods indicated.
DISTRIBUTION BY COUNTY OF E-LOAN'S CALIFORNIA LOAN ORIGINATIONS
<TABLE>
<CAPTION>
1998 FIRST QUARTER 1999
------------------------------- -------------------------------
NUMBER OF PERCENT OF TOTAL NUMBER OF PERCENT OF TOTAL
COUNTY CLOSED LOANS CLOSED LOANS CLOSED LOANS CLOSED LOANS
------ ------------ ---------------- ------------ ----------------
<S> <C> <C> <C> <C>
Santa Clara.......... 783 24% 311 19%
Alameda.............. 481 15% 183 11%
San Mateo............ 301 9% 122 7%
Contra Costa......... 313 10% 178 11%
Los Angeles.......... 270 9% 216 13%
Orange............... 208 6% 130 8%
San Francisco........ 122 4% 58 4%
Other................ 745 23% 438 27%
----- --- ----- ---
Total...... 3,223 100% 1,636 100%
</TABLE>
SALE OF LOANS. E-LOAN sells all loans that it originates, on a loan by loan
basis, along with the loan servicing rights. Substantially all prime credit
quality first mortgage loans sold by E-LOAN are sold without recourse.
Generally, E-LOAN sells its non-conforming conventional loan production to large
buyers in the secondary market.
E-LOAN minimizes its credit exposure on loans funded through its warehouse
credit facilities by currently selling a majority of these loans within 14 days
of funding. To facilitate the rapid sale of each loan, E-LOAN enters into a
best-efforts commitment with the mortgage loan purchaser at the same time the
customer's interest rate commitment is obtained. E-LOAN sells its loans on a
best efforts basis, as opposed to a mandatory basis, in order to avoid the
potential financial penalties associated with failing to deliver a loan to the
mortgage loan purchaser under a mandatory commitment. With the interest rate
risk limited by the commitments to sell originated loans, E-LOAN does not enter
into any hedging transactions in order to offset the risk that a change in
interest rates will result in a decrease in the value of E-LOAN's current
mortgage loan inventory or its commitments to purchase or originate mortgage
loans.
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FINANCING OF INTERNAL MORTGAGE FUNDING OPERATIONS. E-LOAN's principal
financing requirements are associated with its internal loan funding activities.
To satisfy these requirements, E-LOAN currently draws on warehouse credit
facilities it has established with Bank United and GE Capital. E-LOAN has also
secured an additional credit facility with Greenwich Capital. E-LOAN had
committed and uncommitted funds available through its warehouse credit
facilities and its agreement with Greenwich Capital aggregating approximately
$165 million as of May 31, 1999. E-LOAN also has an agreement with Greenwich
Capital to add an additional $100 million in uncommitted funds to finance
E-LOAN's mortgage loan inventory effective upon the closing of this offering. As
of May 31, 1999, the funding sources available to E-LOAN under each of its
current warehouse credit facilities and its agreement with Greenwich Capital are
as follows:
<TABLE>
<S> <C>
Greenwich Capital...................... $100 million
Bank United............................ $ 40 million
GE Capital............................. $ 25 million
</TABLE>
If E-LOAN continues to sell a majority of its internally funded mortgage
loans within 14 days, the existing warehouse credit facilities together with an
increase in the Greenwich Capital commitment would enable E-LOAN to internally
fund approximately $330 million in mortgage loans during each 30-day period,
increasing to approximately $530 million upon the closing of this offering.
Our agreements with GE Capital and Bank United require us to comply with
various operating and financial covenants. These covenants restrict our ability
to:
- sell any of our material assets or merge or consolidate with another
company;
- issue additional shares of common stock without their consent;
- pay dividends on our outstanding shares of common stock; and
- amend our Certificate of Incorporation or Bylaws.
These covenants also require us to:
- maintain a minimum tangible net worth;
- limit the amount of debt we incur relative to our net worth; and
- ensure that our current assets are equal to or greater than our current
liabilities.
E-LOAN intends to increase and diversify further its short-term funding
capabilities and continue to identify and pursue alternative and supplementary
methods to finance its operations through the public and private capital
markets.
CUSTOMER SERVICE
E-LOAN devotes significant resources to providing personalized, timely
customer service and support to minimize the potential uncertainty, anxiety and
inconvenience of the loan process. By combining high-tech communications with
highly personalized attention, E-LOAN believes it provides a level of customer
service superior to that experienced in the traditional loan application
process.
To help prospective customers understand the mortgage process, E-LOAN's
website provides a rich assortment of information on how to choose the most
suitable mortgage, descriptions of the various types of loan products, articles
about buying and refinancing a home, a glossary of mortgage terms, and answers
to frequently asked questions. Prospective customers may call E-LOAN toll-free
with general questions or click on one of the many "contact us" links throughout
its website to send questions via e-mail. Call center staff respond to both
phone calls and e-mail requests within 24 hours, and are available from 5 AM to
8 PM California
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time Monday through Saturday. To respond promptly to questions from Realtors,
E-LOAN also maintains a toll-free Realtor hotline staffed during the same hours.
Once a loan application is submitted online, E-LOAN assigns the customer a
personal customer service representative (CSR). The CSR becomes the customer's
primary point of contact with E-LOAN, ensuring prompt and personalized
attention. The CSR maintains regular e-mail and phone communication with the
borrower to answer questions, address any problems and generally facilitate
closing the loan by coordinating with E-LOAN's underwriting and processing
staff. After closing, E-LOAN asks each borrower to rate the level of customer
service received from the CSR, as well as from appraisal and settlement
personnel. The survey results are factored into the CSR's compensation, ensuring
a strong commitment to continually improving the quality of customer service.
Every online application also triggers the opening of a password-protected
E-Track account. Using E-Track, customers can track the process of their loan
applications online at any time. Each event that occurs throughout the various
stages of the loan process, for instance the receipt of appraisal details or a
lender's request for documentation from the borrower, generates an automated
e-mail alert to the borrower. The information is also logged in E-Track so the
borrower has a continuously updated record of all loan application developments.
With a customer's permission, Realtors may also access the E-Track account to
keep abreast of the progress of a loan.
TECHNOLOGY
E-LOAN's technology systems use a combination of its own proprietary
technologies and commercially available, licensed technologies from industry
leading providers, including Sun Microsystems, Cisco Systems and Oracle.
E-LOAN's systems were designed around industry standard architecture to reduce
downtime in the event of outages or catastrophic occurrences. Our systems
provide availability 24 hours a day, seven days a week, and have capacity for a
tenfold increase in activity before requiring additional hardware or support.
The system architecture and user interface were designed by E-LOAN's co-founders
and engineering staff.
USER INTERFACE. The E-LOAN website is designed for fast downloads and
compatibility with the most basic browsers. Pages are built with minimal
graphics and do not require client-side plug-ins or Java to view.
RATE SEARCHES AND COMPARISONS. Many of the mortgage services that E-LOAN
offers its customers are facilitated through its proprietary database. The
database features a rate-loading mechanism that enables electronic data feeds
from E-LOAN's lenders to be received and added to the database multiple times
per day. This mechanism provides prospective borrowers searching E-LOAN's
database with timely access to rates as the market changes. The database
currently contains rates and other details for about 50,000 products on an
average day and is designed to support a virtually limitless number of products
or search parameters. The database supports the dynamic comparison of loans
according to rate, term and points, and in the case of adjustable-rate
mortgages, margin, index and life cap. The rate-loading and search capabilities
of our database are the focus of significant development resources and we plan
to continuously improve and enhance these features.
LOAN APPLICATION AND TRACKING. When a customer applies for a loan online,
the application data is stored in a file server. As additional information,
including credit reports, appraisal details and financial documentation, is
obtained throughout the loan process and added to the borrower's file, e-mails
are automatically sent to the borrower and Realtor to inform them of the current
status of the loan application. At the same time, the borrower's E-Track account
is updated. Each day, E-LOAN sends thousands of automated e-mails and updates
hundreds of E-Track accounts.
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SECURITY. In order to safeguard borrowers' sensitive financial data,
E-LOAN's systems provide the most secure online transaction capability
available. Customer information sent via the website is encrypted using a Secure
Socket Layer. The server is protected with industry-leading firewall software.
The website itself is locked down, with only two people authorized to change the
content on the production server. E-Track is password-protected so that only the
borrower may access the account. For an extra measure of protection, none of the
borrower's credit or financial information is contained in the E-Track account.
The file server containing borrower data is accessible only to authorized users
within E-LOAN. There is no external access to this internal server via modem,
even by E-LOAN employees.
PARTNER TEMPLATES. E-LOAN's ability to develop and support mortgage loan
centers in partnership with websites, including Yahoo!, E*Trade and DLJdirect is
critical to driving applications and expanding the E-LOAN brand. E-LOAN has
developed a unique template system that allows for the rapid development and
deployment of mortgage loan centers within several hours of signing a
distribution agreement. In addition, our partners' websites contain customized
data and retain unique appearances. E-LOAN currently maintains over 40 mortgage
loan centers on distribution partners' websites.
SERVER HOSTING AND BACK-UP. E-LOAN's website system hardware is hosted at
the Exodus facilities in Santa Clara, California and Jersey City, New Jersey,
providing redundant communication lines and emergency power back-up. We have
implemented load balancing systems and our own redundant servers to provide for
fault tolerance. Scheduled maintenance takes place without taking the website
offline.
MARKETING
E-LOAN's marketing strategy is to attract loan applicants to its website by
promoting the E-LOAN brand as a byword for choice, selection, competitive
pricing and service in the mortgage industry. E-LOAN relies on a variety of
methods to promote its brand. By providing superior customer service, E-LOAN
promotes online referrals from satisfied borrowers. Strategic partnerships with
online financial websites, including Yahoo!, E*Trade, DLJdirect, Telebank and
CBS MarketWatch drive applications through mortgage loan centers on those
websites. Offline marketing campaigns featuring radio, TV, print and outdoor
advertising in key markets and nationwide target the demographic segments with
the highest propensity to utilize an online mortgage provider. E-LOAN also
engages in a number of marketing activities at trade shows and other events in
the real estate industry in order to encourage Realtors to refer homebuyers
directly to our website.
E-LOAN entered into an agreement with Yahoo!, Inc. in September 1998, which
was extended in March 1999 to run through February 2001. Pursuant to this
agreement, E-LOAN is the exclusive provider of mortgage related information on
the "Yahoo! Loan Center" website.
REGULATION OF MORTGAGE BROKERS AND LENDERS
The residential mortgage financing industry is highly regulated. E-LOAN's
business must comply with extensive and complex rules and regulations of, and
licensing and examination by, various federal, state and local government
authorities. These rules impose obligations and restrictions on E-LOAN's
residential loan brokering and lending activities. In particular, these rules
limit the broker fees, interest rates, finance charges and other fees E-LOAN may
assess, require extensive disclosure to E-LOAN's customers, prohibit
discrimination and impose multiple qualification and licensing obligations on
E-LOAN. Failure to comply with these requirements may result in, among other
things, revocation of required licenses or registrations, loss of approved
status, voiding of the loan contracts or security interests, indemnification
liability or the obligation to repurchase mortgage loans sold to mortgage loan
purchasers, rescission of mortgage loans,
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class action lawsuits, administrative enforcement actions and civil and criminal
liability. E-LOAN believes it is in substantial compliance with these rules and
regulations.
As a mortgage company doing business exclusively through the Internet,
E-LOAN faces an additional level of regulatory risk given the fact that the
statutes and regulations governing mortgage transactions have not been
substantially revised or updated to fully accommodate electronic commerce. Most
of the federal and state laws, rules and regulations governing mortgage loans
contemplate or assume paper-based transactions and do not currently address the
delivery of required disclosures and other documents through electronic
communications. Until the applicable laws, rules and regulations are revised to
clarify their applicability to transactions through e-commerce, any company
offering mortgage loans through the Internet or other means of e-commerce will
face uncertainty as to compliance. In addition, there is no assurance that
revisions to the laws, rules and regulations will be adopted and, if adopted,
will be timely or adequate to eliminate this uncertainty. Nonetheless, E-LOAN
believes that it has taken prudent steps to mitigate these risks in offering its
mortgage loan services through the Internet.
At the state level, E-LOAN must comply with licensing and regulation in
most of the states where it acts as a mortgage broker or lender. In addition,
any person who acquires 10% or more of E-LOAN's stock may be required to comply
with state licensing regulations requiring the person to periodically file
certain financial information and other personal and business information. If
any person holding 10% or more of E-LOAN's stock refuses or fails to comply with
these filing requirements, E-LOAN's existing licensing arrangements could be
jeopardized. The loss of required licenses could have a material adverse effect
on E-LOAN's results of operations and financial condition.
State laws limit the broker fees, interest rates, finance charges and other
fees E-LOAN may assess, including late charges, insufficient funds charges for
returned checks and prepayment penalties, and may require payment of interest on
escrow balances. State laws also require extensive disclosure to E-LOAN's
customers concerning fees and charges, brokerage agreements, lock-in agreements
and commitments, alternative mortgage transactions, escrows for taxes and
insurance, choosing settlement attorneys and insurance agents and private
mortgage insurance, among others. These laws regulate both the content and
timing of disclosures. In addition, many state laws regulate advertising claims
in connection with the solicitation of mortgage loan applications. State and
federal laws also prohibit unfair and deceptive trade practices in the mortgage
finance business. E-LOAN believes that it has obtained all licenses material to
our business in the jurisdictions where it conducts business, and is operating
substantially in compliance with the laws of these jurisdictions.
At the federal level, E-LOAN's mortgage brokering and lending activities
are regulated under a variety of laws, including, but not limited to, the Truth
in Lending Act and Regulation Z (TILA), the Equal Credit Opportunity Act and
Regulation B (ECOA), the Fair Housing Act, the Fair Credit Reporting Act (FCRA),
the Real Estate Settlement Procedures Act and Regulation X (RESPA) and the Home
Mortgage Disclosure Act of 1975 and Regulation C (HMDA). These statutes
generally require detailed disclosure of information concerning mortgage loans,
and they regulate the manner in which loans are made, including advertising,
disclosure of consumer information, servicing (and transfer of servicing) of
mortgage loans, payments for settlement services and reporting of consumer data.
These laws regulate both the content and timing of disclosures. E-LOAN believes
that it is operating substantially in compliance with the laws applicable to
E-LOAN's business.
Under TILA, lenders are required to provide consumers with uniform,
understandable information concerning certain terms and conditions of their loan
and credit transactions. Disclosures include providing the annual percentage
rate, monthly payment amount and total amount financed, plus certain disclosures
concerning alternative mortgage transactions. In
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<PAGE> 50
addition, TILA gives borrowers, among other things, the right to rescind loan
transactions if the lender fails to provide the requisite disclosure.
Under ECOA, creditors are prohibited from discriminating against applicants
on the basis of race, color, sex, age, religion, national origin or marital
status. The regulations under ECOA also restrict creditors from requesting
certain types of information from loan applicants. FCRA requires lenders to
supply applicants with certain information (called an "adverse action notice")
when the lender denies its applicants credit. The Fair Housing Act prohibits
discrimination in mortgage lending on the basis of race, color, religion, sex,
handicap, familial status or national origin. Finally, E-LOAN, when acting as a
mortgage lender, must also file annual reports with HUD pursuant to HMDA, which
requires the collection and reporting of statistical data concerning loan
transactions.
RESPA requires certain disclosures, including a good faith estimate of
closing costs and fees, as well as mortgage servicing transfer practices. RESPA
also prohibits the payment or receipt of kickbacks or referral fees, fee shares
or splits, or unearned fees in connection with the provision of real estate
settlement services. It is a common practice for online mortgage companies to
enter into advertising, marketing and distribution arrangements with other
Internet companies and websites whereby the mortgage companies pay the Internet
companies fees for advertising, marketing and distribution services and other
goods and facilities based on the number of click-throughs, completed loan
applications or closed loans derived from these arrangements. The applicability
of RESPA's referral fee prohibitions to the compensation provisions of these
arrangements is unclear and the Department of Housing and Urban Development has
provided no guidance to date on the subject. Although E-LOAN believes that it
has structured its relationships with Internet advertisers to ensure compliance
with RESPA, some level of risk is inherent absent amendments to the law or
regulations, or clarification from regulators.
The laws, rules and regulations applicable to E-LOAN may undergo periodic
modification and change. There are currently proposed various laws, rules and
regulations which, if adopted, could impact E-LOAN. There can be no assurance
that these proposed laws, rules and regulations, or other applicable laws, rules
or regulations, will not be adopted in the future which could make compliance
much more difficult or expensive, restrict E-LOAN's ability to originate,
broker, purchase or sell loans, further limit or restrict the amount of
commissions, interest and other charges earned on loans originated, brokered,
purchased or sold by E-LOAN, or otherwise adversely affect the business or
prospects of E-LOAN.
COMPETITION
The market for the origination of mortgage loans is rapidly evolving, both
online and through traditional channels, and competition for borrowers is
intense and is expected to increase significantly in the future. E-LOAN faces
competition from companies directly competing by offering mortgage loans or
other home buying services over the Internet. Principal among these competitors
are Microsoft HomeAdvisor, Intuit QuickenMortgage, iOwn.com, Keystroke and
Mortgage.com. Traditional lenders, including Countrywide, Norwest, Wells Fargo
and Bank America, also provide access to their mortgage loan offerings over the
Internet. Increased competition, particularly online competition, could result
in price reductions, reduced margins or loss of market share, any of which could
adversely affect our business. Further, there can be no assurance that E-LOAN's
competitors and potential competitors will not develop services and products
that are equal or superior to those of E-LOAN or that achieve greater market
acceptance than its products and services.
E-LOAN believes that the primary competitive factors in creating a
financial services resource on the Internet are functionality, brand
recognition, customer loyalty, ease-of-use, quality of service, reliability and
critical mass. Competition is likely to increase significantly as
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<PAGE> 51
new companies enter the market and current competitors expand their services.
Many of these potential competitors are likely to enjoy substantial competitive
advantages, including:
- longer operating histories;
- greater name recognition;
- larger, established customer bases; and
- substantially greater financial, marketing, technical and other
resources.
LEGAL PROCEEDINGS
E-LOAN is not currently a party to any material legal proceedings. E-LOAN
may become a party to various legal proceedings arising in the ordinary course
of its business.
INTELLECTUAL PROPERTY
Trademarks and other proprietary rights are important to our success and
our competitive position. E-LOAN currently has a number of trademarks and
copyrights; however, it does not hold any patents. Although E-LOAN seeks to
protect its trademarks and other proprietary rights through a variety of means,
E-LOAN may not have taken adequate steps to protect these rights. E-LOAN may
also license content from third parties in the future and it is possible that it
could be subjected to infringement actions based upon the content licensed from
these third parties. Any claims brought against E-LOAN, regardless of their
merit, could result in costly litigation and the diversion of its financial
resources and technical and management personnel. Further, if any claims are
proved valid, through litigation or otherwise, E-LOAN may be required to change
its trademarks and pay financial damages, which could adversely affect its
business.
E-LOAN typically enters into confidentiality or license agreements with its
employees, consultants and corporate partners, and generally controls access to
and distribution of its technologies, documentation and other proprietary
information. Despite its efforts to protect its proprietary rights from
unauthorized use or disclosure, parties may attempt to disclose, obtain or use
E-LOAN's rights. The steps E-LOAN has taken may not prevent misappropriation of
its proprietary rights, particularly in foreign countries where laws or law
enforcement practices may not protect E-LOAN's proprietary rights as fully as in
the United States.
E-LOAN expects it may be involved in legal proceedings and claims in the
ordinary course of its business, including claims of alleged infringement of the
trademarks and other intellectual property rights of third parties by E-LOAN and
its licensees. Any of these claims, even if without merit, could result in the
expenditure of significant financial and managerial resources. Further, if any
of these claims are successful, E-LOAN may be required to change its trademarks,
alter its content and pay financial damages, which could adversely affect its
business.
EMPLOYEES
As of March 31, 1999, E-LOAN employed 237 full-time employees, of whom 185
were in operations, 26 were in administration, 12 were in marketing and business
development and 14 were in engineering. As E-LOAN continues to grow and
introduce more products, it expects to hire more personnel, particularly in the
areas of mortgage operations and marketing. None of E-LOAN's current employees
is represented by a labor union or is the subject of a collective bargaining
agreement. E-LOAN believes that relations with its employees are good.
FACILITIES
E-LOAN is headquartered in Dublin, California, where it leases
approximately 68,000 square feet of space primarily in a single building. E-LOAN
also occupies approximately 2,000 square feet of space in Palo Alto, California.
The lease for E-LOAN's office space in Dublin expires in
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<PAGE> 52
October 2003, and the lease for E-LOAN's office space in Palo Alto is month to
month. E-LOAN currently anticipates that it will require additional space as
more personnel are hired.
THE E-LOAN FOUNDATION
The E-LOAN Foundation was established to support charitable causes in the
San Francisco Bay Area. E-LOAN's reasons for establishing the foundation were to
improve conditions in the local community and build goodwill for E-LOAN.
The E-LOAN Foundation will primarily focus on alleviating homelessness and
improving the quality of life and education for disadvantaged members of the
community. Supported programs will be selected by a grant committee comprised of
E-LOAN employees, with final authorization to be given by our executive officers
Chris Larsen, Janina Pawlowski and Frank Siskowski. The Community Foundation
Silicon Valley will conduct all administration and management of the grants.
Other than some involvement in the nature of the charitable contributions, no
officers or directors of E-LOAN are affiliated with the Community Foundation
Silicon Valley or the E-LOAN Foundation. There are no agreements in place
between E-LOAN and the Community Foundation Silicon Valley with respect to
voting of the shares being donated to the E-LOAN Foundation.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of E-LOAN as of March 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Chris Larsen............................ 38 Chief Executive Officer and Director
Janina Pawlowski........................ 38 President and Director
Frank Siskowski......................... 51 Chief Financial Officer
Harold "Pete" Bonnikson................. 44 Senior Vice President, Operations
William Crane........................... 37 Vice President, Engineering
Doug Galen.............................. 37 Vice President, Business Development &
Sales
Janet Hammond........................... 41 Vice President, Underwriting
Joseph Kennedy.......................... 39 Senior Vice President, Marketing and
Business Development
Steve Majerus........................... 35 Vice President, Secondary Markets
Sara Myers Bisler....................... 39 Vice President, Operations
Sharon Ruwart........................... 36 Vice President, Marketing
Ira M. Ehrenpreis(1)(2)................. 30 Director
Robert C. Kagle(1)(2)................... 43 Director
Tim Koogle(1)(2)........................ 47 Director
Wade Randlett........................... 34 Director
</TABLE>
- ---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
CHRIS LARSEN co-founded E-LOAN in August 1996 and has served as its Chief
Executive Officer since June 1998. From August 1996 to June 1998, Mr. Larsen
served as the President of E-LOAN. Mr. Larsen has been a Director of E-LOAN
since its incorporation in August 1996. From October 1992 to August 1996, Mr.
Larsen was the President of the Palo Alto Funding Group, the mortgage brokerage
he co-founded in 1992 and E-LOAN's predecessor company. Mr. Larsen holds an
M.B.A. degree from Stanford University and a B.S. degree from San Francisco
State University.
JANINA PAWLOWSKI co-founded E-LOAN in August 1996 and has served as its
President since June 1998. From August 1996 to June 1998, Ms. Pawlowski served
as the Chief Executive Officer of E-LOAN. Ms. Pawlowski has been a Director of
E-LOAN since its incorporation in August 1996. From October 1992 to August 1996,
Ms. Pawlowski was the Chief Executive Officer of the Palo Alto Funding Group,
the mortgage brokerage she co-founded in 1992 and E-LOAN's predecessor company.
Ms. Pawlowski holds an M.B.A. degree from the University of Rochester and a B.S.
degree from Cornell University.
FRANK SISKOWSKI has served as the Chief Financial Officer of E-LOAN since
October 1998. Prior to joining E-LOAN, Mr. Siskowski was the Senior Vice
President and Chief Financial Officer of The Indus Group, Inc. from September
1996 to August 1998. From July 1991 to September 1996, Mr. Siskowski served as
Senior Vice President and Controller of VISA International. From January 1985 to
July 1991, Mr. Siskowski served as the Vice President and Chief Financial
Officer of the MCI Pacific Division of MCI Communications Corporation. Mr.
Siskowski holds an M.B.A. degree from Fordham University and a B.A. degree from
Manhattan College.
HAROLD "PETE" BONNIKSON has served as the Senior Vice President of
Operations of E-LOAN since January 1999. Prior to joining E-LOAN, Mr. Bonnikson
was with North American Mortgage
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and its predecessor companies since 1981. Mr. Bonnikson was the Executive Vice
President of North American Mortgage from 1993 to 1999. Mr. Bonnikson holds a
B.S. degree from California State University at Sacramento.
WILLIAM CRANE has served as the Vice President of Engineering of E-LOAN
since April 1998. Prior to joining E-LOAN, Mr. Crane was the Vice President of
Engineering of FrontOffice Technologies from January 1996 to April 1998. From
November 1992 to January 1996, Mr. Crane was the Vice President of Engineering
of Network Computing Devices. Mr. Crane holds a B.S. degree from Texas A&M
University.
DOUG GALEN has served as the Vice President of Business Development and
Sales of E-LOAN since September 1997. Prior to joining E-LOAN, Mr. Galen was the
Vice President of Business Development of Owners.com from August 1996 to August
1997. From January 1996 to August 1996, Mr. Galen was the Vice President of
Limar Realty. From June 1988 to January 1996, Mr. Galen was the Vice President
of The Shilder Group. Mr. Galen holds an M.B.A. degree and a B.A. degree from
the University of California, Berkeley.
JANET HAMMOND has served as the Vice President of Underwriting of E-LOAN
since March 1999. From June 1998 to March 1999, Ms. Hammond served as the
Director of Operations of E-LOAN. From December 1997 to June 1998, Ms. Hammond
served as a manager of Customer Service and then as the Director of Customer
Service of E-LOAN. Prior to joining E-LOAN, from May 1997 to December 1997, Ms.
Hammond was a project manager with PMI Mortgage Insurance, Inc. From September
1990 to May 1997, Ms. Hammond was a Loan Manager for Rockwell Federal Credit
Union. Ms. Hammond attended California State University, Fresno.
JOSEPH KENNEDY has served as the Senior Vice President of Marketing and
Business Development of E-LOAN since February 1999. Mr. Kennedy was the Vice
President of Sales, Service and Marketing of Saturn Corporation from October
1995 to February 1999. From December 1993 to September 1995, Mr. Kennedy was the
General Director of Marketing and Product Planning for the Cadillac Motor Car
Division of General Motors Corporation. From September 1992 to December 1993,
Mr. Kennedy was the Director of Product Portfolio Planning for the North
American Operations of General Motors Corporation. Mr. Kennedy holds an M.B.A.
degree from Harvard Business School and a B.S. degree from Princeton University.
STEVE MAJERUS has served as the Vice President of Secondary Markets of
E-LOAN since January 1999. From April 1998 to January 1999, Mr. Majerus served
as the Director of Mortgage Banking of E-LOAN. Prior to joining E-LOAN, Mr.
Majerus was the Director of Mortgage Lending for of CMG Mortgage from January
1996 to March 1998. From February 1993 to November 1995, Mr. Majerus was the
President of Trans Capital Mortgage, a company which he co-founded.
SARA MYERS BISLER has served as the Vice President of Operations of E-LOAN
since May 1999. From November 1993 to May 1999, Ms. Bisler held various
positions with North American Mortgage Company, most recently as Senior Vice
President of Inventory Management. Ms. Bisler holds a B.A. degree from
California State University, Sacramento.
SHARON RUWART has served as the Vice President of Marketing of E-LOAN since
December 1998. From April 1998 to December 1998, Ms. Ruwart served as Director
of Marketing of E-LOAN. Prior to joining E-LOAN, Ms. Ruwart held a variety of
positions at the San Jose Mercury News, a division of Knight-Ridder, Inc.,
including Brand Group Manager and Recruitment Advertising Manager from January
1995 to April 1998. Ms. Ruwart holds an M.B.A. degree from Stanford University
and a B.A. degree from Yale University.
IRA M. EHRENPREIS has served as a Director of E-LOAN since January 1998.
Since 1996 Mr. Ehrenpreis has been a General Partner of TPW Management V, L.P.
the General Partner of Technology Partners Fund V, L.P. and Managing Director of
TP Management VI, L.L.C., the General Partner of Technology Partners Fund VI,
L.P. Mr. Ehrenpreis holds J.D. and M.B.A.
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<PAGE> 55
degrees from Stanford University and a B.A. degree from the University of
California, Los Angeles.
ROBERT C. KAGLE has served as a Director of E-LOAN since January 1998. Mr.
Kagle has been a member of Benchmark Capital Management Co., L.L.C., since its
founding in May 1995. Mr. Kagle also has been a General Partner of Technology
Venture Investors since January 1984. Mr. Kagle is also a director of eBay Inc.,
a leading online trading community. Mr. Kagle holds a B.S. degree from the
General Motors Institute (renamed Kettering University in January 1998) and an
M.B.A. degree from Stanford University.
TIM KOOGLE has served as a Director of E-LOAN since September 1998. Mr.
Koogle has been the Chief Executive Officer of Yahoo!, Inc. and a member of
Yahoo!'s Board of Directors since August 1995. He has also been Yahoo!'s
Chairman since January 1999 and was its President from August 1995 until January
1999. Prior to joining Yahoo!, Mr. Koogle was President of Intermec Corporation,
a manufacturer of data collection and data communication products, from 1992 to
1995. During that time, he also served as a corporate Vice President of
Intermec's parent company, Western Atlas. Mr. Koogle holds a B.S. degree from
the University of Virginia and an M.S. degree from Stanford University.
WADE RANDLETT has served as a Director of E-LOAN since June 1997. Mr.
Randlett has been the Political Director of TechNet since February 1997. From
November 1992 until February 1997, Mr. Randlett was self-employed as a Policy
Consultant. Mr. Randlett holds a B.S. degree from Princeton University.
BOARD COMPOSITION
E-LOAN currently has authorized six directors. E-LOAN's Restated
Certificate of Incorporation will provide that, effective upon the closing of
this offering, the terms of office of the members of the Board of Directors will
be divided into three classes: Class I, whose term will expire at the annual
meeting of stockholders to be held in 2000, Class II, whose term will expire at
the annual meeting of stockholders to be held in 2001, and Class III, whose term
will expire at the annual meeting of stockholders to be held in 2002. The Class
I directors are Messrs. Ehrenpreis and Randlett, the Class II directors are
Messrs. Kagle and Koogle and the Class III directors are Mr. Larsen and Ms.
Pawlowski. At each annual meeting of stockholders after the initial
classification, the successors to directors whose term will then expire will be
elected to serve from the time of election and qualification until the third
annual meeting following election. In addition, E-LOAN's Bylaws will provide
that the authorized number of directors may be changed only by resolution of the
Board of Directors. Any additional directorships resulting from an increase in
the number of directors will be distributed among the three classes so that, as
nearly as possible, each class will consist of one-third of the total number of
directors. This classification of the Board of Directors may have the effect of
delaying or preventing changes in control or management of E-LOAN.
Each officer is elected by, and serves at the discretion of, the Board of
Directors. Each of E-LOAN's officers and directors, other than nonemployee
directors, devotes full time to the affairs of E-LOAN. E-LOAN's nonemployee
directors devote time to the affairs of E-LOAN as is necessary to discharge
their duties. There are no family relationships among any of the directors,
officers or key employees of E-LOAN.
BOARD COMMITTEES
The Audit Committee of the Board of Directors reviews the internal
accounting procedures of E-LOAN and consults with and reviews the services
provided by E-LOAN's independent accountants. The Audit Committee currently
consists of Messrs. Ehrenpreis, Kagle and Koogle.
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<PAGE> 56
The Compensation Committee of the Board of Directors reviews and recommends
to the Board the compensation and benefits of all executive officers of E-LOAN,
administers E-LOAN's stock option plan and establishes and reviews general
policies relating to compensation and benefits of employees of E-LOAN. The
Compensation Committee currently consists of Messrs. Ehrenpreis, Kagle and
Koogle. No interlocking relationships exist between E-LOAN's Board of Directors
or Compensation Committee and the board of directors or compensation committee
of any other company, nor has any interlocking relationship existed in the past.
DIRECTOR COMPENSATION
Our directors do not currently receive cash compensation from E-LOAN for
their service as members of the Board of Directors, although they are reimbursed
for certain expenses in connection with attendance at Board and Committee
meetings. E-LOAN does not provide additional compensation for committee
participation or special assignments of the Board of Directors. From time to
time, certain directors of E-LOAN have received grants of options to purchase
shares of E-LOAN's common stock pursuant to the 1997 Stock Option Plan. See
"-- Stock Plans" and "Certain Transactions".
EXECUTIVE COMPENSATION
The following table sets forth the total compensation received for services
rendered to E-LOAN during the fiscal year ended December 31, 1998 by our Chief
Executive Officer and other executive officers who received salary and bonus in
that fiscal year in excess of $100,000. The executive officers listed in the
table below are sometimes referred to as Named Executive Officers.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------------
ANNUAL COMPENSATION NUMBER OF
---------------------- SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS
--------------------------- ---------- --------- ---------------------
<S> <C> <C> <C>
Chris Larsen
Chief Executive Officer.................... $129,807 $ -- --
Janina Pawlowski
President.................................. 129,808 -- --
Doug Galen
Vice President, Business Development &
Sales................................... 114,496 -- 150,000
Steve Majerus
Vice President, Secondary Marketing........ 115,773 47,336 225,000
</TABLE>
Mr. Bonnikson joined E-LOAN in January 1999 as its Senior Vice President of
Operations and will be compensated at an annual base salary of $150,000 during
the fiscal year ended December 31, 1999. Mr. Crane joined E-LOAN in April 1998
as its Vice President of Engineering and will be compensated at an annual base
salary of $130,000 during the fiscal year ended December 31, 1999. Mr. Kennedy
joined E-LOAN in February 1999 as its Senior Vice President of Marketing and
Business Development will be compensated at an annual base salary of $200,000
during the fiscal year ended December 31, 1999. Mr. Siskowski joined E-LOAN in
October 1998 as its Chief Financial Officer and will be compensated at an annual
base salary of $170,000 during the fiscal year ended December 31, 1999.
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<PAGE> 57
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain summary information concerning
grants of stock options to each of the Named Executive Officers for the year
ended December 31, 1998. E-LOAN has never granted any stock appreciation rights.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENT OF AT ASSUMED ANNUAL RATES
SECURITIES TOTAL OPTIONS OF STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM(3)
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION ------------------------------------
NAME(1) GRANTED FISCAL YEAR(2) ($/SH) DATE 0% 5% 10%
------- ---------- -------------- -------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Chris Larsen.......... -- -- -- -- -- --
Janina Pawlowski...... -- -- -- -- -- --
Doug Galen............ 120,000 3.9% $0.22 03/12/08 $1,173,600 $1,928,400 $3,086,400
30,000 1.0% $1.00 08/11/08 $ 270,000 $ 458,700 $ 748,200
Steve Majerus......... 225,000 7.3% $0.22 05/07/08 $2,200,500 $3,615,750 $5,787,000
</TABLE>
- ---------------
(1) In January 1999, E-LOAN granted to Mr. Bonnikson an option to purchase
654,261 shares of common stock at an exercise price of $2.00 per share,
which expires on January 13, 2009. In May 1998, E-LOAN granted to Mr. Crane
an option to purchase 495,000 shares of common stock at an exercise price of
$0.22 per share, which expires on May 7, 2008. In February 1999, E-LOAN
granted to Mr. Kennedy an option to purchase 747,519 shares of common stock
at an exercise price of $2.00 per share, which expires on February 22, 2009.
In November 1998, E-LOAN granted to Mr. Siskowski an option to purchase
385,377 shares of common stock at an exercise price of $1.33 per share,
which expires November 25, 2008.
(2) In 1998, E-LOAN granted options to purchase an aggregate of 3,084,627 shares
of common stock, of which 3,011,877 were granted to employees and 72,750
were granted to consultants.
(3) The 0%, 5% and 10% assumed annual rates of stock price appreciation are
mandated by the rules of the Securities and Exchange Commission and do not
represent E-LOAN's estimate or projection of future common stock prices. The
potential realizable value is calculated by assuming that the assumed
initial public offering price of $10.00 per share appreciates at the
indicated rate for the entire term of the option and that the option is
exercised at the exercise price and sold on the last day at the appreciated
price. The potential realizable value is net of the applicable exercise
price, but does not take into account applicable federal or state income tax
consequences and other expenses of option exercises or sales of appreciated
stock.
FISCAL YEAR END OPTION VALUES
The following table provides certain summary information concerning stock
options held as of December 31, 1998 by each of the Named Executive Officers.
None of the Named Executive Officers exercised options in fiscal 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS AT
AT DECEMBER 31, 1998 DECEMBER 31, 1998
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Chris Larsen...................................... -- -- -- --
Janina Pawlowski.................................. -- -- -- --
Doug Galen........................................ 90,000 330,000 $895,500 $3,234,600
Steve Majerus..................................... -- 225,000 $ -- $2,200,500
</TABLE>
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There was no public trading market for E-LOAN's common stock as of December
31, 1998. Accordingly, the value of unexercised in-the-money options as of that
date was calculated on the basis of an assumed initial public offering price of
$10.00 per share.
STOCK PLANS
1997 Stock Plan
E-LOAN's 1997 Stock Plan (1997 Plan) provides for the granting to employees
of incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (Code), and for the granting to employees,
directors and consultants of nonstatutory stock options and stock purchase
rights (SPRs). The 1997 Plan was approved by the Board of Directors in August
1997 and by the stockholders in November 1997. The Board approved amendments to
the 1997 Plan to increase the number of shares reserved under the 1997 Plan in
May 1998 and January 1999, and the stockholders also approved these amendments
to the 1997 Plan in May 1998 and January 1999. Unless terminated sooner, the
1997 Plan will terminate automatically in 2007. A total of 10,500,000 shares of
common stock is currently reserved for issuance pursuant to the 1997 Plan, plus
annual increases equal to the lesser of 4,500,000 shares, 4% of the then
outstanding shares, or a lesser amount determined by the Board.
The 1997 Plan may be administered by the board of directors or a committee
of the board (as applicable, the "Administrator"), which committee shall, in the
case of options intended to qualify as "performance-based compensation" within
the meaning of Section 162(m) of the Code, consist of two or more "outside
directors" within the meaning of Section 162(m) of the Code. The Administrator
has the power to determine the terms of the options or SPRs granted, including
the exercise price, the number of shares, the exercisability thereof, and the
form of consideration payable upon exercise. The board has the authority to
amend, suspend or terminate the 1997 Plan, provided that the action may not
adversely affect any share of common stock previously issued and sold or any
option previously granted under the 1997 Plan.
Options and SPRs granted under the 1997 Plan are not generally transferable
by the optionee, and each option and SPR is exercisable during the lifetime of
the optionee only by the optionee. Options granted under the 1997 Plan must
generally be exercised within three months of the Optionee's separation of
service from E-LOAN, or within 12 months after the optionee's termination by
death or disability, but in no event later than the expiration of the option's
ten year term. In the case of SPRs, unless the Administrator determines
otherwise, the Restricted Stock Purchase Agreement shall grant E-LOAN a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's service for E-LOAN for any reason, including death or
disability. The purchase price for Shares repurchased pursuant to the Restricted
Stock Purchase Agreement shall be the original price paid by the purchaser and
may be paid by cancellation of any indebtedness of the purchaser to E-LOAN. The
repurchase option shall lapse at a rate determined by the Administrator. The
exercise price of all incentive stock options granted under the 1997 Plan must
be at least equal to the fair market value of the common stock on the date of
grant. The exercise price of nonstatutory stock options and SPRs granted under
the 1997 Plan is determined by the Administrator, but with respect to
nonstatutory stock options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the exercise
price must at least be equal to the fair market value of the common stock on the
date of grant. With respect to any participant who owns stock possessing more
than 10% of the voting power of all classes of E-LOAN's outstanding capital
stock, the exercise price of any incentive stock option granted must equal at
least 110% of the fair market value on the grant date and the term of any
incentive stock option must not exceed five years. The term of all other options
granted under the 1997 Plan may not exceed ten years.
The 1997 Plan provides that in the event of a merger of E-LOAN with or into
another corporation or a sale of substantially all of E-LOAN's assets, each
option or SPR shall be
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<PAGE> 59
assumed or an equivalent option or SPR substituted by the successor corporation.
If each outstanding option or SPR is not assumed or substituted as described in
the preceding sentence, the Administrator shall notify the Optionees that each
option or SPR shall be fully vested and exercisable, including shares as to
which it would not otherwise be exercisable, for a period of 15 days from the
date of notice, and the option or SPR will terminate upon the expiration of the
period.
1999 Employee Stock Purchase Plan
E-LOAN's 1999 Employee Stock Purchase Plan (1999 Purchase Plan) was adopted
by the Board of Directors in March 1999 and approved by the stockholders in
April 1999. A total of 1,500,000 shares of common stock has been reserved for
issuance under the 1999 Purchase Plan, plus annual increases on the first day of
E-LOAN's fiscal year beginning in or after 2000 equal to the lesser of 1,500,000
shares, 2% of the then outstanding shares or a lesser amount determined by the
Board. As of the date of this Prospectus, no shares have been issued under the
1999 Purchase Plan.
The 1999 Purchase Plan, which is intended to qualify under Section 423 of
the Internal Revenue Code of 1986, as amended, contains consecutive overlapping
24-month offering periods. Each offering period includes four six-month purchase
periods. The offering periods generally start on the first trading day on or
after May 1 and November 1 of each year, except for the first offering period
which commences on the first trading day on or after the effective date of this
Offering and ends on the last trading day on or before April 30, 2001.
Employees are eligible to participate if they are customarily employed by
E-LOAN or any participating subsidiary for at least 20 hours per week and more
than five months in any calendar year. However, to the extent any employee (a)
immediately after a grant would own stock or hold options to purchase stock
possessing 5% or more of the total combined voting power or value of all classes
of the capital stock of E-LOAN or (b) would have rights to purchase stock under
all employee stock purchase plans of E-LOAN which exceed $25,000 worth of stock
for each calendar year in which the options are outstanding, the employee may be
not be granted an option to purchase stock under the 1999 Purchase Plan. The
1999 Purchase Plan permits participants to purchase common stock through payroll
deductions of up to 15% of the participant's "compensation". Compensation is
defined as the participant's base straight time gross earnings, commissions,
cash incentive payments and bonuses, but exclusive of payments for overtime,
profit sharing payments, shift premium payments, non-cash compensation and other
compensation. The maximum number of shares a participant may purchase during a
single purchase period is 3,750 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each purchase period. The price of stock
purchased under the 1999 Purchase Plan is generally 85% of the lower of the fair
market value of the common stock (i) at the beginning of the offering period or
(ii) at the end of the purchase period. In the event the fair market value at
the end of a purchase period is less than the fair market value at the beginning
of the offering period, the participants will be withdrawn from the current
offering period following exercise and automatically re-enrolled in a new
offering period. The new offering period will use the lower fair market value as
of the first date of the new offering period to determine the purchase price for
future purchase periods. Participants may end their participation at any time
during an offering period, and they will be paid their payroll deductions to
date. Participation ends automatically upon termination of employment with
E-LOAN.
Rights granted under the 1999 Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the 1999 Purchase Plan. The 1999 Purchase Plan provides
that, in the event of a merger of E-LOAN with or into another corporation or a
sale of substantially all of E-LOAN's assets, each outstanding option
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<PAGE> 60
may be assumed or substituted for by the successor corporation. If the successor
corporation refuses to assume or substitute for the outstanding options, the
offering period then in progress will be shortened and a new exercise date will
be set. After shares have been purchased on the New Exercise Date, the 1999
Purchase Plan will terminate. Unless terminated earlier, the 1999 Purchase Plan
will terminate in 2009. The Board of Directors has the authority to amend or
terminate the 1999 Purchase Plan, except that no action may adversely affect any
outstanding rights to purchase stock under the 1999 Purchase Plan.
401(K) PLAN
E-LOAN maintains an employee savings and retirement plan (401(k) Plan)
which covers all eligible employees of E-LOAN (Participants). Pursuant to the
401(k) Plan, Participants may elect to reduce their current compensation, on a
pre-tax basis, up to 15%, or the statutorily prescribed annual limit, whichever
is lower, and have the amount of the reduction contributed to the 401(k) Plan.
Participants' salary reduction contributions are fully vested at all times.
E-LOAN, in its sole discretion, may make discretionary employer contributions,
qualified discretionary employer contributions and matching contributions to the
401(k) Plan. Each Participants' interest in their employer discretionary
contributions and matching contributions generally vest in accordance with a
four-year graduated vesting schedule. Participants may receive loans and
hardship distributions while in service and are eligible for a distribution from
the 401(k) Plan upon separation from service with E-LOAN. The 401(k) Plan is
intended to qualify under Section 401(a) of the Code, and its accompanying trust
is intended to be a tax-exempt trust under Section 501(a) of the Code.
Contributions made on behalf of Participants, on a pre-tax basis, to the 401(k)
Plan, and income earned on the contributions, are not currently taxable to
Participants until distributed to them. All contributions are tax deductible by
E-LOAN. The trustee under the 401(k) Plan, at the direction of Participants,
invests the assets of the 401(k) Plan in any of seven designated investment
options.
EMPLOYMENT AGREEMENT AND CHANGE OF CONTROL ARRANGEMENTS
Under the terms of E-LOAN's offer of employment to Mr. Kennedy, if Mr.
Kennedy's employment is terminated by E-LOAN or a successor company to E-LOAN
within six months prior to or 12 months following a change of control, E-LOAN
has agreed to pay Mr. Kennedy three years of salary, accelerate vesting of all
shares under Mr. Kennedy's option and pay a gross-up for any taxation Mr.
Kennedy incurs in connection with the payment and acceleration above standard
individual taxes for ordinary income. Alternatively, if Mr. Kennedy's employment
is terminated by E-LOAN at any time, E-LOAN has agreed to give Mr. Kennedy three
months notice of termination, pay Mr. Kennedy 12 months of salary and accelerate
vesting of that number of shares under Mr. Kennedy's option that would have been
exercisable on the date 12 months following the date of termination. E-LOAN is
not required to perform any of these obligations if Mr. Kennedy's termination
from E-LOAN is due to a criminal act or gross violation of E-LOAN policy. E-LOAN
has also agreed to reimburse Mr. Kennedy for relocation expenses he incurred in
relocating to the Bay Area.
In accordance with the terms of their option agreements under E-LOAN's 1997
Stock Plan, whether or not the options are assumed or substituted in a merger,
acquisition or asset sale, each Named Executive Officer's outstanding options
vest and become exercisable as to an additional 50% of the unvested shares at
the time of the merger, acquisition or sale of assets.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
E-LOAN's Restated Certificate of Incorporation limits the liability of
directors to the maximum extent permitted by Delaware law. Delaware law provides
that directors of a corporation will not
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be personally liable for monetary damages for breach of their fiduciary duties
as directors, except liability for:
- breach of their duty of loyalty to the corporation or its stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
The limitation of liability does not apply to liabilities arising under the
federal or state securities laws and does not affect the availability of
equitable remedies, including injunctive relief or rescission.
E-LOAN's Bylaws provide that E-LOAN shall indemnify its directors,
officers, employees and other agents to the fullest extent permitted by law.
E-LOAN believes that indemnification under its Bylaws covers at least negligence
and gross negligence on the part of indemnified parties. E-LOAN's Bylaws also
permit it to secure insurance on behalf of any officer, director, employee or
other agent for any liability arising out of his or her actions in such
capacity, regardless of whether the Bylaws permit indemnification.
E-LOAN has entered into agreements to indemnify its directors and executive
officers, in addition to the indemnification provided for in its Bylaws. These
agreements, among other things, indemnify E-LOAN's directors and executive
officers for certain expenses (including attorneys' fees), judgments, fines and
settlement amounts incurred by any person in any action or proceeding, including
any action by or in the right of E-LOAN arising out of that person's services as
a director, officer, employee, agent or fiduciary of E-LOAN, any subsidiary of
E-LOAN or any other company or enterprise to which the person provides services
at the request of E-LOAN. E-LOAN believes that these provisions and agreements
are necessary to attract and retain qualified persons as directors and executive
officers.
At present, there is no pending litigation or proceeding involving a
director or officer of E-LOAN in which indemnification is required or permitted,
and E-LOAN is not aware of any threatened litigation or proceeding that may
result in a claim for indemnification.
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CERTAIN TRANSACTIONS
In December 1997, E-LOAN issued shares of Series B preferred stock to
certain investors at a purchase price of $0.96 per share, which shares will
automatically convert into 1,290,621 shares of common stock upon the completion
of this offering. Also in December 1997, E-LOAN issued shares of Series C
preferred stock to certain investors at a purchase price of $1.23 per share,
which shares will automatically convert into 12,809,808 shares of common stock
upon completion of this offering. In September 1998 and February 1999, E-LOAN
issued shares of Series D preferred stock to certain investors at a purchase
price of $9.26 per share, which shares will automatically convert into 5,107,587
shares of common stock upon the completion of this offering. The investors in
the Series B preferred stock, Series C preferred stock and Series D preferred
stock include the following affiliates of E-LOAN:
<TABLE>
<CAPTION>
SHARES OF SHARES OF SHARES OF
SERIES B SERIES C SERIES D
PREFERRED PREFERRED PREFERRED
INVESTOR STOCK STOCK STOCK
-------- --------- --------- ---------
<S> <C> <C> <C>
Doug Galen.............................................. 15,625 -- --
Benchmark Capital Partners II L.P.(1)................... -- 2,589,959 97,161
Entities Affiliated with Technology Partners(2)......... -- 1,479,977 75,570
Entities Affiliated With STV IV, LLC(3)................. -- -- 777,286
Yahoo!, Inc.(4)......................................... -- -- 323,869
Harold "Pete" Bonnikson................................. -- -- 40,000
</TABLE>
- -------------------------
(1) Mr. Kagle, a director of E-LOAN, is a member of Benchmark Capital Management
Co., L.L.C., the general partner of Benchmark Capital Partners II L.P.
(2) Technology Partners Fund V, L.P. purchased 739,989 shares of Series C
preferred stock and 16,361 shares of Series D preferred stock. Technology
Partners Fund VI, L.P. purchased 739,988 shares of Series C preferred stock
and 59,209 shares of Series D preferred stock. Mr. Ehrenpreis, a director of
E-LOAN, is a general partner of TPW Management V, L.P., the general partner
of Technology Partners Fund V, L.P. and is a managing member of TP
Management VI, L.L.C., the general partner of Technology Partners Fund VI,
L.P.
(3) Softbank Holdings, Inc., L.P. purchased 388,643 shares of Series D preferred
stock, Softbank Technology Advisors Fund, L.P. purchased 7,306 shares of
Series D preferred stock, and Softbank Technology Ventures IV, L.P.
purchased 381,337 shares of Series D preferred stock.
(4) Mr. Koogle, a director of E-LOAN, is the Chief Executive Officer of Yahoo!
In December 1997, E-LOAN entered into an agreement with Yahoo!, Inc., under
which E-LOAN became the exclusive provider of mortgage related information on
the "Yahoo! Loan Center" website and E-LOAN and Yahoo! will conduct joint
marketing activities. In September 1998, E-LOAN entered into a subsequent
agreement with Yahoo!, which became effective in March 1999 upon the expiration
of the December 1997 agreement, under which E-LOAN would continue to be the
exclusive provider of mortgage related information on the "Yahoo! Loan Center"
website and E-LOAN and Yahoo! would continue to conduct joint marketing
activities through February 2000. In March 1999, the parties extended this
agreement through February 2001. Pursuant to the agreement, E-LOAN is required
to pay a slotting fee plus click-through fees to Yahoo! Tim Koogle, a director
of E-LOAN, is the Chief Executive Officer of Yahoo!
In October 1997, March 1998 and August 1998, E-LOAN granted to Doug Galen,
its Vice President of Business Development and Sales, options to purchase
270,000, 120,000 and 30,000 shares of common stock, respectively, at $0.05,
$0.22 and $1.00 per share, respectively. These
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options vest according to the following schedules: 1/4(th) of the total number
of shares under each option vests on August 26, 1998, March 12, 1999 and August
11, 1999, respectively, and 1/48(th) of the total number of shares under each
option vests at the end of each full month thereafter.
In December 1997 and August 1998, E-LOAN granted to Janet Hammond, its Vice
President of Underwriting, an option to purchase 45,000 shares and two separate
options to purchase 30,000 shares of common stock each, respectively, at $0.22
and $1.00 per share, respectively. These options vest according to the following
schedules: 1/4(th) of the total number of shares subject to each option vests
on December 10, 1998, May 1, 1999 and August 11, 1999, respectively, and
1/48(th) of the total number of shares subject to each option vests at the end
of each full month thereafter.
In May 1998, E-LOAN granted to Bill Crane, its Vice President of
Engineering, an option to purchase 495,000 shares of common stock at $0.22 per
share. This option vests according to the following schedule: 1/4(th) of the
total number of shares vests on April 20, 1999 and 1/48(th) of the total number
of shares vests at the end of each full month thereafter.
In May 1998, January 1999 and February 1999, E-LOAN granted to Sharon
Ruwart, its Vice President of Marketing, options to purchase 180,000, 30,000 and
15,000 shares of common stock, respectively, at $0.22, $2.00 and $2.00 per
share, respectively. These options vest according to the following schedules:
1/4(th) of the total number of shares under each option vests on May 1, 1999,
January 1, 2000 and February 22, 2000, respectively, and 1/48(th) of the total
number of shares under each option vests at the end of each full month
thereafter.
In May 1998 and February 1999, E-LOAN granted to Steve Majerus, its Vice
President of Secondary Markets, options to purchase 225,000 and 75,000 shares of
common stock, respectively, at $0.22 and $2.00 per share, respectively. These
options vest according to the following schedules: 1/4(th) of the total number
of shares under each option vests on April 27, 1999 and February 22, 2000,
respectively, and 1/48(th) of the total number of shares under each option vests
at the end of each full month thereafter.
In November 1998, E-LOAN granted to Frank Siskowski, its Chief Financial
Officer, an option to purchase 385,377 shares of common stock at $1.33 per
share. This option vests according to the following schedule: 1/4(th) of the
total number of shares vests on October 26, 1999 and 1/48(th) of the total
number of shares vests at the end of each full month thereafter.
In January 1999, E-LOAN granted to Harold "Pete" Bonnikson, its Senior Vice
President of Operations, an option to purchase 654,261 shares of common stock at
$2.00 per share. This option vests according to the following schedule: 1/4(th)
of the total number of shares vests on January 13, 2000 and 1/48(th) of the
total number of shares vests at the end of each full month thereafter.
In February, 1999, E-LOAN granted to Joseph Kennedy, its Senior Vice
President of Marketing and Business Development, an option to purchase 747,519
shares of common stock at $2.00 per share. This option vests according to the
following schedule: 1/4(th) of the total number of shares vests on February 22,
2000 and 1/48(th) of the total number of shares vests at the end of each full
month thereafter. For a description of the terms of the employment arrangement
between E-LOAN and Mr. Kennedy, see "Management -- Employment Agreement and
Change of Control Arrangements".
In March 1999, E-LOAN entered into a joint venture agreement with Softbank
Corp., under which E-LOAN will hold a minority interest in E-LOAN Japan, a
Japanese corporation. E-LOAN Japan will develop, market and provide an online
mortgage marketplace to serve consumers in Japan and the Republic of Korea.
E-LOAN has entered into indemnification agreements with its officers and
directors containing provisions that require E-LOAN, among other things, to
indemnify its officers and
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directors against certain liabilities that may arise by reason of their status
or service as officers or directors, other than liabilities arising from willful
misconduct of a culpable nature, and to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified.
In May 1999, E-LOAN established the E-LOAN Foundation, a charitable fund
which is administered by the Community Foundation Silicon Valley. To capitalize
the E-LOAN Foundation, E-LOAN donated 75,000 shares of common stock to the
Community Foundation Silicon Valley on behalf of the E-LOAN Foundation. The
E-LOAN Foundation is selling 5,000 shares of common stock in this offering.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of E-LOAN's common stock as of May 18, 1999 and as adjusted to reflect
the sale of common stock offered by this prospectus and in the private placement
to be closed at the same time as this offering, in each case reflecting the
common stock beneficially held by the following individuals or groups:
- each person known by E-LOAN to beneficially own more than 5% of its
outstanding common stock;
- each director of E-LOAN;
- each Named Executive Officer listed in the Summary Compensation Table;
- all directors and executive officers of E-LOAN as a group; and
- the E-LOAN Foundation, the selling stockholder.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to the securities. The address for each listed director and officer is
c/o E-LOAN, Inc., 5875 Arnold Road, Suite 100, Dublin, California 94568. Except
as indicated by footnote, and subject to applicable community property laws, the
persons named in the table have sole voting and investment power with respect to
all shares of common stock shown as beneficially owned by them. The number of
shares of common stock outstanding used in calculating the percentage for each
listed person includes the shares of common stock underlying options or warrants
held by that person that are exercisable within 60 days of May 18, 1999, but
excludes shares of common stock underlying options or warrants held by any other
person. Percentage of beneficial ownership prior to this offering is based on
33,737,403 shares of common stock outstanding as of May 18, 1999, after giving
effect to the conversion of the outstanding preferred stock and the exercise and
conversion of a warrant to purchase Series D preferred stock. Percentage of
beneficial ownership after this offering is based on 38,482,403 shares of common
stock to be outstanding after completion of this offering and the private
placement that will close at the same time as this offering.
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<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES
BENEFICIALLY
OWNED
SHARES NUMBER -------------------
BENEFICIALLY OF SHARES PRIOR TO AFTER
NAME OF BENEFICIAL OWNER OWNED BEING OFFERED OFFERING OFFERING
------------------------ ------------ ------------- -------- --------
<S> <C> <C> <C> <C>
Benchmark Capital Partners II L.P.(1)...... 8,061,360 -- 23.9% 20.9%
Robert C. Kagle
Entities affiliated with Technology
Partners(2).............................. 4,666,641 -- 13.8% 12.1%
Ira M. Ehrenpreis
Entities affiliated with STV IV, LLC(3).... 3,304,590 -- 9.8% 8.6%
Chris Larsen(4)............................ 5,555,121 -- 16.5% 14.4%
Janina Pawlowski(5)........................ 5,511,927 -- 16.3% 14.3%
Doug Galen(6).............................. 185,625 -- * *
Steve Majerus(7)........................... 65,625 -- * *
Tim Koogle(8).............................. 971,607 -- 2.9% 2.5%
Wade Randlett.............................. 1,500 -- * *
The E-LOAN Foundation(9)................... 75,000 5,000 * *
All directors and executive officers as a
group (15 persons)(10)................... 25,345,531 -- 75.1% 65.9%
</TABLE>
- -------------------------
* Represents beneficial ownership of less than one percent of E-LOAN's common
stock.
(1) Mr. Kagle, a director of E-LOAN, is a member of Benchmark Capital
Management Co., L.L.C., the general partner of Benchmark Capital Partners
II, L.P. and disclaims beneficial ownership of the shares held by Benchmark
Capital Partners II, L.P. except to the extent of his proportionate
partnership interest therein.
(2) Consists of 2,397,591 shares held of record by Technology Partners Fund VI,
L.P. and 2,269,050 shares held of record by Technology Partners Fund V,
L.P. Excludes 237,933 and 57,672 shares beneficially owned by Chris Larsen
and pledged to Technology Partners Fund V, L.P. and Technology Partners
Fund VI, L.P., respectively, pursuant to Loan and Pledge Agreements between
these entities and Mr. Larsen. Also excludes 237,933 and 57,672 shares
beneficially owned by Janina Pawlowski and pledged to Technology Partners
Fund V, L.P. and Technology Partners Fund VI, L.P., respectively, pursuant
to Loan and Pledge Agreements between these entities and Ms. Pawlowski. Mr.
Ehrenpreis, a director of E-LOAN, is a general partner of TPW Management V,
L.P., the general partner of Technology Partners Fund V, L.P. and is a
managing member of TP Management VI, L.L.C., the general partner of
Technology Partners Fund VI, L.P. and disclaims beneficial ownership of the
shares held by Technology Partners Fund VI, L.P. and Technology Partners
Fund V, L.P. except to the extent of his proportionate partnership interest
therein.
(3) Consists of 1,165,929 shares held of record by Softbank Holdings, Inc.
L.P., 1,144,011 shares held of record by Softbank Technology Ventures IV,
L.P., 21,918 shares held of record by Softbank Technology Advisors Fund,
L.P., and 972,732 shares held of record by Softbank America Inc. Excludes
378,549, 370,527, 8,025 and 346,731 shares beneficially owned by Chris
Larsen and pledged to Softbank Holdings, Inc., Softbank Technology Ventures
IV, L.P., Softbank Technology Advisors Fund, L.P., and Softbank America
Inc., respectively, pursuant to Loan and Pledge Agreements between these
entities and Mr. Larsen. Also excludes 378,549, 370,527, 8,025 and 303,387
shares beneficially owned by Janina Pawlowski and pledged to Softbank
Holdings, Inc., Softbank Technology Ventures IV, L.P., Softbank Technology
Advisors Fund, L.P., and Softbank America Inc.,
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respectively, pursuant to Loan and Pledge Agreements between these entities
and Ms. Pawlowski.
(4) Includes 150,000 shares held of record by the Larsen Trust. Also includes
2,576,577 shares that are pledged to certain investors to secure $10.8
million in full recourse loans made to Mr. Larsen by these investors. All
of Mr. Larsen's pledged shares are also subject to put and call options
pursuant to agreements between Mr. Larsen and these investors. See
"Description of Capital Stock -- Put/Call Options on Common Stock".
(5) Includes 150,000 shares held of record by the Pawlowski Trust. Also
includes 2,533,233 shares that are pledged to certain investors to secure
$10.1 million in full recourse loans made to Ms. Pawlowski by these
investors. All of Ms. Pawlowski's pledged shares are also subject to put
and call options pursuant to agreements between Ms. Pawlowski and these
investors. See "Description of Capital Stock -- Put/Call Options on Common
Stock".
(6) Includes 21,876 stock options that are exercisable within 60 days of May
18, 1999.
(7) Includes 9,375 stock options that are exercisable within 60 days of May 18,
1999.
(8) Consists of 971,607 shares held of record by Yahoo!, Inc. Mr. Koogle, a
director of E-LOAN, is Chief Executive Officer of Yahoo! and disclaims
beneficial ownership of the shares held by Yahoo!
(9) In May 1999, E-LOAN established a fund known as the E-LOAN Foundation,
which is administered by the Community Foundation Silicon Valley, and to
capitalize this foundation, donated 75,000 shares of common stock to the
E-LOAN Foundation.
(10) Includes 237,376 stock options that are exercisable within 60 days of May
18, 1999.
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THE FORUM HOLDINGS PRIVATE PLACEMENT
In May 1999, E-LOAN entered into a stock purchase agreement with Forum
Holdings, Inc. (Forum) in which E-LOAN agreed to sell shares of common stock to
Forum equal to $12,500,000 divided by the initial public offering price less the
underwriting discount, for a per share price equal to the initial public
offering price less the underwriting discount. E-LOAN entered into this
transaction with Forum in order to support E-LOAN's branding efforts in Europe.
Forum, through its affiliation with the European consumer groups conglomerate
LVMH, has offered to assist E-LOAN with its anticipated European expansion.
There is no affiliation between E-LOAN and Forum. The stock purchase agreement
further provides that Forum will not sell, transfer, encumber or otherwise
dispose of any of the common stock acquired in the private placement in a public
or private sale for a period of one year following the closing of the private
placement.
In addition, Forum has agreed that it will notify E-LOAN of any sale by it
of E-LOAN common stock. Finally, at any time after it owns in excess of 9.5% of
E-LOAN's outstanding common stock and E-LOAN's Board of Directors approves a
sale of substantially all of E-LOAN's assets or a merger in which E-LOAN is not
the surviving entity, Forum has agreed to vote its shares of E-LOAN common stock
in the same proportion as the other stockholders of E-LOAN.
DESCRIPTION OF CAPITAL STOCK
GENERAL
E-LOAN's Restated Certificate of Incorporation, which will become effective
upon the closing of this offering, authorizes the issuance of up to 70 million
shares of common stock, par value $0.001 per share, and five million shares of
preferred stock, par value $0.001 per share, the rights and preferences of which
may be established by E-LOAN's Board of Directors. As of March 31, 1999,
12,742,974 shares of common stock were issued and outstanding and 6,831,307
shares of preferred stock convertible into 20,493,921 shares of common stock
upon the completion of this offering were issued and outstanding. As of March
31, 1999, E-LOAN had 72 stockholders.
COMMON STOCK
Each holder of common stock is entitled to one vote for each share on all
matters to be voted upon by the stockholders and there are no cumulative voting
rights. After taking into account preferences to which holders of preferred
stock issued after the sale of the common stock in this offering may be
entitled, holders of common stock are entitled to receive dividends, if any, as
may be declared by the Board of Directors out of funds legally available
therefor. See "Dividend Policy". In the event of a liquidation, dissolution or
winding up of E-LOAN, holders of common stock would be entitled to share in
E-LOAN's assets remaining after the payment of liabilities and the satisfaction
of any liquidation preference granted the holders of any outstanding shares of
preferred stock. Holders of common stock have no preemptive or conversion rights
or other subscription rights and there are no redemption or sinking fund
provisions applicable to the common stock. All outstanding shares of common
stock are, and the shares of common stock offered by E-LOAN in this offering,
when issued and paid for, will be, fully paid and nonassessable. The rights,
preferences and privileges of the holders of common stock are subject to, and
may be adversely affected by, the rights of the holders of shares of any series
of preferred stock which E-LOAN may designate in the future.
PREFERRED STOCK
Upon the closing of this offering, the Board of Directors will be
authorized, absent any limitations prescribed by law, without stockholder
approval, to issue up to an aggregate of
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<PAGE> 69
five million shares of preferred stock, in one or more series, each of the
series to have rights and preferences, including voting rights, dividend rights,
conversion rights, redemption privileges and liquidation preferences, as shall
be determined by the Board of Directors. The rights of the holders of common
stock will be subject to, and may be adversely affected by, the rights of
holders of any preferred stock that may be issued in the future. Issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, a majority of the outstanding voting
stock of E-LOAN. E-LOAN has no present plans to issue any shares of preferred
stock.
WARRANTS
As of March 31, 1999, E-LOAN had outstanding a warrant to purchase 15,000
shares of Series C preferred stock at an exercise price of $2.00 per share,
convertible into 45,000 shares of common stock upon the effectiveness of this
offering, and a warrant to purchase 53,996 shares of Series D preferred stock at
an exercise price of $9.26 per share, convertible into 161,988 shares of common
stock upon the effectiveness of this offering. Each warrant has a net exercise
provision under which the holder may, in lieu of payment of the exercise price
in cash, surrender the warrant and receive a net amount of shares, based on the
fair market value of E-LOAN's stock at the time of the exercise of the warrant,
after deducting the aggregate exercise price. The warrant for 53,996 shares of
Series D preferred stock will expire upon the closing of this offering. The
warrant for 15,000 shares of Series C preferred stock shall expire three years
from the effective date of this offering.
In May 1999, E-LOAN issued a warrant to purchase 75,000 shares of common
stock at an exercise price equal to the lesser of $13.33 per share and the per
share offering price of the common stock to be issued in this offering. The
warrant has a net exercise provision under which the holder may, in lieu of
payment of the exercise price in cash, surrender the warrant and receive a net
amount of shares, based on the fair market value of E-LOAN's stock at the time
of the exercise of the warrant, after deducting the aggregate exercise price.
The warrant expires May 21, 2000.
REGISTRATION RIGHTS
Pursuant to the terms of an Investor Rights Agreement among E-LOAN and
certain holders of E-LOAN's securities, after the closing of this offering, the
holders of 17,842,395 shares of the outstanding common stock or their permitted
transferees, including shares issuable upon the exercise of warrants to purchase
common stock, are entitled to certain rights with respect to the registration of
the shares under the Securities Act. The holders of at least 66 2/3% of the
shares entitled to registration rights may require E-LOAN to file a registration
statement covering shares entitled to registration rights with an aggregate
gross offering price of at least $1.5 million. E-LOAN is not required to effect
(i) more than two registrations pursuant to demand registration rights; (ii) a
registration within 60 days following the determination by the Board of
Directors of E-LOAN to file a registration statement; (iii) a registration
during the period in which any other registration statement has been filed or
has been declared effective within the prior 120 days; or (iv) a registration
for a period not to exceed 120 days, if the Board of Directors of E-LOAN has
made a good faith determination that a registration would be seriously
detrimental to E-LOAN or to its stockholders. Pursuant to the terms of the
Investor Rights Agreement, the holders of the shares entitled to registration
rights are entitled to certain piggyback registration rights in connection with
any registration by E-LOAN of its securities for its own account or the account
of other security holders. In the event that E-LOAN proposes to register any
shares of common stock under the Securities Act, the holders of piggyback
registration rights are entitled to receive notice of the registration and are
entitled to include their shares in the registration.
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<PAGE> 70
At any time after E-LOAN becomes eligible to file a registration statement
on Form S-3, holders of 20% or more of the Registrable Securities may require
E-LOAN to file an unlimited number of registration statements on Form S-3 under
the Securities Act with respect to their shares of common stock.
Each of the foregoing registration rights is qualified by certain
conditions and limitations, including the right of the underwriters in any
underwritten offering to limit the number of shares to be included in a
registration. The registration rights with respect to any holder thereof
terminate upon the earlier of (i) seven years from the effective date of this
offering or (ii) when the shares held by the holder may be sold under Rule 144
during any three-month period. E-LOAN is generally required to bear all of the
expenses of all registrations, except underwriting discounts and commissions.
Registration of any of the shares entitled to registration rights would result
in the shares becoming freely tradable without restriction under the Securities
Act immediately upon effectiveness of the registration. The Investor Rights
Agreement also contains a commitment of E-LOAN to indemnify the holders of
registration rights.
PUT/CALL OPTIONS ON COMMON STOCK
In December 1997, Chris Larsen, E-LOAN's Chief Executive Officer, and
Janina Pawlowski, E-LOAN's President, each entered into a separate Loan and
Pledge Agreement with some of E-LOAN's investors under which each of these
officers were loaned $250,000 on a full recourse basis. Each officer secured his
or her loan with a pledge of 610,491 shares of common stock and a security
interest in the officer's rights under a Put Option Agreement and Call Option
Agreement among the investors and each officer. The loans are due December 19,
2002 and bear interest, compounded annually, at a rate of 7% per annum. Under
the Call Option Agreements, each officer granted the investors an option to call
the 610,491 shares covered by the option at any time from the date of the
agreement up to December 19, 2001 at an exercise price equal to an aggregate of
$500,000. Under the Put Option Agreements, the investors granted to each officer
an option to put the 610,491 shares covered by the option to the investors at an
exercise price equal to an aggregate of $500,000 together with interest at the
rate of 7% per annum, compounded annually, at any time during the eleven-month
period beginning January 20, 2002 and ending November 19, 2002.
In August 1998, each of these officers entered into a separate Loan and
Pledge Agreement with the investors under which each officer was loaned $5.0
million on a full recourse basis. Each officer secured his or her loan with a
pledge of 1,619,355 shares of common stock and a security interest in the
officer's rights under a Put Option Agreement and Call Option Agreement among
the investors and each officer. The loans are due August 31, 2003 and bear
interest, compounded annually, at a rate of 6% per annum. Under the Call Option
Agreement, each officer granted the investors an option to call the 1,619,355
shares covered by the option at any time from the date of the agreement up to
August 31, 2002 at an exercise price equal to an aggregate of $10.0 million.
Under the Put Option Agreements, the investors granted to each officer an option
to put the 1,619,355 shares covered by the option to the investors at an
exercise price equal to an aggregate $10.0 million together with interest of the
rate of 6% per annum, compounded annually, at any time during the eleven-month
period beginning January 1, 2003 and ending November 30, 2003.
In March 1999, Softbank America Inc. purchased an aggregate of 972,732
shares of common stock and preferred stock from 25 stockholders of E-LOAN,
including 253,269 and 221,613 shares of common stock from Mr. Larsen and Ms.
Pawlowski, respectively, at a purchase price of $16.00 per share. The
stockholders agreement with Softbank America provides that Softbank America will
not dispose of the acquired shares prior to March 23, 2000.
At the time of these purchases, Mr. Larsen and Ms. Pawlowski each entered
into a separate Loan and Pledge Agreement with Softbank America under which Mr.
Larsen was loaned
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<PAGE> 71
$5.5 million on a full recourse basis and Ms. Pawlowski was loaned $4.8 million
on a full recourse basis. Mr. Larsen secured his loan with a pledge of 346,731
shares of common stock and Ms. Pawlowski secured her loan with a pledge of
303,387 shares of common stock and both granted Softbank America a security
interest in the officer's rights under a Put Option Agreement and a Call Option
Agreement. The loans are due March 23, 2004 and bear interest, compounded
annually, at a rate of 7% per annum. Under the Call Option Agreements, both Mr.
Larsen and Ms. Pawlowski granted Softbank America an option to call all of the
shares covered by the option at any time from the date of the agreement up to
March 23, 2003 at an exercise price equal to $5.5 million and $4.8 million,
respectively. Under the Put Option Agreements, Softbank America granted to both
Mr. Larsen and Ms. Pawlowski an option to put all of the shares covered by the
option at an exercise price equal to an aggregate of $5.5 million and $4.8
million, respectively, together with interest at the rate of 7% per annum,
compounded annually, at any time during the eleven-month period beginning in
March 2003 and ending February 2004.
EFFECT OF CERTAIN PROVISIONS OF E-LOAN'S RESTATED CERTIFICATE OF INCORPORATION
AND BYLAWS, AND THE DELAWARE ANTITAKEOVER STATUE
Certain provisions of E-LOAN's Restated Certificate of Incorporation and
Bylaws, which will become effective upon the closing of this offering, may have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of E-LOAN. These
provisions could limit the price that certain investors might be willing to pay
in the future for shares of E-LOAN's common stock. Certain of these provisions
allow E-LOAN to issue preferred stock without any vote or further action by the
stockholders, eliminate the right of stockholders to act by written consent
without a meeting and eliminate cumulative voting in the election of directors.
These provisions may make it more difficult for stockholders to take certain
corporate actions and could have the effect of delaying or preventing a change
in control of E-LOAN. In addition, E-LOAN is bound by Section 203 of the
Delaware General Corporation Law which, subject to certain exceptions, prohibits
a Delaware corporation from engaging in any business combination with any
interested stockholder, unless:
- the Board of Directors of the corporation previously approved either the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder;
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding (a) shares owned by persons who are
directors and also officers, and (b) shares owned by employee stock plans
in which employee participants do not have the right to determine
confidentially whether shares under the plan will be tendered in a tender
or exchange offer; or
- on that date or subsequently, the business combination is approved by the
Board of Directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder.
E-LOAN's Restated Certificate of Incorporation provides that, upon the
closing of this offering, the Board of Directors will be divided into three
classes of directors with each class serving a staggered three-year term. The
classification system of electing directors may tend to discourage a third party
from making a tender offer or otherwise attempting to obtain control of E-LOAN
and may maintain the incumbency of the Board of Directors, as the classification
of the Board of Directors generally increases the difficulty of replacing a
majority of the directors. E-LOAN's Bylaws eliminate the right of stockholders
to call special meetings of stockholders. The authorization of undesignated
preferred stock makes it possible for the Board of Directors to
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<PAGE> 72
issue preferred stock with voting or other rights or preferences that could
impede the success of any attempt to change control of E-LOAN. These and other
provisions may have the effect of deferring hostile takeovers or delaying
changes in control or management of E-LOAN. The amendment of any of these
provisions would require approval by holders of at least 66 2/3% of the
outstanding common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Chase Mellon
Shareholder Services.
68
<PAGE> 73
SHARES AVAILABLE FOR FUTURE SALE
Prior to this offering there has been no public market for E-LOAN's common
stock. Future sales of substantial amounts of E-LOAN's common stock in the
public market or the availability of such shares for sale, could adversely
affect the prevailing market price and the ability of E-LOAN to raise equity
capital in the future.
Upon the closing of this offering, E-LOAN will have an aggregate of
38,482,403 shares of common stock outstanding, assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options to
purchase common stock.
Of the 38,482,403 shares of common stock to be outstanding upon the closing
of this offering, the 3,500,000 shares offered hereby will be eligible for
immediate sale in the public market without restriction, unless the shares are
purchased by "affiliates" of E-LOAN within the meaning of Rule 144 promulgated
under the Securities Act of 1933. The remaining 34,982,403 shares of common
stock held by existing stockholders upon the closing of this offering will be
"restricted securities", as that term is defined in Rule 144. Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rules 144, 144(k) or 701 under
the Securities Act. All of the holders of these "restricted securities,"
including officers and directors of E-LOAN, have entered into "lock-up
agreements" providing that they will not sell, directly or indirectly, any
common stock without the prior consent of the representatives of Goldman, Sachs
& Co. for a period of 180 days from the date of this prospectus. Subject to the
provisions of Rules 144, 144(k) and 701, 32,235,684 shares will be available for
sale in the public market, subject in the case of shares held by affiliates to
compliance with certain volume restrictions, upon expiration of this 180-day
period.
In general, under Rule 144, a person or persons whose shares are
aggregated, including an affiliate who has beneficially owned shares for at
least one year, is entitled to sell within any three-month period a number of
shares that does not exceed the greater of 1% of the outstanding shares of
common stock, or the average weekly trading volume of the common stock during
the four calendar weeks preceding the date on which notice of such sale is
filed, subject to certain restrictions. In addition, a person who is not deemed
to have been an affiliate of E-LOAN at any time during the three months
preceding a sale, and who has beneficially owned the shares proposed to be sold
for at least two years would be entitled to sell such shares under Rule 144(k)
without regard to the requirements described above. To the extent that shares
were purchased from an affiliate of E-LOAN, the purchasers' holding period for
the purpose of effecting a sale under Rule 144 commences on the date of purchase
from the affiliate. As of March 31, 1999, there were outstanding options to
purchase 5,739,432 shares of common stock which will be eligible for sale in the
public market from time to time subject to vesting and the expiration of lock-up
agreements. As of March 31, 1999, there was outstanding a warrant to purchase
15,000 shares of Series C preferred stock convertible into 45,000 shares of
common stock upon the effectiveness of this offering and a warrant to purchase
53,996 shares of Series D preferred stock convertible into 161,988 shares of
common stock upon the effectiveness of this offering. The 206,988 shares of
common stock that will be issuable upon exercise of these warrants will be
eligible for sale in the public market from time to time subject to the
expiration of lock-up agreements and Rule 144. The possible sale of a
significant number of shares by the holders thereof may have an adverse effect
on the price of the common stock.
E-LOAN is unable to estimate the number of shares that will be sold under
Rule 144, as this will depend on the market price for the common stock of
E-LOAN, the personal circumstances of the sellers and other factors. Prior to
this offering, there has been no public market for the common stock, and there
can be no assurance that a significant public market for the common stock will
develop or be sustained after this offering. Any future sale of substantial
amounts of common stock in the open market may adversely affect the market price
of the common stock offered hereby.
E-LOAN will file a registration statement on Form S-8 under the Securities
Act to register the shares of common stock reserved for issuance under its 1997
Stock Option Plan and 1999
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<PAGE> 74
Employee Stock Purchase Plan. As a result, shares issued upon exercise of stock
options granted under the Stock Option Plan will be available, subject to
special rules for affiliates, for resale in the public market after the
effective date of such registration statement. See "Management -- Stock Plans".
Pursuant to an Investor Rights Agreement among E-LOAN and certain holders
of E-LOAN's securities, after the closing of this offering, subject to certain
conditions, the holders of 17,842,395 shares of outstanding common stock,
including shares issuable upon the exercise of certain warrants to purchase
common stock, will be entitled to certain demand and piggyback registration
rights. Registration of such shares under the Securities Act would result in
such shares becoming freely tradable without restriction under the Securities
Act, except for shares purchased by Affiliates. Please see "Description of
Capital Stock -- Registration Rights".
LEGAL MATTERS
The validity of the common stock to be issued in this offering will be
passed upon for E-LOAN by Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto,
California. Certain legal matters will be passed upon for the Underwriters by
Venture Law Group, A Professional Corporation, Menlo Park, California. As of the
date of this prospectus, WS Investment Company 96B and WS Investment Company
97B, investment partnerships composed of certain current and former members of
and persons associated with Wilson Sonsini Goodrich & Rosati, P.C., and Mario M.
Rosati, a member of Wilson Sonsini Goodrich & Rosati, P.C., beneficially own an
aggregate of 166,878 shares of E-LOAN's common stock.
EXPERTS
The financial statements of E-LOAN as of December 31, 1997 and 1998 and for
each of the three years in the period ended December 31, 1998 included in this
Prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
E-LOAN has filed with the Securities and Exchange Commission, a
Registration Statement on Form S-1, including the exhibits and schedules
thereto, under the Securities Act with respect to the shares to be sold in this
offering. This prospectus does not contain all the information set forth in the
Registration Statement. For further information with respect to E-LOAN and the
shares to be sold in this offering, reference is made to the Registration
Statement. Statements contained in this prospectus as to the contents of any
contract, agreement or other document referred to, are not necessarily complete,
and in each instance reference is made to the copy of the contract, agreement or
other document filed as an exhibit to the Registration Statement, each statement
being qualified in all respects by such reference.
You may read and copy all or any portion of the Registration Statement or
any reports, statements or other information E-LOAN files with the Commission at
the Commission's public reference room at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.C., Washington, D.C. 20549 and at the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048 and the Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. You can request copies of these documents upon payment
of a duplicating fee, by writing to the Commission. Please call the Commission
at 1-800-SEC-0330 for further information on the operation of the public
reference rooms. E-LOAN's Commission filings, including the Registration
Statement will also be available to you on the Commission's Internet site. The
address of this site is http://www.sec.gov.
E-LOAN intends to send to its stockholders annual reports containing
audited financial statements for each fiscal year and quarterly reports
containing unaudited financial statements for the first three quarters of each
fiscal year.
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<PAGE> 75
INDEX TO FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants......................... F-2
Balance Sheets at December 31, 1997, 1998 and March 31,
1999 (unaudited)....................................... F-3
Statements of Operations for the years ended December 31,
1996, 1997 and 1998 and the three months ended March
31, 1998 and 1999 (unaudited).......................... F-4
Statements of Stockholders' Deficit for the years ended
December 31, 1996, 1997 and 1998 and the three months
ended March 31, 1999 (unaudited)....................... F-5
Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998 and the three months ended March
31, 1998 and 1999 (unaudited).......................... F-6
Notes to Financial Statements............................. F-7
</TABLE>
F-1
<PAGE> 76
REPORT OF INDEPENDENT ACCOUNTANTS
March 24, 1999
To the Stockholders and Board of Directors of E-Loan, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, stockholders' deficit and cash flows present fairly, in all
material respects, the financial position of E-Loan, Inc. (the Company) at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
F-2
<PAGE> 77
E-LOAN, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
-------------------------- MARCH 31, MARCH 31,
1997 1998 1999 1999
ASSETS ----------- ------------ ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 4,217,687 $ 9,141,367 $ 3,565,219 $ 4,065,219
Mortgage loans held-for-sale.............................. -- 42,153,648 63,729,190
Accounts receivable, net.................................. 33,924 411,058 241,186
Prepaids and other current assets......................... 168,577 720,681 2,247,370
----------- ------------ ------------ ------------
Total current assets................................ 4,420,188 52,426,754 69,782,965 70,282,965
Furniture and equipment, net.............................. 146,207 2,365,564 2,543,980
Deposits and other assets................................. 113,480 730,938 635,264
----------- ------------ ------------ ------------
Total assets........................................ $ 4,679,875 $ 55,523,256 $ 72,962,209 $ 73,462,209
=========== ============ ============ ============
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Warehouse lines payable................................... $ -- $ 41,046,122 $ 60,255,860
Accounts payable, accrued expenses and other.............. 518,186 2,654,623 4,755,336
Capital lease obligation.................................. -- 252,475 252,475
Notes payable............................................. 78,868 71,299 142,889
----------- ------------ ------------ ------------
Total current liabilities........................... 597,054 44,024,519 65,406,560
Capital lease obligations................................. -- 719,294 686,215
Notes payable............................................. -- 570,393 614,295
----------- ------------ ------------ ------------
597,054 45,314,206 66,707,070
----------- ------------ ------------ ------------
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Series C, 4,467,912 shares authorized; 4,069,936,
4,069,936 and 4,269,936 (unaudited) shares issued and
outstanding at December 31, 1997, 1998 and March 31,
1999 (unaudited) (aggregate liquidation preference
$4,997,998 and $5,245,702 at December 31, 1997 and
1998 and March 31, 1999 (unaudited)).................. 5,048,716 5,525,904 6,134,996
Series C-1, 4,467,912 shares authorized; 0 shares issued
and outstanding (liquidation preference $1.22852 per
share)................................................ -- --
Series D, 1,950,000 shares authorized; 1,662,529 and
1,702,529 (unaudited) shares issued and outstanding at
December 31, 1998 and March 31, 1999 (unaudited)
(aggregate liquidation preference $15,400,006 and
$15,770,526 at December 31, 1998 and March 31, 1999
(unaudited)).......................................... -- 15,867,098 16,625,127 --
----------- ------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' DEFICIT:
Convertible preferred stock:
Series A, 428,635 shares authorized; 428,635 shares
issued and outstanding (aggregate liquidation
preference $94,300)................................... 90,901 90,901 90,901 --
Series B, 450,708 shares authorized; 430,207 shares
issued and outstanding (aggregate liquidation
preference $412,999).................................. 411,482 411,482 411,482 --
Common stock, 20,000,000 and 50,000,000 (unaudited) shares
authorized at December 31, 1997 and 1998, and March 31,
1999; 12,255,000, 12,524,010 and 12,742,974 (unaudited)
shares issued and outstanding at December 31, 1997 and
1998 and March 31, 1999; 70,000,000 shares authorized;
33,398,883 shares issued and outstanding on a pro forma
basis (unaudited)....................................... 4,085 26,867 50,108 23,812,614
Less: subscription receivable............................. (4,085) (4,085) (4,085) (4,085)
Unearned compensation..................................... -- (4,477,000) (34,488,000) (34,488,000)
Additional paid-in capital................................ (41,667) 5,366,548 41,414,356 41,414,356
Accumulated deficit....................................... (1,426,611) (12,598,665) (23,979,746) (23,979,746)
----------- ------------ ------------ ------------
Total stockholders' equity (deficit)................ (965,895) (11,183,952) (16,504,984) 6,755,139
----------- ------------ ------------ ------------
Total liabilities, mandatorily redeemable
convertible preferred stock and stockholders'
deficit........................................... $ 4,679,875 $ 55,523,256 $ 72,962,209 $ 73,462,209
=========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 78
E-LOAN, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------- --------------------------
1996 1997 1998 1998 1999
----------- ----------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues (Note 13)................ $ 892,995 $ 1,042,729 $ 6,831,546 $ 526,597 $ 4,801,641
Operating expenses:
Operations...................... 902,736 1,318,342 7,626,413 779,167 4,103,795
Sales and marketing............. -- 470,323 5,642,394 513,044 3,656,761
Technology...................... -- 102,074 1,247,528 163,080 481,363
General and administrative...... 96,865 524,076 2,409,591 378,795 1,422,916
Amortization of unearned
compensation.................. -- -- 1,251,000 44,000 6,554,000
----------- ----------- ------------ ----------- ------------
Total operating
expenses............... 999,601 2,414,815 18,176,926 1,878,086 16,218,835
----------- ----------- ------------ ----------- ------------
Loss from operations.......... (106,606) (1,372,086) (11,345,380) (1,351,489) (11,417,194)
Other income, net................. (3,438) (2,407) 173,326 20,536 36,113
----------- ----------- ------------ ----------- ------------
Net loss................. $ (110,044) $(1,374,493) $(11,172,054) $(1,330,953) $(11,381,081)
=========== =========== ============ =========== ============
Net loss per share:
Basic and diluted............... $ (0.01) $ (0.12) $ (0.98) $ (0.12) $ (0.94)
=========== =========== ============ =========== ============
Weighted-average shares --
basic......................... 12,255,000 12,262,032 12,400,284 12,323,258 12,598,378
=========== =========== ============ =========== ============
Pro forma net loss per share
(unaudited):
Basic and diluted............... $ (0.41) $ (0.06) $ (0.34)
============ =========== ============
Weighted-average shares --
basic......................... 27,153,122 22,743,817 33,100,579
============ =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 79
E-LOAN, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
----------------- ------------------ ------------------- SUBSCRIPTION UNEARNED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT RECEIVABLE COMPENSATION
------- ------- ------- -------- --------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995...... -- $ -- -- $ -- 12,255,000 $ 4,085 $ (4,085) $ --
Net loss..........................
------- ------- ------- -------- --------- ------- ------------ ------------
Balance at December 31, 1996...... -- $ -- -- $ -- 12,255,000 $ 4,085 $ (4,085) $ --
Series A preferred stock issued
for cash, net of issuance costs
of $3,399 at $0.22 per share in
June 1997........................ 428,635 $90,901
Series B preferred stock issued
for cash, net of issuance costs
of $1,517 at $0.96 per share in
December 1997.................... 430,207 411,482
Accretion for preferred stock
Series C.........................
Net loss..........................
------- ------- ------- -------- --------- ------- ------------ ------------
Balance at December 31, 1997...... 428,635 $90,901 430,207 $411,482 12,255,000 $ 4,085 $ (4,085) $
Common Stock issued for cash...... 136,488 20,027
Common Stock issued for cash upon
exercise of stock options........ 132,522 2,755
Accretion for preferred stock
Series C.........................
Accretion for preferred stock
Series D.........................
Issuance of warrants for capital
lease............................
Issuance of warrants in relation
to marketing agreements..........
Issuance of stock options for
services rendered................
Unearned Compensation............. (4,477,000)
Net Loss..........................
------- ------- ------- -------- --------- ------- ------------ ------------
Balance at December 31, 1998...... 428,635 $90,901 430,207 $411,482 12,524,010 $26,867 $ (4,085) $ (4,477,000)
Common stock issued for cash upon
exercise of stock options
(unaudited)...................... 218,964 23,241
Accretion for preferred stock
Series C (unaudited).............
Accretion for preferred stock
Series D (unaudited).............
Unearned Compensation
(unaudited)...................... (30,011,000)
Net Loss (unaudited)..............
------- ------- ------- -------- --------- ------- ------------ ------------
Balance at March 31, 1999
(unaudited)...................... 428,635 $90,901 430,207 $411,482 12,742,974 $50,108 $ (4,085) $(34,488,000)
The accompanying notes are an integral part of these financial statements.
<CAPTION>
ADDITIONAL TOTAL
PAID ACCUMULATED STOCKHOLDERS'
IN CAPITAL DEFICIT DEFICIT
----------- ------------ -------------
<S> <C> <C> <C>
Balance at December 31, 1995...... $ -- $ 57,926 $ 57,926
Net loss.......................... (110,044) (110,044)
----------- ------------ ------------
Balance at December 31, 1996...... $ -- $ (52,118) $ (52,118)
Series A preferred stock issued
for cash, net of issuance costs
of $3,399 at $0.22 per share in
June 1997........................ 90,901
Series B preferred stock issued
for cash, net of issuance costs
of $1,517 at $0.96 per share in
December 1997.................... 411,482
Accretion for preferred stock
Series C......................... (41,667) (41,667)
Net loss.......................... (1,374,493) (1,374,493)
----------- ------------ ------------
Balance at December 31, 1997...... $ (41,667) $ (1,426,611) $ (965,895)
Common Stock issued for cash...... 20,027
Common Stock issued for cash upon
exercise of stock options........ 2,755
Accretion for preferred stock
Series C......................... (500,000) (500,000)
Accretion for preferred stock
Series D......................... (513,352) (513,352)
Issuance of warrants for capital
lease............................ 29,575 29,575
Issuance of warrants in relation
to marketing agreements.......... 640,150 640,150
Issuance of stock options for
services rendered................ 23,842 23,842
Unearned Compensation............. 5,728,000 1,251,000
Net Loss.......................... (11,172,054) (11,172,054)
----------- ------------ ------------
Balance at December 31, 1998...... $ 5,366,548 $(12,598,665) $(11,183,952)
Common stock issued for cash upon
exercise of stock options
(unaudited)...................... 23,241
Accretion for preferred stock
Series C (unaudited)............. (129,095) (129,095)
Accretion for preferred stock
Series D (unaudited)............. (388,097) (388,097)
Unearned Compensation
(unaudited)...................... 36,565,000 6,554,000
Net Loss (unaudited).............. (11,381,081) (11,381,081)
----------- ------------ ------------
Balance at March 31, 1999
(unaudited)...................... $41,414,356 $(23,979,746) $(16,504,984)
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-5
<PAGE> 80
E-LOAN, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------------- ---------------------------
1996 1997 1998 1998 1999
--------- ----------- ------------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................ $(110,044) $(1,374,493) $ (11,172,054) $(1,330,953) $ (11,381,081)
Adjustments to reconcile net loss to cash used
in operating activities:
Amortization of unearned compensation......... -- -- 1,251,000 44,000 6,554,000
Depreciation and amortization................. -- 6,860 512,998 29,417 210,900
Loss on disposal of furniture and equipment... -- 37,361 41,092 -- --
Changes in operating assets and liabilities:
Accounts receivable......................... (3,300) (30,624) (377,134) (1,501) 169,872
Net change in mortgage loans
held-for-sale............................. -- -- (42,153,648) -- (21,575,542)
Prepaids, deposits and other assets......... 2,862 (276,960) (641,899) 46,572 (1,431,259)
Accounts payable, accrued expenses and
other..................................... 33,668 474,583 2,136,437 (265,626) 2,101,472
--------- ----------- ------------- ----------- -------------
Net cash used in operating activities... (76,814) (1,163,273) (50,403,208) (1,478,091) (25,351,638)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and equipment.......... (4,557) (160,775) (1,608,899) (156,334) (389,316)
--------- ----------- ------------- ----------- -------------
Net cash used in investing activities... (4,557) (160,775) (1,608,899) (156,334) (389,316)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock........ -- -- 22,782 21,606 23,241
Payments on obligations under capital
leases...................................... -- -- (26,875) -- (33,078)
Proceeds from notes payable................... 33,565 32,303 641,692 -- 115,493
Repayments of notes payable................... (78,868) (78,868) --
Proceeds from warehouse lines payable......... -- -- 241,242,483 -- 270,045,646
Repayments of warehouse lines payable......... -- -- (200,196,361) -- (250,835,908)
Proceeds from issuance of preferred stock,
net......................................... -- 5,509,432 15,330,934 -- 849,412
--------- ----------- ------------- ----------- -------------
Net cash provided by financing
activities............................ 33,565 5,541,735 56,935,787 (57,262) 20,164,806
--------- ----------- ------------- ----------- -------------
Net increase (decrease) in cash............... (47,806) 4,217,687 4,923,680 (1,691,687) (5,576,148)
Cash and cash equivalents at beginning of
period...................................... 47,806 -- 4,217,687 4,217,687 9,141,367
--------- ----------- ------------- ----------- -------------
Cash and cash equivalents at end of period.... $ -- $ 4,217,687 $ 9,141,367 $ 2,526,000 $ 3,565,219
========= =========== ============= =========== =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest...................... $ 1,124 $ 7,036 $ 588,987 $ 5,356 $ 814,413
========= =========== ============= =========== =============
NONCASH INVESTING AND FINANCING ACTIVITIES:
Furniture and equipment under capital
leases.................................... $ -- $ -- $ 998,642 $ 499,610 $ --
========= =========== ============= =========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 81
E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY
E-Loan, Inc. (the Company) was incorporated on August 26, 1996 and began
marketing its services in June 1997. Prior to that date, the Company conducted
business through a predecessor company, Palo Alto Funding Group (PAFG) which was
established in 1992 as a mortgage broker. The stockholders of PAFG and the
Company were the same and on December 18, 1997 PAFG merged with the Company. The
transaction was accounted for in a manner similar to a pooling of interests and,
as a result, the accompanying financial statements represent the combined
balance sheets and results of operations of the Company and PAFG.
The Company is a provider of mortgage offerings online and is engaged in
the brokerage, origination, and sale of mortgage loans collateralized by
residential real estate. The Company serves U.S. consumers in the first and
second home mortgage loan market over the internet.
2. BASIS OF PRESENTATION
The Company has sustained net losses and negative cash flows from
operations since its inception. The Company's ability to meet its obligations in
the ordinary course of business is dependent upon its ability to establish
profitable operations or raise additional financing through public or private
equity financings, collaborative or other arrangements with corporate sources,
or other sources of financing to fund operations. However, there can be no
assurance that the Company will be able to achieve profitable operations.
Management believes that its current funds and available lines of credit will be
sufficient to enable the Company to meet its planned expenditures through at
least December 31, 1999.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
UNAUDITED INTERIM RESULTS
The accompanying interim financial statements as of March 31, 1999, and for
the three months ended March 31, 1998 and 1999, are unaudited. The unaudited
interim financial statements have been prepared on the same basis as the annual
financial statements and, in the opinion of management, reflect all adjustments,
which include only normal recurring adjustments, necessary to present fairly the
Company's financial position, results of operations and cash flows as of March
31, 1999 and for the three months ended March 31, 1998 and 1999. The financial
data and other information disclosed in these notes to financial statements
related to these periods are unaudited. The results for the three months ended
March 31, 1999 are not necessarily indicative of the results to be expected for
the year ending December 31, 1999.
RISKS AND UNCERTAINTIES
The Company has a limited operating history and its prospects are subject
to the risks, expenses and uncertainties frequently encountered by companies in
the new and rapidly evolving markets for internet products and services. These
risks include the failure to develop and extend the Company's online service
brands, the rejection of the Company's services by consumers,
F-7
<PAGE> 82
E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
vendors and/or advertisers, the inability of the Company to maintain and
increase the levels of traffic on its online services, as well as other risks
and uncertainties.
Additionally, in the normal course of business, companies in the mortgage
banking industry encounter certain economic and regulatory risks. Economic risks
include interest rate risk, credit risk and market risk. The Company is subject
to interest rate risk to the extent that in a rising interest rate environment,
the Company will generally experience a decrease in loan production which may
negatively impact the Company's operations. Credit risk is the risk of default,
primarily in the Company's mortgage loan portfolio that result from the
mortgagors' inability or unwillingness to make contractually required payments.
Market risk reflects changes in the value of mortgage loans held-for-sale and in
commitments to originate loans.
The Company sells loans to mortgage loan purchasers on a servicing released
basis without recourse. As such, the risk of loss or default by the borrower has
been assumed by these purchasers. However, the Company is usually required by
these purchasers to make certain representations relating to credit information,
loan documentation and collateral. To the extent that the Company does not
comply with such representations, or there are early payment defaults, the
Company may be required to repurchase the loans and indemnify these purchasers
for any losses from borrower defaults. For the year ended December 31, 1998 and
the three months ended March 31, 1999 (unaudited), the Company had not
repurchased any loans.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid monetary instruments with an
original maturity of three months or less from the date of purchase to be cash
equivalents.
MORTGAGE LOANS HELD-FOR-SALE
Mortgage loans held-for-sale consist of residential property mortgages
having maturities up to 30 years. Pursuant to the mortgage terms, the borrowers
have pledged the underlying real estate as collateral for the loans. It is the
Company's practice to sell these loans to mortgage loan purchasers shortly after
they are funded. Mortgage loans held-for-sale are recorded at the lower of cost
or aggregate market value. Cost generally consists of loan principal balance
adjusted for net deferred fees and costs. No valuation adjustment was required
at December 31, 1998 or March 31, 1999.
FURNITURE AND EQUIPMENT
Furniture and equipment, including furniture and equipment under capital
leases, are recorded at cost and depreciated using the straight-line method over
their useful lives, which is generally three years for computers and five years
for furniture and fixtures. Assets under capital leases are depreciated over the
shorter of the useful life of the asset or the term of the lease. Leasehold
improvements are amortized over the remaining life of the lease. Maintenance and
repairs are charged to expense as incurred, and improvements and betterments are
capitalized. When assets are retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the accounts and any resulting gain or
loss is reflected in operations in the period realized.
BROKERAGE FEES
Brokerage fees represent compensation earned for the processing of mortgage
loan applications for third party lenders. The Company does not take title to
the mortgages and the
F-8
<PAGE> 83
E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
funding for these customers is provided by third party lenders. The fees for
providing these services are recognized at such time as the loans are funded by
the lender.
GAIN ON SALE OF LOANS
Gain on sale of loans includes gains or losses determined by loan sales
proceeds less the carrying value of the loans sold. Origination fees, net of
certain direct origination costs, are deferred and recognized when the loan is
sold. The carrying value of the loan is adjusted for the deferred origination
fees and costs. Gain on sale of loans are recognized at the time of settlement
with the mortgage loan purchaser.
INTEREST INCOME ON LOANS
Interest income is accrued as earned. Loans are placed on non-accrual
status when any portion of principal or interest is ninety days past due or
earlier when concern exists as to the ultimate collectibility of principal or
interest. Loans return to accrual status when principal and interest become
current and are anticipated to be fully collectible.
ADVERTISING COSTS
Advertising costs related to various media content advertising such as
television, radio, and print are charged to other operating expenses as
incurred. These costs include the cost of production as well as the cost of any
airtime.
INCOME TAXES
The Company accounts for income taxes using the liability method in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax bases of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse. Valuation allowances
are established when necessary to reduce deferred tax assets to the amounts
expected to be realized. The provision for income tax expense represents taxes
payable for the current period, plus the net change in deferred tax assets and
liabilities.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and complies with the disclosure
provision of SFAS No. 123, Accounting for Stock-Based Compensation. Under APB
No. 25, compensation expense is based on the excess of the estimated fair value
of the Company's stock over the exercise price, if any, on the date of the
grant.
NET INCOME (LOSS) PER SHARE
The Company computes net loss per share in accordance with SFAS No. 128,
Earnings per Share. Under the provisions of SFAS No. 128 basic net loss per
share is computed by dividing the net loss available to common stockholders for
the period by the weighted average number of common shares outstanding during
the period. Diluted net loss per share is computed by dividing the net loss
available to common stockholders for the period by the weighted average number
of common and common equivalent shares outstanding during the period, to the
extent such
F-9
<PAGE> 84
E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
common equivalent shares are dilutive. Common equivalent shares are composed of
incremental common shares issuable upon the exercise of stock options and
warrants and upon conversion of Series A, B, C and Series D convertible
preferred stock.
The following table sets forth the computation of basic and diluted net
loss per share for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------------------------------- --------------------------
1996 1997 1998 1998 1999
----------- ----------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss................ $ (110,044) $(1,374,493) $(11,172,054) $(1,330,953) $(11,381,081)
Accretion of Series C
and D mandatorily
redeemable convertible
preferred stock to
redemption value...... -- (41,667) (1,013,352) (125,000) (517,192)
----------- ----------- ------------ ----------- ------------
Net loss
available to
common
shareholders... $ (110,044) $(1,416,160) $(12,185,406) $(1,455,953) $(11,898,273)
=========== =========== ============ =========== ============
Denominator:
Weighted average common
shares -- basic and
diluted............... 12,255,000 12,262,032 12,400,284 12,323,258 12,598,378
----------- ----------- ------------ ----------- ------------
Net loss per share:
Basic and diluted....... $ (0.01) $ (0.12) $ (0.98) $ (0.12) $ (0.94)
=========== =========== ============ =========== ============
</TABLE>
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per share for the year ended December 31, 1998 and the
three months ended March 31, 1998 and 1999 is computed using the weighted
average number of common shares outstanding, including the pro forma effects of
the automatic conversion of the Company's Series A and Series B convertible
preferred stock, Series C and Series D mandatorily redeemable preferred stock
and 53,996 warrants to purchase Series D preferred stock at $9.26 per share into
shares of the Company's Common Stock effective upon the closing of the Company's
initial public offering as if such conversion occurred on January 1, 1998, or at
date of original issuance, if later. Pro forma diluted net loss per share is
computed only using the pro forma weighted average number of common shares as
common stock equivalents are antidilutive.
Effective upon the closing of the Company's proposed initial public
offering, the outstanding shares of Series A and Series B convertible preferred
stock, Series C and D mandatorily redeemable preferred stock and warrants to
purchase Series D preferred stock will automatically convert into 1,285,905,
1,290,621, 12,809,808, 5,107,587 and 161,988 shares, respectively, of Common
Stock (for a total of 20,655,909 shares). The pro forma effects of these
transactions are unaudited and have been reflected in the accompanying pro forma
balance sheet at March 31, 1999.
F-10
<PAGE> 85
E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, Reporting Comprehensive Income, during
1998. The Company classifies items of "other comprehensive income" by their
nature in a financial statement and displays the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the balance sheet. To date the Company has not
had any transactions that are required to be reported in comprehensive income.
SEGMENT REPORTING
The FASB issued SFAS No. 131, Disclosure about Segments of an Enterprise
and Related Information. SFAS No. 131 establishes standards for the way public
business enterprises are to report information about operating segments in
annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports. The Company
has determined that it does not have any separately reportable business
segments.
4. SIGNIFICANT CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK
All cash deposits are held by two financial institutions and exceed
existing federal deposit insurance coverage limits at each institution.
Additionally, approximately 67% and 78% (unaudited) of all loans sold during the
year ended December 31, 1998 and the three months ended March 31, 1999 were sold
to one mortgage loan purchaser.
5. MORTGAGE LOANS HELD-FOR-SALE
The inventory of mortgage loans consists primarily of first trust deed
mortgages on residential properties located throughout the United States,
primarily concentrated in California. As of December 31, 1998 and March 31,
1999, the Company has net mortgage loans held-for-sale of $42,153,648 and
$63,729,190 (unaudited), all of which are on accrual basis. All mortgage loans
held-for-sale are pledged as collateral for borrowings at December 31, 1998 and
March 31, 1999 (see Note 8). There were no mortgage loans held-for-sale at
December 31, 1997.
6. FURNITURE AND EQUIPMENT
Furniture and equipment are recorded at cost and consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1997 1998 1999
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment.......................... $133,295 $ 929,486 $1,225,776
Furniture and fixtures...................... 19,772 646,847 677,054
Equipment under capital leases.............. -- 998,642 998,642
Leasehold improvements...................... -- 144,541 186,456
-------- ---------- ----------
153,067 2,719,516 3,087,928
Accumulated depreciation and amortization... (6,860) (353,952) (543,948)
-------- ---------- ----------
$146,207 $2,365,564 $2,543,980
======== ========== ==========
</TABLE>
F-11
<PAGE> 86
E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Depreciation and amortization expense for the years ended December 31, 1997
and 1998 and three months ended March 31, 1999 was $6,860 and $347,092, $210,900
(unaudited), respectively.
As of December 31, 1998 and March 31, 1999, accumulated amortization for
equipment under capital leases was $203,447 and $278,205 (unaudited). There was
no amortization for equipment under capital leases as of December 31, 1997. All
equipment under capital leases serves as collateral for the related lease
obligation (see Note 10).
7. INCOME TAXES
There was no benefit for income taxes for the years ended December 31,
1996, 1997 and 1998 and the three months ended March 31, 1999 due to the
Company's inability to recognize the benefit of net operating losses. At
December 31, 1998, the Company had net operating loss carryforwards of
approximately $10.0 million for both federal and state income tax purposes. At
March 31, 1999 the Company had net operating loss carryforwards of approximately
$14.0 million (unaudited) for both federal and state income tax purposes. The
federal carryforwards expire in the years 2011 through 2018. For federal and
state tax purposes, a portion of the Company's net operating loss may be subject
to certain limitations on annual utilization in case of changes in ownership, as
defined by federal and state tax laws.
The primary components of temporary differences, which give rise to
deferred taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------ -----------
1997 1998 1999
--------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................. $ 441,756 $ 4,193,310 $ 5,647,521
Other............................................ 78,951 227,984 814,348
--------- ----------- -----------
Total deferred tax assets................ 520,707 4,421,294 6,461,869
Valuation allowance................................ (520,707) (4,245,551) (6,461,869)
--------- ----------- -----------
$ -- $ -- $ --
========= =========== ===========
</TABLE>
Management evaluates the recoverability of the deferred tax asset and the
level of the valuation allowance. Due to the uncertainty surrounding the
realization of the favorable tax attributes in future tax returns, the Company
has recorded a valuation allowance against its net deferred tax asset at
December 31, 1997, 1998 and March 31, 1999 (unaudited). At such time as it is
determined that it is more likely than not that the deferred tax asset will be
realizable, the valuation allowance will be reduced.
8. WAREHOUSE LINES PAYABLE
As of December 31, 1998 and March 31, 1999, the Company had a warehouse
line of credit for borrowings up to $18.8 million, which includes a temporary
overdraft limit of $3.75 million, for interim financing of mortgage loans. The
interest rate charged on borrowings against the warehouse line of credit is
variable based on the commercial paper rate of the lender plus various
percentage rates. Borrowings are collateralized by the mortgage loans
held-for-sale. The line of credit which is uncommitted expires on June 30, 1999.
Upon expiration, management believes it will either renew its existing line or
obtain sufficient additional lines. At December 31,
F-12
<PAGE> 87
E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1998 and March 31, 1999 approximately $15.0 million and $19.9 million
(unaudited) was outstanding under this line. Either the Company or the Lender
can terminate the agreement at any time. On April 23, 1999 the amount of the
warehouse line of credit was increased to $25 million and the expiration date
was extended to April 20, 2000 (unaudited).
This line of credit agreement generally requires the Company to comply with
various financial and non-financial covenants. The Company was not in compliance
with certain covenants contained in the credit agreement and has obtained a
waiver from the lender.
Two of the Company's founding stockholders have provided guarantees for the
Company's obligations under this line of credit.
Additionally, the Company has a commitment to finance up to $35.0 million
of mortgage loan inventory pending sale of these loans to the ultimate mortgage
loan purchasers. This additional loan inventory financing is secured by the
related mortgage loans. The interest rate charged is LIBOR plus 1.25%. Either
the Company or the lender can terminate the agreement at any time. At December
31, 1998 and March 31, 1999 approximately $26.1 million and $17.1 million
(unaudited), respectively was outstanding under this financial commitment. This
agreement includes various non-financial negative and affirmative covenants. The
Company was not in compliance with a covenant contained in the agreement and has
obtained a waiver from the lender.
On May 21, 1999 the Company entered into an agreement with this lender for
a $100 million committed line of credit. In addition, after the closing of the
Company's initial public offering, the agreement is expanded to include another
$100 million of uncommitted funds. Interest accrues on these funds at 95 basis
points (.95%) over the monthly average LIBOR rate. The line expires May 20, 2000
(unaudited).
Subsequent to year end, on January 15, 1999, the Company entered into a
warehouse line of credit agreement for borrowings of up to $40 million for
interim financing of mortgage loans. The interest rate charged on borrowings
against the line is equal to 185 basis points (1.85%) per annum over the Monthly
Average LIBOR Rate. The line of credit expires on January 26, 2000. Upon
expiration, management believes it will either renew its existing line or obtain
sufficient additional lines. At March 31, 1999, approximately $15 million
(unaudited) was outstanding under this line. Either the Company or the lender
can terminate the agreement at anytime.
This line of credit agreement generally requires the Company to comply with
various financial and non-financial covenants. The Company was not in compliance
with certain covenants contained in the credit agreement and has obtained a
waiver from the lender (unaudited).
9. NOTES PAYABLE
In December 1998, the Company entered into two credit facilities in the
aggregate principal amount of $5,000,000 for working capital and equipment
financing. The first credit facility in the amount of $1,500,000 has an interest
rate of prime plus 0.50% and expires in December 1999. The second credit
facility is a $3,500,000 term loan with an interest rate of prime plus 0.50% and
expires in September 2002. At December 31, 1998 and March 31, 1999 $641,692 and
$757,185 (unaudited) was outstanding under these two credit facilities.
These credit facilities require the Company to meet various financial
covenants. The Company was not in compliance with one of these covenants and has
obtained a waiver from the lender.
During March 1999, the Company obtained a commitment of $5.0 million for a
revolving line of credit capital facility. The interest rate will be based on
the prime rate and the facility will
F-13
<PAGE> 88
E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
expire at the earlier of March 2000 or the closing of the Company's initial
public offering. Two of the Company's founding stockholders have provided
guarantees for the Company's obligation under this line of credit.
10. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space under an operating lease which provides for
renewal in October 2003. Rent expense under operating leases amounted to
$77,037, $107,652, $374,794 and $225,059 (unaudited) for the years ended
December 31, 1996, 1997 and 1998 and the three months ended March 31, 1999,
respectively.
During April 1998, the Company entered into a 48-month capital lease for
equipment (see Note 6). The Company's lease obligations under capital and
operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, CAPITAL OPERATING
------------------------ ---------- ----------
<S> <C> <C>
1999............................................ $ 300,408 $ 532,580
2000............................................ 332,068 665,797
2001............................................ 332,068 686,336
2002............................................ 162,424 706,874
2003............................................ -- 603,325
---------- ----------
Total minimum lease payments.................... 1,126,968 $3,194,912
==========
Less amount representing interest....................... (155,199)
----------
Present value of minimum lease payments................. 971,769
Less current portion of capital lease obligations....... (252,475)
----------
Long-term portion....................................... $ 719,294
==========
</TABLE>
Under the terms of the office lease, the Company maintains a $900,000
stand-by letter of credit in favor of the lessor. The Company has deposited
$255,000 as collateral for this letter of credit which is recorded as deposits
and other assets in the accompanying balance sheet.
FACILITY LEASE (UNAUDITED)
In March 1999, the Company entered into an amendment to the existing
facility lease for an additional 25,474 feet commencing June 1, 1999. The
amended lease expires November 30, 2004. In connection with the amendment, the
Company increased the letter of credit securing the facility to $1,250,000 and
released the $255,000 in collateral.
FINANCIAL INSTRUMENT CONTINGENCIES
At December 31, 1998 and March 31, 1999 (unaudited), the Company was party
to commitments to fund loans at interest rates previously agreed (locked) by
both the lender and the borrower for specified periods of time. Prior to
originating loans under these commitments, the Company evaluates each customer's
credit and collateral worthiness. The Company uses its best efforts to fund
these locked loans within the agreed-upon locked period. If the loan cannot be
funded within this period, or if the Company is unable to secure a rate lock
from the lender equal to or less than the rate lock extended to the borrower,
the Company will earn less revenue than it anticipated at the time it locked
with the borrower. At December 31, 1998 and March 31, 1999, the Company has
provided locks to originate loans amounting to approximately $99.1 million and
$52.2 Million (unaudited) (the "locked pipeline"). In addition, the Company
F-14
<PAGE> 89
E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
had commitments at December 31, 1998 and March 31, 1999, in its capacity as a
broker, amounting to approximately $45.0 million and $23.7 (unaudited).
At December 31, 1998 and March 31, 1999, the Company has entered into
non-mandatory forward loan sale agreements, including commitments with lenders
for brokered loans, amounting to approximately $186.3 million and $139.6 million
(unaudited) (this includes the mortgage loans held-for-sale at December 31, 1998
and March 31, 1999, of approximately $42.2 million and $63.7 million
(unaudited)). The forward loan sale agreements do not subject the Company to
mandatory delivery and there is no penalty if the Company does not deliver into
the commitment. The Company is exposed to the risk that these counterparties may
be unable to meet the terms of these sale agreements. The investors are
well-established U.S financial institutions; the Company does not require
collateral to support these commitments, and there has been no failure on the
part of the counterparties to these agreements to date.
LEGAL
In the normal course of business, the Company is at times subject to
pending and threatened legal actions and proceedings. After reviewing pending
and threatened actions and proceedings with counsel, management believes that
the outcome of such actions or proceedings is not expected to have a material
adverse effect on the financial position or results of operation of the Company.
MORTGAGE BANKERS' BLANKET BOND
At December 31, 1998 and March 31, 1999, the Company carried a mortgage
bankers' blanket bond for $300,000 and carried errors and omissions insurance
coverage for $2,000,000. The premiums for the bond and insurance coverage are
paid through May 27, 1999 and January 9, 2000 (unaudited), respectively.
MARKETING SERVICE AGREEMENTS
The Company has entered into several marketing service agreements with
third parties. Under these agreements the third parties will display the
Company's logo and loan information on their internet websites and provide
related marketing services. The Company pays for these services in minimum
monthly and quarterly installments plus, in some cases, a per view charge for
each time the information is displayed. Future minimum payments under these
agreements are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1999.......................................... $5,463,300
2000.......................................... 2,309,800
2001.......................................... 212,000
Thereafter.................................... --
----------
$7,985,100
==========
</TABLE>
Two of these marketing agreements are with a stockholder of the Company.
The Company has incurred approximately $1.04 million and $0.6 million
(unaudited) in marketing service expenses under these agreements with this
stockholder during the year ended December 31, 1998 and the three months ended
March 31, 1999. There were no such agreements as of December 31, 1996 and 1997.
F-15
<PAGE> 90
E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. STOCKHOLDERS' (DEFICIT) AND MANDATORILY REDEEMABLE PREFERRED STOCK
COMMON AND CONVERTIBLE PREFERRED STOCK
At December 31, 1998 and March 31, 1999, the Company was authorized to
issue 20,000,000 shares and 50,000,000 (unaudited) shares of common stock and
11,765,167 shares of preferred stock. The Company has designated 428,635 shares
of the authorized preferred stock as Series A preferred stock, 450,708 shares as
Series B preferred stock, 4,467,912 shares as Series C preferred stock,
4,467,912 shares as Series C-1 preferred stock and 1,950,000 shares as Series D
preferred stock.
REDEMPTION
Series A and B preferred stock are not redeemable.
The Series C and C-1 preferred stock are redeemable at any time after
December 17, 2001 at the request of no less than 66.67% of the then outstanding
Series C and C-1 stockholders. The redemption price is equal to $1.22852 per
share plus 10% per annum on the amount payable plus all declared but unpaid
dividends. The redemption amounts are payable in three annual installments.
The Series D preferred stock is redeemable at any time after September 4,
2002 at the request of no less than 66.67% of the then outstanding Series D
stockholders and subject to the consent of a majority of the Series C and C-1
preferred stockholders. The redemption price is equal to $9.263 per share plus
10% per annum on the amount payable plus all declared but unpaid dividends. The
redemption amounts are payable in three annual installments.
LIQUIDATION PREFERENCE
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of preferred stock retain
liquidation preference over common stockholders. The liquidation amounts are
$0.22 per share of Series A, $0.96 per share of Series B, $1.22852 per share of
Series C, $1.22852 per share of Series C-1, and $9.263 per share of Series D
preferred stock.
The remaining assets and funds of the Company available for distribution
shall be distributed ratably among all holders of Series C, Series C-1, and
Series D preferred stock and common stock pro rata based on the number of shares
of common stock held by each holder (assuming conversion of all Series C, Series
C-1, and Series D preferred stock) until, with respect to holders of Series C
and Series C-1, such holders shall have received an aggregate of $3.6855 per
share and the holders of Series D preferred stock have received an aggregate of
$13.89 per share. Any remaining assets shall be distributed among the holders of
common stock on a pro rata basis.
VOTING RIGHTS
Holders of preferred stock are entitled to vote together with holders of
common stock. The number of votes granted to preferred shareholders is to equal
the number of full shares of common stock into which each share of preferred
stock could be converted as described in the Company's Articles of
Incorporation. Special voting rights are provided to Series C, C-1, and D
preferred stockholders for the election of Board of Director members.
F-16
<PAGE> 91
E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CONVERSION
At the option of the holder, each share of preferred stock is convertible
at any time into shares of common stock as determined by dividing the Issuance
Price by the Conversion Price. The Issuance Price and Conversion Price for the
preferred stock are as follows: $0.22 per share and $0.07333 per share for
Series A; $0.96 per share and $0.32 per share for Series B; $1.22852 per share
and $0.40951 per share for Series C; $1.22852 per share and $0.40951 per share
for Series C-1; and $9.26 per share and $3.0867 per share for Series D,
respectively. The Conversion Price for each series of preferred stock is subject
to adjustment as described in the Company's articles of incorporation.
Additionally, Series C preferred stock may be automatically converted to Series
C-1 preferred stock in the event such holders of Series C preferred stock do not
exercise their right of first refusal as set forth in the restated investors'
rights agreement.
All preferred shares will automatically be converted into shares of common
stock upon the earlier of (i) a firm commitment underwritten public offering
pursuant to an effective registration statement under the Securities Act of 1933
at an offering price of not less than $4.63 per share (as adjusted to reflect
any stock splits, stock dividends, or combinations), and an aggregate offering
price of $15.0 million; or (ii) the date specified by written consent or
agreement of (a) the holders of a majority of the then outstanding shares of
Series C and Series C-1 preferred stock, (b) the holders of a majority of the
then outstanding shares of Series D preferred stock and (c) the holders of a
majority of the then outstanding shares of preferred stock.
DIVIDENDS
Holders of preferred stock are entitled to receive, when and if declared by
the Board of Directors, dividends at the rate of $0.02 per share of Series A,
$0.096 per share of Series B, $0.122852 per share of Series C, $0.122852 per
share of Series C-1 and $0.926 per share of Series D, respectively, per year,
payable in preference to any payment of any dividend on common stock. After such
dividend payment, any additional dividends declared shall be payable entirely to
the holders of Series C and Series C-1 preferred stock and common stock on a pro
rata basis. The dividends are non-cumulative.
WARRANTS
In March 1998, the Company issued warrants to purchase up to 15,000 shares
of Series C preferred stock at an exercise price of $2.00 per share to a lender
in connection with a capital lease. In addition, in connection with two separate
strategic alliance agreements, the Company issued warrants to purchase 200,000
shares of Series C preferred stock at an exercise price of $2.40 per share in
March 1998 and 53,996 shares of Series D preferred stock at an exercise price of
$9.26 per share in September 1998.
As of December 31, 1998, no warrants had been exercised. As of March 31,
1999, 200,000 warrants for Series C preferred stock had been exercised
(unaudited).
12. STOCK OPTION PLAN AND UNEARNED COMPENSATION
As of March 31, 1999, the Company has reserved up to 7,500,000 (unaudited)
shares of common stock issuable upon exercise of options issued to certain
employees, directors, and consultants pursuant to the Company's 1997 Stock
Option Plan. Such options are exercisable at prices established at the date of
grant, and have a term of ten years. Each optionee has a vested interest in 25%
of the option shares upon the optionee's completion of one year of service
measured from the grant date. The balance will vest in equal successive monthly
installments of
F-17
<PAGE> 92
E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1/48 upon the optionee's completion of each of the next 36 months of service. If
an option holder ceases to be employed by the Company, vested options held at
the date of termination may be exercised within three months. As of December 31,
1997, 1998 and March 31, 1999, 1,835,649, 3,084,627 and 2,498,280 (unaudited)
options have been granted and 864,351, 621,630 and 1,409,082 (unaudited) options
were still available for grant under the Company's stock option plan. There were
no options granted in 1996.
Options granted during the years ended December 31, 1997 and 1998 and the
three months ended March 31, 1999 resulted in unearned compensation of $0, $5.7
million and $35.0 million (unaudited), respectively. The amounts recorded
represent the difference between the exercise price and the deemed fair value of
the Company's common stock for shares subject to the options granted. The
amortization of deferred compensation is being charged to operations over the
four-year vesting period of the options. For the year ended December 31, 1998
and the three months ended March 31, 1999, the amortization of unearned
compensation was $1,251,000 and $5,005,000 (unaudited).
Options under the plan may be either Incentive Stock Options, as defined
under Section 422 of the Internal Revenue Code, or Nonstatutory Options.
The following information concerning the Company's stock option plan is
provided in accordance with Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS 123). As permitted by SFAS 123,
the Company accounts for such plans in accordance with APB No. 25 and related
interpretations. The fair value of each stock option is estimated on the date of
grant using the minimum value option-pricing model with the following weighted
average assumptions.
<TABLE>
<S> <C>
Expected life............................................... 5 years
Risk-free interest rate..................................... 5.00%
Expected dividend rate...................................... 0.00%
Estimated volatility........................................ 0.00%
</TABLE>
As a result of the above assumptions, the weighted average fair value of
options granted during the years ending December 31, 1997 and 1998 and the three
months ended March 31, 1998 and 1999 was $0.22, $2.02, $0.38 (unaudited) and
$14.40 (unaudited), respectively.
The following pro forma net loss information has been prepared as if the
Company had followed the provisions of SFAS No. 123:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------- ---------------------------
1997 1998 1998 1999
----------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net loss:
As reported.................. $(1,374,493) $(11,172,054) $(1,330,953) $(11,381,081)
Pro forma.................... $(1,401,894) $(11,210,409) $(1,336,786) $(11,649,135)
Net loss per share:
As reported.................. $ (0.12) $ (0.98) $ (0.12) $ (0.94)
Pro-forma.................... $ (0.12) $ (0.99) $ (0.12) $ (0.97)
</TABLE>
F-18
<PAGE> 93
E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A summary of the status of the Company's stock option plan and changes
during those periods is presented below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED
------------------------------------------------------ MARCH 31, 1999
1997 1998 -------------------------
------------------------- -------------------------- (UNAUDITED)
EXERCISE EXERCISE NUMBER EXERCISE
NUMBER OF PRICE PER NUMBER OF PRICE PER OF PRICE PER
SHARES SHARE SHARES SHARE SHARES SHARE
--------- ------------- ---------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year.. -- -- 1,835,649 $0.05 - $0.32 3,746,118 $0.05 - $1.33
Granted............ 1,835,649 $0.05 - $0.32 3,084,627 $0.05 - $1.33 2,498,280 $2.00
Exercised.......... -- -- (132,522) $0.05 - $0.22 (218,964) $0.05 - $1.00
Terminated/
forfeited........ -- -- (1,041,636) $0.05 - $1.33 (286,002) $0.05 - $2.00
--------- ------------- ---------- ------------- --------- -------------
Outstanding at end of
year............... 1,835,649 $0.05 - $0.32 3,746,118 $0.15 - $1.33 5,739,432 $0.05 - $2.00
========= ============= ========== ============= ========= =============
Options exercisable
at end of year..... 114,999 $ 0.05 496,437 $0.05 - $1.00 237,195 $0.05 - $2.00
========= ============= ========== ============= ========= =============
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
RANGE OF NUMBER AVERAGE REMAINING NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
- --------------- ----------- -------------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.05 786,996 $0.05 8.62 425,226 $0.05
$0.22 1,580,310 $0.22 9.23 30,525 $0.22
$0.32 10,935 $0.32 8.80 3,186 $0.32
$0.33 222,000 $0,33 9.52 -- --
$1.00 408,000 $1.00 9.64 37,500 $1.00
$1.33 737,877 $1.33 9.90 -- --
--------- -------
3,746,118 496,437
========= =======
</TABLE>
F-19
<PAGE> 94
E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about stock options outstanding
at March 31, 1999 (unaudited):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
RANGE OF NUMBER AVERAGE REMAINING NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
- --------------- ----------- -------------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.05 425,463 $0.05 8.18 103,869 $0.05
$0.22 1,521,627 $0.22 9.05 72,711 $0.22
$0.32 10,935 $0.32 8.56 3,870 $0.32
$0.33 207,750 $0.33 9.27 750 $0.33
$1.00 394,500 $1.00 9.39 36,000 $1.00
$1.33 689,877 $1.33 9.65 -- --
$2.00 2,489,280 $2.00 9.87 19,995 $2.00
--------- -------
5,739,432 237,195
</TABLE>
13. REVENUES AND OTHER INCOME, NET
The following table provides the components of revenues
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------- ---------------------
1996 1997 1998 1998 1999
-------- ---------- ---------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Brokerage fees............... $892,995 $1,042,729 $4,456,070 $526,597 $1,732,464
Gain on sale of loans........ -- -- 1,709,195 -- 2,242,116
Interest income on loans..... -- -- 666,281 -- 827,061
-------- ---------- ---------- -------- ----------
Total revenues....... $892,995 $1,042,729 $6,831,546 $526,597 $4,801,641
======== ========== ========== ======== ==========
</TABLE>
The following table provides the components of other income, net
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------- ------------------
1996 1997 1998 1998 1999
------- ------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest on short-term
investments.................. $ -- $ 4,629 $237,187 $29,591 $ 62,440
Interest expense on non-
warehouse facility
borrowings................... (3,438) (7,036) (63,861) (9,055) (26,327)
------- ------- -------- ------- --------
$(3,438) $(2,407) $173,326 $20,536 $ 36,113
======= ======= ======== ======= ========
</TABLE>
F-20
<PAGE> 95
E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. OPERATING EXPENSES
The following table provides the detail of the Company's operating expenses
classified by the following categories:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------- ------------------------
1996 1997 1998 1998 1999
-------- ---------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Compensation and benefits........ $378,149 $ 923,766 $ 7,387,104 $ 807,098 $ 3,693,125
Processing costs................. 394,977 624,210 1,219,869 245,278 185,859
Advertising and marketing........ 11,430 360,524 5,118,727 424,202 3,256,821
Professional services............ 11,201 125,010 307,854 50,673 401,696
Occupancy costs.................. 77,037 107,652 374,794 55,509 247,792
Computer and internet............ 23,775 42,693 248,929 68,158 42,834
General and administrative....... 103,032 230,960 1,510,618 183,168 805,446
Interest expense on warehouse
borrowings..................... -- -- 758,031 -- 1,031,262
Amortization of unearned
compensation................... -- -- 1,251,000 44,000 6,554,000
-------- ---------- ----------- ---------- -----------
Total operating
expenses.............. $999,601 $2,414,815 $18,176,926 $1,878,086 $16,218,835
======== ========== =========== ========== ===========
</TABLE>
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount for which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced liquidation sale. Fair value estimates are subjective in
nature and involve uncertainties and therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
At December 31, 1998 and March 31, 1999, the fair value of mortgage loans
held-for-sale including the related commitments to sell those mortgage loans
exceeds the carrying value of the mortgage loans held-for-sale by approximately
$300,000 and $400,000 (unaudited), respectively. At December 31, 1998, and March
31, 1999, the fair value of commitments to originate mortgage loans and the
related commitments to sell those loans resulted in an unrecognized gain of
approximately $900,000 and $475,000 (unaudited), respectively. The fair value of
mortgage loans held-for-sale are estimated using quoted market prices for
similar loans or prices for mortgage backed securities backed by similar loans
and the fair value of the commitments to originate and commitments to sell
mortgage loans are estimated using quoted market prices.
The carrying value of the Company's other financial instruments, including
cash and cash equivalents, accounts receivable and all other financial assets
and liabilities approximate their fair value because of the short-term maturity
of those instruments or because they carry interest rates which approximate
market.
16. SUBSEQUENT EVENTS (UNAUDITED)
STOCK SPLIT
In May 1999, the Company's Board of Directors effected a three-for-one
stock split of the outstanding shares of Common Stock. All share and per share
information included in these financial statements have been retroactively
adjusted to reflect this stock split.
F-21
<PAGE> 96
E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INITIAL PUBLIC OFFERING AND CONCURRENT PRIVATE PLACEMENT
In March 1999, the Company's Board of Directors authorized the Company to
file a registration statement with the Securities and Exchange Commission for
the purpose of the initial public offering of the Company's common stock. Upon
the completion of the offering, if requirements set forth in the Certificate of
Incorporation are met, all of the Company's outstanding preferred stock will be
converted into shares of common stock, and all such outstanding shares of
preferred stock will be cancelled and retired. Upon the conversion of the
preferred stock, all rights to accrued and unpaid dividends are waived.
Additionally, upon the completion of the offering, the Company will be
authorized to issue 5,000,000 shares of undesignated preferred stock. The board
of directors will have the authority to determine the price, rights,
preferences, privileges and restrictions of the preferred stock.
In May 1999, the Company entered into a stock purchase agreement with Forum
Holdings, Inc. in which the Company agreed to sell shares of common Stock to
Forum Holdings, Inc. equal to $12,500,000 divided by the initial public offering
price less the underwriting discount. This sale of shares is conditioned on the
closing of the Company's initial public offering.
STOCK OPTION PLAN
On April 20, 1999, the Board of Directors of the Company voted to increase
the authorized number of common stock options available for grant under the 1997
Stock Option Plan from 7,500,000 to 10,500,000. During April of 1999, the
Company issued 542,055 additional stock options to employees. These options were
issued at exercise prices less than the fair value of the common stock at the
date of the grant. As a result the Company expects to record unearned
compensation amount of approximately $3.3 million.
SERIES D PREFERRED STOCK PURCHASE
In February 1999, the Company sold 40,000 shares of Series D convertible
and manditorily redeemable preferred stock at a price of $9.26 per share for
aggregate proceeds of $370,520 to an officer of the Company in connection with
his employment by the Company. This price was below the fair value of the common
stock and resulted in a compensation charge in the amount of $1.55 million
(unaudited) which is equal to the difference between the fair value of the
Series D preferred stock and the price paid for these shares.
COMMON STOCK ISSUED TO A FOUNDATION
In May 1999, the Company donated 75,000 shares of common stock in
connection with its establishment of a charitable foundation.
WARRANT ISSUED
In May 1999, the Company issued a warrant to purchase 75,000 shares of
common stock at an exercise price equal to the lesser of $13.33 or the initial
public offering price to a lender in connection with a warehouse agreement. This
warrant expires May 21, 2000.
F-22
<PAGE> 97
UNDERWRITING
E-LOAN, the selling stockholder and the Underwriters named below have
entered into an underwriting agreement with respect to the shares being offered.
Subject to certain conditions, each underwriter has severally agreed to purchase
the number of shares indicated in the following table. Goldman, Sachs & Co.,
Donaldson, Lufkin & Jenrette Securities Corporation, Hambrecht & Quist LLC and
DLJdirect Inc. are the representatives of the underwriters.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ----------
<S> <C>
Goldman, Sachs & Co.........................................
Donaldson, Lufkin, & Jenrette Securities Corporation........
Hambrecht & Quist LLC.......................................
DLJdirect Inc...............................................
Total............................................. 3,500,000
</TABLE>
------------------------
If the underwriters sell more than the total number set forth in the table
above, the underwriters have an option to buy up to an additional 525,000 shares
from E-LOAN to cover such sales. They may exercise that option for 30 days. If
any shares are purchased pursuant to this option, the underwriters will
severally purchase shares in approximately the same proportion as set forth in
the table above.
The following table show the per share and total underwriting discounts and
commissions to be paid to the underwriters by E-LOAN. Such amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
PAID BY E-LOAN
----------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per Share............................. $ $
Total....................... $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
public offering price, the representatives may change the offering price and the
other selling terms.
E-LOAN and the selling stockholder has agreed with the underwriters not to
dispose of or hedge any of its common stock or securities convertible into or
exchangeable for shares of common stock during the period from the date of this
prospectus continuing through the date 180 days after the date of this
prospectus, except with the prior written consent of the representatives. This
agreement does not apply to any grants under E-LOAN's existing employee benefit
plans. See "Shares Available for Future Sale" for a discussion of certain
transfer restrictions.
Prior to this offering, there has been no public market for the shares. The
initial public offering price will be negotiated among E-LOAN and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be E-LOAN's historical performance, estimates of the business
potential and earnings prospects of E-LOAN, an assessment of E-LOAN's management
and the consideration of the above factors in relation to market valuation of
companies in related businesses.
The shares of common stock have been approved for quotation on the Nasdaq
National Market under the symbol "EELN", subject to official notice of issuance.
U-1
<PAGE> 98
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in this offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while this offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
The underwriters have reserved for sale, at the initial public offering
price, up to 300,000 shares of the common stock offered by this prospectus for
certain individuals designated by E-LOAN who have expressed an interest in
purchasing such shares of common stock in the offering. The number of shares
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares not so purchased will
be offered by the underwriters to the general public on the same basis as other
shares offered hereby.
E-LOAN estimates that the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $1.4 million.
E-LOAN and the selling stockholder has agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act of
1933.
E*Trade Group, Inc., a facilitator of Internet distribution of the common
stock offered hereby, purchased 200,000 shares of Series C preferred stock of
E-LOAN for a total purchase price of $480,000 in connection with its exercise of
the warrant issued to E*Trade pursuant to a marketing agreement with E-LOAN. The
shares of Series C preferred stock held by E*Trade are convertible into 600,000
shares of common stock upon the completion of this offering on the same terms as
the other investors in the private placement of E-LOAN's Series C preferred
stock. DLJdirect Inc., an underwriter of the common stock offered hereby and a
wholly owned subsidiary of Donaldson, Lufkin & Jenrette Securities Corporation,
holds a warrant to purchase 53,996 shares of Series D preferred stock of E-LOAN
at an exercise price of $9.26 per share that was issued pursuant to a marketing
agreement with E-LOAN. DLJdirect intends to exercise this warrant prior to the
completion of this offering. The shares of Series D preferred stock to be issued
to DLJdirect upon the exercise of this warrant are convertible into 161,988
shares of common stock upon the completion of this offering on the same terms as
the other investors in the private placement of E-LOAN's Series D preferred
stock. These entities have agreed that they will not sell, transfer, assign or
hypothecate such shares for 180 days after the date of this prospectus, except
with the prior written consent of the representatives.
U-2
<PAGE> 99
[INSIDE BACK COVER]
DESCRIPTION OF ARTWORK:
[HEADER: E-LOAN LOGO. TEXT UNDER LOGO READS:
E-LOAN is proud to partner with these financial and real estate industry
leaders by providing their customers with E-LOAN's mortgage products and
services through loan centers on these websites: [there follows a table showing
logos of 34 of E-LOAN's strategic partners, including]:
E*Trade, DLJdirect, Yahoo!, CBS Marketwatch, SmartMoney.com, Insweb,
Realty.com, USA Today, CCCHome.com, Credit.com, Financenter.com, Homes.com,
HomeSmart USA, InvesTools, Moneyclub, Prism Mortgage Company, NetNoir, NeXTL,
Newconstruction.com, NewRealty.com, Your New House, NextCard, Real Times,
Thomson Investor Network, StockMaster, Talkway, Tegris, Telebank, West Bay
Properties, SiebertNet, Owners.com, Ebtel Federal Credit Union, NetBank,
Bankrate.com.]
[Text underneath the table of logos reads:
All of the companies listed here have consented to the use of their logos
in this prospectus.]
<PAGE> 100
- ----------------------------------------------------------
- ----------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary...................... 1
Risk Factors............................ 4
Forward Looking Statements.............. 13
Use of Proceeds......................... 14
Dividend Policy......................... 14
Capitalization.......................... 15
Dilution................................ 17
Selected Financial Data................. 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 19
Business................................ 31
Management.............................. 49
Certain Transactions.................... 58
Principal and Selling Stockholder....... 61
Description of Capital Stock............ 64
Shares Available for Future Sale........ 69
Legal Matters........................... 70
Experts................................. 70
Available Information................... 70
Index to Financial Statements........... F-1
Underwriting............................ U-1
</TABLE>
Through and including , 1999 (25 days after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when acting
as underwriter and with respect to an unsold allotment or subscription.
- ----------------------------------------------------------
- ----------------------------------------------------------
- ----------------------------------------------------------
- ----------------------------------------------------------
3,500,000 Shares
E-LOAN, INC.
Common Stock
----------------------
[E-Loan Logo]
----------------------
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
HAMBRECHT & QUIST
DLJDIRECT INC.
- ----------------------------------------------------------
- ----------------------------------------------------------
<PAGE> 101
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than the
underwriting discounts, payable by the Registrant in connection with the sale of
the securities being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fee and the Nasdaq/ NMS listing fee.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 15,346
NASD Filing Fee............................................. 6,020
Nasdaq National Market Listing Fee.......................... 50,000
Printing Costs.............................................. 150,000
Legal Fees and Expenses..................................... 600,000
Accounting Fees and Expenses................................ 400,000
Blue Sky Fees and Expenses.................................. 10,000
Transfer Agent and Registrar Fees........................... 10,000
Miscellaneous............................................... 158,634
----------
Total..................................................... $1,400,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933. Article VII of our current
Certificate of Incorporation (Exhibit 3.1 hereto) and Article VI of our current
Bylaws (Exhibit 3.3 hereto) provide for indemnification of our directors,
officers, employees and other agents to the maximum extent permitted by Delaware
law. In addition, we have entered into Indemnification Agreements (Exhibit 10.1
hereto) with our officers and directors. The Underwriting Agreement (Exhibit
1.1) also provides for cross-indemnification among E-LOAN and the Underwriters
with respect to certain matters, including matters arising under the Securities
Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since our incorporation in August 1996, we have sold and issued the
following securities:
1. On September 30, 1996, we issued 12,000,000 shares of common stock to
two founders for an aggregate consideration of $4,000.00. On September
30, 1996 we also issued 255,000 shares of common stock to two investors
for an aggregate consideration of $85.00
2. On June 10, 1997, we issued 428,635 shares of Series A preferred stock
to nine investors for an aggregate consideration of $94,299.70.
3. On December 17, 1997, we issued 430,207 shares of Series B preferred
stock to twenty-two investors for an aggregate consideration of
$412,998.72.
4. On December 19, 1997, we issued 4,069,936 shares of Series C preferred
stock to two accredited investors for an aggregate consideration of
$4,999,997.77.
5. On January 30, 1998, we issued 56,250 shares of common stock to two
investors for an aggregate consideration of $18.76.
6. On March 4, 1998, we issued a warrant for 15,000 shares of Series C
preferred stock convertible into 45,000 shares of common stock to an
equipment lessor in connection
II-1
<PAGE> 102
with a Master Lease Agreement. Such warrants have an exercise price of
$2.00 per share.
7. On March 20, 1998, we issued a warrant for 200,000 shares of Series C
preferred stock to one of our marketing partners pursuant to a
Marketing Agreement. Such warrants had an exercise price of $2.40 per
share and were exercised on January 13, 1999 for aggregate
consideration of $480,000.00
8. On April 16, 1998, we issued 1,500 shares of common stock to one of our
directors for services rendered valued at $325.00.
9. On June 1, 1998, we issued 78,738 shares of common stock to one
investor for an aggregate consideration of $19,683.24.
10. On September 4, 1998, we issued 1,662,529 shares of Series D preferred
stock to twelve accredited investors for an aggregate consideration of
$15,400,006.14.
11. On September 4, 1998, we issued a warrant for 53,996 shares of Series D
preferred stock convertible into 161,988 shares of common stock to one
of our marketing partners pursuant to a Marketing Agreement. Such
warrant has an exercise price of $9.26 per share.
12. On February 24, 1999, we issued 40,000 shares of Series D preferred
stock to one of our officers for an aggregate consideration of $370,520
paid in cash.
13. On May 20, 1999, we issued a warrant for 75,000 shares of common stock
to a lender in connection with a warehouse line agreement. The warrant
has an exercise price equal to the lesser of $13.33 per share and the
initial public offering price per share.
14. Since our incorporation, we have granted an aggregate of 7,960,611
options to purchase our common stock to employees, directors, and
consultants with exercise prices ranging from $0.05 to $10.00.
The issuance of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of such
Securities Act as transactions by an issuer not involving any public offering.
In addition, certain issuances described in Item 12 were deemed exempt from
registration under the Securities Act in reliance upon Rule 701 promulgated
under the Securities Act. The recipients of securities in each such transaction
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and warrants issued
in such transactions. All recipients had adequate access, through their
relationships with us, to information about us.
ITEM 16. EXHIBITS.
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Certificate of Incorporation of E-LOAN as currently in
effect.
3.2* Form of Restated Certificate of Incorporation of E-LOAN to
be filed immediately following the closing of the offering
made under this Registration Statement.
3.3* Bylaws of E-LOAN.
3.4* Form of Bylaws of E-LOAN to be adopted immediately following
the closing of the offering made under this Registration
Statement.
4.1* Specimen Common Stock Certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1* Form of Indemnification Agreement between the Registrant and
each of its directors and officers.
</TABLE>
II-2
<PAGE> 103
<TABLE>
<C> <S>
10.2* 1997 Stock Plan and form of agreements thereunder.
10.3* 1999 Employee Stock Purchase Plan and form of agreements
thereunder.
10.4* Restated Investor Rights Agreement dated September 4, 1998
among E-LOAN and certain investors.
10.5* Warrant Agreement to Purchase Shares of the Series C
Preferred Stock of E-LOAN, Inc. dated March 4, 1998.
10.6* Employment Agreement with Joseph Kennedy dated March 26,
1999.
10.7*+ Marketing Agreement with DLJdirect, Inc. dated September 4,
1998.
10.8*+ Co-Marketing Agreement with E*Trade Group, Inc. dated March
26, 1998.
10.9*+ Marketing Agreement with MarketWatch.com dated February 8,
1999.
10.10* Marketing Agreement with Prism Mortgage Company dated July
6, 1998.
10.11*+ License Agreement with Yahoo!, Inc. dated September 1998 and
amended in March 1999.
10.12* Warehousing Credit and Security Agreement with Bank United,
a federal savings bank, dated February 3, 1999.
10.13* Broker Agreement with Citicorp Mortgage, Inc. dated
September 23, 1997.
10.14*+ Underwriting Review Agreement with CMAC Service Company
dated September 3, 1998.
10.15* Warehouse Credit Agreement with Cooper River Funding, Inc.
and GE Capital Mortgage Services, Inc. dated June 24, 1998
and Amended and Restated Note.
10.16* Loan Purchase Agreement with Countrywide Home Loans, Inc.
dated September 25, 1998.
10.17* Conventional Loan Purchase Agreement with Crestar Mortgage
Corporation dated July 1, 1998.
10.18* GMAC Mortgage Corporation Seller's Agreement for Residential
Mortgage Loans with GMAC Mortgage Corporation dated July 1,
1998.
10.19* Mortgage Loan Purchase and Sale Agreement with Greenwich
Capital Financial Products, Inc. dated September 25, 1998.
10.19A Master Loan and Security Agreement with Greenwich Capital
Financial Products, Inc. dated May 20, 1999.
10.19B Stock Purchase Warrant issued to Greenwich Capital Financial
Products, Inc. dated May 20, 1999.
10.20* License, Staffing, Purchase and Sale Agreement with NetB@nk
dated October 1, 1998.
10.21* Mortgage Loan Processing Agreement with NetB@nk dated
October 1, 1998.
10.22* Wholesale Mortgage Purchase Agreement with PHH Mortgage
Services Corporation dated June 1, 1998.
10.23* Underwriting Services Agreement with PMI Mortgage Services
Co. Dated June 12, 1998.
10.24* Mortgage Purchase Agreement with Resource Bancshares
Mortgage Group, Inc. dated May 1, 1998.
10.25* Mortgage Selling and Servicing Contract with Federal
National Mortgage Association dated February 12, 1999.
10.26* Multi-Tenant Office Triple Net Lease with Creekside South
Trust dated August 19, 1998.
</TABLE>
II-3
<PAGE> 104
<TABLE>
<C> <S>
10.26A* Second Amendment to Lease with Creekside South Trust dated
March 25, 1999.
10.27* Alliance Agreement between E-LOAN, Inc., E-LOAN Europe BV
and Stater BV dated March 19, 1999.
10.28* Lease Agreement between JTC and Palo Alto Funding Group,
Inc. dated June 20, 1996.
10.29* Mortgage Loan Origination Agreement with Chase Home Mortgage
Corporation dated November 30, 1992.
10.30* Correspondent Agreement with Citicorp Mortgage, Inc. dated
June 15, 1998.
10.31* Conventional Wholesale Mortgage Purchase Agreement with
Colonial Mortgage Company dated September 1, 1998.
10.32* Lender Associate Agreement with GreenPoint Mortgage dated
November 9, 1998.
10.33* Correspondent Broker Agreement with New America Financial,
Inc.
10.34* Correspondent Mortgage Services Agreement with PHH Mortgage
Services Corporation dated May 20, 1998.
10.35* Correspondent Purchase Agreement with Prism Mortgage Company
dated March 22, 1998.
10.36* Wholesale Lending Agreement with Union Federal Savings Bank
of Indianapolis dated March 6, 1998.
10.37* Master Lease Agreement with Comdisco, Inc. dated March 4,
1998.
10.38* Loan and Security Agreement with Silicon Valley Bank dated
December 9, 1998.
10.39* Internet Data Center Services Agreement with Exodus
Communications, Inc. dated November 10, 1997.
10.40* Marketing Agreement with PHH Mortgage Services Corporation
dated January 19, 1998.
10.41*+ Joint Venture Agreement with Softbank Corp. dated March 31,
1999.
10.42* Stock Purchase Agreement with Forum Holdings, Inc. dated May
20, 1999.
11.1* Statement regarding computation of per share earnings.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.2* Consent of Counsel (included in Exhibit 5.1).
24.1* Power of Attorney.
27.1* Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
+ Confidential treatment requested.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the registrant
in the successful defense of any action,
II-4
<PAGE> 105
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial BONA FIDE offering
thereof.
II-5
<PAGE> 106
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Palo Alto, State of
California on June 10, 1999.
By: /s/ CHRIS LARSEN
------------------------------------
Chris Larsen
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ CHRIS LARSEN Chief Executive Officer and Director June 10, 1999
- ------------------------------------ (Principal Executive Officer)
Chris Larsen
/s/ JANINA PAWLOWSKI* President and Director June 10, 1999
- ------------------------------------
Janina Pawlowski
/s/ FRANK SISKOWSKI Chief Financial Officer June 10, 1999
- ------------------------------------ (Principal Financial and Accounting Officer)
Frank Siskowski
/s/ IRA M. EHRENPREIS* Director June 10, 1999
- ------------------------------------
Ira M. Ehrenpreis
/s/ ROBERT C. KAGLE* Director June 10, 1999
- ------------------------------------
Robert C. Kagle
/s/ TIM KOOGLE* Director June 10, 1999
- ------------------------------------
Tim Koogle
/s/ WADE RANDLETT* Director June 10, 1999
- ------------------------------------
Wade Randlett
*By: /s/ FRANK SISKOWSKI
- -------------------------------------
Frank Siskowski
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 107
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
------- ------------------------------------------------------------ ------------
<C> <S> <C>
1.1* Form of Underwriting Agreement.
3.1* Certificate of Incorporation of E-LOAN as currently in
effect.
3.2* Form of Restated Certificate of Incorporation of E-LOAN to
be filed immediately following the closing of the offering
made under this Registration Statement.
3.3* Bylaws of E-LOAN.
3.4* Form of Bylaws of E-LOAN to be adopted immediately following
the closing of the offering made under this Registration
Statement.
4.1* Specimen Common Stock Certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1* Form of Indemnification Agreement between the Registrant and
each of its directors and officers.
10.2* 1997 Stock Plan and form of agreements thereunder.
10.3* 1999 Employee Stock Purchase Plan and form of agreements
thereunder.
10.4* Restated Investor Rights Agreement dated September 4, 1998
among E-LOAN and certain investors.
10.5* Warrant Agreement to Purchase Shares of the Series C
Preferred Stock of E-LOAN, Inc. dated March 4, 1998.
10.6* Employment Agreement with Joseph Kennedy dated March 26,
1999.
10.7*+ Marketing Agreement with DLJdirect, Inc. dated September 4,
1998.
10.8*+ Co-Marketing Agreement with E*Trade Group, Inc. dated March
26, 1998.
10.9*+ Marketing Agreement with MarketWatch.com dated February 8,
1999.
10.10* Marketing Agreement with Prism Mortgage Company dated July
6, 1998.
10.11*+ License Agreement with Yahoo!, Inc. dated September 1998 and
amended in March 1999.
10.12* Warehousing Credit and Security Agreement with Bank United,
a federal savings bank, dated February 3, 1999.
10.13* Broker Agreement with Citicorp Mortgage, Inc. dated
September 23, 1997.
10.14*+ Underwriting Review Agreement with CMAC Service Company
dated September 3, 1998.
10.15* Warehouse Credit Agreement with Cooper River Funding, Inc.
and GE Capital Mortgage Services, Inc. dated June 24, 1998
Amended and Restated and Note.
10.16* Loan Purchase Agreement with Countrywide Home Loans, Inc.
dated September 25, 1998.
10.17* Conventional Loan Purchase Agreement with Crestar Mortgage
Corporation dated July 1, 1998.
10.18* GMAC Mortgage Corporation Seller's Agreement for Residential
Mortgage Loans with GMAC Mortgage Corporation dated July 1,
1998.
</TABLE>
<PAGE> 108
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
------- ------------------------------------------------------------ ------------
<C> <S> <C>
10.19* Mortgage Loan Purchase and Sale Agreement with Greenwich
Capital Financial Products, Inc. dated September 25, 1998.
10.19A Master Loan and Security Agreement with Greenwich Capital
Financial Products, Inc. dated May 20, 1999.
10.19B Stock Purchase Warrant issued to Greenwich Capital Financial
Products, Inc. dated May 20, 1999.
10.20* License, Staffing, Purchase and Sale Agreement with NetB@nk
dated October 1, 1998.
10.21* Mortgage Loan Processing Agreement with NetB@nk dated
October 1, 1998.
10.22* Wholesale Mortgage Purchase Agreement with PHH Mortgage
Services Corporation dated June 1, 1998.
10.23* Underwriting Services Agreement with PMI Mortgage Services
Co. Dated June 12, 1998.
10.24* Mortgage Purchase Agreement with Resource Bancshares
Mortgage Group, Inc. dated May 1, 1998.
10.25* Mortgage Selling and Servicing Contract with Federal
National Mortgage Association dated February 12, 1999.
10.26* Multi-Tenant Office Triple Net Lease with Creekside South
Trust dated August 19, 1998.
10.26A* Second Amendment to Lease with Creekside South Trust dated
March 25, 1999.
10.27* Alliance Agreement between E-LOAN, Inc., E-LOAN Europe BV
and Stater BV dated March 19, 1999.
10.28* Lease Agreement between JTC and Palo Alto Funding Group,
Inc. dated June 20, 1996.
10.29* Mortgage Loan Origination Agreement with Chase Home Mortgage
Corporation dated November 30, 1992.
10.30* Correspondent Agreement with Citicorp Mortgage, Inc. dated
June 15, 1998.
10.31* Conventional Wholesale Mortgage Purchase Agreement with
Colonial Mortgage Company dated September 1, 1998.
10.32* Lender Associate Agreement with GreenPoint Mortgage dated
November 9, 1998.
10.33* Correspondent Broker Agreement with New America Financial,
Inc.
10.34* Correspondent Mortgage Services Agreement with PHH Mortgage
Services Corporation dated May 20, 1998.
10.35* Correspondent Purchase Agreement with Prism Mortgage Company
dated March 22, 1998.
10.36* Wholesale Lending Agreement with Union Federal Savings Bank
of Indianapolis dated March 6, 1998.
10.37* Master Lease Agreement with Comdisco, Inc. dated March 4,
1998.
10.38* Loan and Security Agreement with Silicon Valley Bank dated
December 9, 1998.
</TABLE>
<PAGE> 109
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
------- ------------------------------------------------------------ ------------
<C> <S> <C>
10.39* Internet Data Center Services Agreement with Exodus
Communications, Inc. dated November 10, 1997.
10.40* Marketing Agreement with PHH Mortgage Services Corporation
dated January 19, 1998.
10.41*+ Joint Venture Agreement with Softbank Corp. dated March 31,
1999.
10.42* Stock Purchase Agreement with Forum Holdings, Inc. dated May
20, 1999.
11.1* Statement regarding computation of per share earnings.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.2* Consent of Counsel (included in Exhibit 5.1).
24.1* Power of Attorney.
27.1* Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
+ Confidential treatment requested.
<PAGE> 1
EXHIBIT 10.19A
================================================================================
MASTER LOAN AND SECURITY AGREEMENT
---------------------------
DATED AS OF MAY 20, 1999
---------------------------
E-LOAN, INC.
AS BORROWER
AND
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
AS LENDER
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 1. Definitions and Accounting Matters ................................................... 1
1.01 Certain Defined Terms ................................................................ 1
1.02 Accounting Terms and Determinations .................................................. 18
SECTION 2. Advances, Note and Prepayments ....................................................... 18
2.01 Advances ............................................................................. 18
2.02 Notes ................................................................................ 19
2.03 Procedure for Borrowing .............................................................. 19
2.04 Limitation on Types of Advances; Illegality .......................................... 20
2.05 Repayment of Advances; Interest ...................................................... 21
2.06 Mandatory Prepayments or Pledge ...................................................... 21
2.07 Optional Prepayments ................................................................. 22
2.08 Requirements of Law .................................................................. 23
2.09 Extension of Termination Date ........................................................ 24
2.10 Purpose of Advances .................................................................. 24
SECTION 3. Payments; Computations; Taxes; Commitment Fee ........................................ 24
3.01 Payments ............................................................................. 24
3.02 Computations ......................................................................... 24
3.03 U.S. Taxes ........................................................................... 24
3.04 Commitment Fee ....................................................................... 25
Section 4. Collateral Security .................................................................. 25
4.01 Collateral; Security Interest ........................................................ 25
4.02 Further Documentation ................................................................ 27
4.03 Changes in Locations, Name, etc ...................................................... 27
4.04 Lender's Appointment as Attorney-in-Fact. ............................................ 27
4.05 Performance by Lender of Borrower's Obligations ...................................... 28
4.06 Proceeds ............................................................................. 28
4.07 Remedies ............................................................................. 29
4.08 Limitation on Duties Regarding Presentation of Collateral ............................ 30
4.09 Powers Coupled with an Interest ...................................................... 30
4.10 Release of Security Interest ......................................................... 30
SECTION 5. Conditions Precedent ................................................................. 30
5.01 Initial Advance ...................................................................... 30
5.02 Initial and Subsequent Advances ...................................................... 32
SECTION 6. Representations and Warranties ....................................................... 34
6.01 Existence ............................................................................ 34
6.02 Financial Condition .................................................................. 35
6.03 Litigation ........................................................................... 35
6.04 No Breach ............................................................................ 35
6.05 Action ............................................................................... 35
6.06 Approvals ............................................................................ 36
6.07 Margin Regulations ................................................................... 36
6.08 Taxes ................................................................................ 36
6.09 Investment Company Act ............................................................... 36
6.10 No Legal Bar ......................................................................... 36
6.11 No Default ........................................................................... 36
6.12 Collateral; Collateral Security ...................................................... 36
6.13 Chief Executive Office ............................................................... 37
6.14 Location of Books and Records ........................................................ 37
6.15 True and Complete Disclosure ......................................................... 37
6.16 Tangible Net Worth; Liquidity ........................................................ 37
6.17 ERISA ................................................................................ 38
6.18 Licenses ............................................................................. 38
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
6.19 Relevant States ...................................................................... 38
6.20 True Sales ........................................................................... 38
6.21 No Burdensome Restrictions ........................................................... 38
6.22 Subsidiaries ......................................................................... 38
6.23 Origination and Acquisition of Mortgage Loans ........................................ 38
6.24 No Adverse Selection ................................................................. 38
6.25 Borrower Solvent; Fraudulent Conveyance .............................................. 38
6.26 Year 2000 Compliance ................................................................. 39
6.27 Insured Closing Letter ............................................................... 39
6.28 Escrow Agreement ..................................................................... 39
SECTION 7. Covenants of the Borrower ............................................................ 39
7.01 Financial Statements ................................................................. 39
7.02 Litigation ........................................................................... 42
7.03 Existence, Etc ....................................................................... 42
7.04 Prohibition of Fundamental Changes ................................................... 42
7.05 Borrowing Base Deficiency ............................................................ 43
7.06 Notices .............................................................................. 43
7.07 Servicing ............................................................................ 43
7.08 Intentionally Omitted ................................................................ 43
7.09 Underwriting Guidelines .............................................................. 43
7.10 Lines of Business .................................................................... 44
7.11 Transactions with Affiliates ......................................................... 44
7.12 Use of Proceeds ...................................................................... 44
7.13 Limitation on Liens .................................................................. 44
7.14 Limitation on Sale of Assets ......................................................... 44
7.15 Limitation on Distributions .......................................................... 44
7.16 Maintenance of Liquidity. ............................................................ 44
7.17 Maintenance of Tangible Net Worth .................................................... 45
7.18 Maintenance of Ratio of Total Indebtedness to Tangible Net Worth ..................... 45
7.19 Restricted Payments .................................................................. 45
7.20 Servicing Transmission ............................................................... 45
7.21 No Amendment or Waiver ............................................................... 45
7.22 Maintenance of Property; Insurance ................................................... 45
7.23 Further Identification of Collateral ................................................. 45
7.24 Mortgage Loan Determined to be Defective ............................................. 45
7.25 Interest Rate Protection Agreements .................................................. 46
7.26 Year 2000 Compliance ................................................................. 46
7.27 Certificate of a Responsible Officer of the Borrower ................................. 46
7.28 Uncommitted Warehouse Facilities ..................................................... 46
SECTION 8. Events of Default .................................................................... 46
SECTION 9. Remedies Upon Default ................................................................ 49
Section 10. No Duty on Lender's Part ............................................................. 49
SECTION 11. Miscellaneous ........................................................................ 49
11.01 Waiver ............................................................................... 49
11.02 Notices .............................................................................. 50
11.03 Indemnification and Expenses ......................................................... 50
11.04 Amendments ........................................................................... 51
11.05 Successors and Assigns ............................................................... 51
11.06 Survival ............................................................................. 51
11.07 Captions ............................................................................. 51
11.08 Counterparts ......................................................................... 51
11.09 Loan Agreement Constitutes Security Agreement; Governing Law ......................... 51
11.10 SUBMISSION TO JURISDICTION; WAIVERS .................................................. 51
11.11 WAIVER OF JURY TRIAL ................................................................. 52
11.12 Acknowledgments ...................................................................... 52
11.13 Hypothecation or Pledge of Collateral ................................................ 52
11.14 Assignments; Participations .......................................................... 53
</TABLE>
<PAGE> 4
<TABLE>
<S> <C> <C>
11.15 Servicing ............................................................................ 54
11.16 Periodic Due Diligence Review ........................................................ 55
11.17 Set-Off .............................................................................. 55
11.18 Intent ............................................................................... 56
</TABLE>
<PAGE> 5
SCHEDULES
SCHEDULE 1 Representations and Warranties re: Mortgage Loans
SCHEDULE 2 Filing Jurisdictions and Offices
SCHEDULE 3 Relevant States
SCHEDULE 4 Subsidiaries
EXHIBITS
EXHIBIT A Form of Promissory Note
EXHIBIT B Form of Custodial Agreement
EXHIBIT C Form of Opinion of Counsel to the Borrower
EXHIBIT D Form of Notice of Borrowing and Pledge
EXHIBIT E Reserved
EXHIBIT F Required Fields for Mortgage Loan Data Transmission
EXHIBIT G Form of Collection Account Agreement
EXHIBIT H Form of Confidentiality Agreement
<PAGE> 6
MASTER LOAN AND SECURITY AGREEMENT
MASTER LOAN AND SECURITY AGREEMENT, dated as of May 10, 1999,
between E-LOAN, INC., a Delaware corporation (the "Borrower") and GREENWICH
CAPITAL FINANCIAL PRODUCTS, INC., a Delaware corporation (the "Lender").
RECITALS
The Borrower wishes to obtain financing from time to time to
provide interim funding for the origination and acquisition of certain Mortgage
Loans (as defined herein), which Mortgage Loans are to be sold or contributed by
the Borrower to the Lender pursuant to a mortgage loan purchase agreement
between the Borrower and the Lender, to one or more trusts or other entities to
be sponsored by the Borrower or an Affiliate (as defined herein) thereof, or to
third-parties, which Mortgage Loans shall secure Advances (as defined herein) to
be made by the Lender hereunder. The Mortgage Loans shall at all times be
subject to a valid and enforceable Takeout Commitment (as defined herein) unless
such requirement is waived by the Lender.
The Lender has agreed, subject to the terms and conditions of
this Loan Agreement (as defined herein), to provide such financing to the
Borrower, with a portion of the proceeds of the sale of all mortgage-backed
securities issued by any such trust or other entity, together with a portion of
the proceeds of any permitted whole loan sales, together with other funds of the
Borrower, if necessary, being used to repay any Advances made hereunder as more
particularly described herein.
Accordingly, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
SECTION 1. Definitions and Accounting Matters.
1.01 Certain Defined Terms. As used herein, the following terms
shall have the following meanings (all terms defined in this Section 1.01 or in
other provisions of this Loan Agreement in the singular to have the same
meanings when used in the plural and vice versa):
"Accepted Servicing Practices" shall mean, with respect to any
Mortgage Loan, accepted and prudent mortgage servicing practices of prudent
mortgage lending institutions which service mortgage loans of the same type as
such Mortgage Loans in the jurisdiction where the related Mortgaged Property is
located and in a manner at least equal in quality to the servicing the Borrower
or the Borrower's designee provides to mortgage loans which they own in their
own portfolio (as applicable).
"Advance" shall mean any Committed Advance or Uncommitted
Advance, as applicable, and collectively "Advances" shall mean the sum of all
Committed Advances and Uncommitted Advances.
"Affiliate" means, with respect to any Person, any other Person
which, directly or indirectly, controls, is controlled by, or is under common
control with, such Person. For
<PAGE> 7
purposes of this definition, "control" (together with the correlative meanings
of "controlled by" and "under common control with") means possession, directly
or indirectly, of the power (a) to vote 10% or more of the securities (on a
fully diluted basis) having ordinary voting power for the directors or managing
general partners (or their equivalent) of such Person, or (b) to direct or cause
the direction of the management or policies of such Person, whether through the
ownership of voting securities, by contract, or otherwise.
"Agency" means Fannie Mae, Freddie Mac or GNMA, as applicable.
"ALTA" means the American Land Title Association.
"Applicable Collateral Percentage" shall mean with respect to
each Advance:
(a) in the case of Dry Loans:
(1) which are 0 to 59 days past due with respect to
scheduled principal and interest payments, 98%, and (2) which are
60 days or more past due with respect to scheduled principal and
interest payments, 0%; and
(b) in the case of Wet Loans:
(1) for which all Required Documents have not been delivered
for 0 to 10 days, 98%, and (2) for which all Required Documents
have not been delivered within 10 days, 0%.
"Applicable Margin" shall mean with respect to Advances that are
Tranche A Advances and Tranche B Advances respectively, and which are secured by
the Mortgage Loans, the applicable rate per annum set forth below for each day
that such Advances shall be so secured:
<TABLE>
<S> <C>
Tranche A Advances...............................0.95%
Tranche B Advances ..............................1.50%
</TABLE>
"Appraised Value" shall mean the value set forth in an appraisal
made in connection with the origination of the related Mortgage Loan as the
value of the Mortgaged Property.
"Assignment of Mortgage" shall mean, with respect to any
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 assignment and
pledge of the Mortgage.
"Bankruptcy Code" shall mean the United States Bankruptcy Code of
1978, as amended from time to time.
"Best's" means Best's Key Rating Guide, as the same shall be
amended from time to time.
<PAGE> 8
"Borrower" shall have the meaning provided in the heading hereof.
"Borrowing Base" shall mean the aggregate Collateral Value of all
Eligible Mortgage Loans that have been, and remain, pledged to the Lender
hereunder.
"Borrowing Base Certificate" shall mean the certificate prepared
by the Lender in such form as shall be mutually agreed to between the Borrower
and the Lender.
"Borrowing Base Deficiency" shall have the meaning provided in
Section 2.06 hereof.
"Business Day" shall mean any day other than (i) a Saturday or
Sunday, or (ii) a day in which the New York Stock Exchange, the Federal Reserve
Bank of New York or the Custodian is authorized or obligated by law or executive
order to be closed.
"Capital Lease Obligations" shall mean, for any Person, all
obligations of such Person to pay rent or other amounts under a lease of (or
other agreement conveying the right to use) Property to the extent such
obligations are required to be classified and accounted for as a capital lease
on a balance sheet of such Person under GAAP, and, for purposes of this Loan
Agreement, the amount of such obligations shall be the capitalized amount
thereof, determined in accordance with GAAP.
"Cash Equivalents" shall mean (a) securities with maturities of
90 days or less from the date of acquisition issued or fully guaranteed or
insured by the United States Government or any agency thereof, (b) certificates
of deposit and eurodollar time deposits with maturities of 90 days or less from
the date of acquisition and overnight bank deposits of any commercial bank
having capital and surplus in excess of $500,000,000, (c) repurchase obligations
of any commercial bank satisfying the requirements of clause (b) of this
definition, having a term of not more than seven days with respect to securities
issued or fully guaranteed or insured by the United States Government, (d)
commercial paper of a domestic issuer rated at least A-1 or the equivalent
thereof by Standard and Poor's Ratings Group ("S&P") or P-1 or the equivalent
thereof by Moody's Investors Service, Inc. ("Moody's") and in either case
maturing within 90 days after the day of acquisition, (e) securities with
maturities of 90 days or less from the date of acquisition issued or fully
guaranteed by any state, commonwealth or territory of the United States, by any
political subdivision or taxing authority of any such state, commonwealth or
territory or by any foreign government, the securities of which state,
commonwealth, territory, political subdivision, taxing authority or foreign
government (as the case may be) are rated at least A by S&P or A by Moody's, (f)
securities with maturities of 90 days or less from the date of acquisition
backed by standby letters of credit issued by any commercial bank satisfying the
requirements of clause (b) of this definition or (g) shares of money market
mutual or similar funds which invest exclusively in assets satisfying the
requirements of clauses (a) through (f) of this definition.
"Change of Control" means the acquisition by any Person, or two
or more Persons acting in concert, of beneficial ownership (within the meaning
of Rule 13d-3 of the Securities and Exchange Commission under the Securities
Exchange Act of 1934) of outstanding shares of
<PAGE> 9
voting stock of the Borrower at any time if after giving effect to such
acquisition (i) such Person or Persons owns twenty percent (20%) or more of such
outstanding voting stock or (ii) the existing shareholders of the Borrower do
not own more than fifty (50%) of such outstanding shares of voting stock.
"Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
"Collateral" shall have the meaning assigned to such term in
Section 4.01(b) hereof.
"Collateral Value" shall mean with respect to each Mortgage Loan,
the lesser of (x) the Applicable Collateral Percentage times the outstanding
principal balance of such Mortgage Loan, and (y) 98% of the Market Value;
provided, that:
(i) the Collateral Value of a Mortgage Loan originally funded as
a Dry Loan which has a Material Exception with respect thereto shall be
calculated in the same manner as a Wet Loan; and
(ii) the Collateral Value shall be deemed to be zero with respect
to each Mortgage Loan:
(1) in respect of which there is a material breach of a
representation and warranty set forth on Schedule 1 (assuming
each representation and warranty is made as of the date
Collateral Value is determined) or there is a Material Exception
which was not otherwise waived by Lender;
(2) which the Lender determines, in its reasonable discretion, is
not eligible for sale in the secondary market or for
securitization without unreasonable credit enhancement;
(3) which has been released from the possession of the Custodian
under Section 5(a) of the Custodial Agreement to the Borrower or
its bailee for a period in excess of twenty (20) calendar days
(or if such 20th day is not a Business Day, the preceding
Business Day);
(4) which has been released from the possession of the Custodian
(i) under Section 5(b) of the Custodial Agreement under any
Transmittal Letter in excess of the time period stated in such
Transmittal Letter for release, or (ii) under Section 5(c) of the
Custodial Agreement under an Attorney Bailee Letter, from and
after the date such Attorney's Bailee Letter is terminated or
ceases to be in full force and effect;
(5) which has been subject to this Loan Agreement for greater
than 45 days;
<PAGE> 10
(6) in respect of which (a) the related Mortgaged Property is the
subject of a foreclosure proceeding or (b) the related Mortgage
Note has been extinguished under relevant state law in connection
with a judgment of foreclosure or foreclosure sale or otherwise;
(7) if (a) the related Mortgage Note or the related Mortgage is
not genuine or is not the legal, valid, binding and enforceable
obligation of the maker thereof, subject to no right of
rescission, set-off, counterclaim or defense, or (b) such
Mortgage is not a valid, subsisting, enforceable and perfected
first lien on the Mortgaged Property; (8) in respect of which the
related Mortgagor is the subject of a bankruptcy proceeding;
(9) if the Mortgagor has not made its first payment on the
related Mortgage Loan prior to its next scheduled reset date at
the time of the funding of the related Advance;
(10) that is not covered by a Takeout Commitment; or
(11) that was originated more than 30 days prior to the date such
Mortgage Loan was first subject to the terms of this Loan
Agreement.
"Collection Account" shall mean the segregated account
established at the direction of the Borrower, and maintained in the name of the
Lender and subject to a security interest in favor of the Lender into which all
Collections received by the Servicer or a Subservicer shall be remitted by such
Servicer or Subservicer. The Borrower shall have the right to direct that
withdrawals from such account be made until such time as the Lender, in its sole
discretion, provides notice to the Collection Bank terminating such right of the
Borrower.
"Collection Account Agreement" shall mean an agreement between
the Borrower, the Collection Bank, and the Lender, substantially in the form of
Exhibit G hereto, as the same may be amended, supplemented or otherwise modified
from time to time, in which the Borrower and Collection Bank acknowledge the
Lender's lien on the Collection Account (which lien is hereby consented to by
the Borrower), and the Borrower hereby grants to the Lender the right to assume
at any time during the occurrence of an Event of Default hereunder exclusive
dominion and control over the distribution of all monies in the account, which
control may be exercised by the Borrower prior to such assumption of control by
the Lender.
"Collection Bank" shall be mutually determined by the Lender and
the Borrower.
"Collections" shall mean, collectively, all collections and
proceeds on or in respect of the Mortgage Loans excluding collections required
to be paid to the Servicer or a mortgagor on the Mortgage Loans.
"Commitment Fee" shall have the meaning assigned to such term in
Section 3.04 hereof.
<PAGE> 11
"Committed Advance" shall have the meaning assigned to such term
in Section 2.01(a) hereof.
"Contractual Obligation" shall mean as to any Person, any
material provision of any agreement, instrument or other undertaking to which
such Person is a party or by which it or any of its property is bound or any
material provision of any security issued by such Person.
"Cooperative Corporation" shall mean with respect to any
Cooperative Loan, the cooperative apartment corporation that holds legal title
to the related Cooperative Project and grants occupancy rights to units therein
to stockholders through Proprietary Leases or similar arrangements.
"Cooperative Loan" shall mean a Mortgage Loan that is secured by
a first lien on and a perfected security interest in Cooperative Shares and the
related Proprietary Lease granting exclusive rights to occupy the related
Cooperative Unit in the building owned by the related Cooperative Corporation.
"Cooperative Project" shall mean with respect to any Cooperative
Loan, all real property and improvements thereto and rights therein and thereto
owned by a Cooperative Corporation including without limitation the land,
separate dwelling units and all common elements.
"Cooperative Shares" shall mean with respect to any Cooperative
Loan, the shares of stock issued by a Cooperative Corporation and allocated to a
Cooperative Unit and represented by a stock certificate.
"Cooperative Unit" shall mean with respect to any Cooperative
Loan, a specific unit in a Cooperative Project.
"Custodial Agreement" shall mean the Custodial Agreement, dated
as of the date hereof, among the Borrower, the Custodian and the Lender,
substantially in the form of Exhibit B hereto, as the same shall be modified and
supplemented and in effect from time to time.
"Custodian" shall mean Bankers Trust Company of California, N.A.,
its successors and permitted assigns.
"Custodian Loan Transmission" shall have the meaning assigned
thereto in the Custodial Agreement.
"Default" shall mean an Event of Default or an event that with
notice or lapse of time or both would become an Event of Default.
"Disbursement Account" shall have the meaning assigned to such
term in the Custodial Agreement.
"Dollars" and "$" shall mean lawful money of the United States of
America.
<PAGE> 12
"Dry Loan" shall mean a first lien Mortgage Loan which is
underwritten in accordance with the Underwriting Guidelines which Mortgage File
contains all required Mortgage Loan Documents.
"Due Date" means the day of the month on which the Monthly
Payment is due on a Mortgage Loan, exclusive of any days of grace.
"Due Diligence Review" shall mean the performance by the Lender
of any or all of the reviews permitted under Section 11.16 hereof with respect
to any or all of the Mortgage Loans or the Borrower or related parties, as
desired by the Lender from time to time.
"Effective Date" shall mean the date upon which the conditions
precedent set forth in Section 5.01 shall have been satisfied.
"Eligible Mortgage Loan" shall mean a Mortgage Loan secured by a
first mortgage lien (as reflected on the Mortgage Loan Data Transmission) on a
residential property and as to which (i) the representations and warranties in
Section 6.12 and 6.23 and Schedule 1 hereof are correct, (ii) was originated or
acquired by the Borrower in accordance with the Borrower's or Lender approved
third party's Underwriting Guidelines and (iii) such other customary criteria
for eligibility determined by the Lender shall have been satisfied; provided,
however, that the definition of Eligible Mortgage Loan may include Second Lien
Mortgage Loans at such time as the Lender and the Borrower mutually agree upon
the Applicable Collateral Percentage which shall apply to Advances secured by
such Second Lien Mortgage Loans.
"Equity Event" shall mean the date upon which the Borrower,
through an initial public offering, has raised equity capital in an amount
reasonably acceptable to the Lender.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time.
"ERISA Affiliate" shall mean any corporation or trade or business
that is a member of any group of organizations (i) described in Section 414(b)
or (c) of the Code of which the Borrower is a member and (ii) solely for
purposes of potential liability under Section 302(c)(11) of ERISA and Section
412(c)(11) of the Code and the lien created under Section 302(f) of ERISA and
Section 412(n) of the Code, described in Section 414(m) or (o) of the Code of
which the Borrower is a member.
"Escrow Payments" means with respect to any Mortgage Loan, the
amounts constituting ground rents, taxes, assessments, water rates, sewer rents,
municipal charges, mortgage insurance premiums, fire and hazard insurance
premiums, condominium charges, and any other payments required to be escrowed by
the Mortgagor with the Mortgagee pursuant to the Mortgage or any other document.
"Event of Default" shall have the meaning provided in Section 8
hereof.
<PAGE> 13
"Exception Report" shall mean the exception report prepared by
the Custodian pursuant to the Custodial Agreement.
"Fannie Mae" means Fannie Mae, formerly the Federal National
Mortgage Association, or any successor thereto.
"First Lien" shall mean with respect to each Mortgaged Property,
the lien of the mortgage, deed of trust or other instrument securing a mortgage
note which creates a first lien on the Mortgaged Property.
"First Lien Mortgage Loan" shall mean an Eligible Mortgage Loan
secured by a first priority lien on the related Mortgaged Property, subject to
Permitted Exceptions.
"Freddie Mac" means Freddie Mac, formerly the Federal Home Loan
Mortgage Corporation, or any successor thereto.
"Funding Date" shall mean the date on which an Advance is made
hereunder.
"GAAP" shall mean generally accepted accounting principles as in
effect from time to time in the United States of America.
"GNMA" means the Government National Mortgage Association, or any
successor thereto.
"Governmental Authority" shall mean any nation or government, any
state or other political subdivision thereof, any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government and any court or arbitrator having jurisdiction over the Borrower,
any of its Subsidiaries or any of its properties.
"Gross Margin" means with respect to each adjustable rate
Mortgage Loan, the fixed percentage amount set forth in the related Mortgage
Note.
"Guarantee" shall mean, as to any Person, any obligation of such
Person directly or indirectly guaranteeing any Indebtedness of any other Person
or in any manner providing for the payment of any Indebtedness of any other
Person or otherwise protecting the holder of such Indebtedness against loss
(whether by virtue of partnership arrangements, by agreement to keep-well, to
purchase assets, goods, securities or services, or to take-or-pay or otherwise),
provided that the term "Guarantee" shall not include (i) endorsements for
collection or deposit in the ordinary course of business, or (ii) obligations to
make servicing advances for delinquent taxes and insurance, or other obligations
in respect of a Mortgaged Property, to the extent required by the Lender. The
amount of any Guarantee of a Person shall be deemed to be an amount equal to the
stated or determinable amount of the primary obligation in respect of which such
Guarantee is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith. The terms "Guarantee" and "Guaranteed" used as verbs shall have
correlative meanings.
<PAGE> 14
"Indebtedness" shall mean, for any Person: (a) obligations
created, issued or incurred by such Person for borrowed money (whether by loan,
the issuance and sale of debt securities or the sale of Property to another
Person subject to an understanding or agreement, contingent or otherwise, to
repurchase such Property from such Person); (b) obligations of such Person to
pay the deferred purchase or acquisition price of Property or services, other
than trade accounts payable (other than for borrowed money) arising, and accrued
expenses incurred, in the ordinary course of business so long as such trade
accounts payable are payable within 90 days of the date the respective goods are
delivered or the respective services are rendered; (c) Indebtedness of others
secured by a Lien on the Property of such Person, whether or not the respective
Indebtedness so secured has been assumed by such Person; (d) obligations
(contingent or otherwise) of such Person in respect of letters of credit or
similar instruments issued or accepted by banks and other financial institutions
for account of such Person; (e) Capital Lease Obligations of such Person; (f)
obligations of such Person under repurchase agreements or like arrangements; (g)
Indebtedness of others Guaranteed by such Person; (h) all obligations of such
Person incurred in connection with the acquisition or carrying of fixed assets
by such Person; (i) Indebtedness of general partnerships of which such Person is
a general partner; and (j) any other indebtedness of such Person by a note,
bond, debenture or similar instrument.
"Index" means with respect to each adjustable rate Mortgage Loan,
the index set forth in the related Mortgage Note for the purpose of calculating
the interest rate thereon.
"Insurance Proceeds" means with respect to each Mortgage Loan,
proceeds of insurance policies insuring the Mortgage Loan or the related
Mortgaged Property.
"Insured Closing Letter" shall have the meaning assigned to such
term in the Custodial Agreement.
"Interest Period" shall mean, with respect to any Advance, (i)
initially, the period commencing on the Funding Date with respect to such
Advance and ending on the calendar day prior to the next succeeding Reset Date,
and (ii) thereafter, each period commencing on the Reset Date of a month and
ending on the calendar day prior to the Reset Date of the next succeeding month.
Notwithstanding the foregoing, no Interest Period may end after the Termination
Date.
"Interest Rate Adjustment Date" means with respect to each
adjustable rate Mortgage Loan, the date, specified in the related Mortgage Note
and the Mortgage Loan Schedule, on which the Mortgage Interest Rate is adjusted.
"Interest Rate Protection Agreement" shall mean with respect to
any or all of the Mortgage Loans and/or Advances, any interest rate swap, cap or
collar agreement or any other applicable hedging arrangements providing for
protection against fluctuations in interest rates or the exchange of nominal
interest obligations, either generally or under specific contingencies entered
into by the Borrower and reasonably acceptable to the Lender.
"Lender" shall have the meaning assigned thereto in the heading
hereto.
<PAGE> 15
"LIBO Base Rate" shall mean with respect to each day an Advance
is outstanding (or if such day is not a Business Day, the next succeeding
Business Day), the rate per annum equal to the rate published by Bloomberg or if
such rate is not available, the rate appearing at page 3750 of the Telerate
Screen as one-month LIBOR on such date, and if such rate shall not be so quoted,
the rate per annum at which the Lender is offered Dollar deposits at or about
11:00 A.M., eastern time, on such date by prime banks in the interbank
eurodollar market where the eurodollar and foreign currency and exchange
operations in respect of its Advances are then being conducted for delivery on
such day for a period of one month and in an amount comparable to the amount of
the Advances to be outstanding on such day.
"LIBO Rate" shall mean with respect to each Interest Period
pertaining to an Advance, a rate per annum determined by the Lender in its sole
discretion in accordance with the following formula (rounded upwards to the
nearest l/100th of one percent), which rate as determined by the Lender shall be
conclusive absent manifest error by the Lender:
LIBO Base Rate
--------------------------------
1.00 - LIBO Reserve Requirements
The LIBO Rate shall be calculated each Funding Date and Reset
Date commencing with the first Funding Date.
"LIBO Reserve Requirements" shall mean for any Interest Period
for any Advance, the aggregate (without duplication) of the rates (expressed as
a decimal fraction) of reserve requirements applicable to the Lender in effect
on such day (including, without limitation, basic, supplemental, marginal and
emergency reserves under any regulations of the Board of Governors of the
Federal Reserve System or other Governmental Authority having jurisdiction with
respect thereto), dealing with reserve requirements prescribed for eurocurrency
funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of
such Board) maintained by a member bank of such Governmental Authority. As of
the Effective Date, the LIBO Reserve Requirements shall be deemed to be zero.
"Lien" shall mean any mortgage, lien, pledge, charge, security
interest or similar encumbrance.
"Loan Agreement" shall mean this Master Loan and Security
Agreement, as may be amended, supplemented or otherwise modified from time to
time as mutually agreed by the parties in writing.
"Loan Documents" shall mean collectively, this Loan Agreement,
the Note, the Custodial Agreement and the Collection Account Agreement.
"Loan-to-Value Ratio" or "LTV" means with respect to any Mortgage
Loan, the ratio of the original outstanding principal amount of the Mortgage
Loan to the lesser of (a) the Appraised Value of the Mortgaged Property at
origination or (b) if the Mortgaged Property was purchased within 12 months of
the origination of the Mortgage Loan, the purchase price of the Mortgaged
Property.
<PAGE> 16
"Market Value" shall mean the value, determined by the Lender in
its sole reasonable discretion, of the Mortgage Loans if sold in their entirety
to a single third-party purchaser. The Lender's determination of Market Value
shall be conclusive upon the parties, absent manifest error on the part of the
Lender. The Lender shall have the right to mark to market the Mortgage Loans on
a daily basis which Market Value may be determined to be zero. The Borrower
acknowledges that the Lender's determination of Market Value is for the limited
purpose of determining Collateral Value for lending purposes hereunder without
the ability to perform customary purchaser's due diligence and is not
necessarily equivalent to a determination of the fair market value of the
Mortgage Loans achieved by obtaining competing bids in an orderly market in
which the Borrower is not in default and the bidders have adequate opportunity
to perform customary loan and servicing due diligence.
"Material Adverse Effect" shall mean a material adverse effect on
(a) the property, business, operations, financial condition or prospects of the
Borrower, (b) the ability of the Borrower to perform in all material respects
its obligations under any of the Loan Documents or any other gestation,
financing or repurchase documents entered into between Lender and Borrower to
which it is a party, (c) the validity or enforceability in all material respects
of any of the Loan Documents, (d) the rights and remedies of the Lender under
any of the Loan Documents, (e) the timely payment of the principal of or
interest on the Advances or other amounts payable in connection therewith or (f)
the Collateral (other than changes in Market Value due to market conditions).
"Material Exception" shall have the meaning assigned thereto in
the Custodial Agreement.
"Maximum Committed Amount" shall mean $100 million.
"Maximum Credit" shall mean prior to an Equity Event, the Maximum
Committed Amount (reduced by the amount outstanding under any other gestation,
financing or repurchase documents entered into between Lender and Borrower) and
following an Equity Event, the sum of the Maximum Committed Amount and the
Maximum Uncommitted Amount (reduced by the amount outstanding under any other
gestation, financing or repurchase documents entered into between Lender and
Borrower); provided, however, the following limitations on Maximum Credit shall
apply:
(1) the Maximum Credit for Mortgage Loans which are Dry Loans
that are 30 to 59 days delinquent with respect to scheduled
payments of principal and interest may not exceed $3 million at
any time;
(2) the Maximum Credit for Mortgage Loans which are Wet Loans may
not exceed $25 million at any time; and
(3) the Maximum Credit for Mortgage Loans which are Second Lien
Mortgage Loans that are subject to Takeout Commitments may not
exceed $5 million at any time.
<PAGE> 17
"Maximum Uncommitted Amount" shall mean $100 million.
"Monthly Payment" means the scheduled monthly payment of
principal and interest on a Mortgage Loan as adjusted in accordance with changes
in the Mortgage Interest Rate pursuant to the provisions of the Mortgage Note
for an adjustable rate Loan other than a Cooperative Loan, Mortgage Loan.
"Mortgage" shall mean the mortgage, deed of trust or other
instrument, which creates a first or second lien (as indicated on the Mortgage
Loan Data Transmission) on either (i) with respect to a Mortgage Loan other than
a Cooperative Loan, the fee simple or leasehold estate in such real property or
(ii) with respect to a Cooperative Loan, the Proprietary Lease and related
Cooperative Shares, which in either case secures the Mortgage Note.
"Mortgage File" shall have the meaning assigned thereto in the
Custodial Agreement.
"Mortgage Interest Rate" means the annual rate of interest borne
on a Mortgage Note, which shall be adjusted from time to time with respect to
adjustable rate Mortgage Loans.
"Mortgage Interest Rate Cap" means with respect to an adjustable
rate Mortgage Loan, the limit on each Mortgage Interest Rate adjustment as set
forth in the related Mortgage Note.
"Mortgage Loan" shall mean a conforming mortgage loan (including
jumbo mortgage loans of "A" credit quality) or Cooperative Loan which the
Custodian has been instructed to hold for the Lender pursuant to the Custodial
Agreement, and which Mortgage Loan includes, without limitation, (i) a Mortgage
Note, the related Mortgage and all other Mortgage Loan Documents and (ii) all
right, title and interest of the Borrower in and to the Mortgaged Property
covered by such Mortgage.
"Mortgage Loan Data Transmission" shall mean a computer-readable
magnetic or other electronic format incorporating the fields identified on
Exhibit F.
"Mortgage Loan Documents" shall mean, with respect to a Mortgage
Loan, the documents comprising the Mortgage File for such Mortgage Loan.
"Mortgage Loan List" shall mean the hard copy report provided by
the Borrower which shall include with respect to each Mortgage Loan to be
included as Collateral the items set forth on Exhibit D-1 hereto.
"Mortgage Note" shall mean the original executed promissory note
or other evidence of the indebtedness of a mortgagor/borrower with respect to a
Mortgage Loan.
"Mortgaged Property" means the real property (including all
improvements, buildings, fixtures, building equipment and personal property
thereon and all additions, alterations and replacements made at any time with
respect to the foregoing) and all other collateral securing repayment of the
debt evidenced by a Mortgage Note.
<PAGE> 18
"Mortgagee" means either the Borrower or any subsequent holder of
a Mortgage Loan.
"Mortgagor" means the obligor on a Mortgage Note.
"Multiemployer Plan" shall mean a multiemployer plan defined as
such in Section 3(37) of ERISA to which contributions have been or are required
to be made by the Borrower or any ERISA Affiliate and that is covered by Title
IV of ERISA.
"Net Cash Proceeds" shall mean the gross cash proceeds of the
Borrower from an Equity Event less the out-of-pocket expenses of the Borrower
incurred in connection with such Equity Event.
"Net Income" shall mean, for any period, the net income of the
Borrower for such period as determined in accordance with GAAP.
"Net Worth" shall mean, with respect to any Person, the excess of
total assets of such Person, over total liabilities of such Person, determined
in accordance with GAAP.
"Note" shall mean the promissory note provided for by Section
2.02(a) hereof for Advances and any promissory note delivered in substitution or
exchange therefor, in each case as the same shall be modified and supplemented
and in effect from time to time.
"Notice of Borrowing and Pledge" shall have the meaning assigned
to such term in Section 2.03(a).
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
entity succeeding to any or all of its functions under ERISA.
"Permitted Exceptions" shall mean the exceptions to lien priority
including but not limited to: (i) the lien of current real property taxes and
assessments not yet due and payable; (ii) covenants, conditions and
restrictions, rights of way, easements and other matters of the public record as
of the date of recording acceptable to mortgage lending institutions generally
and specifically referred to in the lender's title insurance policy delivered to
the originator of the Mortgage Loan and (A) referred to or otherwise considered
in the appraisal (if any) made for the originator of the Mortgage Loan or (B)
which do not adversely affect the appraised value of the Mortgaged Property set
forth in such appraisal; (iii) other matters to which like properties are
commonly subject which do not materially interfere with the benefits of the
security intended to be provided by the Mortgage or the use, enjoyment, value or
marketability of the related Mortgaged Property; and (iv) in the case of a
Second Lien Mortgage Loan, a First Lien on the related Mortgaged Property.
"Person" shall mean any individual, corporation, company,
voluntary association, partnership, joint venture, limited liability company,
trust, unincorporated association or government (or any agency, instrumentality
or political subdivision thereof).
<PAGE> 19
"Plan" shall mean an employee benefit or other plan established
or maintained by either the Borrower or any ERISA Affiliate and that is covered
by Title IV of ERISA, other than a Multiemployer Plan.
"PMI Policy" or "Primary Insurance Policy" means a policy of
primary mortgage guaranty insurance issued by a Qualified Insurer.
"Post-Default Rate" shall mean, in respect of any principal of
any Advance or any other amount under this Loan Agreement, the Note or any other
Loan Document that is not paid when due to the Lender (whether at stated
maturity, by acceleration or mandatory prepayment or otherwise), a rate per
annum during the period from and including the due date to but excluding the
date on which such amount is paid in full equal to 2% per annum, plus (a)(i) the
interest rate otherwise applicable to such Advance or other amount, or (ii) if
no interest rate is otherwise applicable, the LIBO Rate plus (b) the Applicable
Margin.
"Property" shall mean any right or interest in or to property of
any kind whatsoever, whether real, personal or mixed and whether tangible or
intangible.
"Proprietary Lease" shall mean the lease on a Cooperative Unit
evidencing the possessory interest of the owner of the Cooperative Shares in
such Cooperative Unit.
"Qualified Insurer" means an insurance company duly qualified as
such under the laws of the states in which the Mortgaged Property is located,
duly authorized and licensed in such states to transact the applicable insurance
business and to write the insurance provided, and approved as an insurer by
Fannie Mae and Freddie Mac and whose claims paying ability is rated in the two
highest rating categories by any of the rating agencies with respect to primary
mortgage insurance and in the two highest rating categories by Best's with
respect to hazard and flood insurance.
"Qualified Originator" shall mean (a) the Borrower and (b) any
other originator of Mortgage Loans as may be approved by the Lender in writing
from time to time.
"Regulations G, T, U and X" shall mean Regulations G, T, U and X
of the Board of Governors of the Federal Reserve System (or any successor), as
the same may be modified and supplemented and in effect from time to time.
"Requirement of Law" shall mean as to any Person, the certificate
of incorporation and by-laws or other organizational or governing documents of
such Person, and any law, treaty, rule or regulation or determination of an
arbitrator or a court or other Governmental Authority, in each case applicable
to or binding upon such Person or any of its property or to which such Person or
any of its property is subject.
"Required Documents" shall mean those documents identified in
Section 2(I) of the Custodial Agreement.
"Rescission" shall mean the right of a Mortgagor to rescind the
related Mortgage Note and related documents pursuant to applicable law and
applicable Agency guides.
<PAGE> 20
"Reset Date" shall mean the first day of each calendar month, or
if such day is not a Business Day, the next succeeding Business Day.
"Responsible Officer" shall mean, as to any Person, the chief
executive officer or, with respect to financial matters, the chief financial
officer of such Person; provided, that in the event any such officer is
unavailable at any time he or she is required to take any action hereunder,
Responsible Officer shall mean any officer authorized to act on such officer's
behalf as demonstrated by a certificate of corporate resolution.
"Restricted Payments" shall mean with respect to any Person,
collectively, all dividends or other distributions of any nature (cash,
securities, assets or otherwise), and all payments, by virtue of redemption or
otherwise, on any class of equity securities (including, without limitation,
warrants, options or rights therefor) issued by such Person, whether such
securities are now or may hereafter be authorized or outstanding and any
distribution in respect of any of the foregoing, whether directly or indirectly.
"Second Lien" shall mean with respect to each Mortgaged Property,
the lien of the mortgage, deed of trust or other instrument securing a mortgage
note which creates a second lien on the Mortgaged Property.
"Second Lien Mortgage Loan" shall mean an Eligible Mortgage Loan
secured by the lien on the Mortgaged Property, subject to one prior lien on such
Mortgaged Property securing financing obtained by the related Mortgagor and to
Permitted Exceptions.
"Secured Obligations" shall have the meaning assigned thereto in
Section 4.01(c) hereof.
"Securitization Letter" shall mean that certain letter agreement
by and between the Borrower and the Lender dated the date hereof, outlining
rights and obligations with respect to securitizations and whole loan sales of
mortgage loans that are similar to the Mortgage Loans subject to this Loan
Agreement.
"Servicer" shall mean the Borrower in its capacity as servicer or
master servicer of the Mortgage Loans.
"Servicing Agreement" shall have the meaning provided in Section
11.15(c) hereof.
"Servicing File" means with respect to each Mortgage Loan, the
file retained by the Borrower consisting of originals of all material documents
in the Mortgage File which are not delivered to the Custodian and copies of the
Mortgage Loan Documents set forth in Section 2 of the Custodial Agreement.
"Servicing Records" shall have the meaning assigned thereto in
Section 11.15(b) hereof.
<PAGE> 21
"Servicing Transmission" shall mean a computer-readable magnetic
or other electronic format mutually acceptable to the parties.
"Settlement Agent" shall have the meaning provided in the
Custodial Agreement.
"Subservicer" shall have the meaning provided in Section 11.15(c)
hereof.
"Subsidiary" shall mean, with respect to any Person, any
corporation, partnership or other entity of which at least a majority of the
securities or other ownership interests having by the terms thereof ordinary
voting power to elect a majority of the board of directors or other persons
performing similar functions of such corporation, partnership or other entity
(irrespective of whether or not at the time securities or other ownership
interests of any other class or classes of such corporation, partnership or
other entity shall have or might have voting power by reason of the happening of
any contingency) is at the time directly or indirectly owned or controlled by
such Person or one or more Subsidiaries of such Person or by such Person and one
or more Subsidiaries of such Person.
"Takeout Commitment" shall mean, with respect to any Mortgage
Loan, an irrevocable commitment issued by a Takeout Investor in favor of the
Borrower pursuant to which such Takeout Investor agrees to purchase such
Mortgage Loan at a specific price on a forward delivery basis acceptable to the
Lender in its sole discretion.
"Takeout Investor" shall mean a third party which has agreed to
purchase Mortgage Loans pursuant to a Takeout Commitment.
"Tangible Net Worth" shall mean, with respect to any Person, as
of any date of determination, the consolidated Net Worth of such Person and its
Subsidiaries, less the consolidated net book value of all assets of such Person
and its Subsidiaries (to the extent reflected as an asset in the balance sheet
of such Person or any Subsidiary at such date) which will be treated as
intangibles under GAAP, including, without limitation, such items as deferred
financing expenses, net leasehold improvements, good will, trademarks, trade
names, service marks, copyrights, patents, licenses and unamortized debt
discount and expense; provided, that residual securities issued by such Person
or its Subsidiaries shall not be treated as intangibles for purposes of this
definition.
"Termination Date" shall mean 364 days following the Effective
Date of this Agreement, or such earlier date on which this Loan Agreement shall
terminate in accordance with the provisions hereof or by operation of law as
same may be extended pursuant to Section 2.09.
"Total Indebtedness" shall mean with respect to any Person, for
any period, the aggregate Indebtedness of such Person and its Subsidiaries
during such period, less the amount of any nonspecific consolidated balance
sheet reserves maintained in accordance with GAAP.
"Tranche A Advances" shall mean Advances so long as, and to the
extent that, they are secured by Dry Loans.
<PAGE> 22
"Tranche B Advances" shall mean Advances so long as, and to the
extent that, they are secured by Wet Loans.
"Trust Status" shall mean the determination by the Custodian and
confirmed by the Lender whether a Mortgage Loan delivered as a Wet Loan has
become a Dry Loan.
"Uncommitted Advance" shall have the meaning assigned to such
term in Section 2.01(b) hereof.
"Underwriting Guidelines" shall mean either (i) with respect to
Eligible Mortgage Loans that are agency-conforming mortgage loans except with
respect to outstanding principal balance, the underwriting guidelines of the
Borrower, which shall be subject to the prior written approval of the Lender
(such approval not to be unreasonably withheld) and which shall delivered to the
Lender prior to making any Advances to be secured by Mortgage Loans underwritten
pursuant to such underwriting guidelines and/or the applicable Takeout
Investor's underwriting requirements or (ii) with respect to agency-conforming
Eligible Mortgage Loans, the underwriting guidelines of Fannie Mae.
"Uniform Commercial Code" shall mean the Uniform Commercial Code
as in effect on the date hereof in the State of New York; provided that if by
reason of mandatory provisions of law, the perfection or the effect of
perfection or non-perfection of the security interest in any Collateral is
governed by the Uniform Commercial Code as in effect in a jurisdiction other
than New York, "Uniform Commercial Code" shall mean the Uniform Commercial Code
as in effect in such other jurisdiction for purposes of the provisions hereof
relating to such perfection or effect of perfection or non-perfection.
"Wet Loan" shall mean a wet-funded first lien Mortgage Loan which
is underwritten in accordance with the Underwriting Guidelines and does not
contain all the required Mortgage Loan Documents in the Mortgage File, which in
order to be deemed an Eligible Mortgage Loan shall have the following additional
characteristics:
(a) the proceeds thereof have been funded (or, on the date of the
Advance supported by a Notice of Borrowing and Pledge are being funded) by wire
transfer or cashier's check, cleared check or draft or other form of immediately
available funds to the Settlement Agent for such Wet Loan;
(b) the Borrower expects such Wet Loan to close and become a valid lien
securing actual indebtedness by funding to the order of the Mortgagor
thereunder;
(c) the proceeds thereof have not been returned to the Lender from the
Settlement Agent for such Wet Loan;
(d) the Borrower has not learned that such Wet Loan will not be closed
and funded to the order of the Mortgagor; and
<PAGE> 23
(e) upon recordation such Mortgage Loan will constitute a first lien on
the premises described therein.
"Wire Instruction Data" as defined in the Custodial Agreement.
1.02 Accounting Terms and Determinations. Except as otherwise
expressly provided herein, all accounting terms used herein shall be
interpreted, and all financial statements and certificates and reports as to
financial matters required to be delivered to the Lender hereunder shall be
prepared, in accordance with GAAP.
SECTION 2. Advances, Note and Prepayments.
2.01 Advances.
(a) Subject to fulfillment of the conditions precedent set forth
in Sections 5.01 and 5.02 hereof, and provided that no Default shall have
occurred and be continuing hereunder, the Lender agrees from time to time, on
the terms and conditions of this Loan Agreement, to make loans (individually, a
"Committed Advance"; collectively, the "Committed Advances") to the Borrower in
Dollars, on any Business Day from and including the Effective Date to but
excluding the Termination Date in an aggregate principal amount at any one time
outstanding up to but not exceeding the lesser of (i) the Maximum Committed
Amount (which shall be further subject to the limitations in the definition of
Collateral Value) and (ii) the Borrowing Base as in effect from time to time.
(b) In addition to the foregoing, subject to the successful
completion of an Equity Event, and provided that no Default shall have occurred
and be continuing hereunder, the Lender may from time to time in its sole
discretion, on the terms and conditions of this Loan Agreement, make loans
(individually, an "Uncommitted Advance"; collectively, the "Uncommitted
Advances") to the Borrower in Dollars, on any Business Day from and including
the date of such Equity Event to but excluding the Termination Date in an
aggregate principal amount at any one time outstanding up to but not exceeding
the lesser of (i) the Maximum Uncommitted Amount (which shall be further subject
to the limitations in the definition of Collateral Value) and (ii) the Borrowing
Base as in effect from time to time. Unless otherwise agreed by the parties, in
determining whether Advances secured by Eligible Mortgage Loans are Committed
Advances or Uncommitted Advances, such Advances shall first be deemed Committed
Advances up to the Maximum Committed Amount, and then the remainder shall be
deemed Uncommitted Advances.
(c) Subject to the terms and conditions of this Loan Agreement,
during such period the Borrower may borrow, repay and reborrow hereunder.
(d) In no event shall an Advance be made when any Default or
Event of Default has occurred and is continuing.
(e) The minimum amount of any Advance made by the Lender
hereunder shall be $1,000,000.
<PAGE> 24
2.02 Notes.
(a) The Advances made by the Lender shall be evidenced by a
single promissory note of the Borrower substantially in the form of Exhibit A
hereto (the "Note"), dated the date hereof, payable to the Lender in a principal
amount equal to the amount of the Maximum Credit as originally in effect and
otherwise duly completed. The Lender shall have the right to have its Note
subdivided, by exchange for promissory notes of lesser denominations or
otherwise.
(b) The date, amount and interest rate of each Advance made by
the Lender to the Borrower, and each payment made on account of the principal
thereof, shall be recorded by the Lender on its books and, prior to any transfer
of the Note, noted by the Lender on the grid attached to the Note or any
continuation thereof; provided, that the failure of the Lender to make any such
recordation or notation shall not affect the obligations of the Borrower to make
a payment when due of any amount owing hereunder or under the Note in respect of
the Advances.
2.03 Procedure for Borrowing.
(a) Borrowing Procedure for Requesting an Advance. The Borrower
may request a borrowing to be secured by any Mortgage Loans hereunder, on any
Business Day during the period from and including the Effective Date to the
Termination Date, by delivering to the Lender, with a copy to the Custodian, a
Mortgage Loan Data Transmission, an irrevocable Notice of Borrowing and Pledge
substantially in the form of Exhibit D hereto (a "Notice of Borrowing and
Pledge"), appropriately completed, Wire Instruction Data, an Escrow Letter and
an Insured Closing Letter, each of which must be received no later than 6:00 p.m
(eastern time) one Business Day prior to the requested Funding Date for any
Advance to be made by 9:00 a.m. on the Funding Date and no later than 2:00 p.m.
on the requested Funding Date with respect to an Advance to be made by 4:00 p.m.
on the Funding Date. Such Notice of Borrowing and Pledge shall clearly indicate
those Mortgage Loans that are intended to be Wet Loans and Dry Loans and include
a Mortgage Loan List in respect of the Eligible Mortgage Loans that the Borrower
proposes to pledge to the Lender and to be included in the Borrowing Base in
connection with such borrowing; provided, however, to the extent that any such
requested borrowing shall constitute an Uncommitted Advance, the Lender may, at
its sole option, elect not to make such Uncommitted Advance. Upon the Lender's
request, the Borrower will deliver to the Lender a Takeout Commitment
confirmation and assignment acknowledged by the Takeout Investor for each
Mortgage Loan to be pledged to the Lender hereunder. The Borrower agrees to
immediately report to the Custodian and the Lender by facsimile transmission
within one Business Day of discovery that any Wet Loans that were previously
pledged to the Borrower do not close for any reason including, but not limited
to, a Rescission. The Custodian will deliver a notice of intent to issue a Trust
Receipt to Lender after the Custodian has reviewed the documents contained in
Section 2(a)II of the Custodial Agreement.
(b) Pursuant to the Custodial Agreement, the Custodian shall
review any Required Documents delivered by 2:00 p.m. (eastern time) as specified
in the Custodial Agreement on any Business Day in time to include the related
Mortgage Loans in such Borrowing Base determination on the same day. Not later
than 4:00 p.m. (eastern time) on each Business Day, the Custodian shall deliver
to the Lender, via electronic transmission acceptable to
<PAGE> 25
the Lender, the Custodian Loan Transmission showing the status of all Mortgage
Loans then held by the Custodian, including but not limited to the Wet Loans and
Dry Loans which are subject to document exceptions, and the time the related
Mortgage Loan Documents have been released pursuant to Section 5(a) or 5(b) of
the Custodial Agreement. Not later than 4:30 p.m. (eastern time) on each
Business Day, the Lender shall calculate the Borrowing Base of all Mortgage
Loans that are held by the Custodian and forward to the Borrower by facsimile
transmission a copy of the Borrowing Base Certificate. In addition, the
Custodian shall deliver to the Lender no later than 4:30 p.m. (eastern time) by
facsimile transmission on each Funding Date, one or more Trust Receipts (as
defined in the Custodial Agreement) relating to either Wet Loans or Dry Loans.
The original copies of such Trust Receipts shall be delivered to Chase Manhattan
Bank at Four New York Plaza, Ground Floor, Outsourcing Department, New York, New
York 10004, Attention: Jennifer John for the account of Greenwich Capital
Financial Products, Inc. (telephone number (212) 623-5953), as agent for the
Lender by overnight delivery using a nationally recognized insured overnight
delivery service.
(c) Upon the Borrower's request for a borrowing pursuant to
Section 2.03(a) above, the Lender shall, assuming all conditions precedent set
forth in this Section 2.03 and in Section 5.01 and 5.02 have been met, and
provided no Default shall have occurred and be continuing (in accordance with
Section 2.01), make an Advance to the Disbursement Account (as determined by
Lender) not later than 9:00 a.m. on the requested Funding Date with respect to
an Advance requested in a Notice of Borrowing and Pledge delivered to the Lender
by 6:00 p.m. on the day immediately preceding the Funding Date and not later
than 4:00 p.m. for Advances requested in a Notice of Borrowing and Pledge
delivered to the Lender by 2:00 p.m. on the requested Funding Date in an amount
which would not cause the aggregate amount of Advances then outstanding to
exceed the lesser of (i) the Maximum Credit or (ii) the Borrowing Base shown on
the latest Borrowing Base Certificate of the Lender. Subject to the foregoing,
such borrowing will be made available to the Borrower by the Lender transferring
to the Disbursement Account, via wire transfer, in the aggregate amount of such
borrowing for remittance by the Custodian to the Settlement Agent in accordance
with Section 3(c) of the Custodial Agreement. The Borrower hereby agrees to
deposit into the Disbursement Account any shortfall created to the extent that
any Advance made by the Lender is less than the amount of the payments required
to be made to Settlement Agents.
2.04 Limitation on Types of Advances; Illegality. Anything herein
to the contrary notwithstanding, if, on or prior to the determination of any
LIBO Base Rate:
(a) the Lender determines, which determination shall be
conclusive, that quotations of interest rates for the relevant deposits
referred to in the definition of "LIBO Base Rate" in Section 1.01 hereof
are not being provided in the relevant amounts or for the relevant
maturities for purposes of determining rates of interest for Advances as
provided herein; or
(b) the Lender determines, which determination shall be
conclusive, that the Applicable Margin plus the relevant rate of
interest referred to in the definition of "LIBO Base Rate" in Section
1.01 hereof upon the basis of which the rate of interest for Advances is
to be determined is not likely adequately to cover the cost to the
Lender of making or maintaining Advances; or
<PAGE> 26
(c) it becomes unlawful for the Lender to honor its obligation to
make or maintain Advances hereunder using a LIBO Rate;
then the Lender shall give the Borrower prompt notice thereof and, so long as
such condition remains in effect, the Lender shall be under no obligation to
make additional Advances, and the Borrower shall, at its option, either prepay
such Advances or pay interest on such Advances at a rate per annum as determined
by the Lender taking into account the increased cost to the Lender of making the
Advances.
2.05 Repayment of Advances; Interest.
(a) The Borrower shall repay in full on the Termination Date the
then aggregate outstanding principal amount of the Advances (as evidenced by the
Note). The Lender and the Borrower acknowledge that it is the intent of each
such party that, not later than 1:00 p.m. on each Business Day, the Lender may
buy eligible mortgage loans pursuant to the separate gestation program entered
into between the Borrower and the Lender. The Borrower shall sell to the Lender
pursuant to such gestation program any Dry Mortgage Loan as
identified/authorized by the Borrower and approved by the Lender.
(b) No later than the Business Day prior to each Reset Date, the
Lender shall provide to the Borrower a report which shall state the interest
amount due for the current interest period on the Advance.
(c) The Borrower shall pay to the Lender interest on the unpaid
principal amount of each Advance for the period from and including the date of
such Advance to but excluding the date such Advance shall be paid in full, at a
rate per annum equal to the LIBO Rate plus the Applicable Margin.
Notwithstanding the foregoing, the Borrower shall pay to the Lender interest at
the applicable Post-Default Rate on any principal of any Advance and on any
other amount payable by the Borrower hereunder or under the Note, that shall not
be paid in full when due (whether at stated maturity, by acceleration or by
mandatory prepayment or otherwise), for the period from and including the due
date thereof to but excluding the date the same is paid in full. Accrued
interest on each Advance as calculated in Section 2.05(b) above shall be payable
monthly on each Reset Date (except to the extent the Lender, in its sole
discretion, consents to a later date) and on the Termination Date, except that
interest payable at the Post-Default Rate shall accrue daily and shall be
payable promptly upon receipt of invoice. Promptly after the determination of
any interest rate provided for herein or any change therein, the Lender shall
give written notice thereof to the Borrower.
(d) The Borrower and the Lender acknowledge that the proceeds of
Collateral may be held in the Collection Account pursuant to the Collection
Account Agreement. The Lender agrees that if no Event of Default shall have
occurred and be continuing, on each Reset Date, the Collection Bank shall be
permitted to remit such amounts then held in such Collection Account at the
direction of the Borrower until notified to the contrary by the Lender.
<PAGE> 27
2.06 Mandatory Prepayments or Pledge.
On each Advance Date or other date on which there is a change in
the Mortgage Loans held by the Custodian, the Custodian shall deliver to the
Lender and the Borrower the Custodian Loan Transmission. The Lender shall
deliver to the Borrower a Borrowing Base Certificate by 4:30 p.m. (eastern
time), the calculation in such certificate to be based on the delinquency status
and principal balance of the Eligible Mortgage Loans as of the later of the
funding date balance or the last calendar day of the prior month. Such
information shall be ascertained from the Servicing Transmission which shall be
delivered or caused to be delivered by the Borrower in accordance with Section
7.20 and shall include all Mortgage Loans which were funded on or prior to the
last date of any Advance. In the event that such Borrowing Base Certificate
indicates or if at any time the aggregate outstanding principal amount of
Advances exceeds the Borrowing Base (a "Borrowing Base Deficiency"), as
determined by the Lender and notified to the Borrower on any Business Day, the
Borrower shall no later than one Business Day after receipt of such written
notice, either prepay the Advances in part or in whole or pledge additional
Eligible Mortgage Loans (which Collateral shall be in all respects acceptable to
the Lender) to the Lender, such that after giving effect to such prepayment or
pledge the aggregate outstanding principal amount of the Advances does not
exceed the Borrowing Base.
2.07 Optional Prepayments.
(a) The Advances are prepayable without premium or penalty, in
whole or in part, after providing not less than one (1) Business Days prior
notice (except as specified in Section 2.05(a)). The Advances are prepayable at
any other time, in whole or in part, in accordance herewith and subject to
clause (b) below. Any amounts prepaid shall be applied to repay the outstanding
principal amount of any Advances (together with interest thereon) until paid in
full. Amounts repaid may be reborrowed in accordance with the terms of this Loan
Agreement. If such notice is given, the amount specified in such notice shall be
due and payable on the date specified therein, together with accrued interest to
such date on the amount prepaid. Partial prepayments shall be in an aggregate
principal amount of at least $100,000.
(b) If the Borrower makes a prepayment of the Advances other than
as provided in Section 2.07(a) above, the Borrower shall indemnify the Lender
and hold the Lender harmless from any actual loss or expense which the Lender
may sustain or incur arising from (a) the reemployment of funds obtained by the
Lender to maintain the Advances hereunder or from (b) fees payable to terminate
the deposits from which such funds were obtained, in either case, which actual
loss or expense shall be equal to an amount equal to the excess, as reasonably
determined by the Lender, of (i) its cost of obtaining funds for such Advances
for the period from the date of such payment through the following Reset Date
over (ii) the amount of interest likely to be realized by such Lender in
redeploying the funds not utilized by reason of such payment for such period.
This Section 2.07 shall survive termination of this Loan Agreement and payment
of the Note.
<PAGE> 28
2.08 Requirements of Law.
(a) If any Requirement of Law (other than with respect to any
amendment made to the Lender's certificate of incorporation and by-laws or other
organizational or governing documents) or any change in the interpretation or
application thereof or compliance by the Lender with any request or directive
(whether or not having the force of law) from any central bank or other
Governmental Authority made subsequent to the date hereof:
(i) shall subject the Lender to any tax of any kind whatsoever
with respect to this Loan Agreement, the Note or any Advance made by it
(excluding net income taxes) or change the basis of taxation of payments
to the Lender in respect thereof;
(ii) shall impose, modify or hold applicable any reserve, special
deposit, compulsory Advance or similar requirement against assets held
by deposits or other liabilities in or for the account of advances.
Advances or other extensions of credit by, or any other acquisition of
funds by any office of the Lender which is not otherwise included in the
determination of the LIBO Base Rate hereunder;
(iii) shall impose on the Lender any other condition;
and the result of any of the foregoing is to increase the cost to the Lender, by
an amount which the Lender deems to be material, of making, continuing or
maintaining any Advance or to reduce any amount receivable hereunder in respect
thereof, then, in any such case, the Borrower shall promptly pay the Lender such
additional amount or amounts as will compensate the Lender for such increased
cost or reduced amount receivable thereafter incurred.
(b) If the Lender shall have determined that the adoption of or
any change in any Requirement of Law (other than with respect to any amendment
made to the Lender's certificate of incorporation and by-laws or other
organizational or governing documents) regarding capital adequacy or in the
interpretation or application thereof or compliance by the Lender or any
corporation controlling the Lender with any request or directive regarding
capital adequacy (whether or not having the force of law) from any Governmental
Authority made subsequent to the date hereof shall have the effect of reducing
the rate of return on the Lender's or such corporation's capital as a
consequence of its obligations hereunder to a level below that which the Lender
or such corporation (taking into consideration the Lender's or such
corporation's policies with respect to capital adequacy) by an amount deemed by
the Lender to be material, then from time to time, the Borrower shall promptly
pay to the Lender such additional amount or amounts as will thereafter
compensate the Lender for such reduction.
(c) If the Lender becomes entitled to claim any additional
amounts pursuant to this subsection, it shall promptly notify the Borrower of
the event by reason of which it has become so entitled. A certificate as to any
additional amounts payable pursuant to this subsection submitted by the Lender
to the Borrower shall be conclusive in the absence of manifest error.
<PAGE> 29
2.09 Extension of Termination Date.
At the request of Borrower, at least thirty (30) days prior to
the then Termination Date, the Lender may in its sole discretion extend the
Termination Date for a period of 364 days by giving written notice of such
extension to the Borrower no later than twenty (20) days, but in no event more
than thirty (30) days, prior to the then current Termination Date.
2.10 Purpose of Advances.
Each Advance shall be used to finance the origination or purchase
of Eligible Mortgage Loans identified to the Lender in writing on each Mortgage
Loan Schedule as such Mortgage Loan Schedule may be amended from time to time.
SECTION 3. Payments; Computations; Taxes; Commitment Fee.
3.01 Payments.
Except to the extent otherwise provided herein, all payments of
principal, interest and other amounts to be made by the Borrower under this Loan
Agreement and the Note, shall be made in Dollars, in immediately available
funds, without deduction, set-off or counterclaim, to the Lender at the
following account maintained by the Lender at The Chase Manhattan Bank: Account
Number 140095961, For the A/C of Greenwich Capital Financial Products, Inc.,
ABA# 021000021, Attn: Brett Kibbe, not later than 1:00 p.m., eastern time, on
the date on which such payment shall become due (each such payment made after
such time on such due date to be deemed to have been made on the next succeeding
Business Day). The Borrower acknowledges that it has no rights of withdrawal
from the foregoing account.
3.02 Computations. Interest on the Advances shall be computed on
the basis of a 360-day year for the actual days elapsed (including the first day
but excluding the last day) occurring in the period for which payable.
3.03 U.S. Taxes.
(a) The Borrower agrees to pay to the Lender such additional
amounts as are necessary in order that the net payment of any amount due to the
Lender hereunder after deduction for or withholding in respect of any U.S. Tax
(as defined below) imposed with respect to such payment (or in lieu thereof,
payment of such U.S. Tax by the Lender), will not be less than the amount stated
herein to be then due and payable; provided, that the foregoing obligation to
pay such additional amounts shall not apply:
(i) to any payment to the Lender hereunder unless the Lender is
entitled to submit a Form 1001 (relating to the Lender and entitling it
to a complete exemption from withholding on all interest to be received
by it hereunder in respect of the Advances) or Form 4224 (relating to
all interest to be received by the Lender hereunder in respect of the
Advances), or
<PAGE> 30
(ii) to any U.S. Tax imposed solely by reason of the failure by
the Lender to comply with applicable certification, information,
documentation or other reporting requirements concerning the
nationality, residence, identity or connections with the United States
of America of the Lender if such compliance is required by statute or
regulation of the United States of America as a precondition to relief
or exemption from such U.S. Tax.
For the purposes of this Section 3.03(a), (w) "Form 1001" shall mean Form 1001
(Ownership, Exemption, or Reduced Rate Certificate) of the Department of the
Treasury of the United States of America, (x) "Form 4224" shall mean Form 4224
(Exemption from Withholding of Tax on Income Effectively Connected with the
Conduct of a Trade or Business in the United States) of the Department of the
Treasury of the United States of America (or in relation to either such Form
such successor and related forms as may from time to time be adopted by the
relevant taxing authorities of the United States of America to document a claim
to which such Form relates), and (y) "U.S. Taxes" shall mean any present or
future tax, assessment or other charge or levy imposed by or on behalf of the
United States of America or any taxing authority thereof or therein.
(b) Within 30 days after paying any such amount to the Lender,
and within 30 days after it is required by law to remit such deduction or
withholding to any relevant taxing or other authority, the Borrower shall
deliver to the Lender evidence satisfactory to the Lender of such deduction,
withholding or payment (as the case may be).
(c) The Lender represents and warrants to the Borrower that on
the date hereof the Lender is either incorporated under the laws of the United
States or a State thereof or is entitled to submit a Form 1001 (relating to the
Lender and entitling it to a complete exemption from withholding on all interest
to be received by it hereunder in respect of the Advances) or Form 4224
(relating to all interest to be received by the Lender hereunder in respect of
the Advances).
3.04 Commitment Fee. Subject to Section 5.02(i) hereof, the
Borrower agrees to pay to the Lender, on the Termination Date, a commitment fee
equal to (a) 12.5 basis points (0.125%) multiplied by (b) the Maximum Committed
Amount (the "Commitment Fee"), such payment to be made in Dollars, in
immediately available funds, without deduction, set-off or counterclaim, to the
Lender.
SECTION 4. Collateral Security.
4.01 Collateral; Security Interest.
(a) Pursuant to the Custodial Agreement, the Custodian shall hold
the Mortgage Loan Documents as exclusive bailee and agent for the Lender
pursuant to the terms of the Custodial Agreement and shall deliver to the Lender
Trust Receipts with Exception Reports (as such terms are defined in the
Custodial Agreement) to the effect that it has reviewed such Mortgage Loan
Documents in the manner required by the Custodial Agreement and identifying any
deficiencies in such Mortgage Loan Documents as so reviewed.
<PAGE> 31
(b) Each of the following items or types of property, whether now
owned or hereafter acquired, now existing or hereafter created and wherever
located, is hereinafter referred to as the "Collateral":
(i) all Mortgage Loans identified on a Notice of Borrowing and
Pledge delivered by the Borrower to the Lender and the Custodian from
time to time;
(ii) all Mortgage Loan Documents, including without limitation
all promissory notes, and all Servicing Records (as defined in Section
11.15(b) below), and any other collateral pledged or otherwise relating
to such Mortgage Loans, together with all files, material documents,
instruments, surveys (if available), certificates, correspondence,
appraisals, computer records, computer storage media, Mortgage Loan
accounting records and other books and records relating thereto;
(iii) all mortgage guaranties and insurance (issued by
governmental agencies or otherwise) and any mortgage insurance
certificate or other document evidencing such mortgage guaranties or
insurance relating to any Mortgage Loans and all claims and payments
thereunder;
(iv) all other insurance policies and insurance proceeds relating
to any Mortgage Loans or the related Mortgaged Property;
(v) all Interest Rate Protection Agreements relating to any or
all of the foregoing;
(vi) any purchase agreements or other agreements or contracts
relating to or constituting any or all of the foregoing;
(vii) all purchase or take-out commitments relating to or
constituting any or all of the foregoing;
(viii) all "accounts", "chattel paper" and "general intangibles"
as defined in the Uniform Commercial Code relating to or constituting
any or all of the foregoing; and
(ix) any and all replacements, substitutions, distributions on or
proceeds of any or all of the foregoing.
(c) The Borrower hereby assigns, pledges and grants a security
interest to the Lender in all of its right, title and interest in, to and under
all the Collateral, whether now owned or hereafter acquired, now existing or
hereafter created and wherever located, to secure the repayment of principal of
and interest on all Advances and all other amounts owing to the Lender
hereunder, under the Note and under the other Loan Documents (collectively, the
"Secured Obligations"). The Borrower agrees to mark their computer records and
tapes to evidence the security interests granted to the Lender hereunder.
<PAGE> 32
4.02 Further Documentation. At any time and from time to time,
upon the written request of the Lender, and at the sole expense of the Borrower,
the Borrower will promptly and duly execute and deliver, or will promptly cause
to be executed and delivered, such further instruments and documents and take
such further action as the Lender may reasonably request for the purpose of
obtaining or preserving the full benefits of this Loan Agreement and of the
rights and powers herein granted, including, without limitation, the filing of
any financing or continuation statements under the Uniform Commercial Code in
effect in any jurisdiction with respect to the Liens created hereby. The
Borrower also hereby authorizes the Lender to file any such financing or
continuation statement without the signature of the Borrower to the extent
permitted by applicable law. A carbon, photographic or other reproduction of
this Loan Agreement shall be sufficient as a financing statement for filing in
any jurisdiction.
4.03 Changes in Locations, Name, etc. The Borrower shall not (i)
change the location of its chief executive office/chief place of business from
that specified in Section 6 hereof or (ii) change its name, identity or
corporate structure (or the equivalent) or change the location where it
maintains its records with respect to the Collateral unless it shall have given
the Lender at least 30 days prior written notice thereof and shall have
delivered to the Lender all Uniform Commercial Code financing statements and
amendments thereto as the Lender shall request and taken all other actions
deemed reasonably necessary by the Lender to continue its perfected status in
the Collateral with the same or better priority.
4.04 Lender's Appointment as Attorney-in-Fact.
(a) The Borrower hereby irrevocably constitutes and appoints the
Lender and any officer or agent thereof, with full power of substitution, as its
true and lawful attorney-in-fact with full irrevocable power and authority in
the place and stead of the Borrower and in the name of the Borrower or in its
own name, from time to time in the Lender's discretion, for the purpose of
carrying out the terms of this Loan Agreement, to take any and all appropriate
action and to execute any and all documents and instruments which may be
necessary or desirable to accomplish the purposes of this Loan Agreement, and,
without limiting the generality of the foregoing, the Borrower hereby gives the
Lender the power and right, on behalf of the Borrower, without assent by, but
with notice to, the Borrower, if an Event of Default shall have occurred and be
continuing, to do the following:
(i) in the name of the Borrower or its own name, or otherwise, to
take possession of and endorse and collect any checks, drafts, notes,
acceptances or other instruments for the payment of moneys due under any
mortgage insurance or with respect to any other Collateral and to file
any claim or to take any other action or proceeding in any court of law
or equity or otherwise deemed appropriate by the Lender for the purpose
of collecting any and all such moneys due under any such mortgage
insurance or with respect to any other Collateral whenever payable;
(ii) to pay or discharge taxes and Liens levied or placed on or
threatened against the Collateral; and
<PAGE> 33
(iii) (A) to direct any party liable for any payment under any
Collateral to make payment of any and all moneys due or to become due
thereunder directly to the Lender or as the Lender shall direct; (B) to
ask or demand for, collect, receive payment of and receipt for, any and
all moneys, claims and other amounts due or to become due at any time in
respect of or arising out of any Collateral; (C) to sign and endorse any
invoices, assignments, verifications, notices and other documents in
connection with any of the Collateral; (D) to commence and prosecute any
suits, actions or proceedings at law or in equity in any court of
competent jurisdiction to collect the Collateral or any thereof and to
enforce any other right in respect of any Collateral; (E) to defend any
suit, action or proceeding brought against the Borrower with respect to
any Collateral; (F) to settle, compromise or adjust any suit, action or
proceeding described in clause (E) above and, in connection therewith,
to give such discharges or releases as the Lender may deem appropriate;
and (G) generally, to sell, transfer, pledge and make any agreement with
respect to or otherwise deal with any of the Collateral as fully and
completely as though the Lender were the absolute owner thereof for all
purposes, and to do, at the Lender's option and the Borrower's expense,
at any time, or from time to time, all acts and things which the Lender
deems necessary to protect, preserve or realize upon the Collateral and
the Lender's Liens thereon and to effect the intent of this Loan
Agreement, all as fully and effectively as the Borrower might do.
The Borrower hereby ratifies all that said attorneys shall lawfully do or cause
to be done by virtue hereof. This power of attorney is a power coupled with an
interest and shall be irrevocable.
(b) The Borrower also authorizes the Lender, at any time and from
time to time, to execute, in connection with the sale provided for in Section
4.07 hereof, any endorsements, assignments or other instruments of conveyance or
transfer with respect to the Collateral.
(c) The powers conferred on the Lender are solely to protect the
Lender's interests in the Collateral and shall not impose any duty upon the
Lender to exercise any such powers. The Lender shall be accountable only for
amounts that it actually receives as a result of the exercise of such powers,
and neither the Lender nor any of its officers, directors, or employees shall be
responsible to the Borrower for any act or failure to act hereunder, except for
its own gross negligence or willful misconduct.
4.05 Performance by Lender of Borrower's Obligations. If the
Borrower fails to perform or comply with any of its material agreements
contained in the Loan Documents and the Lender may itself perform or comply, or
otherwise cause performance or compliance, with such agreement, the reasonable
out-of-pocket expenses of the Lender incurred in connection with such
performance or compliance, together with interest thereon at a rate per annum
equal to the Post-Default Rate, shall be payable by the Borrower to the Lender
on demand and shall constitute Secured Obligations.
4.06 Proceeds. If an Event of Default shall occur and be
continuing, (a) all proceeds of Collateral received by the Borrower consisting
of cash, checks and other near-cash items shall be held by the Borrower in trust
for the Lender, segregated from other funds of the Borrower, and shall forthwith
upon receipt by the Borrower be turned over to the Lender in the
<PAGE> 34
exact form received by the Borrower (duly endorsed by the Borrower to the
Lender, if required) and (b) any and all such proceeds received by the Lender
will be applied by the Lender against, the Secured Obligations. Any balance of
such proceeds remaining after the Secured Obligations shall have been paid in
full and this Loan Agreement shall have been terminated shall be promptly paid
over to the Borrower or to whomsoever may be lawfully entitled to receive the
same. For purposes hereof, proceeds shall include, but not be limited to, all
principal and interest payments, all prepayments and payoffs, insurance claims,
condemnation awards, sale proceeds, real estate owned rents and any other income
and all other amounts received with respect to the Collateral.
4.07 Remedies. If an Event of Default shall occur and be
continuing, the Lender may exercise, in addition to all other rights and
remedies granted to it in this Loan Agreement and in any other instrument or
agreement securing, evidencing or relating to the Secured Obligations, all
rights and remedies of a secured party under the Uniform Commercial Code.
Without limiting the generality of the foregoing, the Lender without demand of
performance or other demand, presentment, protest, advertisement or notice of
any kind (except any notice required by law referred to below) to or upon the
Borrower or any other Person (all and each of which demands, defenses,
advertisements and notices are hereby waived), may in such circumstances
forthwith collect, receive, appropriate and realize upon the Collateral, or any
part thereof, and/or may forthwith sell, lease, assign, give option or options
to purchase, or otherwise dispose of and deliver the Collateral or any part
thereof (or contract to do any of the foregoing), in one or more parcels or as
an entirety at public or private sale or sales, at any exchange, broker's board
or office of the Lender or elsewhere upon such terms and conditions and at
prices that are consistent with the prevailing market for similar collateral as
it may deem advisable and at such prices as it may deem best, for cash or on
credit or for future delivery without assumption of any credit risk. The Lender
shall act in good faith to obtain the best execution possible under prevailing
market conditions. The Lender shall have the right upon any such public sale or
sales, and, to the extent permitted by law, upon any such private sale or sales,
to purchase the whole or any part of the Collateral so sold, free of any right
or equity of redemption in the Borrower, which right or equity is hereby waived
or released. The Borrower further agrees, at the Lender's request, to assemble
the Collateral and make it available to the Lender at places which the Lender
shall reasonably select, whether at the Borrower's premises or elsewhere. The
Lender shall apply the net proceeds of any such collection, recovery, receipt,
appropriation, realization or sale, after deducting all reasonable costs and
expenses of every kind incurred therein or incidental to the care or safekeeping
of any of the Collateral or in any way relating to the Collateral or the rights
of the Lender hereunder, including, without limitation, reasonable attorneys'
fees and disbursements, to the payment in whole or in part of the Secured
Obligations, in such order as the Lender may elect, and only after such
application and after the payment by the Lender of any other amount required or
permitted by any provision of law, including, without limitation, Section
9-504(1)(c) of the Uniform Commercial Code, need the Lender account for the
surplus, if any, to the Borrower. To the extent permitted by applicable law, the
Borrower waives all claims, damages and demands it may acquire against the
Lender arising out of the exercise by the Lender of any of its rights hereunder,
other than those claims, damages and demands arising from the gross negligence
or willful misconduct of the Lender. If any notice of a proposed sale or other
disposition of Collateral shall be required by law, such notice shall be deemed
reasonable and proper if given at least 10 days before such sale or other
<PAGE> 35
disposition. The Borrower shall remain liable for any deficiency (plus accrued
interest thereon as contemplated pursuant to Section 2.05(b) hereof) if the
proceeds of any sale or other disposition of the Collateral are insufficient to
pay the Secured Obligations and the reasonable fees and disbursements of any
attorneys employed by the Lender to collect such deficiency.
4.08 Limitation on Duties Regarding Presentation of Collateral.
The Lender's duty with respect to the custody, safekeeping and physical
preservation of the Collateral in its possession, under Section 9-207 of the
Uniform Commercial Code or otherwise, shall be to deal with it in the same
manner as the Lender deals with similar property for its own account. Neither
the Lender nor any of its directors, officers or employees shall be liable for
failure to demand, collect or realize upon all or any part of the Collateral or
for any delay in doing so or shall be under any obligation to sell or otherwise
dispose of any Collateral upon the request of the Borrower or otherwise.
4.09 Powers Coupled with an Interest. All authorizations and
agencies herein contained with respect to the Collateral are irrevocable and
powers coupled with an interest.
4.10 Release of Security Interest. Upon termination of this Loan
Agreement and repayment to the Lender of all Secured Obligations and the
performance of all obligations under the Loan Documents the Lender shall release
its security interest in any remaining Collateral; provided that if any payment,
or any part thereof, of any of the Secured Obligations is rescinded or must
otherwise be restored or returned by the Lender upon the insolvency, bankruptcy,
dissolution, liquidation or reorganization of the Borrower, or upon or as a
result of the appointment of a receiver, intervenor or conservator of, or a
trustee or similar officer for the Borrower or any substantial part of its
Property, or otherwise, this Loan Agreement, all rights hereunder and the Liens
created hereby shall continue to be effective, or be reinstated, until such
payments have been made.
4.11 Establishment of the Collection Amount.
(a) The Borrower shall establish and maintain the Collection
Account, which shall be entitled "Greenwich Capital Financial Products, Inc."
The Borrower shall not change the name of the account without the prior written
consent of the Lender. Such Collection Account shall be subject to a Collection
Account Agreement.
(b) The Borrower shall and shall cause each Subservicer to
deposit all Collections in the Collection Account in accordance with the
applicable Servicing Agreement.
SECTION 5. Conditions Precedent.
5.01 Initial Advance. The obligation of the Lender to make its
initial Advance hereunder is subject to the satisfaction, immediately prior to
or concurrently with the making of such Advance, of the following conditions
precedent:
(a) Loan Agreement. The Lender shall have received this Loan
Agreement, executed and delivered by a duly authorized officer of the Borrower.
<PAGE> 36
(b) Loan Documents. The Lender shall have received the following
documents, each of which shall be satisfactory to the Lender in form and
substance:
(i) Note. The Note, duly completed and executed; and
(ii) Custodial Agreement. The Custodial Agreement, duly
executed and delivered by the Borrower and the Custodian. In
addition, the Borrower shall have filed all Uniform Commercial
Code and related filings and performed under the Custodial
Agreement and taken such other action as the Lender shall have
requested in order to perfect the security interests created
pursuant to the Loan Agreement.
(c) Organizational Documents. A good standing certificate and
certified copies of the charter and by-laws (or equivalent documents) of
the Borrower and of all corporate or other authority for the Borrower
with respect to the execution, delivery and performance of the Loan
Documents and each other document to be delivered by the Borrower from
time to time in connection herewith (and the Lender may conclusively
rely on such certificate until it receives notice in writing from the
Borrower to the contrary).
(d) Legal Opinion. A legal opinion of counsel to the Borrower,
substantially in the form attached hereto as Exhibit C.
(e) Collection Account Agreement. The Lender shall have received
a Collection Account Agreement substantially in the form of Exhibit G
hereof executed by duly authorized officers of the Borrower and the
Collection Bank.
(f) Filings, Registrations, Recordings. Any documents (including,
without limitation, financing statements) required to be filed,
registered or recorded in order to create, in favor of the Lender, a
perfected, first-priority security interest in the Collateral, subject
to no Liens other than those created hereunder, shall have been properly
prepared and executed for filing (including the applicable county(ies)
if the Lender determines such filings are necessary in its reasonable
discretion), registration or recording in each office in each
jurisdiction in which such filings, registrations and recordations are
required to perfect such first-priority security interest.
(g) Fees and Expenses. The Lender shall have received all fees
and expenses required to be paid by the Borrower on or prior to the
initial Funding Date pursuant to Section 11.03(b) and such fees and
expenses may be netted out of any Advance made by the Lender hereunder.
(h) Financial Statements. The Lender shall have received the
financial statements referenced in Section 7.01(a).
(i) Underwriting Guidelines. The Lender and the Borrower shall
have agreed upon the Underwriting Guidelines for Mortgage Loans and the
Lender shall have received a copy thereof.
<PAGE> 37
(j) Consents, Licenses, Approvals, etc. The Lender shall have
received copies certified by the Borrower of all consents, licenses and
approvals, if any, required in connection with the execution, delivery
and performance by the Borrower of, and the validity and enforceability
of, the Loan Documents, which consents, licenses and approvals shall be
in full force and effect.
(k) Insurance. The Lender shall have received evidence in form
and substance satisfactory to the Lender showing compliance by the
Borrower as of such initial Funding Date with Section 7.22 hereof.
(l) Securitization Letter. The Lender shall have received the
Securitization Letter, in form and substance satisfactory to the Lender
and executed by a duly authorized officer of the Borrower.
(m) Warrant. The Lender shall have received an executed Stock
Purchase Warrant, in form and substance satisfactory to the Lender and
executed by a duly authorized officer of the Borrower.
(n) Gestation Documents. The Lender and the Borrower shall have
executed the program documents for a gestation program between the
Borrower and the Lender, in form and substance satisfactory to the
Lender.
(o) Other Documents. The Lender shall have received such other
documents as the Lender or its counsel may reasonably request.
The Borrower's delivery to the Lender of the items listed in
clauses (a), (b)(i), (c), (k), (l) and (m) of this Section 5.01 shall be a
condition precedent to the execution of this Loan Agreement by the Lender.
5.02 Initial and Subsequent Advances. The making of each Advance
to the Borrower (including the initial Advance) on any Business Day is subject
to the following further conditions precedent, both immediately prior to the
making of such Advance and also after giving effect thereto and to the intended
use thereof:
(a) no Default or Event of Default shall have occurred and be
continuing;
(b) both immediately prior to the making of such Advance and also
after giving effect thereto and to the intended use thereof, the
representations and warranties made by the Borrower in Section 6 hereof,
and in each of the other Loan Documents, shall be true and complete on
and as of the date of the making of such Advance in all material
respects (in the case of the representations and warranties in Section
6.23 and Schedule 1, solely with respect to Mortgage Loans included in
the Borrowing Base) with the same force and effect as if made on and as
of such date (or, if any such representation or warranty is expressly
stated to have been made as of a specific date, as of such specific
date). At the request of the Lender, the Lender shall have received an
officer's certificate signed by a Responsible Officer of the Borrower
certifying as to the truth and accuracy of the above, which certificate
shall specifically include a statement that the Borrower is in
<PAGE> 38
compliance with all governmental licenses and authorizations and is
qualified to do business and in good standing in all required
jurisdictions;
(c) the aggregate outstanding principal amount of the Advances
shall not exceed the Borrowing Base or the Maximum Credit;
(d) subject to the Lender's right to perform one or more Due
Diligence Reviews pursuant to Section 11.16 hereof, the Lender shall
have completed its due diligence view of the Mortgage Loan Documents for
each Advance and such other documents, records, agreements, instruments,
mortgaged properties or information relating to such Advances as the
Lender in its reasonable discretion deems appropriate to review and such
review shall be satisfactory to the Lender in its reasonable discretion;
(e) the Lender shall have received a Notice of Borrowing and
Pledge, Loan List and Mortgage Loan Data Transmission and all other
documents required under Section 2.03;
(f) the Lender shall have received from the Custodian a Custodian
Loan Transmission and one or more Trust Receipts in respect of Mortgage
Loans to be pledged hereunder on such Business Day and an Exception
Report, in each case dated such Business Day and duly completed;
(g) in the event that the Mortgage Loans to be pledged would
cause the aggregate outstanding principal balance of Mortgage Loans
pledged secured by Mortgaged Property from any state to exceed 15% of
the aggregate outstanding principal balance of Mortgage Loans pledged
hereunder, then the Borrower shall, upon request by the Lender, deliver
an opinion of counsel acceptable to the Lender in such state,
substantially in the form of items number 12 and 13 of Exhibit C;
(h) with respect to any Mortgage Loan that was funded in the name
of or acquired by a Qualified Originator which is an Affiliate of the
Borrower, the Lender may, in its sole discretion, require the Borrower
to provide evidence sufficient to satisfy the Lender that such Mortgage
Loan was acquired in a legal sale, including without limitation, an
opinion, in form and substance and from an attorney, in both cases,
acceptable to the Lender in its sole discretion, that such Mortgage Loan
was acquired in a legal sale;
(i) none of the following shall have occurred and/or be
continuing:
(i) a catastrophic event or events shall have occurred
resulting in the effective absence of a "repo market" or
comparable "lending market" for financing debt obligations
secured by mortgage loans or securities for a period of (or
reasonably expected to be) at least 30 consecutive days and the
same has resulted in the Lender not being able to finance any
Advances through the "repo market" or "lending market" with
traditional counterparties at rates which would have been
reasonable prior to the occurrence of such catastrophic event or
events;
<PAGE> 39
(ii) a catastrophic event or events shall have occurred
resulting in the effective absence of a "securities market" for
securities backed by mortgage loans for a period of (or
reasonably expected to be) at least 30 consecutive days and the
same results in the Lender not being able to sell securities
backed by mortgage loans at prices which would have been
reasonable prior to such catastrophic event or events; or
(iii) there shall have occurred a material adverse change
in the financial condition of the Lender which affects (or can
reasonably be expected to affect) materially and adversely the
ability of the Lender to fund its obligations under this Loan
Agreement and the Lender shall have given notice thereof pursuant
to Section 11.02 hereof to the Borrower at least 30 days prior to
the requested Funding Date;
In the event of an occurrence of any of the events described in
clauses (i), (ii) or (iii) above, the Commitment Fee payable by the Borrower
shall be prorated on the basis of the actual number of days during which this
Loan Agreement was in effect.
(j) if any Mortgage Loans to be pledged hereunder were acquired
by the Borrower, such Mortgage Loans shall conform to the Borrower's
Underwriting Guidelines or the Lender shall have received Underwriting
Guidelines for such Mortgage Loans acceptable to the Lender in its
reasonable discretion; and
(k) the Lender shall have received all information requested from
the Borrower relating to Interest Rate Protection Agreements pursuant to
Section 7.25, and the Lender shall have reasonably determined that such
Interest Rate Protection Agreements adequately protect the Borrower from
interest rate fluctuations.
Each request for a borrowing by the Borrower hereunder shall constitute a
certification by the Borrower to the effect set forth in this Section (both as
of the date of such notice, request or confirmation and as of the date of such
borrowing).
SECTION 6. Representations and Warranties. The Borrower
represents and warrants to the Lender that throughout the term of this Loan
Agreement:
6.01 Existence. The Borrower (a) is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization, (b) has all requisite corporate or other power, and has all
governmental licenses, authorizations, consents and approvals, necessary to own
its assets and carry on its business as now being or as proposed to be
conducted, except where the lack of such licenses, authorizations, consents and
approvals would not be reasonably likely to have a material adverse effect on
its property, business or financial condition, or prospects; and (c) is
qualified to do business and is in good standing in all other jurisdictions in
which the nature of the business conducted by it makes such qualification
necessary, except where failure so to qualify would not be reasonably likely
(either individually or in the aggregate) to have a material adverse effect on
its property, business or financial
<PAGE> 40
condition, or prospects and (d) is in compliance in all material respect with
all Requirements of Law.
6.02 Financial Condition. The Borrower has heretofore furnished
to the Lender a copy of its audited consolidated balance sheets and the audited
consolidated balance sheets of its consolidated Subsidiaries, each as at
December 31, 1998 with the opinion thereon of PricewaterhouseCoopers LLP, a copy
of which has been provided to Lender. The Borrower has also heretofore furnished
to the Lender the related consolidated statements of income and retained
earnings and of cash flows for the Borrower and its consolidated Subsidiaries
for the period, setting forth comparative form the figures for the previous
year. All such financial statements are materially complete and correct and
fairly present the consolidated financial condition of the Borrower and its
Subsidiaries and the consolidated results of their operations for the fiscal
year ended on said date, all in accordance with GAAP applied on a consistent
basis. Since December 31, 1998 there has been no development or event nor any
prospective development or event which has had or should reasonably be expected
to have a Material Adverse Effect.
6.03 Litigation. There are no actions, suits, arbitrations,
investigations or proceedings pending or, to its knowledge, threatened against
the Borrower or any of its Subsidiaries or affecting any of the property thereof
before any Governmental Authority, (i) as to which individually or in the
aggregate there is a reasonable likelihood of an adverse decision which would be
reasonably likely to have a material adverse effect on the property, business or
financial condition, or prospects of the Borrower or (ii) which questions the
validity or enforceability of any of the Loan Documents or any action to be
taken in connection with the transactions contemplated hereby and there is a
reasonable likelihood of a materially adverse effect or decision.
6.04 No Breach. Neither (a) the execution and delivery of the
Loan Documents or (b) the consummation of the transactions therein contemplated
in compliance with the terms and provisions thereof will conflict with or result
in a breach of the charter or by-laws of the Borrower, or any applicable law,
rule or regulation, or any order, writ, injunction or decree of any Governmental
Authority, or other material agreement or instrument to which the Borrower, or
any of its Subsidiaries, is a party or by which any of them or any of their
property is bound or to which any of them is subject, or constitute a default
under any such material agreement or instrument, or (except for the Liens
created pursuant to this Loan Agreement) result in the creation or imposition of
any Lien upon any property of the Borrower or any of its Subsidiaries, pursuant
to the terms of any such agreement or instrument.
6.05 Action. The Borrower has all necessary corporate or other
power, authority and legal right to execute, deliver and perform its obligations
under each of the Loan Documents to which it is a party; the execution, delivery
and performance by the Borrower of each of the Loan Documents to which it is a
party has been duly authorized by all necessary corporate or other action on its
part; and each Loan Document has been duly and validly executed and delivered by
the Borrower and constitutes a legal, valid and binding obligation of the
Borrower, enforceable against the Borrower in accordance with its terms.
<PAGE> 41
6.06 Approvals. No authorizations, approvals or consents of, and
no filings or registrations with, any Governmental Authority, or any other
Person, are necessary for the execution, delivery or performance by the Borrower
of the Loan Documents to which it is a party or for the legality, validity or
enforceability thereof, except for filings and recordings in respect of the
Liens created pursuant to this Loan Agreement.
6.07 Margin Regulations. Neither the making of any Advance
hereunder, nor the use of the proceeds thereof, will violate or be inconsistent
with the provisions of Regulation G, T, U or X.
6.08 Taxes. The Borrower and its Subsidiaries have filed all
Federal income tax returns and all other material tax returns that are required
to be filed by them and have paid all taxes due pursuant to such returns or
pursuant to any assessment received by any of them, except for any such taxes,
if any, that are being appropriately contested in good faith by appropriate
proceedings diligently conducted and with respect to which adequate reserves
have been provided. The charges, accruals and reserves on the books of the
Borrower and its Subsidiaries in respect of taxes and other governmental charges
are, in the opinion of the Borrower, adequate.
6.09 Investment Company Act. Neither the Borrower nor any of its
Subsidiaries is an "investment company", or a company "controlled" by an
"investment company", within the meaning of the Investment Company Act of 1940,
as amended. The Borrower is not subject to any Federal or state statute or
regulation which limits its ability to incur indebtedness.
6.10 No Legal Bar. The execution, delivery and performance of
this Loan Agreement and the Note, the borrowings hereunder and the use of the
proceeds thereof will not violate any Requirement of Law or Contractual
Obligation of the Borrower or of any of its Subsidiaries and will not result in,
or require, the creation or imposition of any Lien (other than the Liens created
hereunder) on any of its or their respective properties or revenues pursuant to
any such Requirement of Law or Contractual Obligation.
6.11 No Default. Neither the Borrower nor any of its Subsidiaries
is in default under or with respect to any of its Contractual Obligations in any
respect which should reasonably be expected to have a Material Adverse Effect.
No Default or Event of Default has occurred and is continuing.
6.12 Collateral; Collateral Security.
(a) The Borrower has not assigned, pledged, or otherwise conveyed
or encumbered any Mortgage Loan to any other Person, and immediately prior to
the pledge of any such Mortgage Loan, the Borrower was the sole owner of such
Mortgage Loan and had good and marketable title thereto, free and clear of all
Liens, in each case except for Liens to be released simultaneously with the
Liens granted in favor of the Lender hereunder and no Person other than the
Borrower has any Lien on any Mortgage Loan.
<PAGE> 42
(b) The provisions of this Loan Agreement are effective to create
in favor of the Lender a valid security interest in all right, title and
interest of the Borrower in, to and under the Collateral.
(c) Upon receipt by the Custodian of each Mortgage Note, endorsed
in blank by a duly authorized officer of the Borrower, the Lender shall have a
fully perfected first priority security interest therein, in the Mortgage Loan
evidenced thereby and in the Borrower's interest in the related Mortgaged
Property.
(d) Upon the filing of financing statements on Form UCC-1 naming
the Lender as "Secured Party" and the Borrower as "Debtor", and describing the
Collateral, in the jurisdictions and recording offices listed on Schedule 2
attached hereto, the security interests granted hereunder in the Collateral will
constitute fully perfected first priority security interests under the Uniform
Commercial Code in all right, title and interest of the Borrower in, to and
under such Collateral, which can be perfected by filing under the Uniform
Commercial Code.
6.13 Chief Executive Office; Chief Operating Office. The
Borrower's chief executive office and chief operating office on the Effective
Date is located at 5875 Arnold Road, Dublin, California 94568.
6.14 Location of Books and Records. The location where the
Borrower keeps its books and records including all computer tapes and records
relating to the Collateral is its chief executive office or chief operating
office or the offices of the Custodian.
6.15 True and Complete Disclosure. The information, reports,
financial statements, exhibits and schedules furnished in writing by or on
behalf of the Borrower to the Lender in connection with the negotiation,
preparation or delivery of this Loan Agreement and the other Loan Documents or
included herein or therein or delivered pursuant hereto or thereto, when taken
as a whole, do not contain any untrue statement of material fact or omit to
state any material fact necessary to make the statements herein or therein, in
light of the circumstances under which they were made, not misleading. All
written information furnished after the date hereof by or on behalf of the
Borrower to the Lender in connection with this Loan Agreement and the other Loan
Documents and the transactions contemplated hereby and thereby will be true,
complete and accurate in every material respect, or (in the case of projections)
based on reasonable estimates, on the date as of which such information is
stated or certified. There is no fact known to a Responsible Officer that, after
due inquiry, could reasonably be expected to have a Material Adverse Effect that
has not been disclosed herein, in the other Loan Documents or in a report,
financial statement, exhibit, schedule, disclosure letter or other writing
furnished to the Lender for use in connection with the transactions contemplated
hereby or thereby.
6.16 Tangible Net Worth; Liquidity. The Borrower's Tangible Net
Worth is not less than the greater of (a)(i) prior to an Equity Event,
$5,000,000, and (ii) following an Equity Event, $5,000,000 plus 30% of Net Cash
Proceeds. The Borrower has Cash Equivalents in an amount not less than
$5,000,000 (including standby liquidity facility availability expiring upon the
occurrence of an Equity Event) prior to an Equity Event and not less than
$10,000,000 following an Equity Event. The ratio of the Borrower's Total
Indebtedness to Tangible Net
<PAGE> 43
Worth is not greater than 20:1 prior to an Equity Event and not greater than
10:1 following an Equity Event.
6.17 ERISA. Each Plan to which the Borrower or its Subsidiaries
make direct contributions, and, to the knowledge of the Borrower, each other
Plan and each Multiemployer Plan, is in compliance in all material respects
with, and has been administered in all material respects in compliance with, the
applicable provisions of ERISA, the Code and any other Federal or State law. No
event or condition has occurred and is continuing as to which the Borrower would
be under an obligation to furnish a report to the Lender under Section 7.01(d)
hereof.
6.18 Licenses. The Lender will not be required as a result of
financing or taking a pledge of the Mortgage Loans to be licensed, registered or
approved or to obtain permits or otherwise qualify (i) to do business in any
state in which it currently so required or (ii) under any state consumer
lending, fair debt collection or other applicable state statute or regulation.
6.19 Relevant States. Schedule 3 sets forth all of the states or
other jurisdictions (the "Relevant States") in which the Borrower originates
Mortgage Loans in its own name or through brokers on the date of this Loan
Agreement.
6.20 True Sales. Any and all interest of a Qualified Originator
in, to and under any Mortgage funded in the name of or acquired by such
Qualified Originator or seller which is an Affiliate of the Borrower has been
sold, transferred, conveyed and assigned to the Borrower pursuant to a legal
sale and such Qualified Originator retains no interest in such Mortgage Loan,
and if so requested by the Lender, is covered by an opinion of counsel to that
effect in form and substance acceptable to the Lender.
6.21 No Burdensome Restrictions. No Requirement of Law or
Contractual Obligation of the Borrower or any of its Subsidiaries has a Material
Adverse Effect.
6.22 Subsidiaries. All of the Subsidiaries of the Borrower at the
date hereof are listed on Schedule 4 to this Loan Agreement.
6.23 Origination and Acquisition of Mortgage Loans. The Mortgage
Loans were originated or acquired by the Borrower, and the origination and
collection practices used by the Borrower or Qualified Originator, applicable,
with respect to the Mortgage Loans have been, in all material respects legal,
proper, prudent and customary in the residential mortgage loan servicing
business, and in accordance with the Underwriting Guidelines. With respect to
Mortgage Loans acquired by the Borrower, all such Mortgage Loans are in
conformity with the Underwriting Guidelines. Each of the Mortgage Loans complies
with the representations and warranties listed in Schedule I hereto.
6.24 No Adverse Selection. The Borrower used no selection
procedures that identified the Mortgage Loans as being less desirable or
valuable than other comparable Mortgage Loans owned by the Borrower.
6.25 Borrower Solvent; Fraudulent Conveyance. As of the date
hereof and immediately after giving effect to each Advance, the fair value of
the assets of the Borrower is
<PAGE> 44
greater than the fair value of the liability (including, without limitation,
contingent liabilities if and to the extent required to be recorded as a
liability on the financial statements of the Borrower in accordance with GAAP)
of the Borrower and the Borrower is and will be solvent, is and will be able to
pay its debts as they mature and does not and will not have an unreasonably
small capital to engage in the business in which it is engaged and proposes to
engage. Borrower does not intend to incur, or believe that it has incurred, debt
beyond its ability to pay such debts as they mature. Borrower is not
contemplating the commencement of insolvency, bankruptcy, liquidation or
consolidation proceedings or the appointment of a receiver, liquidator,
conservator, trustee or similar official in respect of Borrower or any of its
assets. Borrower is not transferring any Mortgage Loans with any intent to
hinder, delay or defraud any of its creditors.
6.26 Year 2000 Compliance. The Borrower has made a full and
complete assessment of all issues which may be related to the occurrence of the
year 2000, including all issues related to its computer program and software and
the computer program and software of the Subservicer (the "Year 2000 Issues"),
and both the Borrower and the Subservicer have realistic and achievable programs
for remediating the Year 2000 Issues on a timely basis (the "Year 2000
Program"). Based on such assessment and on the Year 2000 Program, the Borrower
does not reasonably anticipate that Year 2000 Issues will have a material
adverse affect on the Borrower's or the Subservicer's operations or financial
condition.
6.27 Insured Closing Letter. As of the date hereof and as of the
date of each delivery of a Mortgage Loan, the Settlement Agent has obtained an
Insured Closing Letter, closing protection letter or similar authorization
letter from a nationally recognized title insurance company approved by the
Lender, copies of which shall be delivered by the Borrower to the Custodian
prior to the Funding Date.
6.28 Escrow Agreement. As of the date hereof and as of the date
of each delivery of a Mortgage Loan, the Settlement Agent has executed an escrow
agreement or letter stating that in the event of a Rescission or any other
reason the Mortgage Loan fails to fund on a given day, the party conducting the
closing is holding all funds which would have been disbursed on behalf of the
Mortgagor as agent for and for the benefit of the Lender and such funds shall be
redeposited in the Disbursement Account for benefit of the Lender not later than
one Business Day after the date of Rescission or other failure of the Mortgage
Loan to fund on a given day.
SECTION 7. Covenants of the Borrower. The Borrower covenants and
agrees with the Lender that, so long as any Advance is outstanding and until
payment in full of all Secured Obligations:
7.01 Financial Statements. The Borrower shall deliver to the
Lender:
(a)(i) as soon as available and in any event within 15 days after
the end of each month, the consolidated balance sheets of the Borrower
and its consolidated Subsidiaries as at the end of such month and the
related unaudited consolidated statements of income and retained
earnings and of cash flows for the Borrower and its consolidated
Subsidiaries for such month and the portion of the fiscal year through
the end of such month, setting forth in each case in comparative form
the figures for the previous year,
<PAGE> 45
accompanied by a certificate of a Responsible Officer of the Borrower,
which certificate shall state that said consolidated financial
statements fairly present the consolidated financial condition and
results of operations of the Borrower and its Subsidiaries in accordance
with GAAP, consistently applied, as at the end of, and for, such month
(subject to normal year-end audit adjustments);
(ii) as soon as available and in any event within 45 days after
the end of each of the first three quarterly fiscal periods of each
fiscal year of the Borrower, the consolidated balance sheets of the
Borrower and its consolidated Subsidiaries as at the end of such period
and the related unaudited consolidated statements of income and retained
earnings and of cash flows for the Borrower and its consolidated
Subsidiaries for such period and the portion of the fiscal year through
the end of such period, setting forth in each case in comparative form
the figures for the previous year, accompanied by a certificate of a
Responsible Officer of the Borrower, which certificate shall state that
said consolidated financial statements fairly present the consolidated
financial condition and results of operations of the Borrower and its
Subsidiaries in accordance with GAAP, consistently applied, as at the
end of, and for, such period (subject to normal year-end audit
adjustments);
(b) as soon as available and in any event within 90 days after
the end of each fiscal year of the Borrower, the consolidated balance
sheets of the Borrower and its consolidated Subsidiaries as at the end
of such fiscal year and the related consolidated statements of income
and retained earnings and of cash flows for the Borrower and its
consolidated Subsidiaries for such year, setting forth in each case in
comparative form the figures for the previous year, accompanied by an
opinion thereon of independent certified public accountants of
recognized national standing, which opinion shall not be qualified as to
scope of audit or going concern and shall state that said consolidated
financial statements fairly present the consolidated financial condition
and results of operations of the Borrower and its consolidated
Subsidiaries at the end of, and for, such fiscal year in accordance with
GAAP, and a certificate of such accountants stating that, in making the
examination necessary for their opinion, they obtained no knowledge,
except as specifically stated, of any Default or Event of Default;
(c) from time to time such other information regarding the
financial condition, operations, or business of the Borrower as the
Lender may reasonably request; and
(d) as soon as reasonably possible, and in any event within
thirty (30) days after a Responsible Officer knows, or with respect to
any Plan or Multiemployer Plan to which the Borrower or any of its
Subsidiaries makes direct contributions, has reason to believe, that any
of the events or conditions specified below with respect to any Plan or
Multiemployer Plan has occurred or exists, a statement signed by a
senior financial officer of the Borrower setting forth details
respecting such event or condition and the action, if any, that the
Borrower or its ERISA Affiliate proposes to take with respect thereto
(and a copy of any report or notice required to be filed with or given
to PBGC by the Borrower or an ERISA Affiliate with respect to such event
or condition):
<PAGE> 46
(i) any reportable event, as defined in Section 4043(b) of
ERISA and the regulations issued thereunder, with respect to a
Plan, as to which PBGC has not by regulation or otherwise waived
the requirement of Section 4043(a) of ERISA that it be notified
within thirty (30) days of the occurrence of such event (provided
that a failure to meet the minimum funding standard of Section
412 of the Code or Section 302 of ERISA, including, without
limitation, the failure to make on or before its due date a
required installment under Section 412(m) of the Code or Section
302(e) of ERISA, shall be a reportable event regardless of the
issuance of any waivers in accordance with Section 412(d) of the
Code); and any request for a waiver under Section 412(d) of the
Code for any Plan;
(ii) the distribution under Section 4041(c) of ERISA of a
notice of intent to terminate any Plan or any action taken by the
Borrower or an ERISA Affiliate to terminate any Plan;
(iii) the institution by PBGC of proceedings under Section
4042 of ERISA for the termination of, or the appointment of a
trustee to administer, any Plan, or the receipt by the Borrower
or any ERISA Affiliate of a notice from a Multiemployer Plan that
such action has been taken by PBGC with respect to such
Multiemployer Plan;
(iv) the complete or partial withdrawal from a
Multiemployer Plan by the Borrower or any ERISA Affiliate that
results in liability under Section 4201 or 4204 of ERISA
(including the obligation to satisfy secondary liability as a
result of a purchaser default) or the receipt by the Borrower or
any ERISA Affiliate of notice from a Multiemployer Plan that it
is in reorganization or insolvency pursuant to Section 4241 or
4245 of ERISA or that it intends to terminate or has terminated
under Section 4041A of ERISA;
(v) the institution of a proceeding by a fiduciary of any
Multiemployer Plan against the Borrower or any ERISA Affiliate to
enforce Section 515 of ERISA, which proceeding is not dismissed
within 30 days; and
(vi) the adoption of an amendment to any Plan that,
pursuant to Section 401(a)(29) of the Code or Section 307 of
ERISA, would result in the loss of tax-exempt status of the trust
of which such Plan is a part if the Borrower or an ERISA
Affiliate fails to timely provide security to such Plan in
accordance with the provisions of said Sections.
The Borrower will furnish to the Lender, at the time it furnishes each set of
financial statements pursuant to paragraphs (a) and (b) above, a certificate of
a Responsible Officer of the Borrower to the effect that, to the best of such
Responsible Officer's knowledge, the Borrower during such fiscal period or year
has observed or performed all of its covenants and other agreements, and
satisfied every material condition, contained in this Loan Agreement and the
other Loan Documents to be observed, performed or satisfied by it, and that such
Responsible Officer has obtained no knowledge of any Default or Event of Default
except as specified in such certificate
<PAGE> 47
(and, if any Default or Event of Default has occurred and is continuing,
describing the same in reasonable detail and describing the action the Borrower
has taken or proposes to take with respect thereto).
7.02 Litigation. The Borrower will promptly, and in any event
within 7 days after service process on any of the following, give to the Lender
notice of all legal or arbitrable proceedings affecting the Borrower or any of
its Subsidiaries that questions or challenges the validity or enforceability of
any of the Loan Documents or as to which there is a reasonable likelihood of
adverse determination which would result in a Material Adverse Effect.
7.03 Existence, Etc. Each of the Borrower and its Subsidiaries
will:
(a) preserve and maintain its legal existence and all of its
material rights, privileges, licenses and franchises;
(b) comply with the requirements of all applicable laws, rules,
regulations and orders of Governmental Authorities (including, without
limitation, truth in lending, real estate settlement procedures and all
environmental laws) if failure to comply with such requirements would be
reasonably likely (either individually or in the aggregate) to have a
Material Adverse Effect;
(c) keep adequate records and books of account, in which complete
entries will be made in accordance with GAAP consistently applied;
(d) not move its chief executive office or chief operating office
from the addresses referred to in Section 6.13 unless it shall have
provided the Lender 30 days prior written notice of such change;
(e) pay and discharge all taxes, assessments and governmental
charges or levies imposed on it or on its income or profits or on any of
its Property prior to the date on which penalties attach thereto, except
for any such tax, assessment, charge or levy the payment of which is
being contested in good faith and by proper proceedings and against
which adequate reserves are being maintained; and
(f) permit representatives of the Lender, during normal business
hours upon three (3) Business Days' prior written notice at a mutually
desirable time, to examine, copy and make extracts from its books and
records, to inspect any of its Properties, and to discuss its business
and affairs with its officers, all to the extent reasonably requested by
the Lender.
7.04 Prohibition of Fundamental Changes. The Borrower shall not
enter into any transaction of merger or consolidation or amalgamation, or
liquidate, wind up or dissolve itself (or suffer any liquidation, winding up or
dissolution) or sell all or substantially all of its assets; provided, that the
Borrower may merge or consolidate with (a) any wholly owned subsidiary of the
Borrower, or (b) any other Person if the Borrower is the surviving corporation;
and provided further, that if after giving effect thereto, no Default would
exist hereunder.
<PAGE> 48
7.05 Borrowing Base Deficiency. If at any time there exists a
Borrowing Base Deficiency the Borrower shall cure same in accordance with
Section 2.06 hereof.
7.06 Notices. The Borrower shall give notice to the Lender
promptly:
(a) upon the Borrower becoming aware of, and in any event within
one (1) Business Day after, the occurrence of any Default or Event of
Default or any Event of Default or Default under any other material
agreement of the Borrower;
(b) upon, and in any event within three (3) Business Days after,
service of process on the Borrower or any of its Subsidiaries, or any
agent thereof for service of process, in respect of any legal or
arbitrable proceedings affecting the Borrower or any of its Subsidiaries
(i) that questions or challenges the validity or enforceability of any
of the Loan Documents or (ii) in which the amount in controversy exceeds
$500,000;
(c) upon the Borrower becoming aware of any default related to
any Collateral, any Material Adverse Effect and any event or change in
circumstances which should reasonably be expected to have a Material
Adverse Effect;
(d) upon the Borrower becoming aware during the normal course of
its business that the Mortgaged Property in respect of any Mortgage Loan
or Mortgage Loans with an aggregate unpaid principal balance of at least
$500,000 has been damaged by waste, fire, earthquake or earth movement,
windstorm, flood, tornado or other casualty, or otherwise damaged so as
to materially and adversely affect the Collateral Value of such Mortgage
Loan;
(e) upon the entry of a judgment or decree in an amount in excess
of $500,000.
Each notice pursuant to this Section 7.06 (other than 7.06(e)) shall be
accompanied by a statement of a Responsible Officer of the Borrower setting
forth details of the occurrence referred to therein and stating what action the
Borrower has taken or proposes to take with respect thereto.
7.07 Servicing. Except as provided in Section 11.15(c), the
Borrower shall not permit any Person other than the Borrower to service Mortgage
Loans without the prior written consent of the Lender, which consent shall not
be unreasonably withheld.
7.08 Intentionally Omitted.
7.09 Underwriting Guidelines. The Borrower shall notify the
Lender in writing of any material modifications to the Underwriting Guidelines
prior to implementation of such change, and unless the Lender objects in writing
within 5 Business Days of receipt of notice, the proposed modifications shall be
deemed acceptable.
<PAGE> 49
7.10 Lines of Business. The Borrower will not engage to any
substantial extent in any line or lines of business activity other than the
businesses generally carried on by it as of the Effective Date.
7.11 Transactions with Affiliates. The Borrower will not enter
into any transaction, including, without limitation, any purchase, sale, lease
or exchange of property or the rendering of any service, with any Affiliate
unless such transaction is (a) otherwise permitted under this Loan Agreement,
(b) in the ordinary course of the Borrower's business and (c) upon fair and
reasonable terms no less favorable to the Borrower than it would obtain in a
comparable arm's length transaction with a Person which is not an Affiliate, or
make a payment that is not otherwise permitted by this Section 7.11 to any
Affiliate.
7.12 Use of Proceeds. The Borrower will use the proceeds of the
Advances solely to originate, fund, manage and service Eligible Mortgage Loans.
7.13 Limitation on Liens. The Borrower will not, nor will it
permit or allow others to, create, incur or permit to exist any Lien, security
interest or claim on or to any of its Property, except for (i) Liens (not
otherwise permitted hereunder) which are created in connection with the purchase
of fixed assets and equipment necessary in the ordinary course of the Borrower's
business or to finance residual certificates issued in connection with
securitizations of mortgage loans completed by the Borrower which are financed
solely based on a pledge of such residual certificates; and (ii) Liens on the
Collateral created pursuant to this Loan Agreement. The Borrower will defend the
Collateral against, and will take such other action as is necessary to remove,
any Lien, security interest or claim on or to the Collateral, other than the
security interests created under this Loan Agreement, and the Borrower will
defend the right, title and interest of the Lender in and to any of the
Collateral against the claims and demands of all persons whomsoever.
7.14 Limitation on Sale of Assets. The Borrower shall not convey,
sell, lease, assign, transfer or otherwise dispose of (collectively,
"Transfer"), all or substantially all of its Property, business or assets
(including, without limitation, receivables and leasehold interests) whether now
owned or hereafter acquired or allow any Subsidiary to Transfer substantially
all of its assets to any Person; provided, that the Borrower may after prior
written notice to the Lender allow such action with respect to any Subsidiary
which is not a material part of the Borrower's overall business operations.
7.15 Limitation on Distributions. Without the Lender's consent,
the Borrower shall not make any payment on account of, or set apart assets for a
sinking or other analogous fund for the purchase, redemption, defeasance,
retirement or other acquisition of, any stock or senior or subordinate debt of
the Borrower, whether now or hereafter outstanding, or make any other
distribution in respect thereof, either directly or indirectly, whether in cash
or property or in obligations of the Borrower.
7.16 Maintenance of Liquidity. The Borrower shall insure that, as
of the end of each calendar month, it has Cash Equivalents in an amount of not
less than (a) $5,000,000 prior to an Equity Event (including standby liquidity
facility availability expiring upon the occurrence of an Equity Event) or (b)
$10,000,000 following an Equity Event.
<PAGE> 50
7.17 Maintenance of Tangible Net Worth. The Borrower shall not
permit Tangible Net Worth at any time to be less than (a) prior to an Equity
Event $5,000,000 and (b) following an Equity Event $5,000,000 plus 30% of Net
Cash Proceeds.
7.18 Maintenance of Ratio of Total Indebtedness to Tangible Net
Worth. The Borrower shall not permit the ratio of Total Indebtedness to Tangible
Net Worth at any time to be greater than 20:1 prior to an Equity Event or
greater than 10:1 following an Equity Event.
7.19 Restricted Payments. The Borrower shall not make any
Restricted Payments following an Event of Default.
7.20 Servicing Transmission. The Borrower shall provide to the
Lender within two (2) Business Days of the Lender's written request (i) the
Servicing Transmission, on a loan-by-loan basis and in the aggregate, with
respect to the Mortgage Loans serviced hereunder by the Borrower which were
funded prior to the first day of the current month, summarizing the Borrower's
delinquency and loss experience with respect to Mortgage Loans serviced by the
Borrower (including, in the case of the Mortgage Loans, the following
categories: current, 30-59, and 60+) and (ii) any other information reasonably
requested by the Lender with respect to the Mortgage Loans.
7.21 No Amendment or Waiver. The Borrower will not, nor will it
permit or allow others to amend, modify, terminate or waive any provision of any
Mortgage Loan to which the Borrower is a party in any manner which shall
reasonably be expected to materially and adversely affect the value of such
Mortgage Loan as Collateral.
7.22 Maintenance of Property; Insurance. The Borrower shall keep
all property useful and necessary in its business in good working order and
condition. The Borrower shall maintain errors and omissions insurance and/or
mortgage impairment insurance and blanket bond coverage in such amounts as are
in effect on the Effective Date (as disclosed to Lender in writing) and shall
not reduce such coverage without the written consent of the Lender, and shall
also maintain such other insurance with financially sound and reputable
insurance companies, and with respect to property and risks of a character
usually maintained by entities engaged in the same or similar business similarly
situated, against loss, damage and liability of the kinds and in the amounts
customarily maintained by such entities.
7.23 Further Identification of Collateral. The Borrower will
furnish to the Lender from time to time statements and schedules further
identifying and describing the Collateral and such other reports in connection
with the Collateral as the Lender or any Lender may reasonably request, all in
reasonable detail.
7.24 Mortgage Loan Determined to be Defective. Upon discovery by
the Borrower or the Lender of any breach of any representation or warranty
listed on Schedule 1 hereto applicable to any Mortgage Loan, the party
discovering such breach shall promptly give notice of such discovery to the
other.
<PAGE> 51
7.25 Interest Rate Protection Agreements. Upon the Lender's
request, the Borrower shall deliver to the Lender any and all information
relating to Interest Rate Protection Agreements.
7.26 Year 2000 Compliance. (a) The Borrower shall take and shall
cause each of its Affiliates and any Sub-servicer to take all such actions as
are reasonably necessary to successfully implement the Year 2000 Program and to
assure that the Year 2000 Issues will not have a material adverse effect on the
Borrower's operations or financial condition. At the request of the Lender, the
Borrower will provide a description of the Year 2000 Program, together with any
updates or progress reports with respect thereto. The Borrower shall provide the
Lender with immediate notice in writing in the event that the Borrower has
reason to believe that the occurrence of the year 2000 will adversely affect the
Borrower's business or any Advances executed in connection herewith.
(b) By September 1, 1999, the Borrower shall be required to
provide written assurance to the Lender that it is year 2000 compliant. If
satisfactory assurance can not be made on such date, the Lender shall have no
obligation to make any additional Advances under this Agreement. In addition,
the failure of the Borrower to provide satisfactory assurance of year 2000
compliance within thirty days thereafter shall constitute an Event of Default
under this Agreement.
7.27 Certificate of a Responsible Officer of the Borrower. At the
time that the Borrower delivers financial statements to the Lender in accordance
with Section 7.01 hereof, the Borrower shall forward to the Lender a certificate
of a Responsible Officer of the Borrower which demonstrates that the Borrower is
in compliance with the covenants set forth in Sections 7.16, 7.17 and 7.18
above.
7.28 Uncommitted Warehouse Facilities. The Borrower shall at all
times have available under uncommitted revolving facilities (other than with the
Lender) at least $40,000,000.
SECTION 8. Events of Default. Each of the following events shall
constitute an event of default (an "Event of Default") hereunder:
(a) the Borrower shall default in the payment of any principal of
or interest on any Advance when due (whether at stated maturity, upon
acceleration or at mandatory prepayment); or
(b) the Borrower shall default in the payment of any other amount
payable by it hereunder or under any other Loan Document after
notification by the Lender of such default, and such default shall have
continued unremedied for three Business Days; or
(c) any representation, warranty or certification made or deemed
made herein or in any other Loan Document by the Borrower or any
certificate furnished to the Lender pursuant to the provisions thereof,
shall prove to have been false or misleading in any material respect as
of the time made or furnished (other than the representations and
warranties set forth in Schedule 1 which shall be considered solely for
the purpose of
<PAGE> 52
determining the Collateral Value of the Mortgage Loans; unless Borrower
shall have made any such representations and warranties with knowledge
that they were materially false or misleading at the time made); or
(d) the Borrower shall fail to comply with the requirements of
Section 7.03(a), Section 7.04, Section 7.06 (a) or (c), Sections 7.12
through 7.19 Section 7.22(b), Section 7.26 or Section 7.28 hereof; or
the Borrower shall default in the performance of its obligations under
Section 7.05 hereof, and such default shall continue unremedied for a
period of one (1) Business Day; or the Borrower shall otherwise fail to
observe or perform any other agreement contained in this Loan Agreement
or any other Loan Document and such failure to observe or perform shall
continue unremedied for a period of five (5) Business Days; or
(e) a final judgment or judgments for the payment of money in
excess of $1,000,000 in the aggregate (to the extent that it is, in the
reasonable determination of the Lender, uninsured and provided that any
insurance or other credit posted in connection with an appeal shall not
be deemed insurance for these purposes) shall be rendered against the
Borrower or any of its Subsidiaries by one or more courts,
administrative tribunals or other bodies having jurisdiction over them
and the same shall not be discharged (or provision shall not be made for
such discharge) or bonded, or a stay of execution thereof shall not be
procured, within 60 days from the date of entry thereof and the Borrower
or any such Subsidiary shall not, within said period of 60 days, or such
longer period during which execution of the same shall have been stayed
or bonded, appeal therefrom and cause the execution thereof to be stayed
during such appeal; or
(f) the Borrower shall admit in writing its inability to pay its
debts as such debts become due; or
(g) the Borrower or any of its Subsidiaries shall (i) apply for
or consent to the appointment of, or the taking of possession by, a
receiver, custodian, trustee, examiner or liquidator of itself or of all
or a substantial part of its property, (ii) make a general assignment
for the benefit of its creditors, (iii) commence a voluntary case under
the Bankruptcy Code, (iv) file a petition seeking to take advantage of
any other law relating to bankruptcy, insolvency, reorganization,
liquidation, dissolution, arrangement or winding-up, or composition or
readjustment of debts, (v) fail to controvert in a timely and
appropriate manner, or acquiesce in writing to, any petition filed
against it in an involuntary case under the Bankruptcy Code or (vi) take
any corporate or other action for the purpose of effecting any of the
foregoing; or
(h) a proceeding or case shall be commenced, without the
application or consent of the Borrower or any of its Subsidiaries, in
any court of competent jurisdiction, seeking (i) its reorganization,
liquidation, dissolution, arrangement or winding-up, or the composition
or readjustment of its debts, (ii) the appointment of a receiver,
custodian, trustee, examiner, liquidator or the like of the Borrower or
any such Subsidiary or of all or any substantial part of its property,
or (iii) similar relief in respect of the Borrower or any such
Subsidiary under any law relating to bankruptcy, insolvency,
reorganization,
<PAGE> 53
winding-up, or composition or adjustment of debts, and such proceeding
or case shall continue undismissed, or an order, judgment or decree
approving or ordering any of the foregoing shall be entered and continue
unstayed and in effect, for a period of 60 or more days; or an order for
relief against the Borrower or any such Subsidiary shall be entered in
an involuntary case under the Bankruptcy Code; or
(i) the Custodial Agreement or any Loan Document shall for
whatever reason (including an event of default thereunder) be terminated
or the lien on the Collateral created by this Agreement or Borrower's
material obligations hereunder shall cease to be in full force and
effect, or the enforceability thereof shall be contested by the
Borrower; or
(j) any materially adverse change in the Properties, business or
financial condition, or prospects of the Borrower or any of its
Subsidiaries or Affiliates, in each case as determined by the Lender in
its sole discretion, or the existence of any other condition which, in
the Lender's sole discretion, constitutes a material impairment of the
Borrower's ability to perform its obligations under this Loan Agreement,
the Note or any other Loan Document; or
(k) (i) any Person shall engage in any "prohibited transaction"
(as defined in Section 406 of ERISA or Section 4975 of the Code)
involving any Plan, (ii) any material "accumulated funding deficiency"
(as defined in Section 302 of ERISA), whether or not waived, shall exist
with respect to any Plan or any Lien in favor of the PBGC or a Plan
shall arise on the assets of the Borrower or any Commonly Controlled
Entity, (iii) a Reportable Event shall occur with respect to, or
proceedings shall commence to have a trustee appointed, or a trustee
shall be appointed, to administer or to terminate, any Single Employer
Plan, which Reportable Event or commencement of proceedings or
appointment of a trustee is, in the reasonable opinion of the Lenders,
likely to result in the termination of such Plan for purposes of Title
IV of ERISA, (iv) any Single Employer Plan shall terminate for purposes
of Title IV of ERISA, (v) the Borrower or any Commonly Controlled Entity
shall, or in the reasonable opinion of the Lenders is likely to, incur
any liability in connection with a withdrawal from, or the insolvency or
reorganization of, a Multiemployer Plan or (vi) any other event or
condition shall occur or exist with respect to a Plan; and in each case
in clauses (i) through (vi) above, such event or condition, together
with all other such events or conditions, if any, could reasonably be
expected to have a Material Adverse Effect; or
(l) any Change of Control of the Borrower shall have occurred
without the prior consent of the Lender; or
(m) the Borrower shall grant, or suffer to exist, any Lien on any
Collateral except the Liens contemplated hereby; or the Liens
contemplated hereby shall cease to be first priority perfected Liens on
the Collateral in favor of the Lender or shall be Liens in favor of any
Person other than the Lender; or
(n) the Lender shall reasonably request, specifying the reasons
for such request, information, and/or written responses to such
requests, regarding the financial
<PAGE> 54
well-being of the Borrower and such information and/or responses shall
not have been provided within three Business Days of such request; or
(o) the Borrower shall default under, or fail to materially
perform as requested under any other transaction with the Lender or its
Affiliates.
SECTION 9. Remedies Upon Default.
(a) Upon the occurrence of one or more Events of Default (subject
to the expiration of the applicable cure period contained therein) other
than those referred to in Section 8(g) or (h), the Lender may
immediately declare the principal amount of the Advances then
outstanding under the Note to be immediately due and payable, together
with all interest thereon and reasonable fees and out-of-pocket expenses
accruing under this Loan Agreement; provided that upon the occurrence of
an Event of Default referred to in Sections 8(g) or (h), such amounts
shall immediately and automatically become due and payable without any
further action by any Person. Upon such declaration or such automatic
acceleration, the balance then outstanding on the Note shall become
immediately due and payable, without presentment, demand, protest or
other formalities of any kind, all of which are hereby expressly waived
by the Borrower and may thereupon exercise any remedies available to it
at law and pursuant to the Loan Documents including, but not limited to,
the transfer of servicing or the liquidation of the Collateral on a
servicing released basis.
(b) Upon the occurrence of one or more Events of Default, the
Lender shall have the right to obtain physical possession of the
Servicing Records and all other files of the Borrower relating to the
Collateral and all documents relating to the Collateral which are then
or may thereafter come in to the possession of the Borrower or any third
party acting for the Borrower and the Borrower shall deliver to the
Lender such assignments as the Lender shall request. The Lender shall be
entitled to specific performance of all agreements of the Borrower
contained in this Loan Agreement.
SECTION 10. No Duty on Lender's Part. The powers conferred on the
Lender hereunder are solely to protect the Lender's interests in the Collateral
and shall not impose any duty upon it to exercise any such powers. The Lender
shall be accountable only for amounts that it actually receives as a result of
the exercise of such powers, and neither it nor any of its officers, directors,
employees or agents shall be responsible to the Borrower for any act or failure
to act hereunder, except for its or their own gross negligence or willful
misconduct.
SECTION 11. Miscellaneous.
11.01 Waiver. No failure on the part of the Lender to exercise
and no delay in exercising, and no course of dealing with respect to, any right,
power or privilege under any Loan Document shall operate as a waiver thereof,
nor shall any single or partial exercise of any right, power or privilege under
any Loan Document preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
<PAGE> 55
11.02 Notices. Except as otherwise expressly permitted by this
Loan Agreement, all notices, requests and other communications provided for
herein and under the Custodial Agreement (including, without limitation, any
modifications of, or waivers, requests or consents under, this Loan Agreement)
shall be given or made in writing (including, without limitation, by telex or
telecopy) delivered to the intended recipient at the "Address for Notices"
specified below its name on the signature pages hereof); or, as to any party, at
such other address as shall be designated by such party in a written notice to
each other party. Except as otherwise provided in this Loan Agreement and except
for notices given under Section 2 (which shall be effective only on receipt),
all such communications shall be deemed to have been duly given when transmitted
by telex or telecopier or personally delivered or, in the case of a mailed
notice, upon receipt, in each case given or addressed as aforesaid.
11.03 Indemnification and Expenses.
(a) The Borrower agrees to hold the Lender harmless from and
indemnify the Lender against all liabilities, losses, damages, judgments, costs
and expenses of any kind which may be imposed on, incurred by, or asserted
against the Lender, relating to or arising out of, this Loan Agreement, the
Note, any other Loan Document or any transaction contemplated hereby or thereby,
or any amendment, supplement or modification of, or any waiver or consent under
or in respect of, this Loan Agreement, the Note, any other Loan Document or any
transaction contemplated hereby or thereby, that, in each case, results from
anything other than the Lender's gross negligence or willful misconduct. In any
suit, proceeding or action brought by the Lender in connection with any Mortgage
Loan for any sum owing thereunder, or to enforce any provisions of any Mortgage
Loan, the Borrower will save, indemnify and hold the Lender harmless from and
against all expense, loss or damage suffered by reason of any defense, set-off,
counterclaim, recoupment or reduction or liability whatsoever of the account
debtor or obligor thereunder, arising out of a breach by the Borrower of any
obligation thereunder or arising out of any other agreement, indebtedness or
liability at any time owing to or in favor of such account debtor or obligor or
its successors from the Borrower. The Borrower also agrees to reimburse the
Lender as and when billed by the Lender for all the Lender's reasonable
out-of-pocket costs and expenses incurred in connection with the enforcement or
the preservation of the Lender's rights under this Loan Agreement, the Note, any
other Loan Document or any transaction contemplated hereby or thereby, including
without limitation the reasonable fees and disbursements of its counsel. The
Borrower hereby acknowledges that, notwithstanding the fact that the Note is
secured by the Collateral, the obligation of the Borrower under the Note is a
recourse obligation of the Borrower.
(b) The Borrower agrees to pay as and when billed by the Lender
all of the out-of pocket costs and expenses incurred by the Lender in connection
with the development, preparation and execution of, and any amendment,
supplement or modification to, this Loan Agreement, the Note, any other Loan
Document or any other documents prepared in connection herewith or therewith.
The Borrower agrees to pay as and when billed by the Lender all of the
out-of-pocket costs and expenses incurred in connection with the consummation
and administration of the transactions contemplated hereby and thereby
including, without limitation, (i) all the reasonable fees, disbursements and
expenses of counsel to the Lender, (ii) all the due diligence, inspection,
testing and review costs and expenses incurred by the Lender with respect
<PAGE> 56
to Collateral under this Loan Agreement, including, but not limited to, those
costs and expenses incurred by the Lender in connection with the approval of any
Takeout Commitments and pursuant to Sections 11.03(a), 11.14 and 11.16 hereof
other than any costs and expenses incurred in connection with the Lender's
rehypothecation of the Mortgage Loans prior to an Event of Default and (iii)
initial and ongoing fees and expenses incurred by the Custodian and any trustee
with respect to the Mortgage Loans. All of the foregoing amounts shall be paid
promptly by the Borrower or may be netted out of any Advance made by the Lender
hereunder.
11.04 Amendments. Except as otherwise expressly provided in this
Loan Agreement, any provision of this Loan Agreement may be modified or
supplemented only by an instrument in writing signed by the Borrower and the
Lender and any provision of this Loan Agreement may be waived by the Lender.
11.05 Successors and Assigns. This Loan Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
11.06 Survival. The obligations of the Borrower under Sections
3.03 and 11.03 hereof shall survive the repayment of the Advances and the
termination of this Loan Agreement. In addition, each representation and
warranty made, or deemed to be made by a request for a borrowing, herein or
pursuant hereto shall survive the making of such representation and warranty,
and the Lender shall not be deemed to have waived, by reason of making any
Advance, any Default that may arise by reason of such representation or warranty
proving to have been false or misleading, notwithstanding that the Lender may
have had notice or knowledge or reason to believe that such representation or
warranty was false or misleading at the time such Advance was made.
11.07 Captions. The table of contents and captions and section
headings appearing herein are included solely for convenience of reference and
are not intended to affect the interpretation of any provision of this Loan
Agreement.
11.08 Counterparts. This Loan Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument, and any of the parties hereto may execute this Loan Agreement
by signing any such counterpart.
11.09 Loan Agreement Constitutes Security Agreement; Governing
Law. This Loan Agreement shall be governed by New York law without reference to
choice of law doctrine (but with reference to Section 5-1401 of the New York
General Obligations Law, which by its terms applies to this Loan Agreement), and
shall constitute a security agreement within the meaning of the Uniform
Commercial Code.
11.10 SUBMISSION TO JURISDICTION; WAIVERS. EACH LOAN PARTY HEREBY
IRREVOCABLY AND UNCONDITIONALLY:
(A) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR
PROCEEDING RELATING TO THIS LOAN AGREEMENT, THE NOTE AND THE OTHER LOAN
DOCUMENTS, OR FOR RECOGNITION AND
<PAGE> 57
ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NONEXCLUSIVE
GENERAL JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK, THE FEDERAL
COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW
YORK, AND APPELLATE COURTS FROM ANY THEREOF;
(B) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN
SUCH COURTS AND, TO THE EXTENT PERMITTED BY LAW, WAIVES ANY OBJECTION
THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR
PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS
BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE
SAME;
(C) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR
PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR
CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE
PREPAID, TO ITS ADDRESS SET FORTH UNDER ITS SIGNATURE BELOW OR AT SUCH
OTHER ADDRESS OF WHICH THE LENDER SHALL HAVE BEEN NOTIFIED; AND
(D) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT
SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT
THE RIGHT TO SUE IN ANY OTHER JURISDICTION.
11.11 WAIVER OF JURY TRIAL. EACH OF THE BORROWER AND THE LENDER
HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW,
ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR
RELATING TO THIS LOAN AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY.
11.12 Acknowledgments. The Borrower hereby acknowledges that:
(a) it has been advised by counsel in the negotiation, execution
and delivery of this Loan Agreement, the Note and the other Loan
Documents to which it is a party;
(b) the Lender has no fiduciary relationship to the Borrower, and
the relationship between the Borrower and the Lender is solely that of
debtor and creditor; and
(c) no joint venture exists among or between the Lender and the
Borrower.
11.13 Hypothecation or Pledge of Collateral. The Lender shall
have free and unrestricted use of all Collateral and nothing in this Loan
Agreement shall preclude the Lender from engaging in repurchase transactions
with the Collateral or otherwise pledging, repledging,
<PAGE> 58
transferring, hypothecating, or rehypothecating the Collateral. Nothing
contained in this Loan Agreement shall obligate the Lender to segregate any
Collateral delivered to the Lender by the Borrower.
11.14 Assignments; Participations.
(a) The Borrower may assign any of its rights or obligations
hereunder or under the Note with the prior written consent of the Lender which
consent shall not be unreasonably withheld. The Lender may assign or transfer to
any bank or other financial institution that makes or invests in loans or any
Affiliate of the Lender all or any of its rights or obligations under this Loan
Agreement and the other Loan Documents.
(b) The Lender may, in accordance with applicable law, at any
time sell to one or more lenders or other entities ("Participants")
participating interests in any Advance, the Note, its commitment to make
Advances, or any other interest of the Lender hereunder and under the other Loan
Documents. In the event of any such sale by the Lender of participating
interests to a Participant, the Lender's obligations under this Loan Agreement
to the Borrower shall remain unchanged, the Lender shall remain solely
responsible for the performance thereof, the Lender shall remain the holder of
the Note for all purposes under this Loan Agreement and the other Loan
Documents, and the Borrower and the Lender shall continue to deal solely and
directly with the Lender in connection with the Lender's rights and obligations
under this Loan Agreement and the other Loan Documents. The Borrower agrees that
if amounts outstanding under this Loan Agreement and the Note are due or unpaid,
or shall have been declared or shall have become due and payable upon the
occurrence of an Event of Default, each Participant shall be deemed to have the
right of set-off in respect of its participating interest in amounts owing under
this Loan Agreement and the Note to the same extent as if the amount of its
participating interest were owing directly to it as a Lender under this Loan
Agreement or the Note; provided, that such Participant shall only be entitled to
such right of set-off if it shall have agreed in the agreement pursuant to which
it shall have acquired its participating interest to share with the Lender the
proceeds thereof. The Lender also agrees that each Participant shall be entitled
to the benefits of Sections 2.07 and 11.03 with respect to its participation in
the Advances outstanding from time to time; provided, that the Lender and all
Participants shall be entitled to receive no greater amount in the aggregate
pursuant to such Sections than the Lender would have been entitled to receive
had no such transfer occurred.
(c) The Lender may furnish any information concerning the
Borrower or any of its Subsidiaries in the possession of such Lender from time
to time to assignees and participants (including prospective assignees and
participants) only after notifying the Borrower in writing and securing signed
confidentiality statements (a form of which is attached hereto as Exhibit H) and
only for the sole purpose of evaluating participations and for no other purpose.
(d) The Borrower agrees to cooperate with the Lender in
connection with any such assignment and/or participation, to execute and deliver
such replacement notes, and to enter into such restatements of, and amendments,
supplements and other modifications to, this Loan Agreement and the other Loan
Documents in order to give effect to such assignment and/or participation. The
Borrower further agrees to furnish to any Participant identified by the Lender
<PAGE> 59
to the Borrower copies of all reports and certificates to be delivered by the
Borrower to the Lender hereunder, as and when delivered to the Lender.
11.15 Servicing.
(a) The Borrower covenants to maintain or cause the servicing of
the Mortgage Loans to be maintained in conformity with Accepted Servicing
Practices. In the event that the preceding language is interpreted as
constituting one or more servicing contracts, each such servicing contract shall
terminate automatically upon the earliest of (i) an Event of Default, or (ii)
the date on which all the Secured Obligations have been paid in full, or (iii)
the transfer of servicing to any entity approved by the Lender.
(b) During the period the Borrower is servicing the Mortgage
Loans, (i) the Borrower agrees that Lender has a first priority perfected
security interest in all servicing records, including but not limited to any and
all servicing agreements, files, documents, records, data bases, computer tapes,
copies of computer tapes, proof of insurance coverage, insurance policies,
appraisals, other closing documentation, payment history records, and any other
records relating to or evidencing the servicing of such Mortgage Loans (the
"Servicing Records"), and (ii) the Borrower grants the Lender a security
interest in all servicing fees and rights relating to the Mortgage Loans and all
Servicing Records to secure the obligation of the Borrower or its designee to
service in conformity with this Section and any other obligation of Borrower to
the Lender. The Borrower covenants to safeguard such Servicing Records and to
deliver them promptly to the Lender or its designee (including the Custodian) at
the Lender's request. It is understood and agreed by the parties that prior to
an Event of Default, the Borrower shall retain the servicing fees with respect
to the Mortgage Loans.
(c) If the Mortgage Loans are serviced by any other third party
servicer (such third party servicer, the "Subservicer"), the Borrower shall
provide a copy of the related servicing agreement to the Lender at least three
(3) Business Days prior to the applicable Funding Date or the date on which the
Subservicer shall begin subservicing the Mortgage Loans, which shall be in the
form and substance acceptable to Lender (the "Servicing Agreement") and shall
have obtained the written consent of the Lender for such Subservicer to
subservice the Mortgage Loans.
(d) The Borrower agrees that upon the occurrence of an Event of
Default, the Lender may terminate the Borrower in its capacity as servicer and
terminate any Servicing Agreement and transfer such servicing to the Lender or
its designee, at no cost or expense to the Lender. The Borrower agrees to
cooperate with the Lender in connection with the transfer of servicing.
(e) After the Funding Date, until the pledge of any Mortgage Loan
is relinquished by the Custodian, the Borrower will have no right to modify or
alter the terms of the Mortgage Loan or consent to the modification or
alteration of the terms of any Mortgage Loan, and the Borrower will have no
obligation or right to repossess any Mortgage Loan or substitute another
Mortgage Loan, except as provided in any Custodial Agreement.
<PAGE> 60
(f) The Borrower shall permit the Lender to inspect upon
reasonable prior written notice (which shall be no more than five (5) Business
Days prior to such date) at a mutually convenient time, the Borrower's or its
Affiliate's servicing facilities, as the case may be, for the purpose of
satisfying the Lender that the Borrower or its Affiliate, as the case may be,
has the ability to service the Mortgage Loans as provided in this Loan
Agreement. In addition, with respect to any Subservicer which is not an
Affiliate of the Borrower, the Borrower shall use its best efforts to enable the
Lender to inspect the servicing facilities of such Subservicer.
11.16 Periodic Due Diligence Review. The Borrower acknowledges
that the Lender has the right to perform continuing due diligence reviews with
respect to the Mortgage Loans, for purposes of verifying compliance with the
representations, warranties and specifications made hereunder, or otherwise, and
the Borrower agrees that upon reasonable (but no less than one (1) Business
Day's) prior notice to the Borrower, the Lender or its authorized
representatives will be permitted during normal business hours to examine,
inspect, make copies of, and make extracts of, the Mortgage Files and any and
all documents, records, agreements, instruments or information relating to such
Mortgage Loans in the possession, or under the control, of the Borrower and/or
the Custodian. The Borrower also shall make available to the Lender a
knowledgeable financial or accounting officer for the purpose of answering
questions respecting the Mortgage Files and the Mortgage Loans. Without limiting
the generality of the foregoing, the Borrower acknowledges that the Lender shall
make Advances to the Borrower based solely upon the information provided by the
Borrower to the Lender in the Mortgage Loan Data Transmission and the
representations, warranties and covenants contained herein, and that the Lender,
at its option, has the right, at any time to conduct a partial or complete due
diligence review on some or all of the Mortgage Loans securing such Advance,
including, without limitation, ordering new credit reports, new appraisals on
the related Mortgaged Properties and otherwise re-generating the information
used to originate such Mortgage Loan. The Lender may underwrite such Mortgage
Loans itself or engage a mutually agreed upon third party underwriter to perform
such underwriting. The Borrower agrees to cooperate with the Lender and any
third party underwriter in connection with such underwriting, including, but not
limited to, providing the Lender and any third party underwriter with access to
any and all documents, records, agreements, instruments or information relating
to such Mortgage Loans in the possession, or under the control, of the Borrower.
In addition, the Lender has the right to perform continuing Due Diligence
Reviews of the Borrower and its Affiliates, directors, officers, employees and
significant shareholders. The Borrower and Lender further agree that all
out-of-pocket costs and expenses incurred by the Lender in connection with the
Lender's activities pursuant to this Section 11.16 shall be paid for as agreed
by such parties.
11.17 Set-Off. In addition to any rights and remedies of the
Lender provided by this Loan Agreement and by law, upon the occurrence of an
Event of Default, the Lender shall have the right, without prior notice to the
Borrower, any such notice being expressly waived by the Borrower to the extent
permitted by applicable law, upon any amount becoming due and payable by the
Borrower hereunder (whether at the stated maturity, by acceleration or
otherwise) to set-off and appropriate and apply against such amount any and all
Property and deposits (general or special, time or demand, provisional or
final), in any currency, and any other credits, indebtedness or claims, in any
currency, in each case whether direct or indirect, absolute or contingent,
matured or unmatured, at any time held or owing by the Lender or any Affiliate
<PAGE> 61
thereof to or for the credit or the account of the Borrower. 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.
11.18 Intent. The parties recognize that each Advance is a
"securities contract" as that term is defined in Section 741 of Title 11 of the
United States Code, as amended.
[SIGNATURE PAGES FOLLOW]
<PAGE> 62
IN WITNESS WHEREOF, the parties hereto have caused this Loan
Agreement to be duly executed and delivered as of the day and year first above
written.
BORROWER
E-LOAN, INC.
By: /s/ Frank Siskowski
---------------------------------------
Title:
Address for Notices:
5875 Arnold Road
Dublin, California 94568
Attention:
Telecopier No.:
Telephone No.:
With a copy to:
Attention: Vice President/Treasury
Telecopier No.:
Telephone No.:
LENDER
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
By:
---------------------------------------
Title:
Address for Notices:
600 Steamboat Road
Greenwich, Connecticut 06830
Attention: Dawn Papaccio
Telecopier No.: (203) 618-2135
Telephone No.: (203) 625-2928
With a copy to:
Attention: General Counsel
Telecopier No.: (203) 618-2132
Telephone No.: (203) 625-2700
<PAGE> 63
SCHEDULE 1
REPRESENTATIONS AND WARRANTIES RE: MORTGAGE LOANS
Eligible Mortgage Loans
As to each Mortgage Loan that forms part of the Collateral
hereunder (and the related Mortgage, Mortgage Note, Assignment of Mortgage and
Mortgaged Property), the Borrower shall be deemed to make the following
representations and warranties to the Lender as of such date and as of each date
Collateral Value is determined:
(a) Mortgage Loans as Described. The information set forth in the
Mortgage Loan Data Transmission with respect to the Mortgage Loan is complete,
true and correct in all material respects.
(b) Payments Current. The first Monthly Payment shall have been
made prior to the second scheduled Monthly Payment becoming due.
(c) No Outstanding Charges. There are no defaults in complying
with the terms of the Mortgage securing the Mortgage Loan, and all taxes,
governmental assessments, insurance premiums, water, sewer and municipal
charges, leasehold payments or ground rents which previously became due and
owing have been paid, or an escrow of funds has been established in an amount
sufficient to pay for every such item which remains unpaid and which has been
assessed but is not yet due and payable. Neither the Borrower nor the Qualified
Originator from which the Borrower acquired the Mortgage Loan has advanced
funds, or induced, solicited or knowingly received any advance of funds by a
party other than the Mortgagor, directly or indirectly, for the payment of any
amount required under the Mortgage Loan, except for interest accruing from the
date of the Mortgage Note or date of disbursement of the proceeds of the
Mortgage Loan, whichever is more recent, to the day which precedes by one month
the Due Date of the first installment of principal and interest thereunder.
(d) Original Terms Unmodified. The terms of the Mortgage Note and
Mortgage have not been impaired, waived, altered or modified in any respect,
from the date of origination; except by a written instrument which has been
recorded, if necessary to protect the interests of the Lender, and which has
been delivered to the Custodian and the terms of which are reflected in the
Mortgage Loan Schedule. The substance of any such waiver, alteration or
modification has been approved by the title insurer, to the extent required by
the title insurance policy, and its terms are reflected on the Mortgage Loan
Schedule. No Mortgagor in respect of the Mortgage Loan has been released, in
whole or in part, except in connection with an assumption agreement approved by
the title insurer, to the extent required by such policy, and which assumption
agreement is part of the Mortgage File delivered to the Custodian and the terms
of which are reflected in the Mortgage Loan Schedule.
(e) No Defenses. The Mortgage Loan is not subject to any right of
rescission, setoff, counterclaim or defense, including without limitation the
defense of usury, nor will the
<PAGE> 64
operation of any of the terms of the Mortgage Note or the Mortgage, or the
exercise of any right thereunder, render either the Mortgage Note or the
Mortgage unenforceable, in whole or in part and no such right of rescission,
set-off, counterclaim or defense has been asserted with respect thereto, and no
Mortgagor in respect of the Mortgage Loan was a debtor in any state or Federal
bankruptcy or insolvency proceeding at the time the Mortgage Loan was
originated.
(f) Hazard Insurance. The Mortgaged Property is insured by a fire
and extended perils insurance policy, issued by a Qualified Insurer, and such
other hazards as are customary in the area where the Mortgaged Property is
located, and to the extent required by the Borrower as of the date of
origination consistent with the Underwriting Guidelines, against earthquake and
other risks insured against by Persons operating like properties in the locality
of the Mortgaged Property, in an amount not less than the greatest of (i) 100%
of the replacement cost of all improvements to the Mortgaged Property, (ii)
either (A) the outstanding principal balance of the Mortgage Loan with respect
to each First Lien Mortgage Loan or (B) with respect to each Second Lien
Mortgage Loan, the sum of the outstanding principal balance of the First Lien
Mortgage Loan and the outstanding principal balance of the Second Lien Mortgage
Loan, (iii) the amount necessary to avoid the operation of any co-insurance
provisions with respect to the Mortgaged Property, and consistent with the
amount that would have been required as of the date of origination in accordance
with the Underwriting Guidelines or (iv) the amount necessary to fully
compensate for any damage or loss to the improvements that are a part of such
property on a replacement cost basis. If any portion of the Mortgaged Property
is in an area identified by any federal Governmental Authority as having special
flood hazards, and flood insurance is available, a flood insurance policy
meeting the current guidelines of the Federal Insurance Administration is in
effect with a generally acceptable insurance carrier, in an amount representing
coverage not less than the least of (1) the outstanding principal balance of the
Mortgage Loan, (2) the full insurable value of the Mortgaged Property, and (3)
the maximum amount of insurance available under the Flood Disaster Protection
Act of 1973, as amended. All such insurance policies (collectively, the "hazard
insurance policy") contain a standard mortgagee clause naming the Borrower, its
successors and assigns (including without limitation, subsequent owners of the
Mortgage Loan), as mortgagee, and may not be reduced, terminated or canceled
without 30 days' prior written notice to the mortgagee. No such notice has been
received by the Borrower. All premiums due and owing on such insurance policy
have been paid. The related Mortgage obligates the Mortgagor to maintain all
such insurance and, at such Mortgagor's failure to do so, authorizes the
mortgagee to maintain such insurance at the Mortgagor's cost and expense and to
seek reimbursement therefor from such Mortgagor. Where required by state law or
regulation, the Mortgagor has been given an opportunity to choose the carrier of
the required hazard insurance, provided the policy is not a "master" or
"blanket" hazard insurance policy covering a condominium, or any hazard
insurance policy covering the common facilities of a planned unit development.
The hazard insurance policy is the valid and binding obligation of the insurer
and is in full force and effect. The Borrower has not engaged in, and has no
knowledge of the Mortgagor's having engaged in, any act or omission which would
impair the coverage of any such policy, the benefits of the endorsement provided
for herein, or the validity and binding effect of either including, without
limitation, no unlawful fee, commission, kickback or other unlawful compensation
or value of any kind has been or will be received, retained or realized by any
attorney, firm or other Person, and no such unlawful items have been received,
retained or realized by the Borrower.
<PAGE> 65
(g) Compliance with Applicable Laws. Any and all requirements of
any federal, state or local law including, without limitation, usury,
truth-in-lending, real estate settlement procedures, consumer credit protection,
equal credit opportunity or disclosure laws applicable to the Mortgage Loan have
been complied with, the consummation of the transactions contemplated hereby
will not involve the violation of any such laws or regulations, and the Borrower
shall maintain or shall cause its agent to maintain in its possession, available
for the inspection of the Lender, and shall deliver to the Lender, upon two
Business Days' request, evidence of compliance with all such requirements.
(h) No Satisfaction of Mortgage. The Mortgage has not been
satisfied, canceled, subordinated or rescinded, in whole or in part, and the
Mortgaged Property has not been released from the lien of the Mortgage, in
whole-or in part, nor has any instrument been executed that would effect any
such release, cancellation, subordination or rescission other than in the case
of a release of a portion of the land comprising a Mortgaged Property or a
release of a blanket Mortgage which release will not cause the Mortgage Loan to
fail to satisfy the Underwriting Guidelines. The Borrower has not waived the
performance by the Mortgagor of any action, if the Mortgagor's failure to
perform such action would cause the Mortgage Loan to be in default, nor has the
Borrower waived any default resulting from any action or inaction by the
Mortgagor.
(i) Location and Type of Mortgaged Property. The Mortgaged
Property is located in the state identified in the Mortgage Loan Schedule and
consists of a single parcel of real property with a detached single family
residence erected thereon, or a two- to four-family dwelling, or an individual
condominium unit in a condominium project, or an individual unit in a planned
unit development or a de minimis planned unit development, provided, however,
that any condominium unit or planned unit development shall conform with the
applicable Fannie Mae and Freddie Mac requirements regarding such dwellings,
that a de minimus percentage of the Mortgage Loans may be Cooperative Loans and
that no residence or dwelling is a mobile home or a manufactured dwelling. No
portion of the Mortgaged Property is used for commercial purposes.
(j) Valid Lien. The Mortgage is a valid, subsisting, enforceable
and perfected (A) first lien and first priority security interest with respect
to each Mortgage Loan which is indicated by the Borrower to be a First Lien
Mortgage Loan (as reflected on the Mortgage Loan Data Transmission) or (B)
second lien and second priority security interest with respect to each Mortgage
Loan which is indicated by the Borrower to be a Second Lien (as reflected on the
Mortgage Loan Data Transmission), in either case, on the real property included
in the Mortgaged Property, including all buildings on the Mortgaged Property and
all installations and mechanical, electrical, plumbing, heating and air
conditioning systems located in or annexed to such buildings, and all additions,
alterations and replacements made at any time with respect to the foregoing and
with respect to Cooperative Loans, including the Proprietary Lease and the
Cooperative Shares. The lien of the Mortgage is subject only to:
(1) the lien of current real property taxes and assessments not
yet due and payable;
<PAGE> 66
(2) covenants, conditions and restrictions, rights of way,
easements and other matters of the public record as of the date of
recording acceptable to prudent mortgage lending institutions generally
and specifically referred to in the Lender's title insurance policy
delivered to the originator of the Mortgage Loan and (a) referred to or
otherwise considered in the appraisal made for the originator of the
Mortgage Loan or (b) which do not adversely affect the Appraised Value
of the Mortgaged Property set forth in such appraisal;
(3) other matters to which like properties are commonly subject
which do not materially interfere with the benefits of the security
intended to be provided by the Mortgage or the use, enjoyment, value or
marketability of the related Mortgaged Property; and
(4) with respect to each Mortgage Loan which is indicated by the
Borrower to be a Second Lien Mortgage Loan (as reflected on the Mortgage
Loan Data Transmission), a First Lien on the Mortgaged Property.
Any security agreement, chattel mortgage or equivalent document
related to and delivered in connection with the Mortgage Loan establishes and
creates a valid, subsisting and enforceable (A) first lien and first priority
security interest with respect to each Mortgage Loan which is indicated by the
Borrower to be a First Lien Mortgage Loan (as reflected on the Mortgage Loan
Data Transmission or (B) second lien and second priority security interest with
respect to each Mortgage Loan which is indicated by the Borrower to be a Second
Lien Mortgage Loan (as reflected on the Mortgage Loan Data Transmission), in
either case, on the property described therein and the Borrower has full right
to pledge and assign the same to the Lender. The Mortgaged Property was not, as
of the date of origination of the Mortgage Loan, subject to a mortgage, deed of
trust, deed to secure debt or other security instrument creating a lien
subordinate to the lien of the Mortgage.
(k) Validity of Mortgage Documents. The Mortgage Note and the
Mortgage and any other agreement executed and delivered by a Mortgagor or
guarantor, if applicable, in connection with a Mortgage Loan are genuine, and
each is the legal, valid and binding obligation of the maker thereof enforceable
in accordance with its terms. All parties to the Mortgage Note, the Mortgage and
any other such related agreement had legal capacity to enter into the Mortgage
Loan and to execute and deliver the Mortgage Note, the Mortgage and any such
agreement, and the Mortgage Note, the Mortgage and any other such related
agreement have been duly and properly executed by such related parties. No
fraud, error, omission, misrepresentation, negligence or similar occurrence with
respect to a Mortgage Loan has taken placed on the part of any Person,
including, without limitation, the Mortgagor, any appraiser, any builder or
developer, or any other party involved in the origination of the Mortgage Loan.
The Borrower has reviewed all of the documents constituting the Servicing File
and has made such inquiries as it deems necessary to make and confirm the
accuracy of the representations set forth herein.
(l) Full Disbursement of Proceeds. The proceeds of the Mortgage
Loan have been fully disbursed (or shall be fully disbursed pursuant to the
terms of the Custodial Agreement) and there is no further requirement for future
advances thereunder, and any and all requirements as to completion of any
on-site or off-site improvement and as to disbursements of
<PAGE> 67
any escrow funds therefor have been complied with. All costs, fees and expenses
incurred in making or closing the Mortgage Loan and the recording of the
Mortgage were paid, and the Mortgagor is not entitled to any refund of any
amounts paid or due under the Mortgage Note or Mortgage.
(m) Ownership. The Borrower is the sole owner and holder of the
Mortgage Loan. All Mortgage Loans acquired by the Borrower from third parties
(including affiliates) were acquired in a true and legal sale pursuant to which
such third party sold, transferred, conveyed and assigned to the Borrower all of
its right, title and interest in, to and under such Mortgage Loan and retained
no interest in such Mortgage Loan. In connection with such sale, such third
party received reasonably equivalent value and fair consideration and, in
accordance with GAAP and for federal income tax purposes, reported the sale of
such Mortgage Loan to the Borrower as a sale of its interests in such Mortgage
Loan. The Mortgage Loan is not assigned or pledged, and the Borrower has good,
indefeasible and marketable title thereto, and has full right to transfer,
pledge and assign the Mortgage Loan to the Lender free and clear of any
encumbrance, equity, participation interest, lien, pledge, charge, claim or
security interest, and has full right and authority subject to no interest or
participation of, or agreement with, any other party, to assign, transfer and
pledge each Mortgage Loan pursuant to this Loan Agreement and following the
pledge of each Mortgage Loan, the Lender will hold such Mortgage Loan free and
clear of any encumbrance, equity, participation interest, lien, pledge, charge,
claim or security interest except any such security interest created pursuant to
the terms of this Loan Agreement.
(n) Doing Business. All parties which have had any interest in
the Mortgage Loan, whether as mortgagee, assignee, pledgee or otherwise, are
(or, during the period in which they held and disposed of such interest, were)
(i) in compliance with any and all applicable licensing requirements of the laws
of the state wherein the Mortgaged Property is located, and (ii) either (A)
organized under the laws of such state, (B) qualified to do business in such
state, (C) a federal savings and loan association, a savings bank or a national
bank having a principal office in such state or (D) not doing business in such
state.
(o) LTV. As of the date of origination of the Mortgage Loan, the
LTV is identified on the Mortgage Loan Data Transmission.
(p) Title Insurance. The Mortgage Loan is covered by either (i)
an attorney's opinion of title and abstract of title, the form and substance of
which is acceptable to prudent mortgage lending institutions making mortgage
loans in the area wherein the Mortgaged Property is located or (ii) an ALTA
Lender's title insurance policy or other generally acceptable form of policy or
insurance acceptable to Fannie Mae or Freddie Mac and each such title insurance
policy is issued by a title insurer acceptable to Fannie Mae or Freddie Mac and
qualified to do business in the jurisdiction where the Mortgaged Property is
located, insuring the Borrower, its successors and assigns, as to the first
priority lien of the Mortgage in the original principal amount of the Mortgage
Loan (or to the extent a Mortgage Note provides for negative amortization, the
maximum amount of negative amortization in accordance with the Mortgage),
subject only to the exceptions contained in clauses (1), (2), (3) and, with
respect to each Mortgage Loan which is indicated by the Borrower to be a Second
Lien Mortgage Loan (as reflected on the Mortgage Loan Data Transmission), (4) of
paragraph (j) of this Part I of
<PAGE> 68
Schedule 1, and in the case of adjustable rate Mortgage Loans, against any loss
by reason of the invalidity or unenforceability of the lien resulting from the
provisions of the Mortgage providing for adjustment to the Mortgage Interest
Rate and Monthly Payment. Where required by state law or regulation, the
Mortgagor has been given the opportunity to choose the carrier of the required
mortgage title insurance. Additionally, such Lender's title insurance policy
affirmatively insures ingress and egress and against encroachments by or upon
the Mortgaged Property or any interest therein. The title policy does not
contain any special exceptions (other than the standard exclusions) for zoning
and uses and has been marked to delete the standard survey exception or to
replace the standard survey exception with a specific survey reading. The
Borrower, its successors and assigns, are the sole insureds of such Lender's
title insurance policy, and such Lender's title insurance policy is valid and
remains in full force and effect and will be in force and effect upon the
consummation of the transactions contemplated by this Loan Agreement. No claims
have been made under such Lender's title insurance policy, and no prior holder
or servicer of the related Mortgage, including the Borrower, has done, by act or
omission, anything which would impair the coverage of such Lender's title
insurance policy, including, without limitation, no unlawful fee, commission,
kickback or other unlawful compensation or value of any kind has been or will be
received, retained or realized by any attorney, firm or other Person, and no
such unlawful items have been received, retained or realized by the Borrower.
(q) No Defaults. There is no default, breach, violation or event
of acceleration existing under the Mortgage or the Mortgage Note and no event
has occurred which, with the passage of time or with notice and the expiration
of any grace or cure period, would constitute a default, breach, violation or
event of acceleration, and neither the Borrower nor its predecessors have waived
any default, breach, violation or event of acceleration. With respect to each
Mortgage Loan which is indicated by the Borrower to be a Second Lien Mortgage
Loan (as reflected on the Mortgage Loan Data Transmission) (i) the First Lien is
in full force and effect, (ii) there is no default, breach, violation or event
of acceleration existing under such First Lien mortgage or the related mortgage
note, (iii) no event which, with the passage of time or with notice and the
expiration of any grace or cure period, would constitute a default, breach,
violation or event of acceleration thereunder, and either (A) the First Lien
mortgage contains a provision which allows or (B) applicable law requires, the
mortgagee under the second lien Mortgage Loan to receive notice of, and affords
such mortgagee an opportunity to cure any default by payment in full or
otherwise under the First Lien Mortgage Loan.
(r) No Mechanics' Liens. At origination, there were no mechanics'
or similar liens or claims which have been filed for work, labor or material
(and no rights are outstanding that under the law could give rise to such liens)
affecting the Mortgaged Property which are or may be liens prior to, or equal or
coordinate with the lien of the Mortgage.
(s) Location of Improvements: No Encroachments. All improvements
which were considered in determining the Appraised Value of the Mortgaged
Property lie wholly within the boundaries and building restriction lines of the
Mortgaged Property, and no improvements on adjoining properties encroach upon
the Mortgaged Property. No improvement located on or being part of the Mortgaged
Property is in violation of any applicable zoning and building law, ordinance or
regulation.
<PAGE> 69
(t) Origination: Payment Terms. The Mortgage Loan was originated
by or in conjunction with a mortgagee approved by the Secretary of Housing and
Urban Development pursuant to Sections 203 and 211 of the National Housing Act,
a savings and loan association, a savings bank, a commercial bank, credit union,
insurance company or similar banking institution which is supervised and
examined by a federal or state authority. Principal payments on the Mortgage
Loan commenced no more than sixty (60) days after funds were disbursed in
connection with the Mortgage Loan. The Mortgage Interest Rate is adjusted, with
respect to adjustable rate Mortgage Loans, on each Interest Rate Adjustment Date
to equal the Index plus the Gross Margin (rounded up or down to the nearest .125
%), subject to the Mortgage Interest Rate Cap. The Mortgage Note is payable on
the day set forth in the Mortgage Note in equal monthly installments of
principal and interest, which installments of interest, with respect to
adjustable rate Mortgage Loans, are subject to change due to the adjustments to
the Mortgage Interest Rate on each Interest Rate Adjustment Date, with interest
calculated and payable in arrears, sufficient to amortize the Mortgage Loan
fully by the stated maturity date, over an original term of not more than 30
years from commencement of amortization. The Due Date of the first payment under
the Mortgage Note is no more than 60 days from the date of the Mortgage Note.
(u) Customary Provisions. The Mortgage Note has a stated
maturity. The Mortgage contains customary and enforceable provisions such as to
render the rights and remedies of the holder thereof adequate for the
realization against the Mortgaged Property of the benefits of the security
provided thereby, including, (i) in the case of a Mortgage designated as a deed
of trust, by trustee's sale, and (ii) otherwise by judicial foreclosure. Upon
default by a Mortgagor on a Mortgage Loan and foreclosure on, or trustee's sale
of, the Mortgaged Property pursuant to the proper procedures, the holder of the
Mortgage Loan will be able to deliver good and merchantable title to the
Mortgaged Property. There is no homestead or other exemption available to a
Mortgagor which would interfere with the right to sell the Mortgaged Property at
a trustee's sale or the right to foreclose the Mortgage.
(v) Conformance with Underwriting Guidelines and Agency
Standards. The Mortgage Loan was underwritten in accordance with the applicable
Underwriting Guidelines. The Mortgage Note and Mortgage are on forms similar to
those used by Freddie Mac or Fannie Mae and the Borrower has not made any
representations to a Mortgagor that are inconsistent with the mortgage
instruments used.
(w) Occupancy of the Mortgaged Property. As of the Funding Date
the Mortgaged Property is either vacant or lawfully occupied under applicable
law. All inspections, licenses and certificates required to be made or issued
with respect to all occupied portions of the Mortgaged Property and, with
respect to the use and occupancy of the same, including but not limited to
certificates of occupancy and fire underwriting certificates, have been made or
obtained from the appropriate authorities. The Borrower has not received written
notification from any governmental authority that the Mortgaged Property is in
material non-compliance with such laws or regulations, is being used, operated
or occupied unlawfully or has failed to have or obtain such inspection, licenses
or certificates, as the case may be. The Borrower has not received notice of any
violation or failure to conform with any such law, ordinance, regulation,
standard, license or certificate. Except as otherwise set forth in the Mortgage
Loan Data
<PAGE> 70
Transmission, the Mortgagor represented at the time of origination of the
Mortgage Loan that the Mortgagor would occupy the Mortgaged Property as the
Mortgagor's primary residence.
(x) No Additional Collateral. The Mortgage Note is not and has
not been secured by any collateral except the lien of the corresponding Mortgage
and the security interest of any applicable security agreement or chattel
mortgage referred to in clause (j) above.
(y) Deeds of Trust. In the event the Mortgage constitutes a deed
of trust, a trustee, authorized and duly qualified under applicable law to serve
as such, has been properly designated and currently so serves and is named in
the Mortgage, and no fees or expenses are or will become payable by the
Custodian or the Lender to the trustee under the deed of trust, except in
connection with a trustee's sale after default by the Mortgagor.
(z) Delivery of Mortgage Documents. If the Mortgage Loan is a Dry
Loan, the Mortgage Note, the Mortgage, the Assignment of Mortgage and any other
documents required to be delivered under the Custodial Agreement for each
Mortgage Loan have been delivered to the Custodian. The Borrower or its agent is
in possession of a complete, true and materially accurate Mortgage File in
compliance with the Custodial Agreement, except for such documents the originals
of which have been delivered to the Custodian.
(aa) Transfer of Mortgage Loans. If the Mortgage Loan is a Dry
Loan, the Assignment of Mortgage is in recordable form and is acceptable for
recording under the laws of the jurisdiction in which the Mortgaged Property is
located.
(bb) Due-On-Sale. The Mortgage contains an enforceable provision
for the acceleration of the payment of the unpaid principal balance of the
Mortgage Loan in the event that the Mortgaged Property is sold or transferred
without the prior written consent of the mortgagee thereunder.
(cc) No Buydown Provisions: No Graduated Payments or Contingent
Interests. The Mortgage Loan does not contain provisions pursuant to which
Monthly Payments are paid or partially paid with funds deposited in any separate
account established by the Borrower, the Mortgagor, or anyone on behalf of the
Mortgagor, or paid by any source other than the Mortgagor nor does it contain
any other similar provisions which may constitute a "buydown" provision. The
Mortgage Loan is not a graduated payment mortgage loan and the Mortgage Loan
does not have a shared appreciation or other contingent interest feature.
(dd) Consolidation of Future Advances. Any future advances made
to the Mortgagor prior to the origination of the Mortgage Loan have been
consolidated with the outstanding principal amount secured by the Mortgage, and
the secured principal amount, as consolidated, bears a single interest rate and
single repayment term. The lien of the Mortgage securing the consolidated
principal amount is expressly insured as having (A) first lien priority with
respect to each Mortgage Loan which is indicated by the Borrower to be a First
Lien Mortgage Loan (as reflected on the Mortgage Loan Data Transmission) or (B)
second lien priority with respect to each Mortgage Loan which is indicated by
the Borrower to be a Second Lien Mortgage Loan (as reflected on the Mortgage
Loan Data Transmission), in either case, by a title insurance policy, an
endorsement to the policy insuring the mortgagee's consolidated interest
<PAGE> 71
or by other title evidence acceptable to Fannie Mae and Freddie Mac. The
consolidated principal amount does not exceed the original principal amount of
the Mortgage Loan.
(ee) Mortgaged Property Undamaged. The Mortgaged Property (and
with respect to any Cooperative Loan, the Cooperative Unit) is undamaged by
waste, fire, earthquake or earth movement, windstorm, flood, tornado or other
casualty so as to affect adversely the value of the Mortgaged Property as
security for the Mortgage Loan or the use for which the premises were intended
and each Mortgaged Property is in good repair. There have not been any
condemnation proceedings with respect to the Mortgaged Property and the Borrower
has no knowledge of any such proceedings.
(ff) Collection Practices: Escrow Deposits: Interest Rate
Adjustments. The origination and collection practices used by the originator,
each servicer of the Mortgage Loan and the Borrower with respect to the Mortgage
Loan have been in all material respects in compliance with Accepted Servicing
Practices, applicable laws and regulations, and have been in all respects legal
and proper. With respect to escrow deposits and Escrow Payments (other than with
respect to each Mortgage Loan which is indicated by the Borrower to be a Second
Lien Mortgage Loan and for which the mortgagee under the First Lien Mortgage
Loan is collecting Escrow Payments (as reflected on the Mortgage Loan Data
Transmission), all such payments are in the possession of, or under the control
of, the Borrower and there exist no deficiencies in connection therewith for
which customary arrangements for repayment thereof have not been made. All
Escrow Payments have been collected in full compliance with state and federal
law. An escrow of funds is not prohibited by applicable law and has been
established in an amount sufficient to pay for every item that remains unpaid
and has been assessed but is not yet due and payable. No escrow deposits or
Escrow Payments or other charges or payments due the Borrower have been
capitalized under the Mortgage or the Mortgage Note. All Mortgage Interest Rate
adjustments have been made in strict compliance with state and federal law and
the terms of the related Mortgage Note. Any interest required to be paid
pursuant to state, federal and local law has been properly paid and credited.
(gg) Other Insurance Policies. No action, inaction or event has
occurred and no state of facts exists or has existed that has resulted or will
result in the exclusion from, denial of, or defense to coverage under any
applicable special hazard insurance policy, PMI Policy or bankruptcy bond,
irrespective of the cause of such failure of coverage. In connection with the
placement of any such insurance, no commission, fee, or other compensation has
been or will be received by the Borrower or by any officer, director, or
employee of the Borrower or any designee of the Borrower or any corporation in
which the Borrower or any officer, director, or employee had a financial
interest at the time of placement of such insurance.
(hh) Soldiers' and Sailors' Civil Relief Act. The Mortgagor has
not notified the Borrower, and the Borrower has no knowledge, of any relief
requested or allowed to the Mortgagor under the Soldiers' and Sailors' Civil
Relief Act of 1940.
(ii) Appraisal. The Mortgage File contains an appraisal of the
related Mortgaged Property signed prior to the approval of the Mortgage Loan
application by a qualified appraiser, duly appointed by the Borrower or the
Qualified Originator, who had no interest,
<PAGE> 72
direct or indirect in the Mortgaged Property or in any loan made on the security
thereof, and whose compensation is not affected by the approval or disapproval
of the Mortgage Loan, and the appraisal and appraiser both satisfy the
requirements of Fannie Mae or Freddie Mac and Title XI of the Federal
Institutions Reform, Recovery, and Enforcement Act of 1989 as amended and the
regulations promulgated thereunder, all as in effect on the date the Mortgage
Loan was originated.
(jj) Disclosure Materials. The Mortgagor has executed a statement
to the effect that the Mortgagor has received all disclosure materials required
by applicable law with respect to the making of adjustable rate mortgage loans,
and the Borrower maintains such statement in the Mortgage File.
(kk) Construction or Rehabilitation of Mortgaged Property. No
Mortgage Loan was made in connection with the construction or rehabilitation of
a Mortgaged Property or facilitating the trade-in or exchange of a Mortgaged
Property.
(ll) No Defense to Insurance Coverage. No action has been taken
or failed to be taken, no event has occurred and no state of facts exists or has
existed on or prior to the Funding Date (whether or not known to the Borrower on
or prior to such date) which has resulted or will result in an exclusion from,
denial of, or defense to coverage under any private mortgage insurance
(including, without limitation, any exclusions, denials or defenses which would
limit or reduce the availability of the timely payment of the full amount of the
loss otherwise due thereunder to the insured) whether arising out of actions,
representations, errors, omissions, negligence, or fraud of the Borrower, the
related Mortgagor or any party involved in the application for such coverage,
including the appraisal, plans and specifications and other exhibits or
documents submitted therewith to the insurer under such insurance policy, or for
any other reason under such coverage, but not including the failure of such
insurer to pay by reason of such insurer's breach of such insurance policy or
such insurer's financial inability to pay.
(mm) Capitalization of Interest. The Mortgage Note does not by
its terms provide for the capitalization or forbearance of interest.
(nn) No Equity Participation. No document relating to the
Mortgage Loan provides for any contingent or additional interest in the form of
participation in the cash flow of the Mortgaged Property or a sharing in the
appreciation of the value of the Mortgaged Property. The indebtedness evidenced
by the Mortgage Note is not convertible to an ownership interest in the
Mortgaged Property or the Mortgagor and the Borrower has not financed nor does
it own directly or indirectly, any equity of any form in the Mortgaged Property
or the Mortgagor.
(oo) Withdrawn Mortgage Loans. If the Mortgage Loan has been
released to the Borrower pursuant to a Request for Release as permitted under
Section 5 of the Custodial Agreement, then the promissory note relating to the
Mortgage Loan was returned to the Custodian within 10 days (or if such tenth day
was not a Business Day, the next succeeding Business Day).
(pp) No Exception. Other than as noted by the Custodian on the
Exception Report; no Material Exception exists (as defined in the Custodial
Agreement) with respect to the
<PAGE> 73
Mortgage Loan which would materially adversely affect the Mortgage Loan or the
Lender's security interest, granted by the Borrower, in the Mortgage Loan as
determined by the Lender in its sole discretion.
(qq) Qualified Originator. The Mortgage Loan has been originated
by, and, if applicable, purchased by the Borrower from, a Qualified Originator.
(rr) Mortgage Submitted for Recordation. The Mortgage has been
submitted for recordation in the appropriate governmental recording office of
the jurisdiction where the Mortgaged Property is located.
(ss) Acceptable Investment. No specific circumstances or
conditions exist with respect to the Mortgage, the Mortgaged Property, the
Mortgagor or the Mortgagor's credit standing that should reasonably be expected
to (i) cause private institutional investors which invest in Mortgage Loans
similar to the Mortgage Loan to regard the Mortgage Loan as an unacceptable
investment, (ii) cause the Mortgage Loan to be more likely to become past due in
comparison to similar Mortgage Loans, or (iii) adversely affect the value or
marketability of the Mortgage Loan in comparison to similar Mortgage Loans.
(tt) Environmental Matters. The Mortgaged Property is free from
any and all toxic or hazardous substances and there exists no violation of any
local, state or federal environmental law, rule or regulation.
(uu) Ground Leases. With respect to each ground lease to which
the Mortgaged Property is subject (a "Ground Lease"): (i) the Mortgagor is the
owner of a valid and subsisting interest as tenant under the Ground Lease; (ii)
the Ground Lease is in full force and effect, unmodified and not supplemented by
any writing or otherwise; (iii) all rent, additional rent and other charges
reserved therein have been paid to the extent they are payable to the date
hereof; (iv) the Mortgagor enjoys the quiet and peaceful possession of the
estate demised thereby, subject to any sublease; (v) the Mortgagor is not in
default under any of the terms thereof and there are no circumstances which,
with the passage of time or the giving of notice or both, would constitute an
event of default thereunder; (vii) the lessor under the Ground Lease is not in
default under any of the terms or provisions thereof on the part of the lessor
to be observed or performed; (vii) the lessor under the Ground Lease has
satisfied all of its repair or construction obligations, if any, to date
pursuant to the terms of the Ground Lease; and (ix) the execution, delivery and
performance of the Mortgage do not require the consent (other than those
consents which have been obtained and are in full force and effect) under, and
will not contravene any provision of or cause a default under, the Ground Lease.
(vv) Value of Mortgage Property. The Borrower has no knowledge of
any circumstances existing that should reasonably be expected to adversely
affect the value or the marketability of the Mortgaged Property or the Mortgage
Loan or to cause the Mortgage Loan to prepay during any period materially faster
or slower than the Mortgage Loans originated by the Borrower generally.
<PAGE> 74
(ww) Section 32 Mortgages; Overages. The Borrower has provided
the related Mortgagor with all disclosure materials required by Section 226.32
of the Federal Reserve Board Regulation Z with respect to any Mortgage Loans
subject to such Section of the Federal Reserve Board Regulation Z. The Borrower
has not made or caused to be made any payment in the nature of an "overage" or
"yield spread premium" to a mortgage broker or like Person which has not been
fully disclosed to the Mortgagor.
(xx) Cooperative Loans. With respect to each Cooperative Loan,
each original UCC financing statement, continuation statement or other
governmental filing or recordation necessary to create or preserve the
perfection and priority of the first priority lien and security interest in the
Cooperative Shares and Proprietary Lease has been timely and properly made. Any
security agreement, chattel mortgage or equivalent document related to the
Cooperative Loan and delivered to the Borrower or its designee establishes in
the Borrower a valid and subsisting perfected first lien on and security
interest in the Mortgaged Property described therein, and the Borrower has full
right to sell and assign the same.
(yy) Takeout Commitment. Each Mortgage Loan is subject to a
Takeout Commitment which is a valid, binding and subsisting obligation
enforceable in accordance with its terms unless otherwise waived by the Lender.
(zz) First Lien Consent. With respect to each Mortgage Loan which
is a Second Lien Mortgage Loan, (i) if the related first lien provides for
negative amortization, the LTV was calculated at the maximum principal balance
of such first lien that could result upon application of such negative
amortization feature, and (ii) either no consent for the Mortgage Loan is
required by the holder of the first lien or such consent has been obtained and
is contained in the Mortgage File.
<PAGE> 75
SCHEDULE 2
<PAGE> 76
SCHEDULE 3
<PAGE> 77
SCHEDULE 4
<PAGE> 78
EXHIBIT A
[FORM OF PROMISSORY NOTE]
$____________
[Month] __, ____
New York, New York
FOR VALUE RECEIVED, _____________________, a ________ corporation
(the "Borrower"), hereby promises to pay to the order of GREENWICH CAPITAL
FINANCIAL PRODUCTS, INC. (the "Lender"), at the principal office of the Lender
at 600 Steamboat Road, Greenwich, Connecticut 06830, in lawful money of the
United States, and in immediately available funds, the principal sum of
[_______________] ($___________) (or such lesser amount as shall equal the
aggregate unpaid principal amount of the Advances made by the Lender to the
Borrower under the Loan Agreement), on the dates and in the principal amounts
provided in the Loan Agreement, and to pay interest on the unpaid principal
amount of each such Advance, at such office, in like money and funds, for the
period commencing on the date of such Advance until such Advance shall be paid
in full, at the rates per annum and on the dates provided in the Loan Agreement.
The date, amount and interest rate of each Advance made by the
Lender to the Borrower, and each payment made on account of the principal
thereof, shall be recorded by the Lender on its books and, prior to any transfer
of this Note, endorsed by the Lender on the schedule attached hereto or any
continuation thereof; provided, that the failure of the Lender to make any such
recordation or endorsement shall not affect the obligations of the Borrower to
make a payment when due of any amount owing under the Loan Agreement or
hereunder in respect of the Advances made by the Lender.
This Note is the Note referred to in the Master Loan and Security
Agreement dated as of [Month] __, ____ (as amended, supplemented or otherwise
modified and in effect from time to time, the "Loan Agreement") between the
Borrower, and the Lender, and evidences Advances made by the Lender thereunder.
Terms used but not defined in this Note have the respective meanings assigned to
them in the Loan Agreement.
The Borrower agrees to pay all the Lender's costs of collection
and enforcement (including reasonable attorneys' fees and disbursements of
Lender's counsel) in respect of this Note when incurred, including, without
limitation, reasonable attorneys' fees through appellate proceedings.
Notwithstanding the pledge of the Collateral, the Borrower hereby
acknowledges, admits and agrees that the Borrower's obligations under this Note
are recourse obligations of the Borrower to which the Borrower pledges its full
faith and credit.
The Borrower, and any indorsers or guarantors hereof, (a)
severally waive diligence, presentment, protest and demand and also notice of
protest, demand, dishonor and nonpayments of this Note, (b) expressly agree that
this Note, or any payment hereunder, may be
<PAGE> 79
extended from time to time, and consent to the acceptance of further Collateral,
the release of any Collateral for this Note, the release of any party primarily
or secondarily liable hereon, and (c) expressly agree that it will not be
necessary for the Lender, in order to enforce payment of this Note, to first
institute or exhaust the Lender's remedies against the Borrower or any other
party liable hereon or against any Collateral for this Note. No extension of
time for the payment of this Note, or any installment hereof, made by agreement
by the Lender with any person now or hereafter liable for the payment of this
Note, shall affect the liability under this Note of the Borrower, even if the
Borrower is not a party to such agreement; provided, however, that the Lender
and the Borrower, by written agreement between them, may affect the liability of
the Borrower.
Any reference herein to the Lender shall be deemed to include and
apply to every subsequent holder of this Note. Reference is made to the Loan
Agreement for provisions concerning optional and mandatory prepayments,
Collateral, acceleration and other material terms affecting this Note.
Any enforcement action relating to this 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. The Borrower hereby submits to New
York jurisdiction with respect to any action brought with respect to this Note
and waives any right with respect to the doctrine of forum non conveniens with
respect to such transactions.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED UNDER THE LAWS OF
THE STATE OF NEW YORK (WITHOUT REFERENCE TO CHOICE OF LAW DOCTRINE BUT WITH
REFERENCE TO SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW, WHICH BY
ITS TERMS APPLIES TO THIS NOTE) WHOSE LAWS THE BORROWER EXPRESSLY ELECTS TO
APPLY TO THIS NOTE. THE BORROWER AGREES THAT ANY ACTION OR PROCEEDING BROUGHT TO
ENFORCE OR ARISING OUT OF THIS NOTE MAY BE COMMENCED IN THE SUPREME COURT OF THE
STATE OF NEW YORK, BOROUGH OF MANHATTAN, OR IN THE DISTRICT COURT OF THE UNITED
STATES FOR THE SOUTHERN DISTRICT OF NEW YORK.
-----------------------------------------
By:
Name:
Title:
<PAGE> 80
SCHEDULE OF LOANS
This Note evidences Advances made under the within-described Loan
Agreement to the Borrower, on the dates, in the principal amounts and bearing
interest at the rates set forth below, and subject to the payments and
prepayments of principal set forth below:
<TABLE>
<CAPTION>
Principal Amount Amount Paid Unpaid Principal Notation
Date Made of Loan or Prepaid Amount Made by
--------- ---------------- ----------- ---------------- --------
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 81
EXHIBIT B
[FORM OF CUSTODIAL AGREEMENT]
<PAGE> 82
EXHIBIT C
[FORM OF OPINION OF COUNSEL TO THE BORROWER]
(date)
Greenwich Capital Financial Products, Inc.
600 Steamboat Road
Greenwich, Connecticut 06830
Dear Sirs and Mesdames:
You have requested [our] [my] opinion, as counsel to
_______________, a ________ corporation, (the "Borrower"), with respect to
certain matters in connection with that certain Master Loan and Security
Agreement, dated as of [Month] __, ____ (the "Loan and Security Agreement"), by
and between the Borrower and Greenwich Capital Financial Products, Inc. (the
"Lender"), being executed contemporaneously with a Promissory Note dated ____ _,
____ from the Borrower to the Lender (the "Note"), a Custodial Agreement, dated
as of [Month] __, ____ (the "Custodial Agreement"), by and among the Borrower,
_____________ (the "Custodian"), and the Lender. Capitalized terms not otherwise
defined herein have the meanings set forth in the Loan and Security Agreement.
[We] [I] have examined the following documents:
(1) the Loan and Security Agreement;
(1) the Note;
(1) Custodial Agreement;
(1) unfiled copies of the financing statements listed on Schedule 1
(collectively, the "Financing Statements") naming the Borrower as Debtor and the
Lender as Secured Party and describing the Collateral (as defined in the Loan
and Security Agreement) as to which security interests may be perfected by
filing under the Uniform Commercial Code of the States listed on Schedule 1 (the
"Filing Collateral"), which I understand will be filed in the filing offices
listed on Schedule 1 (the "Filing Offices");
(1) the reports listed on Schedule 2 as to UCC financing statements
(collectively, the "UCC Search Report"); and
(1) such other documents, records and papers as we have deemed necessary and
relevant as a basis for this opinion.
To the extent [we] [I] have deemed necessary and proper, [we] [I]
have relied upon the representations and warranties of the Borrower contained in
the Loan and Security Agreement. [We] [I] have assumed the authenticity of all
documents submitted to me as
<PAGE> 83
originals, the genuineness of all signatures, the legal capacity of natural
persons and the conformity to the originals of all documents.
Based upon the foregoing, it is [our] [my] opinion that:
(1) The Borrower is a corporation duly organized, validly existing and in good
standing under the laws of the state of [state] and is qualified to transact
business in, duly licensed and is in good standing under, the laws of each state
in which any Mortgaged Property is located to the extent necessary to ensure the
enforceability of each Mortgage Loan and the servicing of each Mortgage Loan
pursuant to the Loan and Security Agreement.
(1) The Borrower has the corporate power to engage in the transactions
contemplated by the Loan and Security Agreement, the Note, and the Custodial
Agreement and all requisite corporate power, authority and legal right to
execute and deliver the Loan and Security Agreement, the Note, and the Custodial
Agreement and observe the terms and conditions of such instruments. The Borrower
has all requisite corporate power to borrow under the Loan and Security
Agreement and to grant a security interest in the Collateral pursuant to the
Loan and Security Agreement.
(1) The execution, delivery and performance by the Borrower of the Loan and
Security Agreement, the Note, and the Custodial Agreement, and the borrowings by
the Borrower and the pledge of the Collateral under the Loan and Security
Agreement have been duly authorized by all necessary corporate action on the
part of the Borrower. Each of the Loan and Security Agreement, the Note and the
Custodial Agreement have been executed and delivered by the Borrower and are
legal, valid and binding agreements enforceable in accordance with their
respective terms against the Borrower, subject to bankruptcy laws and other
similar laws of general application affecting rights of creditors and subject to
the application of the rules of equity, including those respecting the
availability of specific performance, none of which will materially interfere
with the realization of the benefits provided thereunder or with the Lender's
security interest in the Mortgage Loans.
(1) No consent, approval, authorization or order of, and no filing or
registration with, any court or governmental agency or regulatory body is
required on the part of the Borrower for the execution, delivery or performance
by the Borrower of the Advance and Security Agreement, the Note and the
Custodial Agreement or for the borrowings by the Borrower under the Loan and
Security Agreement or the granting of a security interest to the Lender in the
Collateral, pursuant to the Loan and Security Agreement.
(1) The execution, delivery and performance by the Borrower of, and the
consummation of the transactions contemplated by, the Loan and Security
Agreement, the Note and the Custodial Agreement do not and will not (a) violate
any provision of the Borrower's charter or by-laws, (b) violate any applicable
law, rule or regulation, (c) violate any order, writ, injunction or decree of
any court or governmental authority or agency or any arbitral award applicable
to the Borrower of which I have knowledge (after due inquiry) or (d) result in a
breach of, constitute a default under, require any consent under, or result in
the acceleration or required prepayment of any indebtedness pursuant to the
terms of, any agreement or instrument of which I have knowledge (after due
inquiry) to which the Borrower is a party or by which it is bound or to
<PAGE> 84
which it is subject, or (except for the Liens created pursuant to the Loan and
Security Agreement) result in the creation or imposition of any Lien upon any
Property of the Borrower pursuant to the terms of any such agreement or
instrument.
(1) There is no action, suit, proceeding or investigation pending or, to the
best of [our] [my] knowledge, threatened against the Borrower which, in [our]
[my] judgment, either in any one instance or in the aggregate, would be
reasonably likely to result in any material adverse change in the properties,
business or financial condition, or prospects of the Borrower or in any material
impairment of the right or ability of the Borrower to carry on its business
substantially as now conducted or in any material liability on the part of the
Borrower or which would draw into question the validity of the Loan and Security
Agreement, the Note, the Custodial Agreement or the Mortgage Loans or of any
action taken or to be taken in connection with the transactions contemplated
thereby, or which would be reasonably likely to impair materially the ability of
the Borrower to perform under the terms of the Loan and Security Agreement, the
Note, the Custodial Agreement or the Mortgage Loans.
(1) The Loan and Security Agreement is effective to create, in favor of the
Lender, a valid security interest under the Uniform Commercial Code in all of
the right, title and interest of the Borrower in, to and under the Collateral as
collateral security for the payment of the Secured Obligations (as defined in
the Loan and Security Agreement), except that (a) such security interests will
continue in Collateral after its sale, exchange or other disposition only to the
extent provided in Section 9-306 of the Uniform Commercial Code, (b) the
security interests in Collateral in which the Borrower acquires rights after the
commencement of a case under the Bankruptcy Code in respect of the Borrower may
be limited by Section 552 of the Bankruptcy Code.
(1) When the Mortgage Notes are delivered to the Custodian, endorsed in blank by
a duly authorized officer of the Borrower, the security interest referred to in
paragraph 7 above in the Mortgage Notes will constitute a fully perfected first
priority security interest in all right, title and interest of the Borrower
therein, in the Mortgage Loan evidenced thereby and in the Borrower's interest
in the related Mortgaged Property.
(1) (a) Upon the filing of financing statements on Form UCC-1 naming the Lender
as "Secured Party" and the Borrower as "Debtor", and describing the Collateral,
in the jurisdictions and recording offices listed on Schedule 1 attached hereto,
the security interests referred to in paragraph 8 above will constitute fully
perfected security interests under the Uniform Commercial Code in all right,
title and interest of the Borrower in, to and under such Collateral, which can
be perfected by filing under the Uniform Commercial Code.
(b) The UCC Search Report sets forth the proper filing offices
and the proper debtors necessary to identify those Persons who
have on file in the jurisdictions listed on Schedule 1 financing
statements covering the Filing Collateral as of the dates and
times specified on Schedule 2. Except for the matters listed on
Schedule 2, the UCC Search Report identifies no Person who has
filed in any Filing Office a financing statement describing the
Filing Collateral prior to the effective dates of the UCC Search
Report.
<PAGE> 85
(1) The Assignments of Mortgage are in recordable form, except for the insertion
of the name of the assignee, and upon the name of the assignee being inserted,
are acceptable for recording under the laws of the state where each related
Mortgaged Property is located.
(1) The Borrower is duly registered as a [____________] in each state in which
Mortgage Loans were originated to the extent such registration is required by
applicable law, and has obtained all other licenses and governmental approvals
in each jurisdiction to the extent that the failure to obtain such licenses and
approvals would render any Mortgage Loan unenforceable or would materially and
adversely affect the ability of the Borrower to perform any of its obligations
under, or the enforceability of, the Loan Documents.
(1) Assuming that all other elements necessary to render a Mortgage Loan legal,
valid, binding and enforceable were present in connection with the execution,
delivery and performance of each Mortgage Loan (including completion of the
entire Mortgage Loan fully, accurately and in compliance with all applicable
laws, rules and regulations) and assuming further that no action was taken in
connection with the execution, delivery and performance of each Mortgage Loan
(including in connection with the sale of the related Mortgaged Property) that
would give rise to a defense to the legality, validity, binding effect and
enforceability of such Mortgage Loan, nothing in the forms of such Mortgage
Loans, as attached hereto as Exhibit A, would render such Mortgage Loans other
than legal, valid, binding and enforceable.
(1) Assuming their validity, binding effect and enforceability in all other
respects (including completion of the entire Mortgage Loan fully, accurately and
in compliance with all applicable laws, rules and regulations), the forms of
Mortgage Loans attached hereto as Exhibit A are in sufficient compliance with
________ law and Federal consumer protection laws so as not to be rendered void
or voidable at the election of the Mortgagor thereunder.
Very truly yours,
<PAGE> 86
EXHIBIT D
[FORM OF NOTICE OF BORROWING AND PLEDGE]
[insert date]
Greenwich Capital Financial Products, Inc.
600 Steamboat Road
Greenwich, Connecticut 06830
Attention: _______________________
Notice of Borrowing and Pledge No.:_____________________
Ladies/Gentlemen:
Reference is made to the Master Loan and Security Agreement,
dated as of _______________, 199_ (the "Loan Agreement"; capitalized terms used
but not otherwise defined herein shall have the meaning given them in the Loan
Agreement), between ________________ (the "Borrower") and Greenwich Capital
Financial Products, Inc. (the "Lender").
In accordance with Section 2.03(a) of the Loan Agreement, the
undersigned Borrower hereby requests that you, the Lender, make Advances to us
in connection with our deliver of Mortgage Loans on ____________________ [insert
requested Funding Date,], in connection with which we shall pledge to you as
Collateral the Mortgage Loans (along with all previous pledges defined as
Eligible Mortgage Loans for such date) set forth on the Mortgage Loan Schedule
attached hereto.
The Borrower hereby certifies, as of such Funding Date, that:
(a) no Default or Event of Default has occurred and is continuing
on the date hereof nor will occur after giving effect to such Advance as
a result of such Advance;
(b) each of the representations and warranties made by the
Borrower in or pursuant to the Loan Documents is true and correct in all
material respects on and as of such date (in the case of the
representations and warranties in respect of Mortgage Loans, solely with
respect to Mortgage Loans being included the Borrowing Base on the
Funding Date) as if made on and as of the date hereof (or, if any such
representation or warranty is expressly stated to have been made as of a
specific date, as of such specific date);
<PAGE> 87
(c) the Borrower is in compliance with all governmental licenses
and authorizations and is qualified to do business and is in good
standing in all required jurisdictions; and
(d) the Borrower has satisfied all conditions precedent in
Section 5.02 of the Loan Agreement and all other requirements of the
Loan Agreement.
The undersigned duly authorized officer of Borrower further represents
and warrants that (1) the documents constituting the Custodial File (as defined
in the Custodial Agreement) with respect to the Mortgage Loans that are the
subject of the Advance requested herein and more specifically identified on the
mortgage loan schedule or computer readable magnetic transmission delivered to
both the Lender and the Custodian in connection herewith (the "Receipted
Mortgage Loans") [WITH RESPECT TO DRY LOANS: have been or are hereby submitted]
[WITH RESPECT TO WET LOANS: shall be delivered, within ten (10) days of the date
of the execution of this Notice of Borrowing and Pledge,] to Custodian and such
Required Documents are to be held by the Custodian subject to Lender's first
priority security interest thereon, (2) all other documents related to such
Receipted Mortgage Loans (including, but not limited to, mortgages, insurance
policies, loan applications and appraisals) have been or will be created and
held by Borrower in trust for Lender, (3) all documents related to such
Receipted Mortgage Loans withdrawn from Custodian shall be held in trust by
Borrower for Lender, and Borrower will not attempt to pledge, hypothecate or
otherwise transfer such Receipted Mortgage Loans to any other party until the
Advance to which such Receipted Mortgage Loans are related has been paid in full
by Borrower and (4) Borrower has granted a first priority perfected security
interest in and lien on the Receipted Mortgage Loans.
Borrower hereby represents and warrants that (x) the Receipted Mortgage Loans
have an unpaid principal balance as of the date hereof of $__________ and (y)
the number of Receipted Mortgage Loans is ______.
Very truly yours,
By:
----------------------------------
Name:
Title:
<PAGE> 88
EXHIBIT D-1
TO NOTICE OF BORROWING AND PLEDGE
[MORTGAGE LOANS PROPOSED TO BE PLEDGED
TO LENDER ON FUNDING DATE]
MORTGAGE LOAN LIST
Type of Transaction: Cash Window Transaction
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
# OF
REF. LAST FACE MONTHS TO NOTE TAKEOUT SALE COMMIT-
NO. LOAN # NAME AMOUNT MATURITY RATE INVESTOR PRICE MENT #
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
Conduit Transaction
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
COMMIT-
MENT CONFIRM- WARE-
REF. EXPIRATION DELIVERY RELEASE ATION HOUSE
NO. DATE DATE PAYMENT NUMBER LENDER
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</TABLE>
<PAGE> 89
EXHIBIT E
RESERVED
<PAGE> 90
EXHIBIT F
[INTENTIONALLY OMITTED]
<PAGE> 91
EXHIBIT F
REQUIRED FIELDS FOR MORTGAGE LOAN DATA TRANSMISSION
<TABLE>
<S> <C>
(1) The Borrower's reference number;
(2) The name of the Borrower's applicable program;
(3) The Mortgage Loan number;
(4) The last name of the Mortgagor;
(5) The face amount of the Mortgage Note;
(6) The original number of months to maturity of the Mortgage Loan;
(7) The original interest rate borne by the Mortgage Note;
(8) The name of the Takeout Investor;
(9) The sale price of the Mortgage Loan to the Takeout Investor;
(10) The commitment number;
(11) The expiration date of the Takeout Commitment;
(12) The date the Mortgage Loan is scheduled to be delivered to the Takeout Investor;
(13) The Release Payment;
(14) The name of the Warehouse Lender, if any;
(15) The Agency's payee number, if applicable;
(16) The name of the Settlement Agent;
(17) The address of the Mortgaged Property;
(18) The original maturity date; and
(19) A code indicating whether such Mortgage Loan is a Cooperative Mortgage Loan.
</TABLE>
<PAGE> 92
EXHIBIT G
[FORM OF COLLECTION ACCOUNT AGREEMENT]
_______________, 199_
[Bankers Trust]
- -----------------------------------
- -----------------------------------
Attn:
------------------------------
Re: Account Established by Greenwich Capital Financial Products, Inc.
("Lender"), pursuant to that certain Master Loan and Security
Agreement (as amended, supplemented or otherwise modified from time
to time, the "Loan Agreement"), dated as of May 10, 1999, by and
among the Lender, [Bankers Trust] (the "Collection Bank"), and
E-Loan, Inc. ("Borrower")
Ladies and Gentlemen:
We refer to the collection account established by the Borrower
pursuant to the Loan Agreement, at the Collection Bank, [CITY, STATE], Account
No. [ACCOUNT #], ABA# [ABA #], [sub]account identified with respect to Eligible
Assets pledged to the Lender (the "Collection Account"), which the Borrower
maintains in accordance with the Loan Agreement.
From time to time, certain third-party servicers (each a
"Subservicer") will deposit funds received in accordance with a related
servicing agreement into the Collection Account. Greenwich Capital Financial
Products, Inc. (the "Lender") has established a secured loan arrangement with
the Borrower. By its execution of this letter, the Collection Bank and the
undersigned Borrower acknowledges that the Borrower has granted a security
interest in all of the Borrower's right, title and interest in and to the
Collection Account and any funds from time to time on deposit therein with
respect to such Eligible Assets, that such funds are received by the Collection
Bank in trust for the benefit of the Lender and, except as provided below, are
for application against the Borrower's liabilities to the Lender.
By the Collection Bank's and the undersigned Borrower's execution
of this letter, each party agrees: (a) that all funds from time to time
hereafter in the Collection Account are the property of the Borrower held in
trust for the benefit of, and subject to a security interest in favor of, the
Lender; (b) that neither the Collection Bank nor the Borrower will exercise any
right of set-off, banker's lien or any similar right in connection with such
funds provided, that in the event any check is returned to the Collection Bank
or the Borrower because of insufficient funds (or is otherwise unpaid) such
party shall be entitled to set off the amount of any such returned check; (c)
that following such time as the Lender shall provide notice to the Collection
Bank in writing, in its sole discretion, revoking the Borrower's ability to make
withdrawals from the Collection Account, the Borrower will not withdraw, nor
shall the Collection Bank permit the Borrower or any other person or entity to
withdraw or transfer funds from the Collection Account; and (d) that if the
Lender shall notify the Collection Bank that an event of default has
<PAGE> 93
occurred and is continuing under the Lender's secured lending arrangement with
the Borrower, the Collection Bank shall cause or permit withdrawals from the
Collection Account in any other manner as the Lender may instruct.
All bank statements in respect to the Collection Account shall be
sent to the Borrower with copies to:
Greenwich Capital Financial Products, Inc.
600 Steamboat Road
Greenwich, Connecticut 06830
Attention: David Katze
<PAGE> 94
Kindly acknowledge your agreement with the terms of this
agreement by signing the enclosed copy of this letter and returning it to the
undersigned.
Very truly yours,
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
By:
Name:
Title:
Agreed and acknowledged:
E-LOAN, INC.
By:
Name:
Title:
Agreed and acknowledged:
[BANKERS TRUST]
By:
Name:
Title:
<PAGE> 95
EXHIBIT H
[FORM OF CONFIDENTIALITY AGREEMENT]
In connection with your consideration of a possible or actual
acquisition of a participating interest (the "Transaction") in an advance, note
or commitment of Greenwich Capital Financial Products, Inc. ("Greenwich")
pursuant to a Master Loan and Security Agreement between Greenwich and
____________________ (the "Borrower"") dated _____________, ____, you have
requested the right to review certain non-public information regarding the
Borrower that is in the possession of Greenwich. In consideration of, and as a
condition to, furnishing you with such information and any other information
(whether communicated in writing or communicated orally) delivered to you by
Greenwich or its affiliates, directors, officers, employees, advisors, agents or
"controlling persons" (within the meaning of the Securities Exchange Act of
1934, as amended (the "1934 Act")) (such affiliates and other persons being
herein referred to collectively as Greenwich "Representatives") in connection
with the consideration of a Transaction (such information being herein referred
to as "Evaluation Material"), Greenwich hereby requests your agreement as
follows:
(1) The Evaluation Material will be used solely for the purpose of evaluating a
possible Transaction with Greenwich involving you or your affiliates, and unless
and until you have completed such Transaction pursuant to a definitive agreement
between you or any such affiliate and Greenwich, such Evaluation Material will
be kept strictly confidential by you and your affiliates, directors, officers,
employees, advisors, agents or controlling persons (such affiliates and other
persons being herein referred to collectively as "your Representatives"), except
that the Evaluation Material or portions thereof may be disclosed to those of
your Representatives who need to know such information for the purpose of
evaluating a possible Transaction with Greenwich (it being understood that prior
to such disclosure your Representatives will be informed of the confidential
nature of the Evaluation Material and shall agree to be bound by this
Agreement). You agree to be responsible for any breach of this Agreement by your
Representatives.
1. The term "Evaluation Material" does not include any information which (i) at
the time of disclosure or thereafter is generally known by the public (other
than as a result of its disclosure by you or your Representatives) or (ii) was
or becomes available to you on a nonconfidential basis from a person not
otherwise bound by a confidential agreement with Greenwich or its
Representatives or is not otherwise prohibited from transmitting the information
to you. As used in this Agreement, the term "person" shall be broadly
interpreted to include, without limitation, any corporation, company, joint
venture, partnership or individual.
1. In the event that you receive a request to disclose all or any part of the
information contained in the Evaluation Material under the terms of a valid and
effective subpoena or order issued by a court of competent jurisdiction, you
agree to (i) immediately notify Greenwich and the Borrower of the existence,
terms and circumstances surrounding such a request, (ii) consult with the
Borrower on the advisability of taking legally available steps to resist or
narrow such request, and (iii) if disclosure of such information is required,
exercise your
<PAGE> 96
best efforts to obtain an order or other reliable assurance that confidential
treatment will be accorded to such information.
1. Unless otherwise required by law in the opinion of your counsel, neither you
nor your Representative will, without our prior written consent, disclose to any
person the fact that the Evaluation Material has been made available to you.
1. You agree not to initiate or maintain contact (except for those contacts made
in the ordinary course of business) with any officer, director or employee of
the Borrower regarding the business, operations, prospects or finances of the
Borrower or the employment of such officer, director or employee, except with
the express written permission of the Borrower.
1. You understand and acknowledge that the Borrower is not making any
representation or warranty, express or implied, as to the accuracy or
completeness of the Evaluation Material or any other information provided to you
by Greenwich. The Borrower, its respective affiliates or Representatives, nor
any of its respective officers, directors, employees, agents or controlling
persons (within the meaning of the 1934 Act) shall have any liability to you or
any other person (including, without limitation, any of your Representatives)
resulting from your use of the Evaluation Material.
1. You agree that neither Greenwich or the Borrower has not granted you any
license, copyright, or similar right with respect to any of the Evaluation
Material or any other information provided to you by Greenwich.
1. If you determine that you do not wish to proceed with the Transaction, you
will promptly deliver to Greenwich all of the Evaluation Material, including all
copies and reproductions thereof in your possession or in the possession of any
of your Representatives.
1. Without prejudice to the rights and remedies otherwise available to the
Borrower, the Borrower shall be entitled to equitable relief by way of
injunction if you or any of your Representatives breach or threaten to breach
any of the provisions of this Agreement. You agree to waive, and to cause your
Representatives to waive, any requirement for the securing or posting of any
bond in connection with such remedy.
1. The validity and interpretation of this Agreement shall be governed by, and
construed and enforced in accordance with, the laws of the State of New York
applicable to agreements made and to be fully performed therein (excluding the
conflicts of law rules). You submit to the jurisdiction of any court of the
State of New York or the United States District Court for the Southern District
of the State of New York for the purpose of any suit, action, or other
proceeding arising out of this Agreement.
1. The benefits of this Agreement shall inure to the respective successors and
assigns of the parties hereto, and the obligations and liabilities assumed in
this Agreement by the parties hereto shall be binding upon the respective
successors and assigns.
1. If it is found in a final judgment by a court of competent jurisdiction (not
subject to further appeal) that any term or provision hereof is invalid or
unenforceable, (i) the
<PAGE> 97
remaining terms and provisions hereof shall be unimpaired and shall remain in
full force and effect and (ii) the invalid or unenforceable provision or term
shall be replaced by a term or provision that is valid and enforceable and that
comes closest to expressing the intention of such invalid or unenforceable term
or provision.
1. This Agreement embodies the entire agreement and understanding of the parties
hereto and supersedes any and all prior agreements, arrangements and
understandings relating to the matters provided for herein. No alteration,
waiver, amendments, or change or supplement hereto shall be binding or effective
unless the same is set forth in writing by a duly authorized representative of
each party and may be modified or waived only by a separate letter executed by
the Borrower and you expressly so modifying or waiving such Agreement.
1. For the convenience of the parties, any number of counterparts of this
Agreement may be executed by the parties hereto. Each such counterpart shall be,
and shall be deemed to be, an original instrument, but all such counterparts
taken together shall constitute one and the same Agreement.
<PAGE> 98
Kindly execute and return one copy of this letter which will constitute
our Agreement with respect to the subject matter of this letter.
By:
Greenwich Capital Financial Products, Inc.
Confirmed and agreed to this _____ day of _____________, 199_.
By:________________________________
Name
Title:
<PAGE> 1
EXHIBIT 10.19B
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER APPLICABLE STATE
SECURITIES LAWS AND HAVE BEEN TAKEN FOR INVESTMENT PURPOSES ONLY AND NOT WITH A
VIEW TO OR FOR SALE IN CONNECTION WITH ANY DISTRIBUTION THEREOF. THE SECURITIES
MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION AND
QUALIFICATION WITHOUT, EXCEPT UNDER CERTAIN SPECIFIC LIMITED CIRCUMSTANCES, AN
OPINION OF COUNSEL FOR THE HOLDER, CONCURRED IN BY COUNSEL FOR THE COMPANY THAT
SUCH REGISTRATION AND QUALIFICATION ARE NOT REQUIRED.
STOCK PURCHASE WARRANT
To Purchase Shares of Common Stock of
E-LOAN, INC.
THIS CERTIFIES that, for value received, GREENWICH CAPITAL FINANCIAL
PRODUCTS, INC. (the "Investor"), is entitled, upon the terms and subject to the
conditions hereinafter set forth, at any time on or prior to May 21, 2000, but
not thereafter, to subscribe for and purchase, from E-LOAN, INC., a Delaware
corporation (the "Company"), Seventy-five thousand (75,000) shares of Common
Stock. The purchase price of one share of Common Stock under this Warrant shall
be equal to the lesser of (a) Thirteen Dollars and Thirty Three Cents ($13.33)
and (b) the per share offering price of the Company's Common Stock to the issued
in the Company's initial public offering (the "Exercise Price"). The purchase
price and the number of shares for which the Warrant is exercisable shall be
subject to adjustment as provided herein.
1. Title of Warrant. Prior to the expiration hereof and subject to
compliance with applicable laws, this Warrant and all rights hereunder are
transferable, in whole or in part, at the office or agency of the Company,
referred to in Section 2 hereof, by the holder hereof in person or by duly
authorized attorney, upon surrender of this Warrant together with the Assignment
Form annexed hereto properly endorsed.
2. Exercise of Warrant. The purchase rights represented by this Warrant
are exercisable by the registered holder hereof, in whole or in part, at the
times specified in the first paragraph hereof, by the surrender of this Warrant
and the Notice of Exercise annexed hereto duly executed at the office of the
Company, in Dublin, California (or such other office or agency of the Company as
it may designate by notice in writing to the registered holder hereof at the
address of such holder appearing on the books of the Company), and upon payment
of the purchase price of the shares thereby purchased (by cash or by check or
bank draft payable to the order of the Company or by cancellation of
indebtedness of the Company to the holder hereof, if any, at the time of
exercise in an amount equal to the purchase price of the shares thereby
purchased); whereupon the holder of this Warrant shall be entitled to receive a
certificate for the number of shares of Common Stock so purchased. The Company
agrees that if at the time of the surrender of this Warrant and purchase the
holder hereof shall be entitled to exercise this Warrant, the shares so
purchased shall be deemed to be issued to such holder as the record owner of
such shares as of the close of business on the date on which this Warrant shall
have been exercised as aforesaid.
<PAGE> 2
Certificates for shares purchased hereunder shall be delivered to the
holder hereof within a reasonable time, and in any event within five (5) days,
after the date on which this Warrant shall have been exercised as aforesaid.
Notwithstanding any provisions herein to the contrary, if, at the time
of exercise of this Warrant, the fair market value of one share of the Company's
Common Stock is greater than the per share purchase price of this Warrant, in
lieu of exercising this Warrant for cash, the holder may elect to receive shares
equal to the value (as determined below) of this Warrant (or the portion thereof
being canceled) by surrender of this Warrant at the principal office of the
Company together with notice of such election and the properly endorsed Form of
Subscription in which event the Company shall issue to the holder a number of
shares of Common Stock computed using the following formula:
Y(A-B)
X = ------
A
Where X = the number of shares of Common Stock to be issued to the
holder
Y = the number of shares of Common Stock purchasable under
the Warrant or, if only a portion of the Warrant is being
exercised, the portion of the Warrant being canceled (at
the date of such calculation)
A = the fair market value of one share of the Company's
Common Stock (at the date of such calculation)
B = per share purchase price of this Warrant (as adjusted to
the date of such calculation)
For purposes of the above calculation, fair market value of one share of Common
Stock shall be determined by the Company's Board of Directors in good faith;
provided, however, that in the event the Common Stock of the Company is publicly
traded, the fair market value per share shall be the average of the bid and
offer price on the day prior to the date of exercise.
3. Representations, Warranties and Covenants. The Company hereby
represent and warrants that as of the date hereof, there are 33,575,415 shares
of Common Stock issued and outstanding (including all shares Common Stock
issuable upon conversion of all outstanding Preferred Stock but not including
any outstanding warrants or options).
The Company covenants that all shares of Common Stock which may be
issued upon the exercise of rights represented by this Warrant will, upon
exercise of the rights represented by this Warrant, be fully paid and
nonassessable and free from all taxes, liens and charges in respect of the issue
thereof (other than taxes in respect of any transfer occurring contemporaneously
with such issue), which taxes, if any, shall be paid by the Company.
The Company covenants that it will use its reasonable best efforts to
amend its Investor Rights Agreement dated
-2-
<PAGE> 3
4. No Fractional Shares or Scrip. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant. With respect to any fraction of a share called for upon the exercise of
this Warrant, an amount equal to such fraction multiplied by the then current
price at which each share may be purchased hereunder shall be paid in cash to
the holder of this Warrant.
5. Charges, Taxes and Expenses. Issuance of certificates for shares of
Common Stock upon the exercise of this Warrant shall be made without charge to
the holder hereof for any issue or transfer tax or other incidental expense in
respect of the issuance of such certificate, all of which taxes and expenses
shall be paid by the Company, and such certificates shall be issued in the name
of the holder of this Warrant or in such name or names as may be directed by the
holder of this Warrant; provided, however, that in the event certificates for
shares of Common Stock are to be issued in a name other than the name of the
holder of this Warrant, this Warrant when surrendered for exercise shall be
accompanied by the Assignment Form attached hereto duly executed by the holder
hereof; and provided further, that upon any transfer involved in the issuance or
delivery of any certificates for shares of Common Stock, the Company may
require, as a condition thereto, the payment of a sum sufficient to reimburse it
for any transfer tax incidental thereto.
6. No Rights as Shareholders. This Warrant does not entitle the holder
hereof to any voting rights or other rights as a shareholder of the Company
prior to the exercise thereof.
7. Exchange and Registry of Warrant. This Warrant is exchangeable, upon
the surrender hereof by the registered holder at the above-mentioned office or
agency of the Company, for a new Warrant of like tenor and dated as of such
exchange.
The Company shall maintain at the above-mentioned office or agency a
registry showing the name and address of the registered holder of this Warrant.
This Warrant may be surrendered for exchange, transfer or exercise, in
accordance with its terms, at such office or agency of the Company, and the
Company shall be entitled to rely in all respects, prior to written notice to
the contrary, upon such registry.
8. Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt by
the Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant, and in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to it, and upon
reimbursement to the Company of all reasonable expenses incidental thereto, and
upon surrender and cancellation of this Warrant, if mutilated, the Company will
make and deliver a new Warrant of like tenor and dated as of such cancellation,
in lieu of this Warrant.
9. Saturdays, Sundays, Holidays, etc. If the last or appointed day for
the taking of any action or the expiration of any right required or granted
herein shall be a Saturday or a Sunday or shall be a legal holiday, then such
action may be taken or such right may be exercised on the next succeeding day
not a legal holiday.
10. Merger and Dilution.
(a) Merger, Sale of Assets, etc. If at any time the Company
proposes to consolidate with, merge with, sell or convey all or substantially
all of its assets to any other
-3-
<PAGE> 4
corporation, or effect some other form of reorganization (a "Merger Event"),
then as part of such Merger Event lawful provision shall be made so that the
holder of this Warrant shall thereafter be entitled to receive, upon exercise of
the Warrant, the number of shares of securities of the successor corporation
resulting from such Merger Event, equivalent in value to that which would have
been issuable if the holder of this Warrant had exercised this Warrant
immediately prior to the Merger Event.
(b) Reclassification, etc. If the Company at any time shall, by
subdivision, combination or reclassification of securities or otherwise, change
any of the securities to which purchase rights under this Warrant exist into the
same or a different number of securities of any class or classes, or issue any
stock dividends or dividends payable other than a cash dividend, this Warrant
shall thereafter be to acquire such number and kind of securities as would have
been issuable as the result of such change or dividend with respect to the
securities which were subject to the purchase rights under this Warrant
immediately prior to such subdivision, combination, or dividend,
reclassification or other change. If shares of the Company's Common Stock are
subdivided or combined into a greater or smaller number of shares of Common
Stock, the purchase price under this Warrant shall be proportionately reduced in
case of subdivision of shares or proportionately increased in the case of
combination of shares, in both cases by the ratio which the total number of
shares of Common Stock to be outstanding immediately after such event bears to
the total number of shares of Common Stock outstanding immediately prior to such
event.
(c) Cash Distributions. No adjustment on account of cash
dividends or interest on the Company's Common Stock or other securities
purchasable hereunder will be made to the purchase price under this Warrant.
(d) Authorized Shares. The Company covenants that during the
period the Warrant is outstanding, it will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of Common Stock upon the exercise of any purchase rights under this Warrant. The
Company further covenants that its issuance of this Warrant shall constitute
full authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for shares of the
Company's Common Stock upon the exercise of the purchase rights under this
Warrant.
11. Miscellaneous.
(a) Issue Date. The provisions of this Warrant shall be construed
and shall be given effect in all respect as if it had been issued and delivered
by the Company on the date hereof. This Warrant shall be binding upon any
successors or assigns of the Company. This Warrant shall constitute a contract
under the laws of the State of California and for all purposes shall be
construed in accordance with and governed by the laws of said state.
(b) Restrictions. The holder hereof acknowledges that the Common
Stock acquired upon the exercise of this Warrant may have restrictions upon its
resale imposed by state and federal securities laws.
-4-
<PAGE> 5
(c) Waivers and Amendments. This Warrant may only be amended or
any provision waived with the written consent of the Holder and the Company.
[Remainder of page intentionally left blank.]
IN WITNESS WHEREOF, E-LOAN, INC. has caused this Warrant to be executed
by its officers thereunto duly authorized.
Dated: May 20, 1999
E-LOAN, INC.
By /s/ FRANK SISKOWSKI
---------------------------------
Name:
Title:
-5-
<PAGE> 6
NOTICE OF EXERCISE
To: E-LOAN, INC.
(1) The undersigned hereby elects to purchase ____________ shares of
Common Stock of E-LOAN, INC. pursuant to the terms of the attached Warrant, and
tenders herewith payment of the purchase price in full, together with all
applicable transfer taxes, if any.
(2) Please issue a certificate of certificates representing said shares
of Common Stock in the name of the undersigned or in such other name as is
specified below:
--------------------------
(Name)
--------------------------
(Address)
(3) The undersigned represents that the aforesaid shares of Common Stock
are being acquired for the account of the undersigned for investment and not
with a view to, or for resale in connection with, the distribution thereof and
that the undersigned has no present intention of distributing or reselling such
shares.
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(Date) (Signature)
<PAGE> 7
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced
thereby are hereby assigned to
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(Please Print)
whose address is
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(Please Print)
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Dated: , .
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Holder's Signature:
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Holder's Address:
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Signature Guaranteed:
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NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatever, and must be guaranteed by a bank or trust company. Officers of
corporations and those acting in a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing Warrant.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated March 24, 1999 relating to the financial statements of E-Loan,
Inc., which appears in such Registration Statement. We also consent to the
references to us under the headings "Experts" and "Selected Financial Data" in
such Registration Statement.
/s/ PricewaterhouseCoopers LLP
San Francisco, CA
June 10, 1999
