<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 21, 1999
REGISTRATION NO. 333-74945
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 MAY 21, 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 offered hereby, 3,495,000 shares
are being sold by E-LOAN and 5,000 shares are being sold by a selling
stockholder on behalf of a charitable foundation established by E-LOAN. 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 concurrent
private placement additional shares of common stock equal to $12,500,000 at the
initial public offering price less the underwriting discount.
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 $11.00 and $13.00 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
----------------------
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 set forth
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 1,041,667 shares of common stock in the concurrent private placement
at an assumed public offering price of $12.00. 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.
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 execute on its strategy of becoming the leading Internet-based
provider of mortgages and debt
1
<PAGE> 6
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. 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
Community Foundation Silicon Valley is selling 5,000 shares of common stock in
this offering on behalf of the E-LOAN Foundation. 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 the concurrent
private placement..................... 1,041,667 shares
Common stock to be outstanding after
this offering......................... 38,319,070 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 38,319,070 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 a number of our stockholders on
March 23, 1999, Softbank America, Inc. purchased an aggregate of 972,732 shares
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) $ (0.34)
Pro forma weighted average
number of shares
outstanding(2)................ 27,190,457 22,757,470 23,359,274 29,080,490 33,066,508 33,145,579
</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 and the exercise and conversion of all warrants into
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 1,041,667 shares of common stock in the concurrent private placement
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 $12.00 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 4,095 53,320
Total assets................................................ 72,962 73,492 122,717
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) 6,785 56,009
</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 all warrants as if such
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. In such case,
the trading price of our common stock could decline, and you may 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, HAVE ONLY OPERATED DURING PERIODS OF GROWTH
IN THE HOME MORTGAGE MARKET AND CONSEQUENTLY FACE SIGNIFICANT RISKS AND
UNCERTAINTIES
We were incorporated in August 1996 and initiated our online mortgage
operations in June 1997. We have a limited operating history and 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 during such times. We have
generated limited revenues and have never operated profitably.
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 SUBJECT TO SIGNIFICANT FLUCTUATIONS AND
SEASONALITY BECAUSE OF MANY FACTORS, ANY OF WHICH COULD ADVERSELY AFFECT OUR
STOCK PRICE
We believe that quarter-to-quarter comparisons of our operating results are
not a good indication of our future performance. 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
4
<PAGE> 9
from quarter to quarter due to a number of factors, many of which are not in our
control. These factors include:
- interest rate fluctuations;
- seasonality or other economic factors impacting the overall demand for
mortgage credit;
- the volume of mortgage loan originations;
- our ability to offer competitive rates;
- changes in market rates for origination and processing fees;
- the mix of refinanced mortgages versus purchase money mortgages;
- new sites, services or products introduced by us or our competitors;
- the level of Internet usage for financial services;
- our ability to upgrade and develop our systems and infrastructure and
attract new personnel in a timely and effective manner;
- the size and timing of loan sales; and
- economic conditions specific to the Internet as well as general economic
conditions.
We plan to significantly increase our sales and marketing expenses to
increase E-LOAN brand awareness and the number of loan applications that we
receive. We may be unable to adjust spending quickly enough to offset any
unexpected revenue shortfall. If we have a shortfall in revenues in relation to
our expenses, or if our expenses do not lead to increased revenues, then our
operating results would be adversely affected.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for detailed information on our quarterly operating
results.
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. 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
5
<PAGE> 10
approximately 9.5% of our loans were funded after the loan commitment period had
expired. The loan application and approval process is often subject to delays
over which we have little or no control, including the timing of the customer's
decision to commit to an available interest rate, 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.
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 employees
and at March 31, 1999, we had a total of 251 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 such 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
6
<PAGE> 11
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 such
a recession happen again in California, our business would be adversely
affected.
In addition, California historically has been vulnerable to certain natural
disasters, such as 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 ability to
sell loans. The occurrence of such 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.
7
<PAGE> 12
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 ancillary 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 ancillary services we will
likely experience increased customer dissatisfaction and 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, such as 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. Furthermore, 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. Furthermore, 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.
8
<PAGE> 13
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
In each of the geographic markets in which we operate, we face competition
from established mortgage providers, including commercial banks and thrifts.
Competition can take place on various levels, including convenience in obtaining
mortgage loans, service, marketing, pricing and brand awareness. There can be no
assurance that we will be able to successfully compete with these mortgage
providers on any or all of these levels.
In addition, we face increasing direct competition from other companies
offering mortgage loans or other home buying services over the Internet.
Principal among these competitors are Microsoft HomeAdvisor, Intuit
QuickenMortgage, iOwn.com, Keystroke Financial, Inc. and Mortgage.com.
Traditional lenders, such as Countrywide, Norwest, Wells Fargo and BankAmerica,
also offer access to their mortgage products over the Internet. Furthermore,
competition is likely to increase significantly as new companies enter the
market and current competitors expand their services. Many of these current and
potential competitors enjoy substantial competitive advantages, including:
- longer operating histories;
- greater name recognition;
- larger, established customer bases; and
- substantially greater financial, marketing, technical and other
resources.
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 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.
IF WE FAIL TO COMPLY WITH THE NUMEROUS LAWS AND REGULATIONS THAT GOVERN OUR
INDUSTRY, OUR BUSINESS COULD BE ADVERSELY AFFECTED
Our business is subject to 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. From time to time 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
9
<PAGE> 14
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. Furthermore, 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 future success depends on our continuing
to attract, retain and motivate highly skilled employees, particularly with
respect to our loan processing functions. We have from time to time 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,
10
<PAGE> 15
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 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.
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. Moreover, 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 such breaches. 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.
11
<PAGE> 16
OUR BUSINESS WILL BE ADVERSELY AFFECTED IF WE ARE UNABLE TO PROTECT OUR
INTELLECTUAL PROPERTY RIGHTS FROM THIRD PARTY CHALLENGES OR IF WE ARE SUBJECT TO
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 become
subject to 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 such 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.
Despite our efforts to protect our proprietary rights from unauthorized use
or disclosure, parties may attempt to disclose, obtain or use our rights. The
steps we have taken may not prevent misappropriation of our proprietary rights,
particularly in foreign countries where laws or law enforcement practices may
not protect our proprietary rights as fully as in the United States.
We expect that we may be subject to legal proceedings and claims from time
to time in the ordinary course of our business, including claims of alleged
infringement of the trademarks and other intellectual property rights of third
parties by us and our licensees. Such claims, even if without merit, could
result in the expenditure of significant financial and managerial resources.
Further, if such claims are successful, we may be required to change our
trademarks, alter our content 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 be Year 2000 compliant. Furthermore, 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.
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
such purposes 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
12
<PAGE> 17
business. 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. Such 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 their affiliates, will, in the aggregate, own
approximately 74.5% of our outstanding common stock. As a result, such 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, such
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 such a 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
Sales of significant amounts of our common stock in the public market after
this offering or the perception that such sales will occur could adversely
affect the market price of our common stock or our future ability to raise
capital through an offering of our equity securities. Of the 38,319,070 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 our
"affiliates" within the meaning of Rule 144 under the Securities Act of 1933.
The remaining 34,819,070 shares of our 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 Act. All of the holders of
these restricted securities, including our officers and directors, have entered
into lock-up agreements providing that, subject to certain limited exceptions,
they will not sell, directly or indirectly, any common stock without the prior
consent of Goldman, Sachs & Co. for a period of 180 days from the date of this
prospectus. Subject to the provisions of Rules 144,
13
<PAGE> 18
144(k) and 701, 32,235,684 shares of common stock will be available for sale in
the public market, subject to compliance with certain volume restrictions in the
case of shares held by affiliates, upon expiration of this 180-day period.
In addition, 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. In addition, certain stockholders, representing approximately
17,842,395 shares of common stock, including shares issuable upon the exercise
of certain warrants to purchase common stock, will be entitled to certain demand
and piggy-back registration rights, subject to certain conditions. 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 after this
offering, and a warrant to purchase 53,996 shares of Series D preferred stock,
convertible into 161,988 shares of common stock after 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. See "Management -- Stock Plans",
"Description of Capital Stock -- Registration Rights", "Shares Available for
Future Sale" and "Underwriting".
FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future," "intends" and similar expressions to identify such
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.
14
<PAGE> 19
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 the concurrent private placement of 1,041,667
shares of common stock are estimated to be approximately $49.2 million, at an
assumed initial public offering price of $12.00 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 expect to use the majority of such 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.
15
<PAGE> 20
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
68,996 shares underlying warrants to purchase Series C and Series D
preferred stock at $2.00 and $9.26 per share, respectively, into
20,700,909 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 1,041,667 shares of common stock in the concurrent private
placement 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 $12.00
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, 33,443,883 shares issued and outstanding,
pro forma, 38,055,550 shares issued and outstanding, pro
forma as adjusted....................................... 50 23,842 73,067
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) $ 6,785 $ 56,009
------------ -------- --------
Total mandatorily redeemable convertible stock and
stockholders' equity............................. $ 6,255 $ 6,785 $ 56,009
------------ -------- --------
Total capitalization........................................ $ 7,555 $ 8,085 $ 57,309
============ ======== ========
</TABLE>
16
<PAGE> 21
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; and
- 1,500,000 shares issuable under E-LOAN's 1999 Employee Stock Purchase
Plan.
See "Management -- Stock Plans", "Description of Capital Stock" and Notes
11, 12 and 16 of Notes to Financial Statements.
17
<PAGE> 22
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 33,443,883 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 warrants to
purchase 68,996 shares of Series C and Series D preferred stock at $2.00 and
$9.26 per share, respectively). 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 75,000 shares of common stock to the selling stockholder, the
issuance of 1,041,667 shares of common stock in the concurrent private placement
and our sale of the 3,495,000 shares of common stock offered hereby 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
$56.0 million or approximately $1.47 per share. This represents an immediate
increase in net tangible book value of $1.27 per share to existing stockholders
and an immediate dilution in net tangible book value of $10.53 per share to new
investors. The following table illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $12.00
Pro forma net tangible book value per share as of March
31, 1999............................................... $0.20
Increase per share attributable to new investors.......... $1.27
-----
Pro forma net tangible book value per share after the
offering.................................................. $ 1.47
------
Dilution in pro forma net tangible book value per share to
new investors............................................. $10.53
======
</TABLE>
The following table sets forth, 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 $12.00 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....... 33,443,883 88% $22,270,403 29% $ 0.67
New investors............... 4,536,667 12% 54,440,000 71% $12.00
---------- --- ----------- ---
Total..................... 37,980,550 100% $76,710,403 100%
========== === =========== ===
</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 preferred stock, the exercise and conversion
of all warrants to purchase Series C and Series D preferred stock into shares of
common stock and the issuance of 1,041,667 shares of common stock in the
concurrent private placement 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; and
- 75,000 shares issued to the selling stockholder after March 31, 1999.
See "Management -- Stock Plans", "Description of Capital Stock" and Notes
11, 12 and 16 of Notes to Financial Statements.
18
<PAGE> 23
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected financial data set forth 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 set forth
below 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 set forth below 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 set forth below 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>
19
<PAGE> 24
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 such
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,
20
<PAGE> 25
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, have only operated
during periods of growth in the home mortgage market 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 such 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.
21
<PAGE> 26
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. E-LOAN
expects revenues derived from its loan origination and sale operations to
continue to increase as a percentage of its total revenues.
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
22
<PAGE> 27
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.
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 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
23
<PAGE> 28
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.
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>
24
<PAGE> 29
<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.
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.
25
<PAGE> 30
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 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.
26
<PAGE> 31
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, 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
27
<PAGE> 32
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.
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 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. As such, interest rate movements 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 such 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".
28
<PAGE> 33
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 as such 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.
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,
29
<PAGE> 34
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.
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
such purposes 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.
30
<PAGE> 35
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, such as 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.
31
<PAGE> 36
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, such as 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.
Furthermore, 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
32
<PAGE> 37
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.
Furthermore, 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
33
<PAGE> 38
rate search algorithm that sorts through over 50,000 products updated in real
time. The result, 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
34
<PAGE> 39
algorithm takes into account the borrower's investment objectives, prospective
hold period, risk 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
35
<PAGE> 40
continuous enhancement of its customer service offerings. E-LOAN also intends to
extend its 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
36
<PAGE> 41
to track the progress of their loan application as well as the amount of
anticipated closing costs 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.
37
<PAGE> 42
MORTGAGE OPERATIONS
E-LOAN is engaged in the mortgage loan origination business as a
multi-source lender. As such, E-LOAN originates, underwrites, funds and sells
mortgage loans. Originations are funded either 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.
38
<PAGE> 43
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.
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 $2 million.
E-LOAN offers the following categories of loan products:
- long term adjustable rate mortgages;
- intermediate term adjustable rate mortgages;
- fixed rate mortgages;
- balloons;
- home equity lines of credit; and
- no cost loans.
39
<PAGE> 44
Based on the best information available to E-LOAN, the following table sets
forth the number and dollar amount of the various types of loan products sold to
customers for the periods indicated.
TOTAL NUMBER OF CLOSED LOANS BY PRODUCT
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------------------------------------------------
Q1 Q2 Q3 Q4
---------------------------- ---------------------------- ---------------------------- --------
LOAN % OF LOAN % OF LOAN % OF
DOLLAR TOTAL DOLLAR TOTAL DOLLAR TOTAL
NUMBER VOLUME DOLLAR NUMBER VOLUME DOLLAR NUMBER VOLUME DOLLAR NUMBER
TYPE OF LOAN OF LOANS ($ 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 of such loans.
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.
40
<PAGE> 45
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>
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.
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
41
<PAGE> 46
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 $90 million as of March 31, 1999. E-LOAN is negotiating with
Greenwich Capital to increase its commitment to finance E-LOAN's mortgage loan
inventory to $200 million effective upon the closing of this offering. Pending
the successful completion of the negotiations, the funding sources available to
E-LOAN under each of its current warehouse credit facilities and its agreement
with Greenwich Capital would be as follows:
<TABLE>
<S> <C>
Greenwich Capital....................... $35 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 $200 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 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.
42
<PAGE> 47
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, such as 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 such
industry leading providers as 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 such characteristics as 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, such
as 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.
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
43
<PAGE> 48
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 such as 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 is subject to 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, 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
44
<PAGE> 49
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 such 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 such
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 is subject to 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 become subject to certain
state licensing regulations requiring such 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 such
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 such matters as fees and charges, brokerage agreements,
lock-in agreements and commitments, alternative mortgage transactions, such as
adjustable rate loans, 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 such 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 such 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 such laws
as they apply 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. Such disclosures include providing the annual
percentage rate, monthly payment amount and total amount financed, plus certain
disclosures concerning alternative mortgage transactions. In 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
45
<PAGE> 50
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 such 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 such 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 are subject to
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 such 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, such as 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 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.
46
<PAGE> 51
LEGAL PROCEEDINGS
E-LOAN is not currently subject to any material legal proceedings. E-LOAN
may from time to time 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 such 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.
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 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.
47
<PAGE> 52
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
48
<PAGE> 53
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.
49
<PAGE> 54
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 such 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.
50
<PAGE> 55
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 such 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 certain other executive officers who received salary and
bonus for such 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 $170,000 during the fiscal year ended December 31, 1999.
51
<PAGE> 56
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain summary information concerning
grants of stock options to each of the Named Executive Officers for the year
ended December 31, 1998. E-LOAN has never granted any stock appreciation rights.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENT OF AT ASSUMED ANNUAL RATES
SECURITIES TOTAL OPTIONS OF STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM(3)
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION ------------------------------------
NAME(1) GRANTED FISCAL YEAR(2) ($/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 $1,413,600 $2,319,208 $3,708,589
30,000 1.0% $1.00 08/11/08 $ 330,000 $ 556,402 $ 903,747
Steve Majerus......... 225,000 7.3% $0.22 05/07/08 $2,650,500 $4,348,515 $6,953,605
</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 $12.00 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 $1,075,500 $3,894,600
Steve Majerus..................................... -- 225,000 $ -- $2,650,500
</TABLE>
52
<PAGE> 57
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 such
date was calculated on the basis of an assumed initial public offering price of
$12.00 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 outstanding
shares on such date, 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 subject to each option or SPR, the
exercisability thereof, and the form of consideration payable upon such
exercise. The board has the authority to amend, suspend or terminate the 1997
Plan, provided that no such action may 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 such 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 such 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.
53
<PAGE> 58
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 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 such 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 such notice, and the option or SPR will
terminate upon the expiration of such 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 outstanding shares on such date 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 such 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 such options are outstanding, such 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
54
<PAGE> 59
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 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 such 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 such 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 such contributions, are not currently taxable to
Participants until distributed to them. All such 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 such 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 such 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
55
<PAGE> 60
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.
Such 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 such as 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 such 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 such person in any action or proceeding,
including any action by or in the right of E-LOAN arising out of such 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 such indemnification.
56
<PAGE> 61
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
57
<PAGE> 62
options vest according to the following schedules: 1/4(th) of the total number
of shares subject to 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
subject to 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 subject to 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 subject to 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 subject to each option vests on April 27, 1999 and February 22, 2000,
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 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.
58
<PAGE> 63
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 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
Community Foundation Silicon Valley is selling 5,000 shares of common stock in
this offering on behalf of the E-LOAN Foundation.
59
<PAGE> 64
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 the automatic conversion
of all outstanding shares of preferred stock into shares of common stock, 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 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 such 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
33,782,403 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 all warrants to purchase Series C and Series D preferred
stock, and percentage of beneficial ownership after this offering is based on
38,319,070 shares of common stock to be outstanding after completion of this
offering and the concurrent private placement.
60
<PAGE> 65
<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% 21.0%
Robert C. Kagle
Entities affiliated with Technology
Partners(2).............................. 4,666,641 -- 13.8% 12.2%
Ira M. Ehrenpreis
Entities affiliated with STV IV, LLC(3).... 3,304,590 -- 9.8% 8.6%
Chris Larsen(4)............................ 5,555,121 -- 16.4% 14.5%
Janina Pawlowski(5)........................ 5,511,927 -- 16.3% 14.4%
Doug Galen(6).............................. 185,625 -- * *
Steve Majerus(7)........................... 65,625 -- * *
Tim Koogle(8).............................. 971,607 -- 2.9% 2.5%
Wade Randlett.............................. 1,500 -- * *
Community Foundation Silicon Valley(9)..... 75,000 5,000 * *
All directors and executive officers as a
group (15 persons)(10)................... 28,725,121 -- 84.4% 74.5%
</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
such 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 dated between such 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 such
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.,
61
<PAGE> 66
respectively, pursuant to Loan and Pledge Agreements between such entities
and Ms. Pawlowski.
(4) Included 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 shares subject to stock options that are exercisable within
60 days of May 18, 1999.
(7) Includes 9,375 shares subject to 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
Community Foundation Silicon Valley.
(10) Includes 237,376 shares subject to stock options that are exercisable
within 60 days of May 18, 1999.
62
<PAGE> 67
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 from time to time 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. Subject to preferences to which holders of preferred stock issued after
the sale of the common stock offered hereby may be entitled, holders of common
stock are entitled to receive ratably such dividends, if any, as may be declared
from time to time 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, subject to any limitations prescribed by law, without stockholder
approval, from time to time to issue up to an aggregate of five million shares
of preferred stock, in one or more series, each of such series to have such
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
63
<PAGE> 68
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.
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 certain warrants to
purchase common stock, are entitled to certain rights with respect to the
registration of such shares under the Securities Act. The holders of at least
66 2/3% of the shares entitled to registration rights may require E-LOAN,
subject to certain limitations, 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 such
registrations pursuant to such 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 such registration would be seriously detrimental to E-LOAN or
to its stockholders. Furthermore, 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 such piggyback
registration rights are entitled to receive notice of such registration and are
entitled to include their shares therein, subject to certain limitations.
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 subject to certain conditions
and limitations, including the right of the underwriters in any underwritten
offering to limit the number of shares to be included in such 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 such 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 such
registrations, except underwriting discounts and commissions. Registration of
any of the shares entitled to registration rights would result in such shares
becoming freely tradable without restriction under the Securities Act
immediately upon effectiveness of such registration. The Investor Rights
Agreement also contains a commitment of E-LOAN to indemnify the holders of
registration rights, subject to certain limitations.
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 certain 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 such
officer's rights under a Put Option Agreement and Call Option Agreement among
certain 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 certain investors an option to call the 610,491
shares covered by the option at any
64
<PAGE> 69
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, certain
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 certain 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 such
officer's rights under a Put Option Agreement and Call Option Agreement among
certain 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 certain 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, certain 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 certain 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.
Concurrently with 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 $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 such 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 certain
investors 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.
CONCURRENT 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. 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 concurrent private placement
in a public or private sale for a period of one year following the closing of
the concurrent 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
65
<PAGE> 70
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.
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. Such
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 subject to 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:
- prior to such date, the Board of Directors of the corporation 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 held subject to the plan will be tendered
in a tender or exchange offer; or
- on or subsequent to such date, 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 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.
66
<PAGE> 71
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
38,319,070 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 38,319,070 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 34,819,070 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
67
<PAGE> 72
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 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 offered hereby 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 a certain 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 such 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
68
<PAGE> 73
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 consolidated financial statements for each fiscal year and quarterly
reports containing unaudited consolidated financial statements for the first
three quarters of each fiscal year.
69
<PAGE> 74
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> 75
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> 76
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 $ 4,095,219
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 70,312,965
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 $ 73,492,209
=========== ============ ============ ============
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;
33,443,883 shares issued and outstanding on a pro forma
basis (unaudited)....................................... 4,085 26,867 50,108 23,842,614
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) 6,785,139
----------- ------------ ------------ ------------
Total liabilities, mandatorily redeemable
convertible preferred stock and stockholders'
deficit........................................... $ 4,679,875 $ 55,523,256 $ 72,962,209 $ 73,492,209
=========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 77
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......................... 27,190,457 22,757,470 33,145,579
============ =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 78
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 inte
</TABLE>
F-5
<PAGE> 79
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> 80
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> 81
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> 82
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> 83
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 15,000 warrants to purchase Series C preferred stock at $2.00 per share 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 C and D preferred stock will automatically convert into
1,285,905, 1,290,621, 12,809,808, 5,107,587 shares and 206,988, respectively, of
Common Stock (for a total of 20,700,909 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> 84
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> 85
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> 86
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.
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 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.
F-13
<PAGE> 87
E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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).
F-14
<PAGE> 88
E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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> 89
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> 90
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
F-17
<PAGE> 91
E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
measured from the grant date. The balance will vest in equal successive monthly
installments of 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 8,664,351, 6,621,360 and
4,407,582 (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> 92
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> 93
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> 94
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 $ 610,591 $ 3,693,125
Processing costs................. 394,977 624,210 1,219,869 374,644 185,859
Advertising and marketing........ 11,430 360,524 5,118,727 424,201 3,256,821
Professional services............ 11,201 125,010 307,854 117,815 401,696
Occupancy costs.................. 77,037 107,652 374,794 61,700 247,792
Computer and internet............ 23,775 42,693 248,929 68,158 42,834
General and administrative....... 103,032 230,960 1,510,618 176,977 805,446
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 $500,000 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> 95
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, priviledges 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
During 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.
F-22
<PAGE> 96
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 and Hambrecht & Quist LLC
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.......................................
Total.............................................
</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
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.
U-1
<PAGE> 97
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.
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 % 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, also a facilitator of Internet distribution 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> 98
[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> 99
- ----------------------------------------------------------
- ----------------------------------------------------------
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.............. 14
Use of Proceeds......................... 15
Dividend Policy......................... 15
Capitalization.......................... 16
Dilution................................ 18
Selected Financial Data................. 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 20
Business................................ 31
Management.............................. 48
Certain Transactions.................... 57
Principal and Selling Stockholder....... 60
Description of Capital Stock............ 63
Shares Available for Future Sale........ 67
Legal Matters........................... 68
Experts................................. 68
Available Information................... 68
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
- ----------------------------------------------------------
- ----------------------------------------------------------
<PAGE> 100
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> 101
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. 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.
II-2
<PAGE> 102
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.
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.
10.20* 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.
</TABLE>
II-3
<PAGE> 103
<TABLE>
<C> <S>
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.
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, 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
II-4
<PAGE> 104
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> 105
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 May 21, 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 May 21, 1999
- ------------------------------------ (Principal Executive Officer)
Chris Larsen
/s/ JANINA PAWLOWSKI* President and Director May 21, 1999
- ------------------------------------
Janina Pawlowski
/s/ FRANK SISKOWSKI Chief Financial Officer May 21, 1999
- ------------------------------------ (Principal Financial and Accounting Officer)
Frank Siskowski
/s/ IRA M. EHRENPREIS* Director May 21, 1999
- ------------------------------------
Ira M. Ehrenpreis
/s/ ROBERT C. KAGLE* Director May 21, 1999
- ------------------------------------
Robert C. Kagle
/s/ TIM KOOGLE* Director May 21, 1999
- ------------------------------------
Tim Koogle
/s/ WADE RANDLETT* Director May 21, 1999
- ------------------------------------
Wade Randlett
*By: /s/ FRANK SISKOWSKI
- -------------------------------------
Frank Siskowski
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 106
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.
10.19* Mortgage Loan Purchase and Sale Agreement with Greenwich
Capital Financial Products, Inc. dated September 25, 1998.
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.
</TABLE>
<PAGE> 107
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
------- ------------------------------------------------------------ ------------
<C> <S> <C>
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.
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 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
E-LOAN, INC.
E-Loan, Inc., a corporation organized and existing under the General
Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY
CERTIFY:
FIRST: The name of the corporation is E-Loan, Inc. The original
Certificate of Incorporation of the Corporation was filed with the Secretary of
State of Delaware on February 19, 1999.
SECOND: The Amended and Restated Certificate of Incorporation of the
Corporation in the form attached hereto as Exhibit A has been duly adopted in
accordance with the provisions of Sections 228, 242 and 245 of the General
Corporation Law of the State of Delaware by the directors and stockholders of
the Corporation.
THIRD: The Amended and Restated Certificate of Incorporation so adopted
reads in full as set forth in Exhibit A attached hereto and is hereby
incorporated herein by this reference.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by the Chief Executive Officer and the Secretary this 5th day of May,
1999.
E-LOAN, INC.
By /s/ CHRIS LARSEN
-------------------------------------
Chief Executive Officer, Chris Larsen
ATTEST:
By: /s/ FRANK SISKOWSKI
-------------------------------
Secretary, Frank Siskowski
<PAGE> 2
EXHIBIT A
CERTIFICATE OF INCORPORATION
OF E-LOAN, INC.
ARTICLE I
The name of this corporation is E-Loan, Inc.
ARTICLE II
The address of the corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle, Zip Code 19801. The name of its registered
agent at such address is The Corporation Trust Company.
ARTICLE III
The purpose of the corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of Delaware.
ARTICLE IV
This corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares which the corporation is authorized to issue is 61,765,167 shares.
50,000,000 shares shall be Common Stock with a par value of $0.001. 11,765,167
shares shall be Preferred Stock with a par value of $0.001, 428,635 of which
shall be designated as Series A Preferred Stock, 450,708 of which shall be
designated as Series B Preferred Stock, 4,467,912 of which shall be designated
as Series C Preferred Stock, 4,467,912 of which shall be designated as Series
C-1 Preferred Stock, and 1,950,000 of which shall be designated as Series D
Preferred Stock.
Upon filing of this Amended and Restated Certificate of Incorporation,
each outstanding share of Common Stock shall be split and converted into three
(3) shares of Common Stock.
ARTICLE V
The rights, preferences, privileges and restrictions granted to or
imposed upon the Common Stock and Preferred Stock are as follows:
1. Dividend Provisions. When and as declared by the corporation's board
of directors, the holders of Preferred Stock shall be entitled to receive, out
of any funds legally available therefor, dividends at the rate of $0.02 per
share of Series A Preferred Stock, $0.096 per share of Series B
<PAGE> 3
Preferred Stock, $0.122852 per share of Series C Preferred Stock, $0.122852 per
share of Series C-1 Preferred Stock and $0.9263 per share of Series D Preferred
Stock, respectively, per annum, payable in preference to any payment of any
dividend on Common Stock. After payment of such dividends, 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 (as determined
on a per annum basis and on an as converted basis for the Series C and Series
C-1 Preferred Stock). The right of the holders of Preferred Stock to receive
dividends shall not be cumulative, and no right shall accrue to holders of
Preferred Stock by reason of the fact that dividends on such shares are not
declared or paid in any prior year.
2. Liquidation Preference.
(a) Preferred Preference. In the event of any liquidation,
dissolution or winding up of the corporation, either voluntary or involuntary,
the holders of Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any of the assets or surplus funds of the
corporation to the holders of Common Stock by reason of their ownership thereof,
the amount of $0.22 per share for each share of Series A Preferred Stock, $0.96
per share for each share of Series B Preferred Stock, $1.22852 per share for
each share of Series C Preferred Stock, $1.22852 per share for each share of
Series C-1 Preferred Stock and $9.263 per share of Series D Preferred Stock,
respectively, then held by them, and, in addition, an amount equal to all
declared but unpaid dividends on the respective series of Preferred Stock. If
the assets and funds thus distributed among the holders of the Preferred Stock
are insufficient to permit the payment to such holders of their full
preferential amount, then the entire assets and funds of the corporation legally
available for distribution shall be distributed among the holders of Preferred
Stock in proportion to the number of shares of Preferred Stock held by each such
holder in proportion to the preferential amount each such holder is otherwise
entitled to receive.
(b) Remaining Assets. Upon the completion of the distribution
required by subsection (a) of this Section 2, the remaining assets of this
corporation available for distribution to stockholders shall be distributed
among the 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
(assuming full conversion of all such Series C, Series C-1 and Series D
Preferred Stock) until with respect to the holders of Series C and Series C-1
Preferred Stock, such holders shall have received an aggregate of $3.6855 per
share, and with respect to the holders of Series D Preferred, such holders shall
have received an aggregate of $13.89 per share (as adjusted for any stock
splits, stock dividends, recapitalizations or the like) (including amounts paid
pursuant to subsection (a) of this Section 2); thereafter, if assets remain in
this corporation, the holders of the Common Stock of this corporation shall
receive all of the remaining assets of this corporation pro rata based on the
number of shares of Common Stock held by each.
(c) Reorganization or Merger.
(i) A reorganization or merger of the corporation with
or into any other corporation or entity, or a sale of all or substantially all
of the assets of the corporation, in which
<PAGE> 4
transaction the corporation's stockholders immediately prior to such transaction
own immediately after such transaction less than 50% of the equity securities of
the surviving corporation or its parent, shall be deemed to be a liquidation
within the meaning of this Section 2.
(ii) In any of such events, if the consideration
received by this corporation is other than cash, its value will be deemed its
fair market value. Any securities shall be valued as follows:
(A) Securities not subject to investment letter
or other similar restrictions on free marketability covered by (B) below:
(1) If traded on a securities exchange or
through the Nasdaq National Market, the value shall be deemed to be the average
of the closing prices of the securities on such exchange or system over the
thirty (30) day period ending three (3) days prior to the closing;
(2) If actively traded over-the-counter, the
value shall be deemed to be the average of the closing bid or sale prices
(whichever is applicable) over the thirty (30) day period ending three (3) days
prior to the closing; and
(3) If there is no active public market, the
value shall be the fair market value thereof, as mutually determined by this
corporation and the holders of at least a majority of the voting power of all
then outstanding shares of Preferred Stock.
(B) The method of valuation of securities
subject to investment letter or other restrictions on free marketability (other
than restrictions arising solely by virtue of a stockholder's status as an
affiliate or former affiliate) shall be to make an appropriate discount from the
market value determined as above in (A) (1), (2) or (3) to reflect the
approximate fair market value thereof, as mutually determined by this
corporation and the holders of at least a majority of the voting power of all
then outstanding shares of such Preferred Stock.
3. Conversion. The holders of Preferred Stock shall have conversion
rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Preferred Stock shall be
convertible, at the option of the holder thereof, at any time into such number
of fully paid and nonassessable shares of Common Stock as is determined by
dividing the Issuance Price (as defined below) by the Conversion Price (as
defined below) in effect at the time of conversion. The Issuance Price for the
Series A Preferred Stock shall be $0.22. The Conversion Price for the Series A
Preferred Stock shall initially be $0.22, subject to adjustment as provided
below. The Issuance Price for the Series B Preferred Stock shall be $0.96. The
Conversion Price for the Series B Preferred Stock shall initially be $0.96,
subject to adjustment as provided below. The Issuance Price for the Series C and
Series C-1 Preferred Stock shall be $1.22852. The Conversion Price for the
Series C and Series C-1 Preferred Stock shall initially be $1.22852, subject to
adjustment as provided below. The Issuance Price for the Series D Preferred
Stock shall be $9.263. The Conversion Price for the Series D Preferred Stock
shall initially be $9.263, subject to adjustment as provided below. The number
of shares of Common
<PAGE> 5
Stock into which a share of series of Preferred Stock is convertible is
hereinafter referred to as the "Conversion Rate" of such series of Preferred
Stock.
(b) Automatic Conversion. Each share of Preferred Stock shall
automatically be converted into shares of Common Stock at the then effective
Conversion Rate immediately upon the earlier of (i) a firm commitment
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933 (the "Act") covering the offer and sale of
Common Stock for the account of the corporation at a per share offering price of
not less than $13.89 per share (as adjusted for stock splits, dividends or
combinations) and an aggregate offering price of $15,000,000; 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 (voting
together as a single class), (B) the holders of a majority of the then
outstanding shares of Series D Preferred Stock (voting together as a single
class) and (C) the holders of a majority of the then outstanding shares of
Preferred Stock (voting together as a single class).
(c) Mechanics of Conversion. Before any holder of Preferred Stock
shall be entitled to convert the same into full shares of Common Stock and to
receive certificates therefor, he shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the corporation or of any
transfer agent for the Preferred Stock, and shall give written notice to the
corporation at such office that such holder elects to convert the same;
provided, however, that in the event of an automatic conversion pursuant to
Section 3(b) above, the outstanding shares of Preferred Stock shall be converted
automatically without any further action by the holders of such shares and
whether or not the certificates representing such shares are surrendered to the
corporation or its transfer agent, and provided further that the corporation
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon such automatic conversion unless the certificates evidencing
such shares of Preferred Stock are either delivered to the corporation or its
transfer agent as provided above, or the holder notifies the corporation or its
transfer agent that such certificates have been lost, stolen or destroyed and
executes an agreement satisfactory to the corporation to indemnify the
corporation from any loss incurred by it in connection with such certificates.
The corporation shall, as soon as practicable after such delivery, or such
agreement and indemnification in the case of a lost certificate, issue and
deliver at such office to such holder of Preferred Stock, a certificate or
certificates for the number of shares of Common Stock to which the holder shall
be entitled and a check payable to the holder in the amount of any cash amounts
payable as the result of a conversion into fractional shares of Common Stock.
Such conversion shall be deemed to have been made immediately prior to the close
of business on the date of such surrender of the shares of Preferred Stock to be
converted, or in the case of automatic conversion, on the date of closing of the
offering, and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on such date.
(d) Conversion Price Adjustments of Preferred Stock for Certain
Dilutive Issuances, Splits and Combinations. The Conversion Price of the Series
C Preferred Stock and Series D Preferred Stock shall be subject to adjustment
from time to time as follows:
<PAGE> 6
(i) If this corporation shall issue, after the date upon
which any shares of Series C Preferred Stock and Series D Preferred Stock were
first issued (the respective series "Purchase Date"), any Additional Stock (as
defined below) without consideration or for a consideration per share less than
the Conversion Price for such series in effect immediately prior to the issuance
of such Additional Stock, the Conversion Price for such series in effect
immediately prior to each such issuance shall forthwith (except as otherwise
provided in this clause (i)) be adjusted to a price determined by multiplying
such Conversion Price by a fraction, the numerator of which shall be the number
of shares of the series of Preferred Stock being adjusted outstanding
immediately prior to such issuance plus the number of shares of the series of
Preferred Stock being adjusted that the aggregate consideration received by this
corporation for such issuance would purchase at such Conversion Price; and the
denominator of which shall be the number of shares of the series of Preferred
Stock outstanding immediately prior to such issuance plus the number of shares
of such Additional Stock.
(A) No adjustment of the Conversion Price for any
series of Preferred Stock shall be made in an amount less than one cent per
share, provided that any adjustments that are not required to be made by reason
of this sentence shall be carried forward and shall be either taken into account
in any subsequent adjustment made prior to three (3) years from the date of the
event giving rise to the adjustment being carried forward, or shall be made at
the end of three (3) years from the date of the event giving rise to the
adjustment being carried forward. Except to the limited extent provided for in
subsections (E)(3) and (E)(4), no adjustment of such Conversion Price pursuant
to this subsection 3(d)(i) shall have the effect of increasing the Conversion
Price above the Conversion Price in effect immediately prior to such adjustment.
(B) In the case of the issuance of Common Stock for
cash, the consideration shall be deemed to be the amount of cash paid therefor
before deducting any reasonable discounts, commissions or other expenses
allowed, paid or incurred by this corporation for any underwriting or otherwise
in connection with the issuance and sale thereof.
(C) In the case of the issuance of the Common Stock
for a consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to be the fair value thereof as determined by the
Board of Directors irrespective of any accounting treatment.
(D) In the case of the issuance (whether before, on
or after the applicable Purchase Date) of options to purchase or rights to
subscribe for Common Stock, securities by their terms convertible into or
exchangeable for Common Stock or options to purchase or rights to subscribe for
such convertible or exchangeable securities, the following provisions shall
apply for all purposes of this subsection 3(d)(i) and subsection 3(d)(ii):
(1) The aggregate maximum number of shares of
Common Stock deliverable upon exercise (to the extent then exercisable) of such
options to purchase or rights to subscribe for Common Stock shall be deemed to
have been issued at the time such options or rights were issued and for a
consideration equal to the consideration (determined in the manner provided in
subsections 3(d)(i)(C) and (d)(i)(D)), if any, received by this corporation upon
the issuance of such
<PAGE> 7
options or rights plus the minimum exercise price provided in such options or
rights for the Common Stock covered thereby.
(2) The aggregate maximum number of shares of
Common Stock deliverable upon conversion of, or in exchange (to the extent then
convertible or exchangeable) for, any such convertible or exchangeable
securities or upon the exercise of options to purchase or rights to subscribe
for such convertible or exchangeable securities and subsequent conversion or
exchange thereof shall be deemed to have been issued at the time such securities
were issued or such options or rights were issued and for a consideration equal
to the consideration, if any, received by this corporation for any such
securities and related options or rights (excluding any cash received on account
of accrued interest or accrued dividends), plus the minimum additional
consideration, if any, to be received by this corporation upon the conversion or
exchange of such securities or the exercise of any related options or rights
(the consideration in each case to be determined in the manner provided in
subsections 3(d)(i)(C) and (d)(i)(D)).
(3) In the event of any change in the number of
shares of Common Stock deliverable or in the consideration payable to this
corporation upon exercise of such options or rights or upon conversion of or in
exchange for such convertible or exchangeable securities, including, but not
limited to, a change resulting from the antidilution provisions thereof (unless
such options or rights or convertible or exchangeable securities were merely
deemed to be included in the numerator and denominator for purposes of
determining the number of shares of Common Stock outstanding for purposes of
subsection 3(d)(i)(A)), the Conversion Price of the Series C Preferred Stock or
Series D Preferred Stock to the extent in any way affected by or computed using
such options, rights or securities, shall be recomputed to reflect such change,
but no further adjustment shall be made for the actual issuance of Common Stock
or any payment of such consideration upon the exercise of any such options or
rights or the conversion or exchange of such securities.
(4) Upon the expiration of any such options or
rights, the termination of any such rights to convert or exchange or the
expiration of any options or rights related to such convertible or exchangeable
securities, the Conversion Price of the Series C Preferred Stock and Series D
Preferred Stock, to the extent in any way affected by or computed using such
options, rights or securities or options or rights related to such securities
(unless such options or rights were merely deemed to be included in the
numerator and denominator for purposes of determining the number of shares of
Common Stock outstanding for purposes of subsection 3(d)(i)(A)), shall be
recomputed to reflect the issuance of only the number of shares of Common Stock
(and convertible or exchangeable securities that remain in effect) actually
issued upon the exercise of such options or rights, upon the conversion or
exchange of such securities or upon the exercise of the options or rights
related to such securities.
(5) The number of shares of Common Stock deemed
issued and the consideration deemed paid therefor pursuant to subsections
3(d)(i)(E)(1) and (2) shall be appropriately adjusted to reflect any change,
termination or expiration of the type described in either subsection
3(d)(i)(E)(3) or (4).
<PAGE> 8
(ii) "Additional Stock" shall mean any shares of Common
Stock issued (or deemed to have been issued pursuant to subsection 3(d)(i)(E))
by this corporation after the Purchase Date other than:
(A) Common Stock issued pursuant to a
transaction described in subsection 3(f) hereof;
(B) Common Stock issued or issuable upon
conversion of the Preferred Stock; or
(C) 1,500,000 Shares of Common Stock issuable or
issued to employees, consultants, directors or vendors (if in transactions with
primarily non-financing purposes) of this corporation directly or pursuant to a
stock option plan or restricted stock plan approved by the Board of Directors of
this corporation and any other shares issued in connection with transactions
(including additions to the stock option plan) provided such issuances are
unanimously approved by the Board of Directors of this corporation.
(e) Fractional Shares. In lieu of any fractional shares to which
the holder of Preferred Stock would otherwise be entitled, the corporation shall
pay cash equal to such fraction multiplied by the fair market value of one share
of Preferred Stock as determined by the board of directors of the corporation.
Whether or not fractional shares are issuable upon such conversion shall be
determined on the basis of the total number of shares of Preferred Stock of each
holder at the time converting into Common Stock and the number of shares of
Common Stock issuable upon such aggregate conversion.
(f) Adjustment of Conversion Price. The Conversion Price of each
series of Preferred Stock shall be subject to adjustment from time to time as
follows:
(1) If the number of shares of Common Stock outstanding
at any time after the date hereof is increased by a stock dividend payable in
shares of Common Stock or by a subdivision or split-up of shares of Common
Stock, then, on the date such payment is made or such change is effective, the
Conversion Price of the Preferred Stock shall be appropriately decreased so that
the number of shares of Common Stock issuable on conversion of any shares of
Preferred Stock shall be increased in proportion to such increase of outstanding
shares.
(2) If the number of shares of Common Stock outstanding
at any time after the date hereof is decreased by a combination of the
outstanding shares of Common Stock, then, on the effective date of such
combination, the Conversion Price of the Preferred Stock shall be appropriately
increased so that the number of shares of Common Stock issuable on conversion of
any shares of Preferred Stock shall be decreased in proportion to such decrease
in outstanding shares.
(3) In case the corporation shall declare a cash
dividend upon its Common Stock payable otherwise than out of retained earnings
or shall distribute to holders of its Common Stock shares of its capital stock
(other than Common Stock), stock or other securities of other persons, evidences
of indebtedness issued by the corporation or other persons, assets (excluding
cash
<PAGE> 9
dividends) or options or rights (excluding options to purchase and rights to
subscribe for Common Stock or other securities of the corporation convertible
into or exchangeable for Common Stock), then, in each such case, the holders of
the Preferred Stock shall, concurrent with the distribution to holders of Common
Stock, receive a like distribution based upon the number of shares of Common
Stock into which such Preferred Stock is then convertible.
(4) In case, at any time after the date hereof, of any
capital reorganization, or any reclassification of the stock of the corporation
(other than as a result of a stock dividend or subdivision, split-up or
combination of shares), or the consolidation or merger of the corporation with
or into another person (other than a consolidation or merger in which the
corporation is the continuing entity and which does not result in any change in
the Common Stock), the shares of Preferred Stock shall, after such
reorganization, reclassification, consolidation, merger, sale or other
disposition, be convertible into the kind and number of shares of stock or other
securities or property of the corporation or otherwise to which such holder
would have been entitled if immediately prior to such reorganization,
reclassification, consolidation, merger, sale or other disposition such holder
had converted its shares of Preferred Stock into Common Stock. The provisions of
this clause (iv) shall similarly apply to successive reorganizations,
reclassification, consolidations, mergers, sales or other dispositions.
(5) All calculations under this Section 3 shall be made
to the nearest cent or to the nearest one hundredth (1/100) of a share, as the
case may be.
(g) Minimal Adjustments. No adjustment in the Conversion Price
for the Preferred Stock need be made if such adjustment would result in a change
in the Conversion Price of less than $0.01. Any adjustment of less than $0.01
which is not made shall be carried forward and shall be made at the time of and
together with any subsequent adjustment which, on a cumulative basis, amounts to
an adjustment of $0.01 or more in the Conversion Price.
(h) No Impairment. The corporation will not through any
reorganization, recapitalization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms to be observed
or performed hereunder by the corporation, but will at all times in good faith
assist in the carrying out of all the provisions of this Section 3 and in the
taking of all such action as may be necessary or appropriate in order to protect
the Conversion Rights of the holders of Preferred Stock against impairment. This
provision shall not restrict the corporation's right to amend its Articles of
Incorporation with the requisite stockholder consent.
(i) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Rate for the Preferred Stock
pursuant to this Section 3, the corporation at its expense shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
prepare and furnish to each holder of Preferred Stock a certificate setting
forth such adjustment or readjustment and showing in detail the facts upon which
such adjustment or readjustment is based. The corporation shall, upon written
request at any time of any holder of Preferred Stock, furnish or cause to be
furnished to such holder a like certificate setting forth (i) all
<PAGE> 10
such adjustments and readjustments, (ii) the Conversion Rate at the time in
effect, and (iii) the number of shares of Common Stock and the amount, if any,
of other property which at the time would be received upon the conversion of
such holder's shares of Preferred Stock.
(j) Notices of Record Date. In the event of any taking by the
corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property or to receive any other right, the corporation
shall mail to each holder of Preferred Stock at least ten (10) days prior to
such record date, a notice specifying the date on which any such record is to be
taken for the purpose of such dividend or distribution or right, and the amount
and character of such dividend, distribution or right.
(k) Notices. Any notice required by the provisions of this
Section 3 to be given to any holder of Preferred Stock shall be deemed given if
deposited in the United States mail, postage prepaid, and addressed to each
holder of record at such holder's address appearing on the corporation's books.
(l) Pay-to-Play; Special Mandatory Conversion.
(i) At any time following the Purchase Date, if (a) the
holders of shares of Series C Preferred Stock are entitled to exercise the right
of first offer (the "Preemptive Rights") set forth in Section 3 of the Restated
Investors' Rights Agreement, dated September 4, 1998 by and among this
corporation and certain investors, as amended from time to time (the "Rights
Agreement"), with respect to an equity financing of this corporation to which
Section 3(d) would be applicable (the "Equity Financing"), (b) this corporation
has complied with its notice obligations, or such obligations have been waived,
under the Right of First Offer with respect to such Equity Financing and this
corporation thereafter proceeds to consummate the Equity Financing, and (c) such
holder (a "Non-Participating Holder") does not by exercise of such holder's
Right of First Offer acquire his, her or its Pro Rata Share (as defined in
Section 3 of the Rights Agreement) offered in such Equity Financing (a
"Mandatory Offering"), then all of such Non-Participating Holder's shares of
Series C Preferred Stock shall automatically and without further action on the
part of such holder be converted effective upon, subject to, and concurrently
with, the consummation of the Mandatory Offering (the "Mandatory Offering Date")
into an equivalent number of shares of Series C-1 Preferred Stock; provided,
however, that no such conversion shall occur in connection with a particular
Equity Financing if, pursuant to the written request of this corporation, such
holder agrees in writing to waive his, her or its Right of First Offer with
respect to such Equity Financing. Upon conversion pursuant to this subsection
3(l)(i), the shares of Series C Preferred Stock so converted shall be canceled
and not subject to reissuance.
(ii) The holder of any shares of Series C Preferred
Stock converted pursuant to this subsection 3(l) shall deliver to this
corporation during regular business hours at the office of any transfer agent of
this corporation for the Series C Preferred Stock, or at such other place as may
be designated by this corporation, the certificate or certificates for the
shares so converted, duly
<PAGE> 11
endorsed or assigned in blank or to this corporation. As promptly as practicable
thereafter, this corporation shall issue and deliver to such holder, at the
place designated by such holder, a certificate or certificates for the number of
full shares of the Series C-1 Preferred Stock to be issued and such holder shall
be deemed to have become a stockholder of record of Series C-1 Preferred Stock
on the Mandatory Offering Date unless the transfer books of this corporation are
closed on that date, in which event he, she or it shall be deemed to have become
a stockholder of record of Series C-1 Preferred Stock on the next succeeding
date on which the transfer books are open.
(iii) In the event that any Series C-1 Preferred Stock
shares are issued, concurrently with such issuance, this corporation shall use
its best efforts to take all such action as may be required, including amending
its Articles of Incorporation, (a) to cancel all authorized shares of Series C-1
Preferred Stock that remain unissued after such issuance, (b) to create and
reserve for issuance upon Special Mandatory Conversion of any Series C Preferred
Stock a new series of Preferred Stock equal in number to the number of shares of
Series C-1 Preferred Stock so canceled and designated Series C-2 Preferred
Stock, with the designations, powers, preferences and rights and the
qualifications, limitations and restrictions identical to those then applicable
to the Series C-1 Preferred Stock, except that the Conversion Price for such
shares of Series C-2 Preferred Stock once initially issued shall be the Series C
Conversion Price in effect immediately prior to such issuance and (c) to amend
the provisions of this subsection 3(l) to provide that any subsequent Special
Mandatory Conversion will be into shares of Series C-2 Preferred Stock rather
than Series C-1 Preferred Stock. This corporation shall take the same actions
with respect to the Series C-2 Preferred Stock and each subsequently authorized
series of Preferred Stock upon initial issuance of shares of the last such
series to be authorized. The right to receive any dividend declared but unpaid
at the time of conversion on any shares of Preferred Stock converted pursuant to
the provisions of this subsection 4(l) shall accrue to the benefit of the new
shares of Preferred Stock issued upon conversion thereof.
4. Redemption.
(a) At any time after December 17, 2001, but within ninety (90)
days after the receipt by this corporation of a written request from the holders
of not less than sixty-six and two-thirds percent (66-2/3%) of the then
outstanding Series C and Series C-1 Preferred Stock (voting together as a single
class) that all or, if less than all, a specified percentage of such holders'
shares of Series C and Series C-1 Preferred Stock be redeemed, and concurrently
with surrender by such holders of the certificates representing such shares,
this corporation shall, to the extent it may lawfully do so, redeem in three (3)
annual installments (each payment date being referred to herein as a "Series C
Redemption Date") the shares specified in such request by paying in cash
therefor a sum per share equal to (i) $1.22852 per share of Series C and Series
C-1 Preferred Stock (as adjusted for any stock splits, stock dividends,
recapitalizations or the like, and with respect to the Series C Preferred Stock
as adjusted in accordance with Section 3(d)) plus (ii) ten percent (10%) per
annum on the amount payable under this Section 4(a) accruing from the date
hereof, plus (iii) all declared but unpaid dividends on such share (the "Series
C Redemption Price"). The number of shares of Series C and Series C-1 Preferred
Stock that this corporation shall be required to redeem on any one Series C
Redemption Date shall be equal to the amount determined by dividing (i) the
aggregate number of
<PAGE> 12
shares of Series C and Series C-1 Preferred Stock outstanding immediately prior
to such Series C Redemption Date that have been requested to be redeemed
pursuant to this Section 4(a) by (ii) the number of remaining Series C
Redemption Dates (including the Redemption Date to which such calculation
applies). Any redemption of Series C and Series C-1 Preferred Stock effected
pursuant to this subsection 4(a) shall be made on a pro rata basis among the
holders of the Series C and Series C-1 Preferred Stock in proportion to the
number of shares of Series C and Series C-1 Preferred Stock proposed to be
redeemed by such holders. No other capital stock of the corporation is
redeemable prior to the Series C or Series C-1 Preferred Stock without the prior
written consent of the holders of a majority of the Series C and Series C-1
Preferred Stock (voting together as a single class).
(b) At any time after September 4, 2002, but within ninety (90)
days after the receipt by this corporation of a written request from the holders
of not less than sixty-six and two-thirds percent (66-2/3%) of the then
outstanding Series D Preferred Stock (voting together as a single class) that
all or, if less than all, a specified percentage of such holders' shares of
Series D Preferred Stock be redeemed, and concurrently with surrender by such
holders of the certificates representing such shares, this corporation shall, to
the extent it may lawfully do so, redeem in three (3) annual installments (each
payment date being referred to herein as a "Series D Redemption Date") the
shares specified in such request by paying in cash therefor a sum per share
equal to (i) $9.263 per share of Series D Preferred Stock (as adjusted for any
stock splits, stock dividends, recapitalizations or the like, and with respect
to the Series D Preferred Stock as adjusted in accordance with Section 3(d))
plus (ii) ten percent (10%) per annum on the amount payable under this Section
4(a) accruing from the date hereof, plus (iii) all declared but unpaid dividends
on such share (the "Series D Redemption Price"). The number of shares of Series
D Preferred Stock that this corporation shall be required to redeem on any one
Series D Redemption Date shall be equal to the amount determined by dividing (i)
the aggregate number of shares of Series D Preferred Stock outstanding
immediately prior to such Series D Redemption Date that have been requested to
be redeemed pursuant to this Section 4(b) by (ii) the number of remaining Series
D Redemption Dates (including the Redemption Date to which such calculation
applies). Any redemption of Series D Preferred Stock effected pursuant to this
subsection 4(b) shall be made on a pro rata basis among the holders of the
Series D Preferred Stock in proportion to the number of shares of Series D
Preferred Stock proposed to be redeemed by such holders. No other capital stock
of the corporation is redeemable prior to the Series D Preferred Stock without
the prior written consent of the holders of a majority of the Series D Preferred
Stock (voting together as a single class).
(c) At least fifteen (15) but no more than thirty (30) days prior
to each Redemption Date, written notice shall be mailed, first class postage
prepaid, to each holder of record (at the close of business on the business day
next preceding the day on which notice is given) of the Series C, Series C-1
Preferred Stock or Series D Preferred Stock (collectively the Redeemable
Preferred) to be redeemed, at the address last shown on the records of this
corporation for such holder, notifying such holder of the redemption to be
effected on the applicable Redemption Date, specifying the number of shares to
be redeemed from such holder, the Redemption Date, the Redemption Price, the
place at which payment may be obtained and calling upon such holder to surrender
to this corporation, in the manner and at the place designated, his, her or its
certificate or certificates representing the shares to
<PAGE> 13
be redeemed (the "Redemption Notice"). Except as provided in subsection (4)(d),
on or after each Redemption Date, each holder of Redeemable Preferred Stock to
be redeemed on such Redemption Date shall surrender to this corporation the
certificate or certificates representing such shares, in the manner and at the
place designated in the Redemption Notice, and thereupon the applicable
Redemption Price of such shares shall be payable to the order of the person
whose name appears on such certificate or certificates as the owner thereof and
each surrendered certificate shall be canceled. In the event less than all the
shares represented by any such certificate are redeemed, a new certificate shall
be issued representing the unredeemed shares.
(d) From and after each Redemption Date, unless there shall have
been a default in payment of the Redemption Price, all rights of the holders of
shares of Redeemable Preferred Stock designated for redemption on such
Redemption Date in the Redemption Notice as holders of Redeemable Preferred
Stock (except the right to receive the applicable Redemption Price without
interest upon surrender of their certificate or certificates) shall cease with
respect to such shares, and such shares shall not thereafter be transferred on
the books of this corporation or be deemed to be outstanding for any purpose
whatsoever. If the funds of this corporation legally available for redemption of
shares of Redeemable Preferred Stock on a Redemption Date are insufficient to
redeem the total number of shares of Redeemable Preferred Stock to be redeemed
on such date, those funds that are legally available will be used to redeem the
maximum possible number of such shares ratably among the holders of such shares
to be redeemed such that each holder of a share of Redeemable Preferred Stock
receives the same percentage of the applicable Redeemable Redemption Price. The
shares of Redeemable Preferred Stock not redeemed shall remain outstanding and
entitled to all the rights and preferences provided herein. At any time
thereafter when additional funds of this corporation are legally available for
the redemption of shares of Redeemable Preferred Stock, such funds will
immediately be used to redeem the balance of the shares that this corporation
has become obliged to redeem on any Redemption Date but that it has not
redeemed.
(e) On or prior to each Redemption Date, this corporation shall
deposit the Redemption Price of all shares of Redeemable Preferred Stock
designated for redemption on such Redemption Date in the Redemption Notice, and
not yet redeemed or converted, with a bank or trust corporation having aggregate
capital and surplus in excess of $100,000,000 as a trust fund for the benefit of
the respective holders of the shares designated for redemption and not yet
redeemed, with irrevocable instructions and authority to the bank or trust
corporation to publish the notice of redemption thereof and pay the Redemption
Price for such shares to their respective holders on or after the Redemption
Date, upon receipt of notification from this corporation that such holder has
surrendered his, her or its share certificate to this corporation pursuant to
subsection (4)(c) above. As of the date of such deposit (even if prior to the
Redemption Date), the deposit shall constitute full payment of the shares to
their holders, and from and after the date of the deposit the shares so called
for redemption shall be redeemed and shall be deemed to be no longer
outstanding, and the holders thereof shall cease to be stockholders with respect
to such shares and shall have no rights with respect thereto except the rights
to receive from the bank or trust corporation payment of the Redemption Price of
the shares, without interest, upon surrender of their certificates therefor, and
the right to convert such shares as provided in Article IV(3) hereof. Such
instructions shall also provide that any moneys deposited by this corporation
pursuant to this subsection (4)(e) for the redemption of shares thereafter
converted
<PAGE> 14
into shares of this corporation's Common Stock pursuant to Article
IV(3) hereof prior to the Redemption Date shall be returned to this corporation
forthwith upon such conversion. The balance of any moneys deposited by this
corporation pursuant to this subsection (4)(e) remaining unclaimed at the
expiration of two (2) years following the Redemption Date shall thereafter be
returned to this corporation upon its request expressed in a resolution of its
Board of Directors.
5. Voting Rights.
(a) General Voting Rights. The holder of each share of Preferred
Stock shall be entitled to notice of any stockholders' meeting in accordance
with the bylaws of the corporation and shall vote with holders of the Common
Stock upon the election of directors and upon any other matter submitted to a
vote of stockholders, except those matters required by law to be submitted to a
class vote and except as otherwise set forth herein. The holder of each share of
Preferred Stock shall be entitled to that number of votes equal to the number of
shares of Common Stock into which each share of Preferred Stock could be
converted on the record date for the vote or consent of stockholders. Fractional
votes shall not, however, be permitted and any fractional voting rights
resulting from the above formula (after aggregating all shares of Preferred
Stock held by each holder) shall be disregarded.
(b) Voting for the Election of Directors. As long as at least a
majority of the shares of Series C Preferred Stock originally issued remain
outstanding (including shares subsequently converted into shares of Series C-1
Preferred Stock), the holders of such shares of Series C and Series C-1
Preferred Stock shall be entitled to elect two (2) directors of this corporation
at each annual election of directors. As long as at least a majority of the
shares of Series D Preferred Stock originally issued remain outstanding, the
holders of Series D Preferred shall be entitled to elect one (1) director of
this corporation at each annual election of directors. The holders of
outstanding Common Stock shall be entitled to elect two (2) directors of this
corporation at each annual election of directors. The holders of Preferred Stock
and Common Stock (voting together as a single class and not as separate series,
and on an as-converted basis) shall be entitled to elect the remaining
directors.
(a) In the case of any vacancy (other than a vacancy caused by
removal) in the office of a director occurring among the directors elected by
the holders of a class or series of stock pursuant to this Section 5(b), the
remaining directors so elected by that class or series may by affirmative vote
of a majority thereof (or the remaining director so elected if there be but one,
or if there are no such directors remaining, by the affirmative vote of the
holders of a majority of the shares of that class or series), elect a successor
or successors to hold office for the unexpired term of the director or directors
whose place or places shall be vacant. Any director who shall have been elected
by the holders of a class or series of stock or by any directors so elected as
provided in the immediately preceding sentence hereof may be removed during the
aforesaid term of office, either with or without cause, by, and only by, the
affirmative vote of the holders of the shares of the class or series of stock
entitled to elect such director or directors, given either at a special meeting
of such stockholders duly called for that purpose or pursuant to a written
consent of stockholders, and any vacancy thereby created may be filled by the
holders of that class or series of stock represented at the meeting or
<PAGE> 15
pursuant to unanimous written consent.
6. Protective Provisions.
(a) General. In addition to any other class vote that may be
required by law, so long as any shares of Preferred Stock are outstanding, this
corporation shall not without first obtaining the approval (by vote or written
consent, as provided by law) of the holders of at least a majority of the then
outstanding shares of Preferred Stock voting together as a single class:
(i)adversely alter or change the powers, preferences or
special rights of the Preferred Stock; or
(ii) increase or decrease (other than by redemption or
conversion) the aggregate number of authorized shares of Preferred Stock; or
(iii) create, authorize or issue any new class or series
of shares having any powers, preferences, or special rights superior to or on a
parity with the Preferred Stock as to dividends, liquidation, conversion rights
or voting rights; or
(iv) redeem, purchase or otherwise acquire (or pay into
or set aside for a sinking fund for such purpose) any share or shares of
Preferred Stock or Common Stock; provided, however, that this restriction shall
not apply to (i) the repurchase of shares of Common Stock from employees,
officers, directors, consultants or other persons performing services for this
corporation or any subsidiary pursuant to agreements under which this
corporation has the option to repurchase such shares at cost or at cost upon the
occurrence of certain events, such as the termination of employment or (ii) the
redemption of any share or shares of Preferred Stock in accordance with Section
4;
(v) sell, convey, or otherwise dispose of all or
substantially all of its property or business or merge into or consolidate with
any other corporation (other than a wholly-owned subsidiary corporation) or
effect any transaction or series of related transactions in which more than
fifty percent (50%) of the voting power of this corporation is disposed of;
(vi) declare or pay any dividend on any shares of Common
Stock; or
(vii) change the authorized number of directors of this
corporation.
(b) Series D Protective Provisions. So long as at least a
majority of the shares of Series D Preferred Stock originally issued remain
outstanding, this corporation shall not without first obtaining the approval (by
vote or written consent, as provided by law) of the holders of at least a
majority of the then outstanding shares of Series D Preferred Stock:
(i) adversely alter or change the powers, preferences or
special rights of the Series D Preferred Stock;
(ii) increase or decrease (other than by redemption or
conversion) the
<PAGE> 16
aggregate number of authorized shares of Series D Preferred Stock;
(iii) create, authorize or issue any new class or series
of shares having any powers, preferences, or special rights superior to or on a
parity with the Series D Preferred Stock as to dividends, liquidation,
conversion rights or voting rights;
(iv) change the authorized number of directors of this
corporation; or
(v) sell, convey, or otherwise dispose of all or
substantially all of its property or business or merge into or consolidate with
any other corporation (other than a wholly-owned subsidiary corporation) or
effect any transaction or series of related transactions in which more than
fifty percent (50%) of the voting power of this corporation is disposed,
provided that such transaction has an aggregate pre-money valuation of this
corporation of less than or equal to $165,000,000 and such approval is not
unreasonably withheld.
7. Residual Rights. All rights accruing to the outstanding shares of
capital stock not expressly provided for to the contrary herein shall be vested
in the Common Stock.
ARTICLE VI
The following is applicable to the Common Stock:
1. Dividend Rights. Subject to the prior rights of holders of all
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of the corporation legally
available therefor, such dividends as may be declared from time to time by the
Board of Directors.
2. Liquidation Rights. Upon the liquidation, dissolution or winding up
of the corporation, the assets of the corporation shall be distributed as
provided in Section 3 of Article Five hereof.
3. Redemption. The Common Stock is not redeemable.
4. Voting Rights. The holder of each share of Common Stock shall have
the right to one vote, and shall be entitled to notice of any stockholders'
meeting in accordance with the Bylaws of the corporation, and shall be entitled
to vote upon such matters and in such manner as may be provided by law.
ARTICLE VII
The corporation is to have perpetual existence.
ARTICLE VIII
In furtherance and not in limitation of the powers conferred by statute,
the
<PAGE> 17
Board of Directors is expressly authorized to make, alter, amend or repeal
the Bylaws of the Corporation.
ARTICLE IX
The election of directors need not be by written ballot unless the
Bylaws of the corporation shall so provide.
ARTICLE X
To the fullest extent permitted by the Delaware General Corporation Law
as the same exists or as may hereafter be amended, a director of the corporation
shall not be personally liable to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director. The corporation
shall indemnify to the fullest extent permitted by the law, any person made or
threatened to be made a party, to any action or proceeding, whether criminal,
civil, administrative or investigative, by reason of the fact the he or she, or
his or her testator or intestate, is or was a director or officer of the
corporation or any predecessor of the corporation, or serves or served at any
other enterprise as a director or officer at the request of the corporation or
any predecessor to the corporation. Neither any amendment nor repeal of this
Article, nor the adoption of any provision of this Certificate of Incorporation
inconsistent with this Article, shall eliminate or reduce the effect of this
Article in respect of any matter occurring, or any cause of action, suit or
claim that, but for this Article, would accrue or arise, prior to such
amendment, repeal or adoption of an inconsistent provision.
ARTICLE XI
The corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
<PAGE> 1
EXHIBIT 4.1
[E-LOAN COMMON STOCK CERTIFICATE]
[NUMBER] [SHARES]
INCORPORATED UNDER THE LAWS COMMON STOCK
OF THE STATE OF DELAWARE
SEE REVERSE FOR CERTAIN DEFINITIONS
AND A STATEMENT AS TO THE RIGHTS,
PREFERENCES, PRIVILEGES AND
RESTRICTIONS OF SHARES
CUSIP 268618 10 7
THIS CERTIFICATE IS TRANSFERABLE
IN RIDGEFIELD PARK, NJ OR NEW YORK, NY
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $.001 PAR VALUE, OF
E-LOAN, Inc., the transfer of which may be registered on the books maintained
for such purpose by or on behalf of the Corporation upon surrender of this
certificate properly endorsed.
This certificate is not valid unless countersigned by the Transfer Agent and
registered by the Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
<TABLE>
<S> <C> <C>
/s/ Chris Larsen COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
CHIEF EXECUTIVE OFFICER TRANSFER AGENT AND REGISTRAR
[E-LOAN, INC. SEAL] BY:
/s/ Frank Siskowski
CHIEF FINANCIAL OFFICER AUTHORIZED SIGNATURE
</TABLE>
- -----------------------------------------------
AMERICAN BANK NOTE COMPANY MAY 4, 1999
711 ARMSTRONG LANE 00_____FR
COLUMBIA, TN 38401
(931) 388-3003 Proof ____ REV 3
(FAX) (931) 381-3810
- ------------------------------------------------
<PAGE> 2
E-LOAN, INC.
A statement of the powers, designations, preferences and relative,
participating, optional, or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights as established, from time to time, by the Certificate
of Incorporation of the Corporation and by any certificate of determination,
the number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge
at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT -............Custodian .............
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act ............................
in common (State)
UNIF TRF MIN ACT -..........Custodian (until age .....)
(Cust)
.............under Uniform Transfers
(Minor)
to Minors Act .......................
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _______________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------- Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ----------------------------------------------------------------------- Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
----------------------------
X
--------------------------------------
X
--------------------------------------
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By
---------------------------------
THE SIGNATURE(S) MUST BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCK BROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS
WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-1E.
- ------------------------------------------------
AMERICAN BANK NOTE COMPANY APRIL 21, 1999
711 ARMSTRONG LANE 00_______BK
COLUMBIA, TN 38401
(931) 388-3003
(FAX) (931) 381-3810 Proof___ REV 1
- ------------------------------------------------
<PAGE> 1
EXHIBIT 10.2
E-LOAN, INC.
1997 STOCK PLAN
(as amended and restated April 27, 1999)
1. Purposes of the Plan. The purposes of this 1997 Stock Plan are:
- to attract and retain the best available personnel for positions
of substantial responsibility,
- to provide additional incentive to Employees, Directors and
Consultants, and
- to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. Stock Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees as
shall be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options or Stock Purchase Rights are,
or will be, granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means a committee of Directors appointed by the
Board in accordance with Section 4 of the Plan.
(f) "Common Stock" means the common stock of the Company.
(g) "Company" means E-Loan, Inc., a Delaware corporation.
(h) "Consultant" means any person, including an advisor, engaged
by the Company or
<PAGE> 2
a Parent or Subsidiary to render services to such entity.
(i) "Director" means a member of the Board.
(j) "Disability" means total and permanent disability as defined
in Section 22(e)(3) of the Code.
(k) "Employee" means any person, including Officers and
Directors, employed by the Company or any Parent or Subsidiary of the Company. A
Service Provider shall not cease to be an Employee in the case of (i) any leave
of absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(m) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any established
stock exchange or a national market system, including without limitation the
Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market,
its Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, the Fair
Market Value of a Share of Common Stock shall be the mean between the high bid
and low asked prices for the Common Stock on the last market trading day prior
to the day of determination, as reported in The Wall Street Journal or such
other source as the Administrator deems reliable; or
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify
as an incentive
-2-
<PAGE> 3
stock option within the meaning of Section 422 of the Code and the regulations
promulgated thereunder.
(o) "Nonstatutory Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
(p) "Notice of Grant" means a written or electronic notice
evidencing certain terms and conditions of an individual Option or Stock
Purchase Right grant. The Notice of Grant is part of the Option Agreement.
(q) "Officer" means a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(r) "Option" means a stock option granted pursuant to the Plan.
(s) "Option Agreement" means an agreement between the Company and
an Optionee evidencing the terms and conditions of an individual Option grant.
The Option Agreement is subject to the terms and conditions of the Plan.
(t) "Option Exchange Program" means a program whereby outstanding
Options are surrendered in exchange for Options with a lower exercise price.
(u) "Optioned Stock" means the Common Stock subject to an Option
or Stock Purchase Right.
(v) "Optionee" means the holder of an outstanding Option or Stock
Purchase Right granted under the Plan.
(w) "Parent" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(x) "Plan" means this 1997 Stock Plan.
(y) "Restricted Stock" means shares of Common Stock acquired
pursuant to a grant of Stock Purchase Rights under Section 11 of the Plan.
(z) "Restricted Stock Purchase Agreement" means a written
agreement between the Company and the Optionee evidencing the terms and
restrictions applying to stock purchased under a Stock Purchase Right. The
Restricted Stock Purchase Agreement is subject to the terms and conditions of
the Plan and the Notice of Grant.
-3-
<PAGE> 4
(aa) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
(bb) "Section 16(b)" means Section 16(b) of the Exchange Act.
(cc) "Service Provider" means an Employee, Director or
Consultant.
(dd) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 13 of the Plan.
(ee) "Stock Purchase Right" means the right to purchase Common
Stock pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
(ff) "Subsidiary" means a "subsidiary corporation", whether now
or hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 3,500,000 Shares, plus an annual increase to be added on the
first day of the Company's fiscal year (beginning in 2000) equal to the lesser
of (i) 1,500,000 Shares, (ii) 4% of the outstanding shares on such date or (iii)
a lesser amount determined by the Board. The Shares may be authorized, but
unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes
unexercisable without having been exercised in full, or is surrendered pursuant
to an Option Exchange Program, the unpurchased Shares which were subject thereto
shall become available for future grant or sale under the Plan (unless the Plan
has terminated); provided, however, that Shares that have actually been issued
under the Plan, whether upon exercise of an Option or Right, shall not be
returned to the Plan and shall not become available for future distribution
under the Plan, except that if Shares of Restricted Stock are repurchased by the
Company at their original purchase price, such Shares shall become available for
future grant under the Plan.
4. Administration of the Plan.
(a) Procedure.
(i) Multiple Administrative Bodies. The Plan may be
administered by different Committees with respect to different groups of Service
Providers.
(ii) Section 162(m). To the extent that the Administrator
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the
-4-
<PAGE> 5
meaning of Section 162(m) of the Code, the Plan shall be administered by a
Committee of two or more "outside directors" within the meaning of Section
162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify
transactions hereunder as exempt under Rule 16b-3, the transactions contemplated
hereunder shall be structured to satisfy the requirements for exemption under
Rule 16b-3.
(iv) Other Administration. Other than as provided above,
the Plan shall be administered by (A) the Board or (B) a Committee, which
committee shall be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and
Stock Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock
to be covered by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the
Plan;
(v) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any Option or Stock Purchase Right
granted hereunder. Such terms and conditions include, but are not limited to,
the exercise price, the time or times when Options or Stock Purchase Rights may
be exercised (which may be based on performance criteria), any vesting
acceleration or waiver of forfeiture restrictions, and any restriction or
limitation regarding any Option or Stock Purchase Right or the shares of Common
Stock relating thereto, based in each case on such factors as the Administrator,
in its sole discretion, shall determine;
(vi) to reduce the exercise price of any Option or Stock
Purchase Right to the then current Fair Market Value if the Fair Market Value of
the Common Stock covered by such Option or Stock Purchase Right shall have
declined since the date the Option or Stock Purchase Right was granted;
(vii) to institute an Option Exchange Program;
(viii) to construe and interpret the terms of the Plan
and awards granted pursuant to the Plan;
-5-
<PAGE> 6
(ix) to prescribe, amend and rescind rules and
regulations relating to the Plan, including rules and regulations relating to
sub-plans established for the purpose of qualifying for preferred tax treatment
under foreign tax laws;
(x) to modify or amend each Option or Stock Purchase
Right (subject to Section 15(c) of the Plan), including the discretionary
authority to extend the post-termination exercisability period of Options longer
than is otherwise provided for in the Plan;
(xi) to allow Optionees to satisfy withholding tax
obligations by electing to have the Company withhold from the Shares to be
issued upon exercise of an Option or Stock Purchase Right that number of Shares
having a Fair Market Value equal to the amount required to be withheld. The Fair
Market Value of the Shares to be withheld shall be determined on the date that
the amount of tax to be withheld is to be determined. All elections by an
Optionee to have Shares withheld for this purpose shall be made in such form and
under such conditions as the Administrator may deem necessary or advisable;
(xii) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option or Stock
Purchase Right previously granted by the Administrator;
(xiii) to make all other determinations deemed necessary
or advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options or Stock Purchase Rights.
5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may
be granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
6. Limitations.
(a) Each Option shall be designated in the Option Agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 6(a), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares
-6-
<PAGE> 7
shall be determined as of the time the Option with respect to such Shares is
granted.
(b) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they interfere in
any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options:
(i) No Service Provider shall be granted, in any fiscal
year of the Company, Options to purchase more than 750,000 Shares.
(ii) In connection with his or her initial service, a
Service Provider may be granted Options to purchase up to an additional 750,000
Shares which shall not count against the limit set forth in subsection (i)
above.
(iii) The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization as
described in Section 13.
(iv) If an Option is canceled in the same fiscal year of
the Company in which it was granted (other than in connection with a transaction
described in Section 13), the canceled Option will be counted against the limits
set forth in subsections (i) and (ii) above. For this purpose, if the exercise
price of an Option is reduced, the transaction will be treated as a cancellation
of the Option and the grant of a new Option.
7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall
become effective upon its adoption by the Board. It shall continue in effect for
a term of ten (10) years unless terminated earlier under Section 15 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Option
Agreement. In the case of an Incentive Stock Option, the term shall be ten (10)
years from the date of grant or such shorter term as may be provided in the
Option Agreement. Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any Parent or Subsidiary, the term of the
Incentive Stock Option shall be five (5) years from the date of grant or such
shorter term as may be provided in the Option Agreement.
9. Option Exercise Price and Consideration.
(a) Exercise Price. The per share exercise price for the Shares
to be issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
-7-
<PAGE> 8
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the
Incentive Stock Option is granted, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the per Share exercise price shall be no less than 110% of the
Fair Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee
described in paragraph (A) immediately above, the per Share exercise price shall
be no less than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per
Share exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be
granted with a per Share exercise price of less than 100% of the Fair Market
Value per Share on the date of grant pursuant to a merger or other corporate
transaction.
(b) Waiting Period and Exercise Dates. At the time an Option is
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions which must be satisfied before the
Option may be exercised.
(c) Form of Consideration. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six months on the date of surrender, and (B) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which said Option shall be exercised;
-8-
<PAGE> 9
(v) consideration received by the Company under a
cashless exercise program implemented by the Company in connection with the
Plan;
(vi) a reduction in the amount of any Company liability
to the Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation program or
arrangement;
(vii) any combination of the foregoing methods of
payment; or
(viii) such other consideration and method of payment for
the issuance of Shares to the extent permitted by Applicable Laws.
10. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement. Unless the Administrator provides otherwise,
vesting of Options granted hereunder shall be tolled during any unpaid leave of
absence. An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company
receives: (i) written or electronic notice of exercise (in accordance with the
Option Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the
number of Shares thereafter available, both for purposes of the Plan and for
sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) Termination of Relationship as a Service Provider. If an
Optionee ceases to be a Service Provider, other than upon the Optionee's death
or Disability, the Optionee may exercise his
-9-
<PAGE> 10
or her Option within such period of time as is specified in the Option Agreement
to the extent that the Option is vested on the date of termination (but in no
event later than the expiration of the term of such Option as set forth in the
Option Agreement). In the absence of a specified time in the Option Agreement,
the Option shall remain exercisable for three (3) months following the
Optionee's termination. If, on the date of termination, the Optionee is not
vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified by the
Administrator, the Option shall terminate, and the Shares covered by such Option
shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
to the extent the Option is vested on the date of termination (but in no event
later than the expiration of the term of such Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If, on the date of termination, the Optionee is not vested as to
his or her entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service
Provider, the Option shall vest and become exercisable in full, including Shares
as to which it would not otherwise be vested or exercisable, and the Option may
be exercised within such period of time as is specified in the Option Agreement
(but in no event later than the expiration of the term of such Option as set
forth in the Notice of Grant), by the Optionee's estate or by a person who
acquires the right to exercise the Option by bequest or inheritance. In the
absence of a specified time in the Option Agreement, the Option shall remain
exercisable for twelve (12) months following the Optionee's termination. The
Option may be exercised by the executor or administrator of the Optionee's
estate or, if none, by the person(s) entitled to exercise the Option under the
Optionee's will or the laws of descent or distribution. If the Option is not so
exercised within the time specified herein, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to
buy out for a payment in cash or Shares an Option previously granted based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
11. Stock Purchase Rights.
(a) Rights to Purchase. Stock Purchase Rights may be issued
either alone, in addition to, or in tandem with other awards granted under the
Plan and/or cash awards made outside of the Plan. After the Administrator
determines that it will offer Stock Purchase Rights under the Plan, it
-10-
<PAGE> 11
shall advise the offeree in writing or electronically, by means of a Notice of
Grant, of the terms, conditions and restrictions related to the offer, including
the number of Shares that the offeree shall be entitled to purchase, the price
to be paid, and the time within which the offeree must accept such offer. The
offer shall be accepted by execution of a Restricted Stock Purchase Agreement in
the form determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines
otherwise, the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's service with the Company 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 the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
(c) Other Provisions. The Restricted Stock Purchase Agreement
shall contain such other terms, provisions and conditions not inconsistent with
the Plan as may be determined by the Administrator in its sole discretion.
(d) Rights as a Shareholder. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 13
of the Plan.
12. Non-Transferability of Options and Stock Purchase Rights. Unless
determined otherwise by the Administrator, an Option or Stock Purchase Right may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Stock Purchase Right transferable, such Option
or Stock Purchase Right shall contain such additional terms and conditions as
the Administrator deems appropriate.
13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
Asset Sale.
(a) Changes in Capitalization. Subject to any required action by
the shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding
-11-
<PAGE> 12
Option or Stock Purchase Right, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option or Stock
Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until fifteen (15) days prior to
such transaction as to all of the Optioned Stock covered thereby, including
Shares as to which the Option would not otherwise be exercisable. In addition,
the Administrator may provide that any Company repurchase option applicable to
any Shares purchased upon exercise of an Option or Stock Purchase Right shall
lapse as to all such Shares, provided the proposed dissolution or liquidation
takes place at the time and in the manner contemplated. To the extent it has not
been previously exercised, an Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the event
that the successor corporation refuses to assume or substitute for the Option or
Stock Purchase Right, the Optionee shall fully vest in and have the right to
exercise the Option or Stock Purchase Right as to all of the Optioned Stock,
including Shares as to which it would not otherwise be vested or exercisable. If
an Option or Stock Purchase Right becomes fully vested and exercisable in lieu
of assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee in writing or electronically that the
Option or Stock Purchase Right shall be fully vested and exercisable for a
period of fifteen (15) days from the date of such notice, and the Option or
Stock Purchase Right shall terminate upon the expiration of such period. For the
purposes of this paragraph, the Option or Stock Purchase Right shall be
considered assumed if, following the merger or sale of assets, the option or
right confers the right to purchase or receive, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right immediately prior to the merger or
sale of assets, the consideration (whether stock, cash, or other securities or
property) received in the merger or sale of assets by holders of Common Stock
for each Share held on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen
-12-
<PAGE> 13
by the holders of a majority of the outstanding Shares); provided, however, that
if such consideration received in the merger or sale of assets is not solely
common stock of the successor corporation or its Parent, the Administrator may,
with the consent of the successor corporation, provide for the consideration to
be received upon the exercise of the Option or Stock Purchase Right, for each
Share of Optioned Stock subject to the Option or Stock Purchase Right, to be
solely common stock of the successor corporation or its Parent equal in fair
market value to the per share consideration received by holders of Common Stock
in the merger or sale of assets.
14. Date of Grant. The date of grant of an Option or Stock Purchase
Right shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall be
provided to each Optionee within a reasonable time after the date of such grant.
15. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend,
alter, suspend or terminate the Plan.
(b) Shareholder Approval. The Company shall obtain shareholder
approval of any Plan amendment to the extent necessary and desirable to comply
with Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
16. Conditions Upon Issuance of Shares.
(a) Legal Compliance. Shares shall not be issued pursuant to the
exercise of an Option or Stock Purchase Right unless the exercise of such Option
or Stock Purchase Right and the issuance and delivery of such Shares shall
comply with Applicable Laws and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of
an Option or Stock Purchase Right, the Company may require the person exercising
such Option or Stock Purchase Right to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
-13-
<PAGE> 14
opinion of counsel for the Company, such a representation is required.
17. Inability to Obtain Authority. The inability of the Company to
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any Shares hereunder, shall relieve the Company of any liability in
respect of the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
18. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. Shareholder Approval. The Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
-14-
<PAGE> 15
E-LOAN, INC.
1997 STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall
have the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
[Optionee's Name and Address]
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Grant Number _________________________
Date of Grant _________________________
Vesting Commencement Date _________________________
Exercise Price per Share $________________________
Total Number of Shares Granted _________________________
Total Exercise Price $_________________________
Type of Option: ___ Incentive Stock Option
___ Nonstatutory Stock Option
Term/Expiration Date: _________________________
Vesting Schedule:
This Option may be exercised, in whole or in part, in accordance with
the following schedule:
[25% OF THE SHARES SUBJECT TO THE OPTION SHALL VEST TWELVE MONTHS AFTER
THE VESTING COMMENCEMENT DATE, AND 1/48 OF THE SHARES SUBJECT TO THE OPTION
SHALL VEST EACH MONTH THEREAFTER, SUBJECT TO THE OPTIONEE CONTINUING TO BE A
SERVICE PROVIDER ON SUCH DATES].
<PAGE> 16
Termination Period:
This Option may be exercised for three months after Optionee ceases to
be a Service Provider. Upon the death or Disability of the Optionee, this Option
may be exercised for one year after Optionee ceases to be a Service Provider. In
no event shall this Option be exercised later than the Term/Expiration Date as
provided above.
II. AGREEMENT
1. Grant of Option. The Plan Administrator of the Company hereby grants
to the Optionee named in the Notice of Grant attached as Part I of this
Agreement (the "Optionee") an option (the "Option") to purchase the number of
Shares, as set forth in the Notice of Grant, at the exercise price per share set
forth in the Notice of Grant (the "Exercise Price"), subject to the terms and
conditions of the Plan, which is incorporated herein by reference. Subject to
Section 15(c) of the Plan, in the event of a conflict between the terms and
conditions of the Plan and the terms and conditions of this Option Agreement,
the terms and conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option under
Section 422 of the Code. However, if this Option is intended to be an Incentive
Stock Option, to the extent that it exceeds the $100,000 rule of Code Section
422(d) it shall be treated as a Nonstatutory Stock Option ("NSO").
2. Exercise of Option.
(a) Right to Exercise. This Option is exercisable during its term
in accordance with the Vesting Schedule set out in the Notice of Grant and the
applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option is exercisable by delivery of
an exercise notice, in the form attached as Exhibit A (the "Exercise Notice"),
which shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised (the "Exercised Shares"), and
such other representations and agreements as may be required by the Company
pursuant to the provisions of the Plan. The Exercise Notice shall be completed
by the Optionee and delivered to the Secretary of the Company. The Exercise
Notice shall be accompanied by payment of the aggregate Exercise Price as to all
Exercised Shares. This Option shall be deemed to be exercised upon receipt by
the Company of such fully executed Exercise Notice accompanied by such aggregate
Exercise Price.
No Shares shall be issued pursuant to the exercise of this Option
unless such issuance and exercise complies with Applicable Laws. Assuming such
compliance, for income tax purposes the Exercised Shares shall be considered
transferred to the Optionee on the date the Option is
-16-
<PAGE> 17
exercised with respect to such Exercised Shares.
3. Method of Payment. Payment of the aggregate Exercise Price shall be
by any of the following, or a combination thereof, at the election of the
Optionee:
(a) cash; or
(b) check; or
(c) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan; or
(d) surrender of other Shares which (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, AND (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares; or
(e) with the Administrator's consent, delivery of Optionee's
promissory note (the "Note") in the form attached hereto as Exhibit C, in the
amount of the aggregate Exercise Price of the Exercised Shares together with the
execution and delivery by the Optionee of the Security Agreement attached hereto
as Exhibit B. The Note shall bear interest at the "applicable federal rate"
prescribed under the Code and its regulations at time of purchase, and shall be
secured by a pledge of the Shares purchased by the Note pursuant to the Security
Agreement.
4. Non-Transferability of Option. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by the Optionee. The terms
of the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
5. Term of Option. This Option may be exercised only within the term set
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option Agreement.
6. Tax Consequences. Some of the federal tax consequences relating to
this Option, as of the date of this Option, are set forth below. THIS SUMMARY IS
NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.
THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR
DISPOSING OF THE SHARES.
(a) Exercising the Option.
-17-
<PAGE> 18
(i) Nonstatutory Stock Option. The Optionee may incur
regular federal income tax liability upon exercise of a NSO. The Optionee will
be treated as having received compensation income (taxable at ordinary income
tax rates) equal to the excess, if any, of the Fair Market Value of the
Exercised Shares on the date of exercise over their aggregate Exercise Price. If
the Optionee is an Employee or a former Employee, the Company will be required
to withhold from his or her compensation or collect from Optionee and pay to the
applicable taxing authorities an amount in cash equal to a percentage of this
compensation income at the time of exercise, and may refuse to honor the
exercise and refuse to deliver Shares if such withholding amounts are not
delivered at the time of exercise.
(ii) Incentive Stock Option. If this Option qualifies as
an ISO, the Optionee will have no regular federal income tax liability upon its
exercise, although the excess, if any, of the Fair Market Value of the Exercised
Shares on the date of exercise over their aggregate Exercise Price will be
treated as an adjustment to alternative minimum taxable income for federal tax
purposes and may subject the Optionee to alternative minimum tax in the year of
exercise. In the event that the Optionee ceases to be an Employee but remains a
Service Provider, any Incentive Stock Option of the Optionee that remains
unexercised shall cease to qualify as an Incentive Stock Option and will be
treated for tax purposes as a Nonstatutory Stock Option on the date three (3)
months and one (1) day following such change of status.
(b) Disposition of Shares.
(i) NSO. If the Optionee holds NSO Shares for at least
one year, any gain realized on disposition of the Shares will be treated as
long-term capital gain for federal income tax purposes.
(ii) ISO. If the Optionee holds ISO Shares for at least
one year after exercise and two years after the grant date, any gain realized on
disposition of the Shares will be treated as long-term capital gain for federal
income tax purposes. If the Optionee disposes of ISO Shares within one year
after exercise or two years after the grant date, any gain realized on such
disposition will be treated as compensation income (taxable at ordinary income
rates) to the extent of the excess, if any, of the lesser of (A) the difference
between the Fair Market Value of the Shares acquired on the date of exercise and
the aggregate Exercise Price, or (B) the difference between the sale price of
such Shares and the aggregate Exercise Price. Any additional gain will be taxed
as capital gain, short-term or long-term depending on the period that the ISO
Shares were held.
(c) Notice of Disqualifying Disposition of ISO Shares. If the
Optionee sells or otherwise disposes of any of the Shares acquired pursuant to
an ISO on or before the later of (i) two years after the grant date, or (ii) one
year after the exercise date, the Optionee shall immediately notify the Company
in writing of such disposition. The Optionee agrees that he or she may be
subject to income tax withholding by the Company on the compensation income
recognized from
-18-
<PAGE> 19
such early disposition of ISO Shares by payment in cash or out of the current
earnings paid to the Optionee.
7. Entire Agreement; Governing Law. The Plan is incorporated herein by
reference. The Plan and this Option Agreement constitute the entire agreement of
the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by the internal substantive laws, but not
the choice of law rules, of California.
8. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT
THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE
OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT
CAUSE.
By your signature and the signature of the Company's representative
below, you and the Company agree that this Option is granted under and governed
by the terms and conditions of the Plan and this Option Agreement. Optionee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Plan and Option Agreement.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator upon any questions relating to the Plan
and Option Agreement. Optionee further agrees to notify the Company upon any
change in the residence address indicated below.
OPTIONEE: E-LOAN, INC.
- ----------------------------------- ---------------------------------------
Signature By
-19-
<PAGE> 20
- ------------------------------------ --------------------------------------
Print Name Title
- ------------------------------------
Residence Address
- ------------------------------------
CONSENT OF SPOUSE
The undersigned spouse of Optionee has read and hereby approves the
terms and conditions of the Plan and this Option Agreement. In consideration of
the Company's granting his or her spouse the right to purchase Shares as set
forth in the Plan and this Option Agreement, the undersigned hereby agrees to be
irrevocably bound by the terms and conditions of the Plan and this Option
Agreement and further agrees that any community property interest shall be
similarly bound. The undersigned hereby appoints the undersigned's spouse as
attorney-in-fact for the undersigned with respect to any amendment or exercise
of rights under the Plan or this Option Agreement.
---------------------------------------
Spouse of Optionee
-20-
<PAGE> 21
EXHIBIT A
<PAGE> 22
E-LOAN, INC.
1997 STOCK PLAN
EXERCISE NOTICE
E-Loan, Inc.
540 University Avenue, Suite 350
Palo Alto, CA 94301
Attention: Secretary
1. Exercise of Option. Effective as of today, ________________, _____,
the undersigned ("Purchaser") hereby elects to purchase ______________ shares
(the "Shares") of the Common Stock of E-Loan, Inc. (the "Company") under and
pursuant to the 1997 Stock Plan (the "Plan") and the Stock Option Agreement
dated ______, _____ (the "Option Agreement"). The purchase price for the Shares
shall be $______, as required by the Option Agreement.
2. Delivery of Payment. Purchaser herewith delivers to the Company the
full purchase price for the Shares.
3. Representations of Purchaser. Purchaser acknowledges that Purchaser
has received, read and understood the Plan and the Option Agreement and agrees
to abide by and be bound by their terms and conditions.
4. Rights as Shareholder. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the Shares, no right to vote or receive dividends or
any other rights as a shareholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Shares so acquired shall
be issued to the Optionee as soon as practicable after exercise of the Option.
No adjustment will be made for a dividend or other right for which the record
date is prior to the date of issuance, except as provided in Section 13 of the
Plan.
5. Tax Consultation. Purchaser understands that Purchaser may suffer
adverse tax consequences as a result of Purchaser's purchase or disposition of
the Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
6. Entire Agreement; Governing Law. The Plan and Option Agreement are
incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire
-22-
<PAGE> 23
agreement of the parties with respect to the subject matter hereof and supersede
in their entirety all prior undertakings and agreements of the Company and
Purchaser with respect to the subject matter hereof, and may not be modified
adversely to the Purchaser's interest except by means of a writing signed by the
Company and Purchaser. This agreement is governed by the internal substantive
laws, but not the choice of law rules, of California.
Submitted by: Accepted by:
PURCHASER: E-LOAN, INC.
- ---------------------------------- -------------------------------------
Signature By
- ---------------------------------- -------------------------------------
Print Name Its
Address: Address:
- ---------------------------------- E-Loan, Inc.
- ---------------------------------- 540 University Avenue, Suite 350
Palo Alto, CA 94301
-------------------------------------
Date Received
-23-
<PAGE> 24
EXHIBIT B
SECURITY AGREEMENT
This Security Agreement is made as of __________, _____ between E-Loan,
Inc. a Delaware corporation ("Pledgee"), and _________________________
("Pledgor").
Recitals
Pursuant to Pledgor's election to purchase Shares under the Option
Agreement dated ________ (the "Option"), between Pledgor and Pledgee under
Pledgee's 1997 Stock Plan, and Pledgor's election under the terms of the Option
to pay for such shares with his promissory note (the "Note"), Pledgor has
purchased _________ shares of Pledgee's Common Stock (the "Shares") at a price
of $________ per share, for a total purchase price of $__________. The Note and
the obligations thereunder are as set forth in Exhibit C to the Option.
NOW, THEREFORE, it is agreed as follows:
1. Creation and Description of Security Interest. In consideration of
the transfer of the Shares to Pledgor under the Option Agreement, Pledgor,
pursuant to the California Commercial Code, hereby pledges all of such Shares
(herein sometimes referred to as the "Collateral") represented by certificate
number ______, duly endorsed in blank or with executed stock powers, and
herewith delivers said certificate to the Secretary of Pledgee ("Pledgeholder"),
who shall hold said certificate subject to the terms and conditions of this
Security Agreement.
The pledged stock (together with an executed blank stock assignment for
use in transferring all or a portion of the Shares to Pledgee if, as and when
required pursuant to this Security Agreement) shall be held by the Pledgeholder
as security for the repayment of the Note, and any extensions or renewals
thereof, to be executed by Pledgor pursuant to the terms of the Option, and the
Pledge holder shall not encumber or dispose of such Shares except in accordance
with the provisions of this Security Agreement.
2. Pledgor's Representations and Covenants. To induce Pledgee to enter
into this Security Agreement, Pledgor represents and covenants to Pledgee, its
successors and assigns, as follows:
a. Payment of Indebtedness. Pledgor will pay the principal sum of
the Note secured hereby, together with interest thereon, at the time and in the
manner provided in the Note.
b. Encumbrances. The Shares are free of all other encumbrances,
defenses and liens, and Pledgor will not further encumber the Shares without the
prior written consent of Pledgee.
<PAGE> 25
c. Margin Regulations. In the event that Pledgee's Common Stock
is now or later becomes margin-listed by the Federal Reserve Board and Pledgee
is classified as a "lender" within the meaning of the regulations under Part 207
of Title 12 of the Code of Federal Regulations ("Regulation G"), Pledgor agrees
to cooperate with Pledgee in making any amendments to the Note or providing any
additional collateral as may be necessary to comply with such regulations.
3. Voting Rights. During the term of this pledge and so long as all
payments of principal and interest are made as they become due under the terms
of the Note, Pledgor shall have the right to vote all of the Shares pledged
hereunder.
4. Stock Adjustments. In the event that during the term of the pledge
any stock dividend, reclassification, readjustment or other changes are declared
or made in the capital structure of Pledgee, all new, substituted and additional
shares or other securities issued by reason of any such change shall be
delivered to and held by the Pledgee under the terms of this Security Agreement
in the same manner as the Shares originally pledged hereunder. In the event of
substitution of such securities, Pledgor, Pledgee and Pledgeholder shall
cooperate and execute such documents as are reasonable so as to provide for the
substitution of such Collateral and, upon such substitution, references to
"Shares" in this Security Agreement shall include the substituted shares of
capital stock of Pledgor as a result thereof.
5. Options and Rights. In the event that, during the term of this
pledge, subscription Options or other rights or options shall be issued in
connection with the pledged Shares, such rights, Options and options shall be
the property of Pledgor and, if exercised by Pledgor, all new stock or other
securities so acquired by Pledgor as it relates to the pledged Shares then held
by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under
the terms of this Security Agreement in the same manner as the Shares pledged.
6. Default. Pledgor shall be deemed to be in default of the Note and of
this Security Agreement in the event:
a. Payment of principal or interest on the Note shall be
delinquent for a period of 10 days or more; or
b. Pledgor fails to perform any of the covenants set forth in the
Option or contained in this Security Agreement for a period of 10 days after
written notice thereof from Pledgee.
In the case of an event of Default, as set forth above, Pledgee shall
have the right to accelerate payment of the Note upon notice to Pledgor, and
Pledgee shall thereafter be entitled to pursue its remedies under the California
Commercial Code.
-25-
<PAGE> 26
7. Release of Collateral. Subject to any applicable contrary rules under
Regulation G, there shall be released from this pledge a portion of the pledged
Shares held by Pledgeholder here under upon payments of the principal of the
Note. The number of the pledged Shares which shall be released shall be that
number of full Shares which bears the same proportion to the initial number of
Shares pledged hereunder as the payment of principal bears to the initial full
principal amount of the Note.
8. Withdrawal or Substitution of Collateral. Pledgor shall not sell,
withdraw, pledge, substitute or otherwise dispose of all or any part of the
Collateral without the prior written consent of Pledgee.
9. Term. The within pledge of Shares shall continue until the payment
of all indebtedness secured hereby, at which time the remaining pledged stock
shall be promptly delivered to Pledgor, subject to the provisions for prior
release of a portion of the Collateral as provided in paragraph 7 above.
10. Insolvency. Pledgor agrees that if a bankruptcy or insolvency
proceeding is instituted by or against it, or if a receiver is appointed for the
property of Pledgor, or if Pledgor makes an assignment for the benefit of
creditors, the entire amount unpaid on the Note shall become immediately due and
payable, and Pledgee may proceed as provided in the case of default.
11. Pledgeholder Liability. In the absence of willful or gross
negligence, Pledgeholder shall not be liable to any party for any of his acts,
or omissions to act, as Pledgeholder.
12. Invalidity of Particular Provisions. Pledgor and Pledgee agree that
the enforceability or invalidity of any provision or provisions of this Security
Agreement shall not render any other provision or provisions herein contained
unenforceable or invalid.
13. Successors or Assigns. Pledgor and Pledgee agree that all of the
terms of this Security Agreement shall be binding on their respective successors
and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein
shall be deemed to include, for all purposes, the respective designees,
successors, assigns, heirs, executors and administrators.
14. Governing Law. This Security Agreement shall be interpreted and
governed under the internal substantive laws, but not the choice of law rules,
of California.
-26-
<PAGE> 27
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
"PLEDGOR" ------------------------------------
Signature
------------------------------------
Print Name
Address: ------------------------------------
------------------------------------
"PLEDGEE" E-LOAN, INC.,
a Delaware corporation
------------------------------------
Signature
------------------------------------
Print Name
------------------------------------
Title
"PLEDGEHOLDER" ------------------------------------
Secretary of
E-Loan, Inc.
-27-
<PAGE> 28
EXHIBIT C
NOTE
$_______________ Palo Alto, Ca.
--------------, -----
FOR VALUE RECEIVED, _______________ promises to pay to E-Loan, Inc. a
Delaware corporation (the "Company"), or order, the principal sum of
_______________________ ($_____________), together with interest on the unpaid
principal hereof from the date hereof at the rate of _______________ percent
(____%) per annum, compounded semiannually.
Principal and interest shall be due and payable on __________, _____.
Payment of principal and interest shall be made in lawful money of the United
States of America.
The undersigned may at any time prepay all or any portion of the
principal or interest owing hereunder.
This Note is subject to the terms of the Option, dated as of
________________. This Note is secured in part by a pledge of the Company's
Common Stock under the terms of a Security Agreement of even date herewith and
is subject to all the provisions thereof.
The holder of this Note shall have full recourse against the
undersigned, and shall not be required to proceed against the collateral
securing this Note in the event of default.
In the event the undersigned shall cease to be an employee, director or
consultant of the Company for any reason, this Note shall, at the option of the
Company, be accelerated, and the whole unpaid balance on this Note of principal
and accrued interest shall be immediately due and payable.
Should any action be instituted for the collection of this Note, the
reasonable costs and attorneys' fees therein of the holder shall be paid by the
undersigned.
------------------------------------
------------------------------------
<PAGE> 29
1997 STOCK PLAN
NOTICE OF GRANT OF STOCK PURCHASE RIGHT
Unless otherwise defined herein, the terms defined in the Plan shall
have the same defined meanings in this Notice of Grant.
[Grantee's Name and Address]
You have been granted the right to purchase Common Stock of the Company,
subject to the Company's Repurchase Option and your ongoing status as a Service
Provider (as described in the Plan and the attached Restricted Stock Purchase
Agreement), as follows:
Grant Number _________________________
Date of Grant _________________________
Price Per Share $________________________
Total Number of Shares Subject _________________________
to This Stock Purchase Right
Expiration Date: _________________________
YOU MUST EXERCISE THIS STOCK PURCHASE RIGHT BEFORE THE EXPIRATION DATE
OR IT WILL TERMINATE AND YOU WILL HAVE NO FURTHER RIGHT TO PURCHASE THE SHARES.
By your signature and the signature of the Company's representative
below, you and the Company agree that this Stock Purchase Right is granted under
and governed by the terms and conditions of the 1997 Stock Plan and the
Restricted Stock Purchase Agreement, attached hereto as Exhibit A-1, both of
which are made a part of this document. You further agree to execute the
attached Restricted Stock Purchase Agreement as a condition to purchasing any
shares under this Stock Purchase Right.
GRANTEE: E-LOAN, INC.
__________________________ ___________________________________
Signature By
__________________________ ___________________________________
Print Name Title
<PAGE> 30
EXHIBIT A-1
1997 STOCK PLAN
RESTRICTED STOCK PURCHASE AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall
have the same defined meanings in this Restricted Stock Purchase Agreement.
WHEREAS the Purchaser named in the Notice of Grant, (the "Purchaser") is
an Service Provider, and the Purchaser's continued participation is considered
by the Company to be important for the Company's continued growth; and
WHEREAS in order to give the Purchaser an opportunity to acquire an
equity interest in the Company as an incentive for the Purchaser to participate
in the affairs of the Company, the Admin istrator has granted to the Purchaser a
Stock Purchase Right subject to the terms and conditions of the Plan and the
Notice of Grant, which are incorporated herein by reference, and pursuant to
this Restricted Stock Purchase Agreement (the "Agreement").
NOW THEREFORE, the parties agree as follows:
1. Sale of Stock. The Company hereby agrees to sell to the Purchaser and
the Purchaser hereby agrees to purchase shares of the Company's Common Stock
(the "Shares"), at the per Share purchase price and as otherwise described in
the Notice of Grant.
2. Payment of Purchase Price. The purchase price for the Shares may be
paid by delivery to the Company at the time of execution of this Agreement of
cash, a check, or some combination thereof.
3. Repurchase Option.
(a) In the event the Purchaser ceases to be a Service Provider
for any or no reason (including death or disability) before all of the Shares
are released from the Company's Repurchase Option (see Section 4), the Company
shall, upon the date of such termination (as reasonably fixed and determined by
the Company) have an irrevocable, exclusive option (the "Repurchase Option") for
a period of sixty (60) days from such date to repurchase up to that number of
shares which constitute the Unreleased Shares (as defined in Section 4) at the
original purchase price per share (the "Repurchase Price"). The Repurchase
Option shall be exercised by the Company by delivering written notice to the
Purchaser or the Purchaser's executor (with a copy to the Escrow Holder) AND, at
the Company's option, (i) by delivering to the Purchaser or the Purchaser's
executor a check in the amount of the aggregate Repurchase Price, or (ii) by
canceling an amount of the Purchaser's indebtedness to the Company equal to the
aggregate Repurchase Price, or (iii) by a combination of (i) and (ii) so that
the combined payment and cancellation of indebtedness equals the aggregate
Repurchase Price. Upon delivery of such notice and the payment of the aggregate
Repurchase Price,
<PAGE> 31
the Company shall become the legal and beneficial owner of the Shares being
repurchased and all rights and interests therein or relating thereto, and the
Company shall have the right to retain and transfer to its own name the number
of Shares being repurchased by the Company.
(b) Whenever the Company shall have the right to repurchase
Shares hereunder, the Company may designate and assign one or more employees,
officers, directors or shareholders of the Company or other persons or
organizations to exercise all or a part of the Company's purchase rights under
this Agreement and purchase all or a part of such Shares. If the Fair Market
Value of the Shares to be repurchased on the date of such designation or
assignment (the "Repurchase FMV") exceeds the aggregate Repurchase Price of such
Shares, then each such designee or assignee shall pay the Company cash equal to
the difference between the Repurchase FMV and the aggregate Repurchase Price of
such Shares.
4. Release of Shares From Repurchase Option.
(a) _______________________ percent (______%) of the Shares shall
be released from the Company's Repurchase Option [one year] after the Date of
Grant and __________________ percent (______%) of the Shares [at the end of each
month thereafter], provided that the Purchaser does not cease to be a Service
Provider prior to the date of any such release.
(b) Any of the Shares that have not yet been released from the
Repurchase Option are referred to herein as "Unreleased Shares."
(c) The Shares that have been released from the Repurchase Option
shall be delivered to the Purchaser at the Purchaser's request (see Section 6).
5. Restriction on Transfer. Except for the escrow described in Section 6
or the transfer of the Shares to the Company or its assignees contemplated by
this Agreement, none of the Shares or any beneficial interest therein shall be
transferred, encumbered or otherwise disposed of in any way until such Shares
are released from the Company's Repurchase Option in accordance with the provi
sions of this Agreement, other than by will or the laws of descent and
distribution.
6. Escrow of Shares.
(a) To ensure the availability for delivery of the Purchaser's
Unreleased Shares upon repurchase by the Company pursuant to the Repurchase
Option, the Purchaser shall, upon execution of this Agreement, deliver and
deposit with an escrow holder designated by the Company (the "Escrow Holder")
the share certificates representing the Unreleased Shares, together with the
stock assignment duly endorsed in blank, attached hereto as Exhibit A-2. The
Unreleased Shares and
-31-
<PAGE> 32
stock assignment shall be held by the Escrow Holder, pursuant to the Joint
Escrow Instructions of the Company and Purchaser attached hereto as Exhibit A-3,
until such time as the Company's Repurchase Option expires. As a further
condition to the Company's obligations under this Agreement, the Company may
require the spouse of Purchaser, if any, to execute and deliver to the Company
the Consent of Spouse attached hereto as Exhibit A-4.
(b) The Escrow Holder shall not be liable for any act it may do
or omit to do with respect to holding the Unreleased Shares in escrow while
acting in good faith and in the exercise of its judgment.
(c) If the Company or any assignee exercises the Repurchase
Option hereunder, the Escrow Holder, upon receipt of written notice of such
exercise from the proposed transferee, shall take all steps necessary to
accomplish such transfer.
(d) When the Repurchase Option has been exercised or expires
unexercised or a portion of the Shares has been released from the Repurchase
Option, upon request the Escrow Holder shall promptly cause a new certificate to
be issued for the released Shares and shall deliver the certificate to the
Company or the Purchaser, as the case may be.
(e) Subject to the terms hereof, the Purchaser shall have all the
rights of a shareholder with respect to the Shares while they are held in
escrow, including without limitation, the right to vote the Shares and to
receive any cash dividends declared thereon. If, from time to time during the
term of the Repurchase Option, there is (i) any stock dividend, stock split or
other change in the Shares, or (ii) any merger or sale of all or substantially
all of the assets or other acquisition of the Company, any and all new,
substituted or additional securities to which the Purchaser is entitled by
reason of the Purchaser's ownership of the Shares shall be immediately subject
to this escrow, deposited with the Escrow Holder and included thereafter as
"Shares" for purposes of this Agreement and the Repurchase Option.
7. Legends. The share certificate evidencing the Shares, if any, issued
hereunder shall be endorsed with the following legend (in addition to any legend
required under applicable state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT
BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE
SECRETARY OF THE COMPANY.
8. Adjustment for Stock Split. All references to the number of Shares
and the purchase price of the Shares in this Agreement shall be appropriately
adjusted to reflect any stock split, stock dividend or other change in the
Shares which may be made by the Company after the date of this Agreement.
-32-
<PAGE> 33
9. Tax Consequences. The Purchaser has reviewed with the Purchaser's own
tax advisors the federal, state, local and foreign tax consequences of this
investment and the transactions contem plated by this Agreement. The Purchaser
is relying solely on such advisors and not on any statements or representations
of the Company or any of its agents. The Purchaser understands that the
Purchaser (and not the Company) shall be responsible for the Purchaser's own tax
liability that may arise as a result of the transactions contemplated by this
Agreement. The Purchaser understands that Section 83 of the Internal Revenue
Code of 1986, as amended (the "Code"), taxes as ordinary income the difference
between the purchase price for the Shares and the Fair Market Value of the
Shares as of the date any restrictions on the Shares lapse. In this context,
"restriction" includes the right of the Company to buy back the Shares pursuant
to the Repurchase Option. The Purchaser understands that the Purchaser may elect
to be taxed at the time the Shares are purchased rather than when and as the
Repurchase Option expires by filing an election under Section 83(b) of the Code
with the IRS within 30 days from the date of purchase. The form for making this
election is attached as Exhibit A-5 hereto.
THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE
RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION
83(b), EVEN IF THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE
THIS FILING ON THE PURCHASER'S BEHALF.
10. General Provisions.
(a) This Agreement shall be governed by the internal substantive
laws, but not the choice of law rules of California. This Agreement, subject to
the terms and conditions of the Plan and the Notice of Grant, represents the
entire agreement between the parties with respect to the purchase of the Shares
by the Purchaser. Subject to Section 15(c) of the Plan, in the event of a
conflict between the terms and conditions of the Plan and the terms and
conditions of this Agreement, the terms and conditions of the Plan shall
prevail. Unless otherwise defined herein, the terms defined in the Plan shall
have the same defined meanings in this Agreement.
(b) Any notice, demand or request required or permitted to be
given by either the Company or the Purchaser pursuant to the terms of this
Agreement shall be in writing and shall be deemed given when delivered
personally or deposited in the U.S. mail, First Class with postage prepaid, and
addressed to the parties at the addresses of the parties set forth at the end of
this Agreement or such other address as a party may request by notifying the
other in writing.
Any notice to the Escrow Holder shall be sent to the Company's
address with a copy to the other party hereto.
-33-
<PAGE> 34
(c) The rights of the Company under this Agreement shall be
transferable to any one or more persons or entities, and all covenants and
agreements hereunder shall inure to the benefit of, and be enforceable by the
Company's successors and assigns. The rights and obligations of the Purchaser
under this Agreement may only be assigned with the prior written consent of the
Company.
(d) Either party's failure to enforce any provision of this
Agreement shall not in any way be construed as a waiver of any such provision,
nor prevent that party from thereafter enforcing any other provision of this
Agreement. The rights granted both parties hereunder are cumulative and shall
not constitute a waiver of either party's right to assert any other legal remedy
available to it.
(e) The Purchaser agrees upon request to execute any further
documents or instruments necessary or desirable to carry out the purposes or
intent of this Agreement.
(f) PURCHASER ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES
PURSUANT TO SECTION 4 HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS A SERVICE
PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED OR
PURCHASING SHARES HEREUNDER). PURCHASER FURTHER ACKNOWLEDGES AND AGREES THAT
THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE
SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED
ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT
ALL, AND SHALL NOT INTERFERE WITH PURCHASER'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE PURCHASER'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR
WITHOUT CAUSE.
By Purchaser's signature below, Purchaser represents that he or she is
familiar with the terms and provisions of the Plan, and hereby accepts this
Agreement subject to all of the terms and provisions thereof. Purchaser has
reviewed the Plan and this Agreement in their entirety, has had an opportunity
to obtain the advice of counsel prior to executing this Agreement and fully
understands all provisions of this Agreement. Purchaser agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Agreement.
Purchaser further agrees to notify the Company upon any change in the residence
indicated in the Notice of Grant.
DATED: _____________________
PURCHASER: E-LOAN, INC.
______________________________ _________________________________________
Signature By
-34-
<PAGE> 35
______________________________ _________________________________________
Print Name Title
-35-
<PAGE> 36
EXHIBIT A-2
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I, __________________________, hereby sell, assign
and transfer unto ___________________ (__________) shares of the Common Stock of
E-Loan, Inc. standing in my name of the books of said corporation represented by
Certificate No. _____ herewith and do hereby irrevocably constitute and
appoint_____________________to transfer the said stock on the books of the
within named corporation with full power of substitution in the premises.
This Stock Assignment may be used only in accordance with the Restricted
Stock Purchase Agreement (the "Agreement") between________________________ and
the undersigned dated____________, _____.
Dated: _______________, _____
Signature:______________________________
INSTRUCTIONS: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Company to exercise the
Repurchase Option, as set forth in the Agreement, without requiring additional
signatures on the part of the Purchaser.
<PAGE> 37
EXHIBIT A-3
JOINT ESCROW INSTRUCTIONS
__________,_____
Corporate Secretary
E-Loan, Inc.
540 University Avenue, Suite 350
Palo Alto, Ca 94301
Dear___________:
As Escrow Agent for both E-Loan, Inc., a Delaware corporation (the
"Company"), and the undersigned purchaser of stock of the Company (the
"Purchaser"), you are hereby authorized and directed to hold the documents
delivered to you pursuant to the terms of that certain Restricted Stock Purchase
Agreement ("Agreement") between the Company and the undersigned, in accordance
with the following instructions:
1. In the event the Company and/or any assignee of the Company (referred
to collectively as the "Company") exercises the Company's Repurchase Option set
forth in the Agreement, the Company shall give to Purchaser and you a written
notice specifying the number of shares of stock to be purchased, the purchase
price, and the time for a closing hereunder at the principal office of the
Company. Purchaser and the Company hereby irrevocably authorize and direct you
to close the transaction contemplated by such notice in accordance with the
terms of said notice.
2. At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver same, together with the certificate
evidencing the shares of stock to be transferred, to the Company or its
assignee, against the simultaneous delivery to you of the purchase price (by
cash, a check, or some combination thereof) for the number of shares of stock
being purchased pursuant to the exercise of the Company's Repurchase Option.
3. Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as Purchaser's
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities all documents necessary or appropriate to make such
securities negotiable and to complete any transaction herein contemplated,
including but not limited to the filing with any applicable state blue sky
authority of any required applications for consent to, or notice of transfer of,
the securities. Subject to the provisions of this paragraph 3, Purchaser shall
exercise all rights and privileges of a shareholder of the Company while the
stock is held by you.
<PAGE> 38
4. Upon written request of the Purchaser, but no more than once per
calendar year, unless the Company's Repurchase Option has been exercised, you
shall deliver to Purchaser a certificate or certificates representing so many
shares of stock as are not then subject to the Company's Repurchase Option.
Within 90 days after Purchaser ceases to be a Service Provider, you shall
deliver to Purchaser a certificate or certificates representing the aggregate
number of shares held or issued pursuant to the Agreement and not purchased by
the Company or its assignees pursuant to exercise of the Company's Repurchase
Option.
5. If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Purchaser,
you shall deliver all of the same to Purchaser and shall be discharged of all
further obligations hereunder.
6. Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties. You
shall not be personally liable for any act you may do or omit to do hereunder as
Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith,
and any act done or omitted by you pursuant to the advice of your own attorneys
shall be conclusive evidence of such good faith.
8. You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law, and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court. In
case you obey or comply with any such order, judgment or decree, you shall not
be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.
9. You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
10. You shall not be liable for the outlawing of any rights under the
statute of limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.
11. You shall be entitled to employ such legal counsel and other experts
as you may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the
-38-
<PAGE> 39
advice of such counsel, and may pay such counsel reasonable compensation
therefor.
12. Your responsibilities as Escrow Agent hereunder shall terminate if
you shall cease to be an officer or agent of the Company or if you shall resign
by written notice to each party. In the event of any such termination, the
Company shall appoint a successor Escrow Agent.
13. If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
14. It is understood and agreed that should any dispute arise with
respect to the delivery and/or ownership or right of possession of the
securities held by you hereunder, you are authorized and directed to retain in
your possession without liability to anyone all or any part of said securities
until such disputes shall have been settled either by mutual written agreement
of the parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.
15. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties thereunto entitled at the
following addresses or at such other addresses as a party may designate by ten
days' advance written notice to each of the other parties hereto.
COMPANY: E-Loan, Inc.
540 University Avenue, Suite 350
Palo Alto, CA 94301
PURCHASER: _______________________________________________
_______________________________________________
_______________________________________________
ESCROW AGENT: Corporate Secretary
E-Loan, Inc.
540 University Avenue
Palo Alto, CA 94301
16. By signing these Joint Escrow Instructions, you become a party
hereto only for the
-39-
<PAGE> 40
purpose of said Joint Escrow Instructions; you do not become a party to the
Agreement.
17. This instrument shall be binding upon and inure to the benefit of
the parties hereto, and their respective successors and permitted assigns.
18. These Joint Escrow Instructions shall be governed by, and construed
and enforced in accordance with, the internal substantive laws, but not the
choice of law rules, of California.
Very truly yours,
E-LOAN, INC.
_________________________________________
By
_________________________________________
Title
PURCHASER:
_________________________________________
Signature
_________________________________________
Print Name
ESCROW AGENT:
_____________________________
Corporate Secretary
-40-
<PAGE> 41
EXHIBIT A-4
CONSENT OF SPOUSE
I, ____________________, spouse of ___________________, have read and
approve the foregoing Restricted Stock Purchase Agreement (the "Agreement"). In
consideration of the Company's grant to my spouse of the right to purchase
shares of E-Loan, Inc., as set forth in the Agreement, I hereby appoint my
spouse as my attorney-in-fact in respect to the exercise of any rights under the
Agreement and agree to be bound by the provisions of the Agreement insofar as I
may have any rights in said Agreement or any shares issued pursuant thereto
under the community property laws or similar laws relating to marital property
in effect in the state of our residence as of the date of the signing of the
foregoing Agreement.
Dated: _______________, _____
_________________________________________
Signature of Spouse
<PAGE> 42
EXHIBIT A-5
ELECTION UNDER SECTION 83(b)
OF THE INTERNAL REVENUE CODE OF 1986
The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the
Internal Revenue Code of 1986, as amended, to include in taxpayer's gross income
for the current taxable year the amount of any compensation taxable to taxpayer
in connection with his or her receipt of the property described below:
1. The name, address, taxpayer identification number and taxable year of the
undersigned are as follows:
NAME: TAXPAYER: SPOUSE:
ADDRESS:
IDENTIFICATION NO.: TAXPAYER: SPOUSE:
TAXABLE YEAR:
2. The property with respect to which the election is made is described as
follows: shares (the "Shares") of the Common Stock of E-Loan, Inc. (the
"Company").
3. The date on which the property was transferred is:_____________,_______.
4. The property is subject to the following restrictions:
The Shares may be repurchased by the Company, or its assignee, upon certain
events. This right lapses with regard to a portion of the Shares based on the
continued performance of services by the taxpayer over time.
5. The fair market value at the time of transfer, determined without regard
to any restriction other than a restriction which by its terms will
never lapse, of such property is:
$____________.
6. The amount (if any) paid for such property is:
$____________.
The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.
The undersigned understands that the foregoing election may not be revoked
except with the consent of the Commissioner.
Dated:___________________, ______ ____________________________________________
Taxpayer
The undersigned spouse of taxpayer joins in this election.
Dated:___________________, ______ ____________________________________________
Spouse of Taxpayer
<PAGE> 1
EXHIBIT 10.3
E-LOAN, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
1. Purpose. The purpose of the Plan is to provide employees of the
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the intention
of the Company to have the Plan qualify as an "Employee Stock Purchase Plan"
under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(c) "Common Stock" shall mean the common stock of the Company.
(d) "Company" shall mean E-Loan, Inc. and any Designated
Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross
earnings, commissions, cash incentive compensation and bonuses, but exclusive of
payments for overtime, shift premium, non-cash incentive compensation and other
compensation.
(f) "Designated Subsidiary" shall mean any Subsidiary which has
been designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.
(g) "Employee" shall mean any individual who is an Employee of
the Company for tax purposes whose customary employment with the Company is at
least twenty (20) hours per week and more than five (5) months in any calendar
year. For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
(h) "Enrollment Date" shall mean the first Trading Day of each
Offering Period.
(i) "Exercise Date" shall mean the last Trading Day of each
Purchase Period.
(j) "Fair Market Value" shall mean, as of any date, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any established
stock exchange or a national market system, including without limitation the
Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market,
its Fair Market Value shall be the closing sales price
<PAGE> 2
for such stock (or the closing bid, if no sales were reported) as quoted on such
exchange or system for the last market trading day prior to the date of
determination, as reported in The Wall Street Journal or such other source as
the Board deems reliable;
(ii) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, its Fair
Market Value shall be the mean of the closing bid and asked prices for the
Common Stock prior to the date of determination, as reported in The Wall Street
Journal or such other source as the Board deems reliable;
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Board; or
(iv) For purposes of the Enrollment Date of the first
Offering Period under the Plan, the Fair Market Value shall be the initial price
to the public as set forth in the final prospectus included within the
registration statement in Form S-1 filed with the Securities and Exchange
Commission for the initial public offering of the Company's Common Stock (the
"Registration Statement").
(k) "Offering Periods" shall mean the periods of approximately
twenty-four (24) months during which an option granted pursuant to the Plan may
be exercised, commencing on the first Trading Day on or after May 1 and November
1 of each year and terminating on the last Trading Day in the periods ending
twenty-four months later; provided, however, that the first Offering Period
under the Plan shall commence with the first Trading Day on or after the date on
which the Securities and Exchange Commission declares the Company's Registration
Statement effective and ending on the last Trading Day on or before April 30,
2001. The duration and timing of Offering Periods may be changed pursuant to
Section 4 of this Plan.
(l) "Plan" shall mean this 1999 Employee Stock Purchase Plan.
(m) "Purchase Period" shall mean the approximately six month
period commencing after one Exercise Date and ending with the next Exercise
Date, except that the first Purchase Period of any Offering Period shall
commence on the Enrollment Date and end with the next Exercise Date.
(n) "Purchase Price" shall mean 85% of the Fair Market Value of a
share of Common Stock on the Enrollment Date or on the Exercise Date, whichever
is lower; provided however, that the Purchase Price may be adjusted by the Board
pursuant to Section 20.
(o) "Reserves" shall mean the number of shares of Common Stock
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
(p) "Subsidiary" shall mean a corporation, domestic or foreign,
of which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
<PAGE> 3
(q) "Trading Day" shall mean a day on which national stock
exchanges and the Nasdaq System are open for trading.
3. Eligibility.
(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding,
no Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
4. Offering Periods. The Plan shall be implemented by consecutive,
overlapping Offering Periods with a new Offering Period commencing on the first
Trading Day on or after May 1 and November 1 each year, or on such other date as
the Board shall determine, and continuing thereafter until terminated in
accordance with Section 20 hereof; provided, however, that the first Offering
Period under the Plan shall commence with the first Trading Day on or after the
date on which the Securities and Exchange Commission declares the Company's
Registration Statement effective and ending on the last Trading Day on or before
April 30, 2001. The Board shall have the power to change the duration of
Offering Periods (including the commencement dates thereof) with respect to
future offerings without shareholder approval if such change is announced at
least five (5) days prior to the scheduled beginning of the first Offering
Period to be affected thereafter.
5. Participation.
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office prior
to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the
first payroll following the Enrollment Date and shall end on the last payroll in
the Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
6. Payroll Deductions.
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding fifteen percent 15% of the
Compensation which he or she receives on each pay day during
<PAGE> 4
the Offering Period.
(b) All payroll deductions made for a participant shall be
credited to his or her account under the Plan and shall be withheld in whole
percentages only. A participant may not make any additional payments into such
account.
(c) A participant may discontinue his or her participation in the
Plan as provided in Section 10 hereof, or may increase or decrease the rate of
his or her payroll deductions during the Offering Period by completing or filing
with the Company a new subscription agreement authorizing a change in payroll
deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to
comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a
participant's payroll deductions may be decreased to zero percent (0%) at any
time during a Purchase Period. Payroll deductions shall recommence at the rate
provided in such participant's subscription agreement at the beginning of the
first Purchase Period which is scheduled to end in the following calendar year,
unless terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or
at the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period, each
eligible Employee participating in such Offering Period shall be granted an
option to purchase on each Exercise Date during such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Purchase Period more than 3,750
shares of the Company's Common Stock (subject to any adjustment pursuant to
Section 19), and provided further that such purchase shall be subject to the
limitations set forth in Sections 3(b) and 12 hereof. The Board may, for future
Offering Periods, increase or decrease, in its absolute discretion, the maximum
number of shares of the Company's Common Stock an Employee may purchase during
each Purchase Period of such Offering Period. Exercise of the option shall occur
as provided in Section 8 hereof, unless the participant has
<PAGE> 5
withdrawn pursuant to Section 10 hereof. The option shall expire on the last day
of the Offering Period.
8. Exercise of Option.
(a) Unless a participant withdraws from the Plan as provided in
Section 10 hereof, his or her option for the purchase of shares shall be
exercised automatically on the Exercise Date, and the maximum number of full
shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Purchase Period or Offering Period, subject to earlier withdrawal by the
participant as provided in Section 10 hereof. Any other monies left over in a
participant's account after the Exercise Date shall be returned to the
participant. During a participant's lifetime, a participant's option to purchase
shares hereunder is exercisable only by him or her.
(b) If the Board determines that, on a given Exercise Date, the
number of shares with respect to which options are to be exercised may exceed
(i) the number of shares of Common Stock that were available for sale under the
Plan on the Enrollment Date of the applicable Offering Period, or (ii) the
number of shares available for sale under the Plan on such Exercise Date, the
Board may in its sole discretion (x) provide that the Company shall make a pro
rata allocation of the shares of Common Stock available for purchase on such
Enrollment Date or Exercise Date, as applicable, in as uniform a manner as shall
be practicable and as it shall determine in its sole discretion to be equitable
among all participants exercising options to purchase Common Stock on such
Exercise Date, and continue all Offering Periods then in effect, or (y) provide
that the Company shall make a pro rata allocation of the shares available for
purchase on such Enrollment Date or Exercise Date, as applicable, in as uniform
a manner as shall be practicable and as it shall determine in its sole
discretion to be equitable among all participants exercising options to purchase
Common Stock on such Exercise Date, and terminate any or all Offering Periods
then in effect pursuant to Section 20 hereof. The Company may make pro rata
allocation of the shares available on the Enrollment Date of any applicable
Offering Period pursuant to the preceding sentence, notwithstanding any
authorization of additional shares for issuance under the Plan by the Company's
shareholders subsequent to such Enrollment Date.
9. Delivery. As promptly as practicable after each Exercise Date on which a
purchase of shares occurs, the Company shall arrange the delivery to each
participant, as appropriate, of a certificate representing the shares purchased
upon exercise of his or her option.
10. Withdrawal.
(a) A participant may withdraw all but not less than all the
payroll deductions credited to his or her account and not yet used to exercise
his or her option under the Plan at any time by giving written notice to the
Company in the form of Exhibit B to this Plan. All of the participant's payroll
deductions credited to his or her account shall be paid to such participant
promptly after receipt of notice of withdrawal and such participant's option for
the Offering Period shall be automatically
<PAGE> 6
terminated, and no further payroll deductions for the purchase of shares shall
be made for such Offering Period. If a participant withdraws from an Offering
Period, payroll deductions shall not resume at the beginning of the succeeding
Offering Period unless the participant delivers to the Company a new
subscription agreement.
(b) A participant's withdrawal from an Offering Period shall not
have any effect upon his or her eligibility to participate in any similar plan
which may hereafter be adopted by the Company or in succeeding Offering Periods
which commence after the termination of the Offering Period from which the
participant withdraws.
11. Termination of Employment.
Upon a participant's ceasing to be an Employee, for any reason, he or
she shall be deemed to have elected to withdraw from the Plan and the payroll
deductions credited to such participant's account during the Offering Period but
not yet used to exercise the option shall be returned to such participant or, in
the case of his or her death, to the person or persons entitled thereto under
Section 15 hereof, and such participant's option shall be automatically
terminated. The preceding sentence notwithstanding, a participant who receives
payment in lieu of notice of termination of employment shall be treated as
continuing to be an Employee for the participant's customary number of hours per
week of employment during the period in which the participant is subject to such
payment in lieu of notice.
12. Interest. No interest shall accrue on the payroll deductions of a
participant in the Plan.
13. Stock.
(a) Subject to adjustment upon changes in capitalization of the
Company as provided in Section 19 hereof, the maximum number of shares of the
Company's Common Stock which shall be made available for sale under the Plan
shall be 1,500,000 shares, plus an annual increase to be added on the first day
of the Company's fiscal year beginning in 2000 equal to the lesser of (i)
1,500,000 shares, (ii) 2% of the outstanding shares on such date or (iii) a
lesser amount determined by the Board.
(b) The participant shall have no interest or voting right in
shares covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall
be registered in the name of the participant or in the name of the participant
and his or her spouse.
14. Administration. The Plan shall be administered by the Board or a
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision and
determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
<PAGE> 7
15. Designation of Beneficiary.
(a) A participant may file a written designation of a beneficiary
who is to receive any shares and cash, if any, from the participant's account
under the Plan in the event of such participant's death subsequent to an
Exercise Date on which the option is exercised but prior to delivery to such
participant of such shares and cash. In addition, a participant may file a
written designation of a beneficiary who is to receive any cash from the
participant's account under the Plan in the event of such participant's death
prior to exercise of the option. If a participant is married and the designated
beneficiary is not the spouse, spousal consent shall be required for such
designation to be effective.
(b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the event of the death of a
participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such participant's death, the Company shall
deliver such shares and/or cash to the executor or administrator of the estate
of the participant, or if no such executor or administrator has been appointed
(to the knowledge of the Company), the Company, in its discretion, may deliver
such shares and/or cash to the spouse or to any one or more dependents or
relatives of the participant, or if no spouse, dependent or relative is known to
the Company, then to such other person as the Company may designate.
16. Transferability. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
17. Use of Funds. All payroll deductions received or held by the Company
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
18. Reports. Individual accounts shall be maintained for each
participant in the Plan. Statements of account shall be given to participating
Employees at least annually, which statements shall set forth the amounts of
payroll deductions, the Purchase Price, the number of shares purchased and the
remaining cash balance, if any.
19. Adjustments Upon Changes in Capitalization, Dissolution,
Liquidation, Merger or Asset Sale.
(a) Changes in Capitalization. Subject to any required action by
the shareholders of the Company, the Reserves, the maximum number of shares each
participant may purchase each Purchase Period (pursuant to Section 7), as well
as the price per share and the number of shares of Common Stock covered by each
option under the Plan which has not yet been exercised shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification
<PAGE> 8
of the Common Stock, or any other increase or decrease in the number of shares
of Common Stock effected without receipt of consideration by the Company;
provided, however, that conversion of any convertible securities of the Company
shall not be deemed to have been "effected without receipt of consideration."
Such adjustment shall be made by the Board, whose determination in that respect
shall be final, binding and conclusive. Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of shares
of Common Stock subject to an option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Offering Period then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and
shall terminate immediately prior to the consummation of such proposed
dissolution or liquidation, unless provided otherwise by the Board. The New
Exercise Date shall be before the date of the Company's proposed dissolution or
liquidation. The Board shall notify each participant in writing, at least ten
(10) business days prior to the New Exercise Date, that the Exercise Date for
the participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise Date,
unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10 hereof.
(c) Merger or Asset Sale. In the event of a proposed sale of all
or substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each outstanding option shall be assumed or an
equivalent option substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the option, any Purchase Periods
then in progress shall be shortened by setting a new Exercise Date (the "New
Exercise Date") and any Offering Periods then in progress shall end on the New
Exercise Date. The New Exercise Date shall be before the date of the Company's
proposed sale or merger. The Board shall notify each participant in writing, at
least ten (10) business days prior to the New Exercise Date, that the Exercise
Date for the participant's option has been changed to the New Exercise Date and
that the participant's option shall be exercised automatically on the New
Exercise Date, unless prior to such date the participant has withdrawn from the
Offering Period as provided in Section 10 hereof.
20. Amendment or Termination.
(a) The Board of Directors of the Company may at any time and for
any reason terminate or amend the Plan. Except as provided in Section 19 hereof,
no such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Offering Period or the Plan
is in the best interests of the Company and its shareholders. Except as provided
in Section 19 and this Section 20 hereof, no amendment may make any change in
any option theretofore granted which adversely affects the rights of any
participant. To the extent necessary to comply with Section 423 of the Code (or
any successor rule or provision or any other applicable law, regulation or stock
exchange rule), the Company shall obtain shareholder approval in such a manner
and to such a degree as required.
<PAGE> 9
(b) Without shareholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
(c) In the event the Board determines that the ongoing operation
of the Plan may result in unfavorable financial accounting consequences, the
Board may, in its discretion and, to the extent necessary or desirable, modify
or amend the Plan to reduce or eliminate such accounting consequence including,
but not limited to:
(i) altering the Purchase Price for any Offering Period
including an Offering Period underway at the time of the change in Purchase
Price;
(ii) shortening any Offering Period so that Offering
Period ends on a new Exercise Date, including an Offering Period underway at the
time of the Board action; and
(iii) allocating shares.
Such modifications or amendments shall not require stockholder approval
or the consent of any Plan participants.
21. Notices. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require the
person exercising such option to represent and warrant at the time of any such
exercise that the shares are being purchased only for investment and without any
present intention to sell or distribute such shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
<PAGE> 10
aforementioned applicable provisions of law.
23. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 20 hereof.
24. Automatic Transfer to Low Price Offering Period. To the extent
permitted by any applicable laws, regulations, or stock exchange rules if the
Fair Market Value of the Common Stock on any Exercise Date in an Offering Period
is lower than the Fair Market Value of the Common Stock on the Enrollment Date
of such Offering Period, then all participants in such Offering Period shall be
automatically withdrawn from such Offering Period immediately after the exercise
of their option on such Exercise Date and automatically re-enrolled in the
immediately following Offering Period as of the first day thereof.
<PAGE> 11
EXHIBIT A
E-LOAN, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date: ___________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. ____________________ hereby elects to participate in the E-Loan, Inc.
1999 Employee Stock Purchase Plan (the "Employee Stock Purchase Plan")
and subscribes to purchase shares of the Company's Common Stock in
accordance with this Subscription Agreement and the Employee Stock
Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount
of ____% of my Compensation on each payday (from 1 to 15%) during the
Offering Period in accordance with the Employee Stock Purchase Plan.
(Please note that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise my
option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is
in all respects subject to the terms of the Plan. I understand that my
ability to exercise the option under this Subscription Agreement is
subject to shareholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of (Employee or Employee and Spouse only):.
6. I understand that if I dispose of any shares received by me pursuant to
the Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares) or one year after
the Exercise Date, I will be treated for federal income tax purposes as
having received ordinary income at the time of such disposition in an
amount equal to the excess of the fair market value of the shares at the
time such shares were purchased by me over the price which I paid for
the shares. I hereby agree to notify the Company in writing
<PAGE> 12
within 30 days after the date of any disposition of my shares and I will
make adequate provision for Federal, state or other tax withholding
obligations, if any, which arise upon the disposition of the Common
Stock. The Company may, but will not be obligated to, withhold from my
compensation the amount necessary to meet any applicable withholding
obligation including any withholding necessary to make available to the
Company any tax deductions or benefits attributable to sale or early
disposition of Common Stock by me. If I dispose of such shares at any
time after the expiration of the 2-year and 1-year holding periods, I
understand that I will be treated for federal income tax purposes as
having received income only at the time of such disposition, and that
such income will be taxed as ordinary income only to the extent of an
amount equal to the lesser of (1) the excess of the fair market value of
the shares at the time of such disposition over the purchase price which
I paid for the shares, or (2) 15% of the fair market value of the shares
on the first day of the Offering Period. The remainder of the gain, if
any, recognized on such disposition will be taxed as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon
my eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print)__________________________________________
(First) (Middle) (Last)
______________________________________
Relationship
(Address)
<PAGE> 13
Employee's Social
Security Number: ____________________________________
Employee's Address: ____________________________________
____________________________________
____________________________________
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:_________________________
Signature of Employee
Spouse's Signature (If beneficiary
other than spouse)
<PAGE> 14
EXHIBIT B
E-LOAN, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the E-Loan, Inc.
1999 Employee Stock Purchase Plan which began on ____________, ______ (the
"Enrollment Date") hereby notifies the Company that he or she hereby withdraws
from the Offering Period. He or she hereby directs the Company to pay to the
undersigned as promptly as practicable all the payroll deductions credited to
his or her account with respect to such Offering Period. The undersigned
understands and agrees that his or her option for such Offering Period will be
automatically terminated. The undersigned understands further that no further
payroll deductions will be made for the purchase of shares in the current
Offering Period and the undersigned shall be eligible to participate in
succeeding Offering Periods only by delivering to the Company a new Subscription
Agreement.
Name and Address of Participant:
--------------------------------
--------------------------------
--------------------------------
Signature:
--------------------------------
Date:____________________________
<PAGE> 1
EXHIBIT 10.6
[E-LOAN LETTERHEAD]
March 26, 1999
THIS VERSION SUPERSEDES ALL PRIOR ITERATIONS
Joe Kennedy
2865 Shadywood
Troy, MI 48098
Dear Joe,
We are very excited about your joining E-LOAN and helping us to build the
leading brand in the online mortgage space. We have all the ingredients in place
to make the best attempt ever in developing the first nationally branded
multi-lender. We've set the pace for product presentation and price leadership;
we own the best name for brand recognition and we have not only the experience,
but the vision to stay ahead of the competition and fundamentally change the way
people finance their homes.
However, to win the game we need more than just a great product and a great
name. We need a world class person that can translate E-LOAN into a promise that
customers believe in and aspire to. We believe that you are the person who can
help us to accomplish this, as a key team member.
The following is contingent upon a reference check.
POSITION: Senior Vice President of Marketing and Business
Development
START DATE: February 22, 1999
STOCK OPTIONS:249,173 in options shares of E-LOAN common
stock. This represents 2% of the current, fully diluted
stock (including all outstanding warrants and options,
vested and unvested). The stock options shall vest
monthly and become exercisable in full on the date four
(4) years after your hire date. 25% of the options will
become vested as of the 1st anniversary of employment.
The balance of the options will vest on a monthly basis.
Such options shall be subject to the terms and
conditions of the Company's Stock Option Plan and Stock
Option Agreement, including vesting requirements. Option
price to be set at $6.00. All options will be fully
adjusted for events such as splits. E-LOAN agrees to
provide a process for cashless exercise in the event
that the stock becomes publicly traded. In the event of
a change in control, E-LOAN agrees to vest the unvested
portion of your options at the rate of 50% so they may
be exercised in conjunction with the change of control
under terms as favorable as those offered to any
shareholder. In the event of a change in control, you
will have the option of leaving your options unvested
and fairly adjusted or converted in accordance with the
acquiring company's requirements.
<PAGE> 2
SALARY: $200,000 annually to be paid bi-weekly in accordance
with E-LOAN, Inc. payroll practices and policy. Eligible
for senior management bonus, if one is established.
BENEFITS:
Health benefits will be offered to all employees. E-LOAN
contributes 70% of the actual monthly premium and the
employee contributes 30%. You will be eligible for all
management benefits programs. Upon the adoption of a
company plan, additional benefits will be offered.
E-LOAN does agree to reimburse you, with tax gross-up,
for the cost of your purchase of a $2 million Life
Insurance policy to benefit your family in the event of
your death, and for the cost of a Long-Term Disability
plan to provide you with $120,000 per year.
401K: You will be eligible upon adoption of the E-LOAN plan.
VACATION: You are eligible for 4 weeks vacation each year of
employment.
RELOCATION: E-LOAN will reimburse you for expense incurred in the
relocation of your and your family. Specifically, E-LOAN
will cover full reimbursement and tax gross-up as
necessary for: the physical move of your household goods
and automobiles; two house-hunting trips for you and
your family; house hunting services from a local
relocation vendor; temporary living expense and storage
of all household goods for up to 60 days; selling
commissions and fees to sell your current home; all
points, fees and closing costs on your purchase of a
home in the Bay Area; a bridge loan and long-term loan
assistance associated with the purchase of your new
home.
RESPONSIBILITIES: Including but not limited to: creating and further
developing E-LOAN's overall brand and marketing plan
along with all associated projects and activities,
provide leadership in development of the strategy and
tactics for new customers. Execution of the marketing
plan. Creation of marketing campaigns to generate new
customers using both traditional print and broadcast
advertising. Responsible for all business development
opportunities.
SEVERANCE: If your employment with E-LOAN is terminated by E-LOAN
other than for "Cause" (as defined below), then E-LOAN
will provide you with (i) a three month notice period,
(ii) twelve months salary and (iii) option vesting equal
to that which would have been achieved 12 months from
the actual severance date. Notwithstanding the
preceeding sentence, if your employment with E-LOAN is
terminated as a result of an "Involuntary Termination"
(as defined below) at any time within six (6) months
before or twelve (12) months after a "Change of Control"
(as defined below), then E-LOAN will provide you with 3
years of salary and full option vesting, including
gross-up for any taxation above standard individual tax
rates for ordinary income. If your employment with
E-LOAN terminates (i) voluntarily by you or (ii) for
Cause by E-LOAN,
-2-
<PAGE> 3
then you shall only be eligible for severance benefits
in accordance with the E-LOAN's established policies as
then in effect.
For this purpose, "Cause" is defined as: (i) an act of
dishonesty made by you in connection with your
responsibilities as an employee, (ii) your conviction
of, or plea of nolo contendere to, a felony, (iii) your
gross misconduct, or (iv) your failure to perform your
employment duties. For this purpose, "Change of Control"
of the Company is defined as: (i) any "person" (as such
term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended) is or
becomes the "beneficial owner" (as defined in Rule 13d-3
under said Act), directly or indirectly, of securities
of the Company representing 50% or more of the total
voting power represented by the Company's then
outstanding voting securities; or (ii) a change in the
composition of the Board of Directors of the Company
occurring within a two-year period, as a result of which
fewer than a majority of the directors are Incumbent
Directors. "Incumbent Directors" shall mean directors
who either (A) are directors of the Company as of the
date hereof, or (B) are elected, or nominated for
election, to the Board of Directors of the Company with
the affirmative votes of at least a majority of the
Incumbent Directors at the time of such election or
nomination (but shall not include an individual whose
election or nomination is in connection with an actual
or threatened proxy contest relating to the election of
directors to the Company); or (iii) the date of the
consummation of a merger or consolidation of the Company
with any other corporation that has been approved by the
stockholders of the Company, other than a merger or
consolidation which would result in the voting
securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities
of the surviving entity) more than fifty percent (50%)
of the total voting power represented by the voting
securities of the Company or such surviving entity
outstanding immediately after such merger or
consolidation, or the stockholders of the Company
approve a plan of complete liquidation of the Company;
or (iv) the date of the consummation of the sale or
disposition by the Company of all or substantially all
the Company's assets. For this purpose, "Involuntary
Termination" shall mean (i) without your consent, the
significant reduction of your duties or responsibilities
relative to your duties or responsibilities in effect
immediately prior to such reduction; (ii) without your
consent, a significant reduction by the Company in your
Base Salary as in effect immediately prior to such
reduction; (iii) a significant reduction by the Company
in the kind or level of employee benefits to which you
are entitled immediately prior to such reduction with
the result that your overall benefits package is
significantly reduced; or (iv) any purported termination
of you by the Company which is not effected by virtue of
your death, permanent and total disability, or for
Cause.
-3-
<PAGE> 4
Joe, we look forward to your working with the E-LOAN team. Please feel free to
call us if you have any questions, concerns or comments.
Sincerely,
/s/ CHRIS LARSEN /s/ JANINA PAWLOWSKI
Chris Larsen Janina Pawlowski
CEO President
To indicate your acceptance of E-LOAN's offer, please sign and date this letter
in the space provided below and return it to me. A duplicate original is
enclosed for your records. This letter, along with any agreement relating to
proprietary rights between you and E-LOAN, set forth the terms of your
employment with E-LOAN and supersedes any prior representation or agreements,
whether written or oral. This letter may not be modified or amended except by a
written agreement, signed by the CEO of E-LOAN and you. Please review the
attached Addendum that explains our Conflict of Interest policy.
/s/ JOE KENNEDY 3/30/99
- ------------------------------- -------------------------------
Joe Kennedy Date
-4-
<PAGE> 5
Addendum:
CONFLICT OF INTEREST: You agree that, during the term of your employment with
E-LOAN, you will not engage in any other business, occupation, consulting or
other business activity directly related to the business in which E-LOAN is now
involved or becomes involved during the term of your employment, nor will you
engage in any other activities that conflict with your obligations to E-LOAN.
-5-
<PAGE> 1
EXHIBIT 10.15
$15,000,000
WAREHOUSE CREDIT AGREEMENT
among
E-LOAN, INC., as Borrower,
COOPER RIVER FUNDING INC., as Lender
and
GE CAPITAL MORTGAGE SERVICES, INC., as Agent
Dated as of June 24, 1998
<PAGE> 2
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
<S> <C> <C>
SECTION 1. DEFINITIONS AND PRINCIPLES OF CONSTRUCTION 1
1.01 Defined Terms 1
1.02 Principles of Construction 14
SECTION 2. AMOUNT AND TERMS OF CREDIT 15
2.01 Commitment 15
2.02 Minimum Borrowing Amount 15
2.03 Pledge of Collateral 15
2.04 Request for Advance 16
2.05 Disbursement of Funds 16
2.06 Note 16
2.07 Interest 17
SECTION 3. FEES 17
3.01 Fees 17
SECTION 4. PREPAYMENTS; PAYMENTS 18
4.01 Voluntary Prepayments 18
4.02 Mandatory Prepayments 18
4.03 Release of Collateral; Substitution 20
4.04 Sale of Collateral to Investors 21
4.05 Method and Place of Payment 22
4.06 Net Payments 22
SECTION 5. CONDITIONS PRECEDENT 22
5.01 Execution of Agreement; Note 22
5.02 No Default; Representations and Warranties 22
5.03 Request for Advance 22
5.04 Opinion of Counsel 23
5.05 Diligence 23
5.06 Corporate Documents; Proceedings 23
5.07 Financial Statements 23
5.08 Mandatory Prepayment 23
5.09 Warehouse Security Agreement 24
5.10 No Adverse Change 24
5.11 Insurance 24
5.12 [Intentionally omitted] 24
5.13 Delivery of the Collateral 24
5.14 Fees 25
5.15 No Litigation 25
5.16 Liquidity Agreement 25
5.17 Acknowledgment 25
5.18 Legal or Regulatory Proceedings 25
5.19 Guaranty Agreement 25
5.20 Support Agreement 25
5.21 Intercreditor Agreement 25
5.22 Treatment of Existing Liens 26
SECTION 6. REPRESENTATIONS, WARRANTIES AND AGREEMENTS 26
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
6.01 Corporate Status 26
6.02 Corporate Power and Authority 26
6.03 No Violation 26
6.04 Governmental Approvals 27
6.05 Financial Statements; Financial Condition; Undisclosed
Liabilities; etc. 27
6.06 Litigation 27
6.07 True and Complete Disclosure 27
6.08 Use of Proceeds; Margin Regulations 28
6.09 Tax Returns and Payments 28
6.10 Compliance with ERISA 28
6.11 Capitalization 28
6.12 Subsidiaries 29
6.13 Compliance with Statutes, etc 29
6.14 Investment Company Act 29
6.15 No Burdensome Agreement 29
6.16 Security Interests 29
6.17 Registration 29
6.18 Representations Relating to the Mortgage Loans 30
6.19 Representations Relating to the Mortgage-backed Securities 31
6.20 Insurance 31
6.21 Title to Property 32
6.22 No Recourse Sales 32
6.23 Fictitious Names 32
SECTION 7. AFFIRMATIVE COVENANTS 32
7.01 Information Covenants 32
7.02 Books, Records and Inspections 35
7.03 Maintenance of Property, Insurance 35
7.04 Corporate Franchises 36
7.05 Compliance with Statutes, etc. 36
7.06 ERISA 36
7.07 Performance of Obligations 37
7.08 Mortgage Loans 37
7.09 Payment of Taxes 37
7.10 Corporate Separateness 38
7.11 Collateral 38
7.12 Portfolio Hedging Arrangements 38
7.13 Borrowing Base Valuation Reports 38
SECTION 8. NEGATIVE COVENANTS 39
8.01 Liens 39
8.02 Consolidation, Merger, Sale of Assets, etc. 39
8.03 Dividends 39
8.04 [Intentionally omitted] 40
8.05 Advances, Investments and Loans 40
8.06 Transactions with Affiliates 40
8.07 Capital Expenditures 41
8.08 Maximum Adjusted Leverage Ratio 41
8.09 Minimum Adjusted Tangible Net Worth 41
8.10 [Intentionally omitted] 41
8.11 Modifications of Certificate of Incorporation, By-Laws,
Certain Other Agreements and Collateral 41
8.12 Limitation on Restrictions on Subsidiary Dividends and Other
Distributions 41
8.13 Limitation on Issuances of Capital Stock by Subsidiaries 41
8.14 Business 42
8.15 Portfolio Aging 42
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
8.16 Minimum Current Ratio 42
SECTION 9. EVENTS OF DEFAULT 42
9.01 Payments 42
9.02 Representations, etc. 42
9.03 Covenants 42
9.04 Default Under Other Agreements 42
9.05 Default Under Agreements With Agent 43
9.06 Bankruptcy, etc. 43
9.07 ERISA 43
9.08 Warehouse Security Agreement 43
9.09 [Intentionally omitted] 43
9.10 Management 43
9.11 Judgments 44
9.12 Material Adverse Change 44
9.13 Default Not a Condition of a 120-Day Demand 44
SECTION 10. THE AGENT 44
10.01 Authorization and Action 44
10.02 Agent's Duties 45
10.03 GE Capital Mortgage Services, Inc. and Affiliates 45
10.04 Successor Agent 45
SECTION 11. MISCELLANEOUS 46
11.01 Payment of Expenses; Indemnity 46
11.02 Notices 51
11.03 Benefit of Agreement 51
11.04 Remedies Cumulative 51
11.05 Calculations; Computations 51
11.06 Governing Law; Submission to Jurisdiction; Venue 51
11.07 No Proceedings 52
11.08 Counterparts 52
11.09 Effectiveness 52
11.10 Headings Descriptive 52
11.11 Amendment or Waiver 52
11.12 Survival 52
11.13 Waiver of Jury Trial 53
SCHEDULES
SCHEDULE 6.11 CAPITALIZATION
SCHEDULE 6.12 LIST OF SUBSIDIARIES
SCHEDULE 7.01(p) CREDIT PACKAGE DOCUMENTS (LIST OF DOCUMENTS TO BE
DELIVERED WITH RESPECT TO A PLEDGED MORTGAGE)
</TABLE>
iii
<PAGE> 5
<TABLE>
<CAPTION>
EXHIBITS
<S> <C>
EXHIBIT A-1 - FORM OF PLEDGE OF COLLATERAL
EXHIBIT A-2 - FORM OF REQUEST FOR ADVANCE BY CHECK
EXHIBIT A-3 - FORM OF REQUEST FOR ADVANCE BY WIRE
EXHIBIT B-1 - FORM OF WET ADVANCE DISBURSEMENT INSTRUCTION
EXHIBIT B-2 - FORM OF BORROWER'S WET ADVANCE DISBURSEMENT INSTRUCTION
EXHIBIT C - INTENTIONALLY OMITTED
EXHIBIT D - FORM OF NOTE
EXHIBIT E - FORM OF OPINION OF SPECIAL COUNSEL FOR THE BORROWER
EXHIBIT F-1 - FORM OF OFFICERS' CERTIFICATE FOR BORROWER
EXHIBIT F-2 - FORM OF OWNERS' AND OFFICERS' CERTIFICATION
EXHIBIT G - CREDIT SCORES
EXHIBIT H - FORM OF ACKNOWLEDGEMENT OF COLLATERAL AGENT'S RIGHTS
EXHIBIT I - FORM OF WAREHOUSE SECURITY AGREEMENT
EXHIBIT J - FORM OF GUARANTY AGREEMENT
EXHIBIT K - FORM OF SUPPORT AGREEMENT
EXHIBIT L - FORM OF INTERCREDITOR AGREEMENT
</TABLE>
iv
<PAGE> 6
WAREHOUSE CREDIT AGREEMENT (as modified, supplemented or amended from
time to time, this "Agreement"), dated as of June 24, 1998, among E-LOAN, INC.,
a California corporation (the "Borrower"), COOPER RIVER FUNDING INC., a Delaware
corporation (the "Lender"), and GE CAPITAL MORTGAGE SERVICES, INC., a New Jersey
corporation (the "Agent").
WITNESSETH:
----------
WHEREAS, subject to and upon the terms and conditions herein set forth,
the Lender is willing to make available to the Borrower the credit facilities
provided for herein;
NOW, THEREFORE, IT IS AGREED:
Section 1. Definitions and Principles of Construction.
------------------------------------------
1.01 Defined Terms. As used in this 'Agreement, the following terms
-------------
shall have the following meanings (such meanings to be equally applicable to
both the singular and plural forms of the terms defined):
"Adjusted Leverage Ratio" shall mean, as to any Person, the ratio of
-----------------------
the Consolidated Liabilities of such Person to the Adjusted Tangible Net Worth
of such Person.
"Adjusted Tangible Net Worth" shall mean, as to any Person, (x) the
----------------------------
sum of, without duplication, the Consolidated Net Worth of such Person and its
Subsidiaries, plus an amount equal to 0% of the aggregate principal amount of
the Servicing Portfolio of such Person, plus the principal amount of any
Indebtedness that is subordinated to the payment of the Obligations on such
terms as are acceptable to the Agent and that does not permit or require any
principal payment in respect thereof prior to the Expiry Date in effect from
time to time, less (y) the sum of (i) the amount of all intangible items,
including, without limitation, goodwill, franchises, licenses, patents,
trademarks, trade names, copyrights, service marks, brand names, write-ups of
assets and purchased, capitalized or excess servicing, (ii) all receivables from
any officer, director or Affiliate of the Borrower, (iii) all unpaid stock
subscriptions, (iv) the Contingent Obligations of such Person as determined by
the Agent and (v) any other assets determined by the Agent in its reasonable
discretion.
"Advance" shall have the meaning provided in Section 2.01.
-------
"Advance Account" shall mean the depositary account of the Borrower
---------------
designated by the Borrower by written notice to the Agent and the Lender.
"Affiliate" shall mean, as to any Person, any other Person (other
---------
than an individual) directly or indirectly controlling, controlled by, or under
direct or indirect common control with, such
<PAGE> 7
Person; provided, however, that for purposes of Section 8.06, an Affiliate of
-------- -------
the Borrower shall include any Person that directly or indirectly owns more than
5% of the Borrower and any officer or director of the Borrower or any such
Person. A Person shall be deemed to control another Person if such Person
possesses, directly or indirectly, the power to direct or cause the direction of
the management and policies of such other Person, whether through the ownership
of voting securities, by contract or otherwise.
"Bankruptcy Code" shall mean Title 11 of the United States Code
---------------
entitled "Bankruptcy," as now or hereafter in effect, or any successor thereto.
"Borrower's Wet Advance Disbursement Instruction" shall have the
-----------------------------------------------
meaning provided in Section 2.05.
"Borrowing Base" shall mean, as of any date, an amount that is the sum
--------------
of the following, with respect to all Eligible Mortgage Loans, Eligible
Nonconforming Mortgage Loans and Liquid Assets pledged to the Security Agent as
of such date: (1) the sum for all Conforming Loans that are Committed Mortgage
Loans and are the subject of an Interest Rate Commitment of the product of (x)
the Mortgage Loan Aging Percentage with respect to such Mortgage Loan and (y)
100% of the Market Value of such Mortgage Loan, (2) the sum for all other
Conforming Loans that are Committed Mortgage Loans of the product of (x) the
Mortgage Loan Aging Percentage with respect to such Mortgage Loan and (y) 99% of
the Market Value of such Mortgage Loan, (3) the sum for all Jumbo Loans (each of
which shall be a Committed Mortgage Loan) which are the subject of an Interest
Rate Commitment of the product of (x) the Mortgage Loan Aging Percentage with
respect to such Mortgage Loan and (y) 100% of the Market Value of such Mortgage
Loan, (4) the sum for all other Jumbo Loans (each of which shall be a Committed
Mortgage Loan) of the product of (x) the Mortgage Loan Aging Percentage with
respect to such Mortgage Loan and (y) 99% of the Market Value of such Mortgage
Loan, (5) the sum for all Mortgage Loans that are FHA Loans, VA Loans or State
Loans of the product of (x) the Mortgage Loan Aging Percentage with respect to
such Mortgage Loan and (y) 99% of the Market Value of such Mortgage Loan, (6) 0%
of the Market Value of each Mortgage-backed Security, (7) an amount equal to the
aggregate principal amount of the Liquid Assets, (8) the sum for all Credit A-
Loans of the product of (x) the Nonconforming Mortgage Loan Aging Percentage
with respect to such Mortgage Loan and (y) 99% of the Market Value of such
Mortgage Loan, (9) the sum for all Credit B Loans of the product of (x) the
Nonconforming Mortgage Loan Aging Percentage with respect to such Mortgage Loan
and (y) 99% of the Market Value of such Mortgage Loan, (10) the sum for all
Credit C Loans of the product of (x) the Nonconforming Mortgage Loan Aging
Percentage with respect to such Mortgage Loan and (y) 98% of the Market Value of
such Mortgage Loan and (11) the sum for all Credit D Loans of the product of (x)
the Nonconforming Mortgage Loan Aging Percentage with respect to such Mortgage
Loan and (y) 0% of the Market Value of such Mortgage Loan.
"Borrowing Base Valuation Report" shall have the meaning provided in
-------------------------------
Section 7.13.
"Business Day" shall mean any day except Saturday, Sunday and any
------------
day which shall be in New York, New York, a legal holiday or a day on which
banking institutions are authorized or required by law or other government
action to close.
2
<PAGE> 8
"Cash Equivalents" means (i) securities with maturities of sixty days
----------------
or less from the date of acquisition issued or fully guaranteed or insured by
the United States Government or any agency thereof, (ii) certificates of
deposit, eurodollar time deposits, overnight bank deposits, bankers' acceptances
and repurchase agreements of any commercial bank whose short-term obligations
are rated "A-1" by S&P and, if rated by Moody's, "P-1" by Moody's and, if rated
by Fitch, "F-1" by Fitch, having maturities of sixty days or less from the date
of acquisition, (iii) commercial paper having maturities of sixty days or less
from the date of acquisition, rated at least "A-1" by S&P or "P-1" by Moody's
and, if rated by Fitch, "F-1" by Fitch, (iv) money market funds rated at least
"AAAm" or "AAA-G" by S&P or "P-1" by Moody's and, if rated by Fitch, "AAA" by
Fitch, and (v) repurchase agreements with counterparties whose short-term
obligations are rated at least "A-1" by S&P or "P-1" by Moody's and, if rated by
Fitch, "F-1" with a term of sixty days or less.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
----
time to time.
"Collateral" shall mean all "Collateral" as defined in the Warehouse
----------
Security Agreement.
"Collateral Agent" shall mean General Electric Capital Corporation in
----------------
its capacity as collateral agent pursuant to the Cooper River Security
Agreement.
"Collateral Documents" shall mean, as to a Mortgage Loan which has
--------------------
been or is to be pledged to the Security Agent as Collateral, the following
documents and instruments:
(i) The original Mortgage Note executed with respect to such
Mortgage Loan by a third party in favor of the Borrower (or
properly endorsed to the Borrower if purchased or acquired by
the Borrower) and endorsed in blank by the Borrower;
(ii) The original recorded Mortgage securing such Mortgage Note or
a copy of the original Mortgage securing such Mortgage Note,
certified by the Borrower or a title company or escrow company
reasonably satisfactory to the Security Agent to be a true
copy of the original instrument submitted for recording;
(iii) If the Mortgage Note was purchased by the Borrower, an
original properly recorded assignment of the related Mortgage
to the Borrower or a copy of such assignment certified by the
Borrower or a title or escrow company reasonably satisfactory
to the Security Agent to be a true copy of the original
instrument submitted for recording and a certified copy of
each intervening assignment of such Mortgage, if any;
(iv) An assignment of the Mortgage by the Borrower to the Security
Agent fully completed and in recordable form. If appropriate
filing and recording information regarding the Mortgage has
not been inserted into the assignment, the Borrower hereby
authorizes the Security Agent to insert such information, when
available. Such assignment shall not be filed for recordation
unless the Security Agent shall in good faith deem such action
necessary to further secure any Advances, in which
3
<PAGE> 9
case the Security Agent may file of record any or all such
assignments. The Borrower shall immediately reimburse the
Security Agent for any and all costs and expenses incurred by
the Security Agent in connection with such recordation;
(v) A closing protection letter executed by an authorized
representative of a title insurance company or escrow company
reasonably satisfactory to the Agent stating that the closing
agent with respect to such Mortgage Loan is an authorized
agent of such title insurance company or escrow company; and
(vi) Such other documents as the Security Agent may reasonably
require from time to time, including, without limitation, a
copy of any Purchase Commitment or Master Commitment relating
to the Mortgage Loan.
"Collateral Value" shall mean, at any time, with respect to a Mortgage
---------------
Loan or a Mortgage-backed Security, the amount resulting from that part of the
calculation of the Borrowing Base at such time that relates to such Mortgage
Loan or Mortgage-backed Security.
"Combined Loan-to-Value Ratio" shall mean, as to any Mortgage Loan,
----------------------------
the ratio expressed as a percentage that the sum of the original principal
balance of such Mortgage Loan and the then current principal balance of any
related first priority mortgage bears to the appraised value of the related
mortgaged property at the time such Mortgage Loan was originated.
"Commercial Paper" shall mean the short-term promissory notes of the
----------------
Lender.
"Commercial Paper Rate" shall mean with respect to any calendar month,
---------------------
a rate per annum determined by annualizing the aggregate interest expense of
Lender (determined on an accrual basis) for such calendar month in respect of
(i) Commercial Paper outstanding during such calendar month and (ii) any
borrowings made by Lender under the Liquidity Agreement.
"Commitment" shall mean the obligation of the Lender to make Advances
----------
in an aggregate principal amount outstanding at any time not to exceed
$15,000,000.
"Committed Mortgage Loans" shall mean all Mortgage Loans pledged to
------------------------
the Security Agent pursuant to the terms of this Agreement and of the Warehouse
Security Agreement (i) which satisfy all of the requirements of any Purchase
Commitment or are covered by a Hedging Contract, (ii) which could be delivered
under any such Purchase Commitment, and (iii) which, in respect of all Mortgage
Loans of a particular type and yield, do not in the aggregate have a principal
amount in excess of the sum of (A) the aggregate then remaining amount of all
Purchase Commitments the requirements of which are satisfied by Mortgage Loans
of such type and yield owned by the Borrower plus (B) the aggregate amount of
all Hedging Contracts that cover Mortgage Loans of such type and yield owned by
the Borrower.
"Conforming Loan" shall mean a Mortgage Loan (other than a VA Loan,
---------------
an FHA Loan or a State Loan) that is underwritten in conformity with FHLMC or
FNMA underwriting standards and is otherwise eligible for purchase by FNMA or
FHLMC.
4
<PAGE> 10
"Consolidated Liabilities" shall mean, as to any Person, the
------------------------
liabilities of such Person and its Subsidiaries determined on a consolidated
basis and in accordance with generally accepted accounting principles in the
United States, applied on a consistent basis, and shall include in any event the
Contingent Obligations of such Person and its Subsidiaries.
"Consolidated Net Worth" shall mean, as to any Person, the Net Worth
----------------------
of such Person and its Subsidiaries determined on a consolidated basis and in
accordance with generally accepted accounting principles in the United States,
applied on a consistent basis.
"Consolidated Subsidiaries" shall mean, as to any Person, all
-------------------------
Subsidiaries of such Person which are or are required to be consolidated with
such Person for financial reporting purposes in accordance with generally
accepted accounting principles in the United States.
"Contingent Obligation" shall mean, as to any Person, any obligation
---------------------
of such Person arising from an existing condition or situation that involves
uncertainty as to outcome and that will be resolved by the occurrence or
nonoccurrence of some future event, including but not limited to any obligation
of such Person guaranteeing or intended to guarantee any Indebtedness, leases,
dividends or other obligations ("primary obligations") of any other Person (the
"primary obligor") in any manner, whether directly or indirectly; provided,
--------
however, that the term Contingent Obligation shall not include endorsements of
- -------
instruments for deposit or collection in the ordinary course of business. The
amount of any Contingent Obligation shall be deemed to be an amount equal to the
stated or determinable amount of the primary obligation in respect of which such
Contingent Obligation is made or, if not stated or determinable, the maximum
reasonably anticipated liability in respect thereof (assuming such Person is
required to perform thereunder) as determined by the Agent.
"Cooper River Security Agreement" shall mean the Assignment and
-------------------------------
Security Agreement dated as of March 1, 1993 among the Lender, the Collateral
Agent and the cash collateral bank named therein (as such agreement may be
amended, supplemented or modified from time to time).
"Credit A-Loan" shall mean a Mortgage Loan (other than a Mortgage
-------------
Loan that satisfies all the requirements of an Eligible Mortgage Loan) the
obligor of which has a Credit Score as described on Exhibit G hereto.
"Credit B Loan" shall mean a Mortgage Loan (other than a Mortgage
-------------
Loan that satisfies all the requirements of an Eligible Mortgage Loan) the
obligor of which has a Credit Score as described on Exhibit G hereto.
"Credit C Loan" shall mean a Mortgage Loan (other than a Mortgage
-------------
Loan that satisfies all the requirements of an Eligible Mortgage Loan) the
obligor of which has a Credit Score as described on Exhibit G hereto.
5
<PAGE> 11
"Credit D Loan" shall mean a Mortgage Loan (other than a Mortgage
-------------
Loan that satisfies all the requirements of an Eligible Mortgage Loan) the
obligor of which has a Credit Score as described on Exhibit G hereto.
"Credit Documents" shall mean this Agreement, the Note and the
----------------
Warehouse Security Agreement.
"Credit Package Documents" shall have the meaning provided in Section
------------------------
7.01(p).
"Credit Score" shall mean the numeric consumer credit score developed
------------
by Fair Isaac & Co., Inc. and referred to as a "FICO Score".
"Current Ratio" shall mean, as to any Person, the ratio of current
-------------
assets to current liabilities, as determined in accordance with generally
accepted accounting principles in the United States, applied on a consistent
basis.
"Custodian" shall mean, with respect to any Investor, any financial
---------
institution selected by such Investor to act as a custodian for Mortgage Loans
acquired or to be acquired by such Investor; provided that such financial
institution has been approved by the Security Agent and meets all applicable
requirements of such Investor to act as such custodian.
"Default" shall mean any event, act or condition which with notice
-------
or lapse of time, or both, would constitute an Event of Default.
"Depositary" shall mean Bankers Trust Company, a New York banking
----------
corporation, in its capacity as issuing and paying agent for the Commercial
Paper under the Depositary Agreement.
"Depositary Agreement" shall mean the Depositary Agreement entered
--------------------
into by the Lender, the Depositary, and the agent under the Liquidity Agreement,
as such agreement may be supplemented or modified from time to time.
"Effective Date" shall have the meaning provided in Section 11.09.
--------------
"Eligible Mortgage Loan" shall mean at the time of the determination
----------------------
thereof (a) a Mortgage Loan, which at such time (i) is pledged as Collateral
pursuant to the terms of this Agreement and of the Warehouse Security Agreement
and is not pledged as security for any Indebtedness owing to, or otherwise
subject to a Lien for the benefit of, any person other than the Lender, (ii) is
a First Mortgage Loan, (iii) is, without duplication, a Conforming Loan, a Jumbo
Loan, an FHA Loan, a VA Loan or a State Loan, (iv) is subject to a Purchase
Commitment or covered by a Hedging Contract or is a Mortgage Loan that bears
interest at an adjustable rate and is covered by a Master Commitment, (v) in the
case of a Mortgage Loan that is not subject to a Wet Advance, has an Origination
Date that is less than 180 calendar days prior to such time, (vi) in the case of
a Mortgage Loan that is subject to a Wet Advance, has an Origination Date that
is not more than five Business Days prior to such time and (vii) has a Combined
Loan-to-Value Ratio of 100% or less, excluding in all such cases, however, any
Mortgage Loan about which any of the
6
<PAGE> 12
representations, warranties and agreements contained in Section 6.18 is not true
and correct; provided that, in the case of a Mortgage Loan (other than a State
--------
Loan), the interest rate on such Mortgage Loan was, as of the date on which
such interest rate was set or established, at least equal to the then current
market rate of interest for mortgage loans of the same type as determined by the
Agent; or (b) a Mortgage-backed Security which at such time (i) is subject to a
Purchase Commitment, (ii) is pledged as Collateral pursuant to the terms of this
Agreement and of the Warehouse Security Agreement and (iii) was issued by FNMA,
FHLMC or GNMA not more than 60 calendar days prior to such time.
"Eligible Nonconforming Mortgage Loan" shall mean at the time of the
------------------------------------
determination thereof, a Mortgage Loan, which at such time (i) is pledged as
Collateral pursuant to the terms of this Agreement and of the Warehouse Security
Agreement and is not pledged as security for any Indebtedness owing to, or
otherwise subject to a Lien for the benefit of, any person other than the
Lender, (ii) is, without duplication, a First Mortgage Loan or a Second Mortgage
Loan, (iii) is subject to a Purchase Commitment, (iv) has and has had no
delinquency with respect to any payment due thereunder, (v) has no deficiencies
in respect of the documentation therefor, (vi) is, without duplication, a Credit
A- Loan, a Credit B Loan, a Credit C Loan or a Credit D Loan, (vii) in the case
of a Mortgage Loan that is not subject to a Wet Advance, has an Origination Date
that is less than 20 calendar days prior to such time, (viii) in the case of a
Mortgage Loan that is subject to a Wet Advance, has an Origination Date that is
not more than five Business Days prior to such time and (ix) has a Combined
Loan-to-Value Ratio of 100% or less, excluding in all such cases, however any
Mortgage Loan about which any of the representations, warranties and agreements
contained in Section 6.18 is not true and correct; provided that the interest
---------
rate on such Mortgage Loan was, as of the date on which such interest rate was
set or established, at least equal to the then current market rate of interest
for mortgage loans of the same type as determined by the Agent.
"ERISA" shall mean the Employee Retirement Income Security Act of
-----
1974, as amended from time to time, and the regulations promulgated and rulings
issued thereunder.
"ERISA Affiliate" shall mean any person (as defined in Section 3(9)
---------------
of ERISA) which together with the Borrower or any of its Subsidiaries would be a
member of the same "controlled group" within the meaning of Section 414(b), (m),
(c) and (o) of the Code.
"Event of Default" shall have the meaning provided in Section 9.
----------------
"Existing Indebtedness" shall have the meaning provided in Section
---------------------
8.04(ii).
"Expiry Date" shall mean the earlier of (i) June 30, 1999 as such
-----------
date may be extended upon mutual agreement among the Borrower, the Lender and
the Agent from time to time, (ii) the date which is fifteen days prior to the
Liquidity Termination Date in effect from time to time and (iii) the date that
is 120 days after the date on which the Lender shall have given the Borrower the
notice referred to in Section 9.13 hereof.
7
<PAGE> 13
"Facility Documents" shall mean the Credit Documents, the Collateral
------------------
Documents, the Liquidity Agreement, the Depositary Agreement, the Reimbursement
Agreement, the Cooper River Security Agreement, any letters of credit issued
pursuant to the terms of the Reimbursement Agreement, the Commercial Paper and
any agreements entered into by the Lender with placement agent(s) or dealer(s)
for the placement or sale of Commercial Paper.
"Fees" shall mean all fees and expenses required to be paid by the
----
Borrower pursuant to Section 3.01.
"FHA" shall mean the Federal Housing Administration or any successor
---
thereto.
"FHA Loan" shall mean a Mortgage Loan which (i) is eligible for
--------
insurance by FHA and (ii) is so insured or is subject to a current binding and
enforceable commitment for such insurance pursuant to the provisions of the
National Housing Act, as now in effect and as may be hereafter amended from time
to time, and is otherwise eligible for inclusion in a GNMA Mortgage-backed
Security pool.
"FHLMC" shall mean the Federal Home Loan Mortgage Corporation or
-----
any successor thereto.
"First Mortgage Loan" shall mean a Mortgage Loan that is underwritten
-------------------
in conformity with underwriting standards approved by the applicable Investor
and is secured by a first priority Mortgage.
"Fitch" shall mean Fitch Investors Service, L.P.
-----
"FNMA" shall mean the Federal National Mortgage Association or any
----
successor thereto.
"GNMA" shall mean the Governmental National Mortgage Association or
----
any successor thereto.
"Guaranty Agreement" shall have the meaning provided in Section 5.19.
------------------
"Hedging Contract" shall mean a written contractual arrangement
----------------
designed to provide protection against fluctuations in interest rates with
respect to Mortgage Loans and commitments made to prospective Mortgage Loan
obligors to extend Mortgage Loans at specified rates of interest, in each case
in accordance with guidelines acceptable to the Agent.
"HUD" shall mean the Department of Housing and Urban Development or
---
any successor thereto.
"Indebtedness" shall mean, as to any Person, without duplication,
------------
(i) all indebtedness (including principal; interest, fees and charges) of such
Person for borrowed money or for the deferred purchase price of property or
services, (ii) the face amount of all letters of credit issued for the account
of such Person and all drafts drawn thereunder, (iii) all liabilities secured by
any Lien
8
<PAGE> 14
on any property owned by such Person, whether or not such liabilities have been
assumed by such Person, (iv) the aggregate amount required in accordance with
generally accepted accounting principles to be capitalized under leases under
which such Person is the lessee and (v) all Contingent Obligations of such
Person.
"Initial Borrowing Date" shall mean the date on which the initial
----------------------
incurrence of Advances occurs.
"Insolvency Event" shall mean, with respect to any Person, the
----------------
occurrence of any of the following events: (i) such Person shall become
insolvent or generally fail to pay, or admit in writing its inability to pay,
its debts as they become due, or shall voluntarily commence any proceeding or
file any petition under any bankruptcy, insolvency or similar law or seeking
dissolution, liquidation or reorganization or the appointment of a receiver,
trustee, custodian, conservator or liquidator for itself or a substantial
portion of its property, assets or business or to effect a plan or other
arrangement with its creditors, or shall file any answer admitting the
jurisdiction of the court and the material allegations of an involuntary
petition filed against it in any bankruptcy, insolvency or similar proceeding,
or shall be adjudicated bankrupt, or shall make a general assignment for the
benefit of creditors, or such Person, or a substantial part of its property,
assets or business, shall be subject to, consent to or acquiesce in the
appointment of a receiver, trustee, custodian, conservator or liquidator for
itself or a substantial portion of its property, assets or business; (ii)
corporate action shall be taken by such Person for the purpose of effectuating
any of the foregoing; (iii) an order for relief shall be entered in a case under
the Bankruptcy Code in which such Person is a debtor; or (iv) involuntary
proceedings or an involuntary petition shall be commenced or filed against such
Person under any bankruptcy, insolvency or similar law or seeking the
dissolution, liquidation or reorganization of such Person or the appointment of
a receiver, trustee, custodian, conservator or liquidator for such Person or of
a substantial part of the property, assets or business of such Person, or any
writ, order, judgment, warrant of attachment, execution or similar process shall
be issued or levied against a substantial part of the property, assets or
business of such Person, and such proceeding or petition shall not be dismissed,
or such execution or similar process shall not be released, vacated or fully
bonded, within sixty (60) days after commencement, filing or levy, as the case
may be.
"Interest Rate Commitment" shall mean a commitment whereby the
------------------------
Borrower agrees to deliver a Mortgage Loan to GE Capital Mortgage Services,
Inc., as investor, according to the terms of a Purchase Commitment and GE
Capital Mortgage Services, Inc. agrees to a specified interest rate and purchase
price for a designated length of time.
"Investor" shall mean FHLMC, FNMA, GNMA or any financial institution,
--------
broker, dealer, institutional investor or state agency or instrumentality
approved by the Agent.
"Jumbo Loan" shall mean a Mortgage Loan (other than an FHA Loan, a
----------
VA Loan, or a State Loan) that is underwritten in accordance with standards
approved by the Agent that are generally comparable to the standards established
by FNMA or FHLMC in all respects other than the original principal amount of the
Mortgage Loan and that were established by an Investor (other than FHLMC, FNMA
or GNMA).
9
<PAGE> 15
"Lien" shall mean any mortgage, pledge, hypothecation, assignment,
----
deposit arrangement, encumbrance, lien (statutory or other), preference,
priority or other security agreement of any kind or nature whatsoever
(including, without limitation, any conditional sale or other title retention
agreement, any financing or similar statement or notice filed under the UCC or
any other similar recording or notice statute, and any lease having
substantially the same effect as any of the foregoing).
"Liquid Assets" shall mean (i) certificates of deposit of any
-------------
commercial bank whose short-term obligations are rated "A-1+" by S&P and, if
rated by Moody's, "P-1" by Moody's and, if rated by Fitch, "F-1+" by Fitch
having maturities of 60 days or less from the date of acquisition and (ii)
securities issued or fully guaranteed or insured by the United States
Government or any agency thereof having maturities of 60 days or less from the
date of acquisition.
"Liquidity Agreement" shall mean the Liquidity Agreement dated as of
-------------------
March 1, 1993 among the Lender, the liquidity lenders party thereto and General
Electric Capital Corporation, as liquidity agent, as the same may be amended or
modified from time to time.
"Liquidity Lenders" shall mean the banks and financial institutions
-----------------
that are parties to the Liquidity Agreement from time to time.
"Liquidity Termination Date" shall mean the earlier of (i) March 31,
--------------------------
1999, as such date may be extended in accordance with the terms of the Liquidity
Agreement and (ii) the date on which the commitment of the Liquidity Lenders
under the Liquidity Agreement is terminated following the occurrence of an event
of default thereunder.
"LOC Providers" shall mean those banks and financial institutions
-------------
that are parties to the Reimbursement Agreement.
"Margin Stock" shall have the meaning provided in Regulation U of the
------------
Board of Governors of the Federal Reserve System.
"Market Value" shall mean as of any date at which the amount thereof
------------
is to be determined, (i) as to any Mortgage-backed Security, the purchase price
therefor (exclusive of any accrued interest included in such purchase price)
under the Purchase Commitment with respect thereto; and (ii) as to any Mortgage
Loan an amount equal to the lower of (A) an amount equal to (1) with respect to
a Mortgage Loan that was funded directly by the Borrower to the obligor
thereunder, the outstanding principal amount of such Mortgage Loan or (2) with
respect to a Mortgage Loan that was purchased by the Borrower, the lesser of (x)
the purchase price paid by the Borrower therefor (exclusive of any accrued
interest or servicing release premium included in such purchase price) and (y)
the outstanding principal amount of such Mortgage Loan, as applicable, (B) the
amount determined by the Agent, in its reasonable discretion, as the price
(exclusive of any accrued interest that would be included in such price) at
which such Mortgage Loan could on the date of such determination be sold in the
secondary market to a bona fide investor in an arm's-length transaction and (C)
the price at which an Investor has committed to purchase such Mortgage Loan.
- --- -----
10
<PAGE> 16
"Master Commitment" shall mean a written master commitment or any
-----------------
other written commitment, on general terms and conditions approved by the Agent,
from an Investor to purchase from the Borrower from time to time up to a
specified dollar amount of Mortgage Loans without specification of the yield or
purchase price of each such Mortgage Loan.
"Moody's" shall mean Moody's Investors Service, Inc.
-------
"Mortgage" shall mean a first or second mortgage, first or second
--------
deed of trust, first or second deed to secure debt or other first or second
security device which is customary and serves the same function as a mortgage
under the law and practice in the jurisdiction in which the premises subject to
the mortgage are located. For all Mortgage Loans secured by premises located in
states in which it is customary to use deeds of trust or security deeds as the
security device, a deed of trust or security deed, as the case may be, shall be
used as the security device. Mortgages shall, unless the Agent shall otherwise
approve, be on forms acceptable to FNMA, GNMA or FHLMC.
"Mortgage-backed Securities" shall mean securities that are (A)(i)
--------------------------
issued in accordance with guidelines established by GNMA, FNMA or FHLMC, (ii)
guaranteed as to payment by GNMA, FNMA or FHLMC in accordance with the
guidelines established by such entities and (iii) secured by a pool of Mortgage
Loans originally included as Eligible Mortgage Loans hereunder, or which would
have otherwise satisfied the requirements for Eligible Mortgage Loans if such
Mortgage Loans had been pledged to the Security Agent pursuant to the terms of
this Agreement and of the Warehouse Security Agreement, (B) subject to a
Purchase Commitment and (C) issued in book-entry form.
"Mortgage Bankers' Reporting Forms" shall have the meaning provided
---------------------------------
in Section 7.01(o).
"Mortgage Loan" shall mean a loan evidenced by a Mortgage Note and
-------------
secured by a Mortgage encumbering a completed one to four family residential
property (including, without limitation, condominium units and excluding
cooperative ownership interests).
"Mortgage Loan Aging Percentage" shall mean, as of any date, with
------------------------------
respect to any Eligible Mortgage Loan, (i) 100% if such Mortgage Loan has an
Origination Date that is less than 90 days prior to such date, (ii) 75% if such
Mortgage Loan has an Origination Date that is less than 120 days and more than
89 days prior to such date, (iii) 50% if such Mortgage Loan has an Origination
Date that is less than 150 days and more than 119 days prior to such date, (iv)
25% if such Mortgage Loan has an Origination Date that is less than 180 days and
more than 149 days prior to such date and (v) 0% if such Mortgage Loan has an
Origination Date that is 180 or more days prior to such date.
"Mortgage Note" shall mean a promissory note executed by a competent
-------------
party which is secured by a Mortgage.
11
<PAGE> 17
"Net Worth" shall mean, as to any Person, the sum of (i) its capital
---------
stock, capital in excess of par or stated value of shares of its capital stock,
retained earnings and any other account which, in accordance with generally
accepted accounting principles in the United States, constitutes stockholder
equity less (ii) any treasury stock, any unpaid stock subscriptions and any
subordinated or other loans from stockholders, in each case to the extent
included in clause (i).
"Nonconforming Commitment" shall have the meaning provided in Section
------------------------
2.01.
"Nonconforming Mortgage Loan Aging Percentage" shall mean, as of any
--------------------------------------------
date, with respect to any Eligible Nonconforming Mortgage Loan, (i) 100% if such
Mortgage Loan has an Origination Date that is less than 60 days prior to such
date, (ii) 50% if such Mortgage Loan has an Origination Date that is less than
90 days and more than 59 days prior to such date and (iii) 0% if such Mortgage
Loan has an Origination Date that is 90 days or more prior to such date.
"Note" shall have the meaning provided in Section 2.06.
----
"Obligations" shall mean all amounts owing to the Lender or the Agent
-----------
pursuant to the terms of this Agreement and any other Credit Document.
"Office" shall mean the office of the Agent located at Three Executive
------
Campus, Cherry Hill, New Jersey 08002 or such other address as the Agent may
specify from time to time in a written notice to the Borrower and the Lender.
"Origination Date" shall mean, with respect to any Mortgage Loan, the
----------------
date such Mortgage Loan was funded to the obligor thereon.
"PBGC" shall mean the Pension Benefit Guaranty Corporation established
----
pursuant to Section 4002 of ERISA or any successor thereto.
"Person" shall mean any individual, partnership, joint venture, firm,
------
corporation, association, trust or other enterprise or any government or
political subdivision or any agency, department or instrumentality thereof.
"Plan" shall mean any multiemployer plan or single-employer plan as
----
defined in Section 4001 of ERISA, which is maintained or contributed to by (or
to which there is an obligation to contribute of), or at any time during the
five calendar years preceding the date of this Agreement was maintained or
contributed to by (or to which there is an obligation to contribute of), the
Borrower or by a Subsidiary of the Borrower or an ERISA Affiliate.
"Purchase Commitment" shall mean a current binding and enforceable
-------------------
written commitment (or contract for purchase) from an Investor to purchase from
the Borrower Mortgage Loans or Mortgage-backed Securities of a particular type
and yield owned by the Borrower at a committed price, which commitment shall at
all times be subject to approval by the Agent as to terms and conditions.
12
<PAGE> 18
"Rating Agency" shall mean each credit rating agency that the Lender
-------------
shall have requested to provide a credit rating with respect to the Commercial
Paper and which is then providing such a credit rating.
"Reimbursement Agreement" shall mean the Letter of Credit and
-----------------------
Reimbursement Agreement dated as of March 1, 1993 among the Lender, the banks
and financial institutions party thereto and General Electric Capital
Corporation, as letter of credit agent, as such agreement may be amended,
supplemented or modified from time to time.
"Reportable Event" shall mean an event described in Section 4043(b)
----------------
of ERISA with respect to a Plan as to which the 30-day notice requirement has
not been waived by the PBGC.
"Request for Advance" shall have the meaning provided in Section 2.04.
-------------------
"S&P" shall mean Standard & Poor's Corporation.
---
"Second Mortgage Loan" shall mean a Mortgage Loan that is underwritten
--------------------
in conformity with underwriting standards approved by the applicable Investor
and is secured by a second priority Mortgage.
"Security Agent" shall mean GE Capital Mortgage Services, Inc. in its
--------------
capacity as security agent for the Lender pursuant to the Warehouse Security
Agreement.
"Servicing Portfolio" shall mean, as to any Person, all Mortgage Loans
-------------------
the servicing or subservicing rights for which are owned by such Person and with
respect to which such Person functions as the servicing institution.
"State Loan" shall mean a Mortgage Loan that is (i) underwritten in
----------
conformity with underwriting standards that are established by a state agency or
instrumentality and approved by the Agent and (ii) subject to a Purchase
Committment from such state agency or instrumentality.
"Subsidiary" shall mean, as to any Person, (i) any corporation more
----------
than 50% of whose stock of any class or classes having by the terms thereof
ordinary voting power to elect a majority of the directors of such corporation
(irrespective of whether or not at the time stock of any class or classes of
such corporation shall have or might have voting power by reason of the
happening of any contingency) is at the time owned by such Person and/or one or
more Subsidiaries of such Person and (ii) any partnership, association, joint
venture or other entity in which such Person and/or one or more Subsidiaries of
such Person has (A) more than a 50% equity interest at the time or (B) an
interest satisfying the provisions of clause (i) hereof in any general partner
of any limited partnership or joint venture.
"Support Agreement" shall have the meaning provided in Section 5.20.
-----------------
"Taxes" shall have the meaning provided in Section 11.01(e).
-----
13
<PAGE> 19
"UCC" shall mean the Uniform Commercial Code as from time to time in
---
effect in New Jersey or any other relevant jurisdiction, as applicable.
"Unfunded Current Liability" of any Plan means the amount, if any, by
--------------------------
which the present value of the accrued benefits under the Plan as of the close
of its most recent plan year, determined in accordance with Statement of
Financial Accounting Standards No. 35, based upon the actuarial assumptions used
by the Plan's actuary in the most recent annual valuation of the Plan, exceeds
the fair market value of the assets allocable thereto, determined in accordance
with Section 412 of the Code.
"VA" shall mean the Veterans Administration or any successor thereto.
--
"VA Loan" shall mean a Mortgage Loan which is eligible for guarantee
-------
by VA and is either so guaranteed or is subject to a current binding and
enforceable commitment for such guarantee pursuant to the provisions of the
Servicemen's Readjustment Act, as now in effect and as may be hereafter amended
from time to time, and is otherwise eligible for inclusion in a GNMA
Mortgage-backed Security pool.
"Warehouse Payment Account" shall mean the segregated direct deposit
-------------------------
account number 00-377-975 maintained by the Collateral Agent with respect to
this Agreement at Bankers Trust Company in accordance with the terms of the
Cooper River Security Agreement.
"Warehouse Security Agreement" shall have the meaning provided in
----------------------------
Section 5.09.
"Wet Advance" shall mean an Advance made by the Lender against the
-----------
pledge of Eligible Mortgage Loans or Eligible Nonconforming Mortgage Loans with
respect to which the Borrower has delivered to the Agent a Request for Advance
in accordance with Section 2.04 in lieu of the delivery of the Mortgage Note
related thereto: provided, however, that from and after the date on which the
-------- -------
Mortgage Note with respect to any such Mortgage Loan is received by the Security
Agent, such Advance shall cease to be a Wet Advance.
"Wet Advance Disbursement Instruction" shall have the meaning provided
------------------------------------
in Section 2.05.
"Wholly-Owned Subsidiary" shall mean, as to any Person, (i) any
-----------------------
corporation 100% of whose capital stock is at the time owned by such Person
and/or one or more Wholly-Owned Subsidiaries of such Person and (ii) any
partnership, association, joint venture or other entity in which such Person
and/or one or more Wholly-Owned Subsidiaries of such Person has a 100% equity
interest at such time.
1.02 Principles of Construction. (a) All references to sections,
--------------------------
schedules and exhibits are to sections, schedules and exhibits in or to this
Agreement unless otherwise specified. The words "hereof," "herein," "hereto" and
"hereunder" and words of similar import when used in this Agreement shall refer
to this Agreement as a whole and not to any particular provision of this
Agreement.
14
<PAGE> 20
(b) All accounting terms not specifically defined herein shall be
construed in accordance with generally accepted accounting principles in
conformity with those used in the preparation of the financial statements
referred to in Section 6.05(a).
Section 2. Amount and Terms of Credit.
--------------------------
2.01 Commitment. Subject to and upon the terms and conditions set
----------
forth herein, the Lender agrees, at any time and from time to time prior to the
Expiry Date (or such earlier date as the Commitment shall have been terminated
pursuant to the terms hereof), to make an advance or advances (each an "Advance"
and, collectively, the "Advances") to the Borrower, which Advance: (i) shall be
made at any time and from time to time in accordance with the terms hereof on
and after the Effective Date and prior to the Expiry Date; (ii) shall bear
interest as provided in Section 2.07; (iii) may be prepaid and reborrowed in
accordance with the provisions hereof; and (iv) shall be made against the pledge
by the Borrower of Eligible Mortgage Loans, Eligible Nonconforming Mortgage
Loans or Liquid Assets as Collateral for such Advance as provided herein and in
the Warehouse Security Agreement; provided, however, that (1) the aggregate
-------- -------
principal amount of Advances outstanding at any time shall not exceed the lesser
of (x) the Commitment and (y) the Borrowing Base, at such time, (2) the
aggregate principal amount of Advances outstanding at any time secured by
Mortgage-backed Securities shall not exceed 0% of the Commitment, (3) the
aggregate principal amount of Wet Advances outstanding at any time shall not
exceed 30% of the Commitment, (4) the aggregate principal amount of Advances
outstanding at any time secured by Jumbo Loans shall not exceed 75% of the
Commitment, (5) the aggregate principal amount of Advances outstanding at any
time secured by Eligible Nonconforming Mortgage Loans shall not exceed
$1,500,000 (the "Nonconforming Commitment"), (6) the aggregate principal amount
of Advances outstanding at any time secured by Credit A- Loans shall not exceed
100% of the Nonconforming Commitment, (7) the aggregate principal amount of
Advances outstanding at any time secured by Credit B Loans shall not exceed 100%
of the Nonconforming Commitment, (8) the aggregate principal amount of Advances
outstanding at any time secured by Credit C Loans shall not exceed 50% of the
Nonconforming Commitment and (9) the aggregate principal amount of Advances
outstanding at any time secured by Credit D Loans shall not exceed 0% of the
Nonconforming Commitment.
2.02 Minimum Borrowing Amount. The principal amount of each
------------------------
Advance shall not be less than $500.
2.03 Pledge of Collateral. Whenever the Borrower desires to
--------------------
pledge a Mortgage Loan or Mortgage-Backed Security to the Security Agent, it
shall deliver to the Agent at its office a pledge of Collateral substantially in
the form of Exhibit A-1 (the "Pledge of Collateral"). Each Pledge of Collateral:
(i) shall be appropriately completed by an authorized employee of the Borrower
to describe the Collateral to be pledged; and (ii) shall have attached thereto
each of the Collateral Documents required in the Pledge of Collateral,
including, without limitation, in the case of a Mortgage Loan with respect to
which a Wet Advance is being requested in accordance with Section 2.04, an
assignment by the Borrower to the Security Agent of the related Mortgage fully
completed and in recordable form.
15
<PAGE> 21
2.04 Request for Advance. Whenever the Borrower desires to incur
-------------------
an Advance hereunder, it shall deliver to the Agent at its Office a request
for Advance substantially in the form of Exhibit A-2 or Exhibit A-3, as
applicable (the "Request for Advance") not later than the close of business on
the Business Day prior to the proposed date of such Advance; provided, however,
--------- -------
that before submitting a request for an Advance to be secured by a Mortgage
Loan with an outstanding principal amount in excess of $650,000, the Borrower
shall have obtained the prior approval of the Agent. Each Request for Advance:
(i) shall be appropriately completed by an authorized employee of the Borrower
to specify the aggregate principal amount of the Advance or Wet Advance to be
made and the proposed date of such Advance (which shall be a Business Day); and
(ii) shall, in the case of a Wet Advance, include instructions with respect to
the disbursement of such Wet Advance.
2.05 Disbursement of Funds. (a) No later than 3:00 P.M. (New York
---------------------
City time) on the date specified in the Request for Advance with respect to any
Advance other than a Wet Advance, the Lender shall make available to the
Borrower the amount of such Advance requested to be made on such date by wire
transfer of funds to the Borrower's Advance Account.
(b) No later than 3:00 P.M. (New York City time) on the date specified
in the Request for Advance with respect to any Wet Advance, the Agent shall
disburse the amount of such Wet Advance directly to the appropriate title
company, escrow agent or closing agent, by cashier's check or wire transfer in
accordance with the instructions set forth in the related Request for Advance,
the Agent's customary practice and the requirements of applicable law.
(c) In the event that a Wet Advance is disbursed by a cashier's check
sent by the Agent or the Agent's bank to the appropriate title company, escrow
agent or closing agent, the Agent shall disburse the amount of such Wet Advance
under cover of an instruction letter substantially in the form of Exhibit B-1 (a
"Wet Advance Disbursement Instruction"). In the event that a Wet Advance is to
be disbursed by wire transfer or by a cashier's check printed at the Borrower's
office and sent by the Borrower to the appropriate title company, escrow agent
or closing agent, the Borrower shall deliver to the appropriate title company,
escrow agent or closing agent an instruction letter substantially in the form of
Exhibit B-2 (a "Borrower's Wet Advance Disbursement Instruction"). Upon the
request of the Agent, the Borrower shall deliver to the Agent a copy of any
Borrower's Wet Advance Disbursement Instruction delivered by the Borrower.
2.06 Note. The Borrower's obligation to pay the principal of, and
----
interest on, all Advances made to it by the Lender shall be evidenced by a
promissory note substantially in the form of Exhibit D (the "Note"). The Note
shall (i) be executed by the Borrower, (ii) be payable to the order of the
Lender and be dated on or prior to the Initial Borrowing Date, (iii) be in a
stated principal amount equal to the Commitment and be payable in the aggregate
principal amount of the Advances evidenced thereby, (iv) mature, with respect to
each Advance evidenced thereby, on the Expiry Date, (v) bear interest as
provided in Section 2.07, (vi) be subject to mandatory prepayment as provided in
Section 4.02 and (vii) be entitled to the benefits of this Agreement and the
other Credit Documents. The Lender will note on its internal records the amount
of each Advance made by it and each payment in respect thereof and will prior to
any transfer of the Note endorse on the
16
<PAGE> 22
reverse side thereof the outstanding principal amount of Advances evidenced
thereby. Failure to make any such notation shall not affect the Borrower's
obligations in respect of such Advances.
2.07 Interest. (a) The Borrower agrees to pay interest in respect
--------
of the outstanding principal amount of the Advances from the date the proceeds
thereof are made available to the Borrower until the maturity thereof (whether
by acceleration or otherwise) (i) with respect to Advances secured by Eligible
Mortgage Loans, at a rate per annum equal to 2.00% in excess of the Commercial
Paper Rate in effect from time to time and (ii) with respect to Advances secured
by Eligible Nonconforming Mortgage Loans, at a rate per annum equal to 2.25% in
excess of the Commercial Paper Rate in effect from time to time; provided,
--------
however, that with respect to any Advance which is disbursed by cashier's check,
- -------
which Advance has been outstanding for less than sixteen days (16), the
applicable rate of interest, calculated in accordance with the provisions of
this Section 2.07(a), shall be reduced by .50%.
(b) Overdue principal and, to the extent permitted by law, overdue
interest, and any other overdue amount payable by the Borrower hereunder, shall
bear interest at a rate per annum equal to 4% per annum in excess of the rate
specified in clause (a) above in effect from time to time; provided, however,
-------- -------
that no Advance shall bear interest at a rate in excess of the maximum rate
permitted by applicable law.
(c) Accrued (and theretofore unpaid) interest shall be payable in
respect of the Advances (i) monthly in arrears on the fifth Business Day of each
calendar month with respect to interest accrued during the preceding calendar
month, (ii) on any prepayment which reduces the outstanding Advances to zero,
(iii) at maturity (whether by acceleration, demand or otherwise) and (iv) after
such maturity, on demand. The Agent shall provide the Borrower with a notice
setting forth the interest accrued with respect to each calendar month not later
than the third Business Day following the end of such calendar month.
Section 3. Fees.
----
3.01 Fees. (a) The Borrower shall pay the Agent an administration
----
fee (the "Administration Fee") with respect to each calendar month during the
term of this Agreement in an amount equal to the sum of $20.00 for each Mortgage
Loan pledged as Collateral for the first time during such calendar month. In
addition, the Borrower shall pay all administrative costs of the Lender or the
Agent in connection with the making of an Advance and the handling of
Collateral, including, but not limited to, the costs of overnight and express
delivery, cashier's checks and wire transfers. The Administration Fee and
administrative costs with respect to each calendar month. will be due and
payable on the fifth Business Day following the end of such calendar month.
(b) The Agent shall provide the Borrower with a notice setting forth
the Administration Fee accrued and the administrative costs with respect to each
calendar month not later than the third Business Day following the end of such
calendar month.
17
<PAGE> 23
Section 4. Prepayments; Payments.
---------------------
4.01 Voluntary Prepayments. The Borrower shall have the right to
---------------------
prepay the Advances, without premium or penalty, in whole or in part from time
to time on the following terms and conditions: (i) the Borrower shall give the
Agent at its Office notice of its intent to prepay not later than 2:00 p.m. (New
York City time) at least one Business Day prior to the date of such prepayment;
provided, however, that with respect to any prepayment of an amount in excess
- --------- -------
of 30% of the Advances then outstanding, the Borrower shall give the Agent
notice of its intent to prepay at least 5 Business Days prior to the date of
such prepayment, and (ii) the amount of such prepayment shall be at least
$10,000.
4.02 Mandatory Prepayments. Except as set forth in Section
---------------------
4.03(b), a prepayment of Advances shall be required, without notice or demand
of any kind to the Borrower, as follows:
(a) if on any date the aggregate principal amount of Advances
outstanding (after giving effect to all other repayments thereof on
such date) exceeds the lesser of (x) the Commitment or (y) the
Borrowing Base, as then in effect, the Borrower shall immediately
prepay the principal of Advances in an aggregate amount equal to such
excess;
(b) if on any date the aggregate principal amount outstanding
of Advances secured by Mortgage-backed Securities exceeds 0% of the
Commitment, the Borrower shall immediately prepay the principal of
Advances secured by Mortgage-backed Securities in an aggregate amount
equal to such excess;
(c) if on any date the aggregate principal amount outstanding
of Wet Advances exceeds 30% of the Commitment, the Borrower shall
immediately prepay the principal of Wet Advances in an aggregate amount
equal to such excess;
(d) if on any date the aggregate principal amount outstanding
of Advances secured by Jumbo Loans exceeds 75% of the Commitment, the
Borrower shall immediately prepay the principal of Advances secured by
Jumbo Loans in an aggregate amount equal to such excess;
(e) if (i) 60 calendar days shall have elapsed from the date
of first issuance of a Mortgage-backed Security in respect of which an
Advance has been made hereunder, and (ii) such Mortgage-backed Security
has not been sold by the Borrower and paid for by an Investor and (iii)
the Advances secured by such Mortgage-backed Security have not been
prepaid pursuant to any other clause of this Section 4.02, the Borrower
shall immediately prepay the principal of Advances in an aggregate
amount equal to the Collateral Value of such Mortgage-backed Security;
(f) if the Agent shall have notified the Borrower or the
Borrower otherwise becomes aware that any Mortgage Loan or
Mortgage-backed Security originally included as an Eligible Mortgage
Loan or an Eligible Nonconforming Mortgage Loan no longer constitutes
an Eligible Mortgage Loan or an Eligible Nonconforming Mortgage Loan
pursuant to the terms and standards set forth herein and in the
Warehouse Security
18
<PAGE> 24
Agreement, the Borrower shall immediately prepay the principal of Advances in an
aggregate amount equal to the Collateral Value of such Mortgage Loan or
Mortgage-backed Security;
(g) if a Mortgage Loan or a Mortgage-backed Security in respect of
which an Advance has been made hereunder is sold, the Borrower shall on the date
of settlement for such sale prepay the principal of Advances in an aggregate
amount equal to the Collateral Value of such Mortgage Loan or Mortgage-backed
Security;
(h) if 21 calendar days shall have elapsed from the date a Mortgage
Loan is sent from the Security Agent to an Investor or the Custodian for an
Investor as provided in Section 4.04 and in the Warehouse Security Agreement and
such Mortgage Loan has neither been redelivered to the Security Agent nor
purchased pursuant to the letter of transmittal delivered therewith, the form of
which shall be that customarily used by the Security Agent or, if appropriate,
the form required by FNMA or FHLMC, the Borrower shall immediately prepay the
principal of Advances in an aggregate amount equal to the Collateral Value of
such Mortgage Loan;
(i) if 14 calendar days shall have elapsed from the date on which the
Borrower is requested by the Security Agent to obtain a substantially corrected
or completed copy of any material document in connection with any Mortgage Loan
or Mortgage-backed Security and the same shall not have been delivered to the
Security Agent with the appropriate completion or correction, the Borrower shall
immediately prepay the principal of Advances in an aggregate amount equal to the
Collateral Value of such Mortgage Loan or Mortgage-backed Security;
(j) if (1) there shall be a default in the payment of principal or
interest by the obligor under (x) an Eligible Mortgage Loan in respect of which
an Advance has been made hereunder and such default shall be continuing for 60
days or more or (y) a Mortgage-backed Security in respect of which an Advance
has been made hereunder and such default shall be continuing for 3 Business Days
or more or (z) an Eligible Nonconforming Mortgage Loan in respect of which an
Advance has been made hereunder and such default shall be continuing for 60 days
or more, (2) an Insolvency Event shall occur in respect of an obligor on any
Mortgage Loan in respect of which an Advance has been made hereunder or (3)
foreclosure or similar proceedings shall be commenced in respect of the premises
which secure any Mortgage Loan in respect of which an Advance has been made
hereunder, the Borrower shall immediately prepay the principal of Advances in an
aggregate amount equal to the Collateral Value of such Mortgage Loan or
Mortgage-backed Security;
(k) if the Mortgage Loan to be funded with the proceeds of any Wet
Advance is not funded on the date of such Wet Advance, the Borrower shall
immediately prepay the full principal amount of such Wet Advance;
(l) if the Mortgage Note in respect of any Mortgage Loan securing a Wet
Advance is not delivered to the Lender within five Business Days following the
date on
19
<PAGE> 25
which such Wet Advance was made, the Borrower shall immediately prepay
the full principal amount of such Wet Advance;
(m) if on any date the aggregate principal amount of Advances
outstanding at any time secured by Eligible Nonconforming Mortgage
Loans exceeds the Nonconforming Commitment then in effect, the Borrower
shall immediately prepay the principal of Advances in an aggregate
amount equal to such excess;
(n) if on any date the aggregate principal amount of Advances
secured by Credit A- Loans exceeds 100% of the Nonconforming
Commitment, the Borrower shall immediately prepay the principal of
Advances secured by Credit A- Loans in an aggregate amount equal to
such excess;
(o) if on any date the aggregate principal amount of Advances
secured by Credit B Loans exceeds 100% of the Nonconforming Commitment,
the Borrower shall immediately prepay the principal of Advances secured
by Credit B Loans in an aggregate amount equal to such excess;
(p) if on any date the aggregate principal amount of Advances
secured by Credit C Loans exceeds 50% of the Nonconforming Commitment,
the Borrower shall immediately prepay the principal of Advances secured
by Credit C Loans in an aggregate amount equal to such excess; and
(q) if on any date the aggregate principal amount of Advances
secured by Credit D Loans exceeds 0% of the Nonconforming Commitment,
the Borrower shall immediately prepay the principal of Advances secured
by Credit D Loans in an aggregate amount equal to such excess.
4.03 Release of Collateral; Substitution. (a) So long as no
-----------------------------------
Default or Event of Default has occurred and is continuing or would result
therefrom, upon the Borrower's request therefor accompanied by a prepayment by
the Borrower of Advances in an amount sufficient to cause the amount of Advances
outstanding to be less than or equal to the Borrowing Base (calculated without
reference to any Collateral which the Borrower requests be released from the
Lien granted pursuant to the Warehouse Security Agreement) and a deposit by the
Borrower of such amount as the Agent shall reasonably designate as a reserve for
application to any fees, accrued interest or breakage costs payable with respect
to the calendar month in which such prepayment occurs, the Security Agent shall,
within one Business Day after the later of the receipt of such request or such
prepayment and deposit, release from the Lien granted pursuant to the Warehouse
Security Agreement and deliver to the Borrower in accordance with the terms of
the Warehouse Security Agreement (i) the Collateral corresponding to such
Mortgage Loan(s) or Mortgage-backed Security(ies) and (ii) the Collateral
Documents pertaining thereto.
(b) So long as no Default or Event of Default has occurred and is
continuing in lieu of any required pre-payment of principal pursuant to Section
4.02, the Borrower may, subject to the terms and conditions hereof and the prior
consent of the Agent, substitute and pledge additional Eligible Mortgage Loans
and/or Eligible Nonconforming Mortgage Loans (together with all
20
<PAGE> 26
required Collateral Documents with respect thereto) having an aggregate
Collateral Value in an amount such that immediately after giving effect to such
substitution or addition, such prepayment is no longer required.
4.04 Sale of Collateral to Investors. (a) The Security Agent
-------------------------------
shall arrange, in accordance with the provisions of the Warehouse Security
Agreement, for the delivery of Mortgage Loans pledged to the Security Agent to
an Investor (or such Investor's Custodian) pursuant to a Purchase Commitment for
examination and purchase thereof by such Investor; provided, however, that prior
-------- -------
thereto the Security Agent shall have received from the Borrower one Business
Day's prior written notice describing the Mortgage Loan(s) to be delivered and
the shipping or wiring instructions therefor, such notice executed by an
authorized employee of the Borrower and identifying the Investor and the price
which such Investor has agreed to pay for such Collateral and/or the
Mortgage-backed Security that is to be issued against the delivery and release
of such Collateral.
(b) The Security Agent shall release Collateral consisting of
Mortgage-backed Securities to the Investor under the related Purchase Commitment
on the settlement date specified in such Purchase Commitment by book-entry
transfer of such Mortgage-backed Securities to the account of such Investor
against the wire transfer to the account of the Security Agent of the full
purchase price specified in such Purchase Commitment; provided
--------
that (i) the Security Agent shall have received from the Investor or the
Borrower appropriate instructions with respect to such delivery, transfer and
payment and (ii) the Borrower shall have made all deposits (if any) required in
connection therewith pursuant to Section 4.04(c) below.
(c) The Borrower shall make a deposit in immediately available funds
into the Warehouse Payment Account by 4:00 p.m. on the Business Day on which the
release of the Security Agent's security interest in such Mortgage Loan or
Mortgage-backed Securities is scheduled to occur pursuant to the purchase by an
Investor under a Purchase Commitment, in an amount equal to the amount by which
the aggregate amount of Advances outstanding exceeds the Borrowing Base
(calculated without reference to any such Mortgage Loan or Mortgage-backed
Security).
(d) Each delivery of Collateral pursuant to this Section 4.04 shall be
accompanied by a bailee letter in accordance with the requirements of the
Warehouse Security Agreement. All payments in respect of such Collateral so
purchased shall not be deemed received by the Security Agent until such funds
constitute "immediately available" funds in the Warehouse Payment Account or
such Mortgage-backed Securities have been credited to the account of the
Security Agent. For purposes hereof, confirmation of receipt of wired funds
shall constitute "immediately available" funds.
(e) In the event that the Borrower has entered into an agreement which
provides for the sale by the Borrower to an Investor of the rights to service
any Mortgage Loan (which sale is separate from the sale of such Mortgage Loan)
pledged to the Security Agent pursuant to the terms of this Agreement and the
Warehouse Security Agreement, the Borrower shall provide such Investor with
written notice (in a form satisfactory to the Agent) that the payment for such
servicing rights shall be made directly to the Agent for the account of the
Lender.
21
<PAGE> 27
(f) The Borrower shall deliver to the Agent, on or prior to 10:30 a.m.
on the Business Day following receipt by the Security Agent of payment from an
Investor for Mortgage Loans (or the right to service Mortgage Loans) or
Mortgage-backed Securities purchased, notice designating the Mortgage Loans or
Mortgage-backed Securities to which such payment applies. An amount equal to the
funds transferred to the Security Agent in respect of Mortgage Loans (or the
right to service Mortgage Loans) or Mortgage-backed Securities purchased by an
Investor (whether such funds were transferred by the Borrower pursuant to
Section 4.04(c) or by the Investor pursuant to Sections 4.04(b), 4.04(d) or
4.04(e)) shall be applied by the Security Agent as a prepayment of Advances.
4.05 Method and Place of Payment. Except as otherwise specifically
---------------------------
provided herein, all payments under this Agreement and the Note shall be made to
the Agent for the account of the Lender not later than 2:00 p.m. (New York City
time) on the date when due and shall be made in immediately available funds for
deposit to the Warehouse Payment Account. Any payment received after 2:00 p.m.
(New York City time) on any Business Day shall be treated as being received on
the next succeeding Business Day. Whenever any payment to be made hereunder or
under the Note shall be stated to be due on a day which is not a Business Day,
the due date thereof shall be extended to the next succeeding Business Day and,
with respect to payments of principal, interest, fees and penalties shall be
payable at the rate otherwise applicable. The Borrower hereby authorizes the
Lender, with prior notice to the Borrower by the Lender, to deduct from each
Advance to be made hereunder, all amounts due and owing to the Lender or Agent
including interest, penalties, fees or mandatory prepayments.
4.06 Net Payments. All payments made by or on behalf of the
------------
Borrower hereunder will be made without setoff, counter-claim or other defense.
Section 5. Conditions Precedent.
--------------------
The obligation of the Lender to make each Advance to the Borrower
hereunder is subject, at the time of the making of each such Advance (except as
hereinafter indicated), to the satisfaction of the following conditions:
5.01 Execution of Agreement; Note. On or prior to the Initial
----------------------------
Borrowing Date, (i) the Effective Date shall have occurred and (ii) there shall
have been delivered to the Lender the Note executed by the Borrower in the
amount, maturity and as otherwise provided herein.
5.02 No Default; Representations and Warranties. At the time of
------------------------------------------
the making of each Advance and also after giving effect thereto (i) there shall
exist no Default or Event of Default, and (ii) all representations and
warranties contained herein and in the other Credit Documents shall be true and
correct in all material respects with the same effect as though such
representations and warranties had been made on and as of the date of such
Advance.
5.03 Request for Advance. Prior to the making of each Advance,
-------------------
the Agent shall have received a Request for Advance with respect thereto meeting
the requirements of Section 2.04.
22
<PAGE> 28
5.04 Opinion of Counsel. On the Initial Borrowing Date, the Lender
------------------
shall have received from outside counsel for the Borrower (who shall be
reasonably satisfactory to the Lender) an opinion addressed to the Lender and
dated the Initial Borrowing Date covering the matters set forth in Exhibit E and
such other matters incident to the transactions contemplated herein as the
Lender may reasonably request.
5.05 Diligence. On or prior to the Effective Date, the Agent shall
---------
have satisfactorily completed its due diligence review of the Borrower's
operations, business, financial condition and underwriting and origination of
Mortgage Loans.
5.06 Corporate Documents: Proceedings. (a) On the Initial
--------------------------------
Borrowing Date, the Lender shall have received a certificate, dated the Initial
Borrowing Date, signed by the President or any Vice President of the Borrower,
and attested to by the Secretary or any Assistant Secretary of the Borrower,
substantially in the form of Exhibit F-1 and with appropriate insertions,
together with copies of the Certificate of Incorporation and By-Laws of the
Borrower, the resolutions of the Borrower referred to in such certificate and a
good-standing certificate from the Secretary of State of the jurisdiction of
incorporation of the Borrower.
(b) All corporate and legal proceedings and all instruments and
agreements in connection with the transactions contemplated in this Agreement
and the other Credit Documents shall be reasonably satisfactory in form and
substance to the Lender, and the Lender shall have received all information and
copies of all documents and papers, including records of corporate proceedings
and governmental approvals, if any, which the Lender reasonably may have
requested in connection therewith, such documents and papers where appropriate
to be certified by proper corporate or governmental authorities.
5.07 Financial Statements. On or prior to the Initial Borrowing
--------------------
Date, the Lender shall have received (i) the consolidated and consolidating
balance sheets of the Borrower and its Consolidated Subsidiaries for the fiscal
year most recently ended and the related statements of income and retained
earnings and statements of cash flows of the Borrower and its Consolidated
Subsidiaries for such fiscal year, in each case certified by an independent
certified public accountant reasonably acceptable to the Lender and prepared in
accordance with generally accepted accounting principles in the United States
consistently applied, together with any "management letters" detailing any
"material weaknesses in internal controls" (as defined by the Financial
Accounting Standards Board) noted by such accountants for such period and (ii)
copies of any uniform single audit reports in respect of the Borrower required
or requested by FNMA or FHLMC, any audits or financial reports in respect of the
Borrower completed or requested by HUD, GNMA, FNMA, FHLMC or any other
governmental agency or Investor and any Mortgage Bankers' Reporting Forms
prepared by the Borrower, in each case during the year preceding the date
hereof.
5.08 Mandatory Prepayment. After giving effect to the proposed
--------------------
Advance, no prepayment would be required pursuant to Section 4.02.
23
<PAGE> 29
5.09 Warehouse Security Agreement. The Borrower shall have duly
----------------------------
authorized, executed and delivered a Warehouse Security Agreement substantially
in the form of Exhibit I (as modified, supplemented or amended from time to
time, the "Warehouse Security Agreement") covering all of the Borrower's present
and future Collateral, together with:
(a) acknowledgment copies of proper financing statements (Form UCC-1)
duly filed under the UCC of each jurisdiction as may be necessary or,
in the opinion of the Security Agent, desirable to perfect the security
interests purported to be created by the Warehouse Security Agreement;
(b) certified copies of "Requests for Information or Copies" (Form
UCC-11), or equivalent reports, listing the financing statements
referred to in clause (a) above and all other effective financing
statements that name the Borrower as debtor and that are filed in the
jurisdictions referred to in said clause (a), together with copies of
such other financing statements (none of which shall cover the
Collateral, except to the extent evidencing Liens permitted pursuant to
Section 8.01); and
(c) evidence of the completion of all other recordings and filings of,
or with respect to, the Warehouse Security Agreement and the taking of
all other actions as may be necessary or, in the opinion of the
Security Agent, desirable to perfect the security interests purported
to be created by the Warehouse Security Agreement.
5.10 No Adverse Change. Since April 30, 1998, there shall have
-----------------
been no material adverse change in the operations, business, property, assets or
financial condition or prospects of the Borrower.
5.11 Insurance. On or prior to the Initial Borrowing Date, the
---------
Lender shall have received from the Borrower, a copy of a fidelity bond and
policy of insurance containing errors and omissions coverage and such other
insurance as the Lender shall require, each of which policies, where applicable,
shall be in such form, with such companies and in such amounts as are in
accordance with the Agent's requirements and shall name the Lender and the Agent
as loss payees and certificate holders.
5.12 [Intentionally omitted]
5.13 Delivery of the Collateral. Prior to the making of an
--------------------------
Advance, the Security Agent shall have received (a) if such Advance is to be
made inrespect of Mortgage Loans and is not to be a Wet Advance, the Collateral
Documents relating to the Mortgage Loans pledged to secure such Advance; (b) if
such Advance is to be a Wet Advance, a duly executed assignment by the Borrower
to the Security Agent of the related Mortgage fully completed and in recordable
form, a copy of the Purchase Commitment or the Master Commitment, if applicable,
and satisfactory confirmation that the Collateral Documents relating thereto are
to be delivered to an escrow agent, closing agent or title company acceptable to
the Lender with instructions that such Collateral Documents are to be delivered
directly to the Security Agent; or (c) if such Advance is to be made in respect
of Mortgage-backed Securities, copies of the applicable mortgage schedules and
FNMA,
24
<PAGE> 30
FHLMC or GNMA delivery schedules, the confirmed trade ticket and satisfactory
confirmation of the Security Agent's interest in such Mortgage-backed
Securities.
5.14 Fees. Prior to the making of an Advance, the Borrower shall
----
have paid all Fees then due and payable to the Lender and the Agent.
5.15 No Litigation. There shall be no judgment, order, injunction
-------------
or other restraint which shall prohibit or impose, and no litigation pending or
threatened against or affecting the Borrower or any of its Subsidiaries which,
in the opinion of the Lender or the Agent, would prohibit or result in the
imposition of materially adverse conditions upon, the financing contemplated
hereby, or otherwise have a material adverse effect on the business, operations,
property, assets, condition (financial or otherwise) or prospects of the
Borrower or any of its Subsidiaries.
5.16 Liquidity Agreement. The Liquidity Agreement shall be in full
-------------------
force and effect and the Lender shall have obtained sufficient funds to permit
it to make such Advance through the issuance of Commercial Paper as provided in
the Liquidity Agreement or through the borrowing of such funds from the
Liquidity Lenders.
5.17 Acknowledgment. On or prior to the Initial Borrowing Date,
--------------
the Borrower shall have executed and delivered to the Agent an Acknowledgment of
Collateral Agent's Rights substantially in the form of Exhibit H pursuant to
which the Borrower shall have acknowledged that all of the right, title and
interest of the Lender in and to this Agreement, the Note and the Collateral has
been pledged and assigned to, and will be enforceable by, General Electric
Capital Corporation, as Collateral Agent for the secured parties under the
Cooper River Security Agreement.
5.18 Legal or Regulatory Proceedings. On or prior to the Initial
-------------------------------
Borrowing Date, the Borrower shall have delivered to the Agent certificates of
the principal shareholders and senior officers of the Borrower, in substantially
the form of Exhibit F-2, with respect to certain legal and regulatory
proceedings relating to such persons.
5.19 Guaranty Agreement. On or prior to the Initial Borrowing
------------------
Date, the Lender shall have received from Christian A. Larsen and Janina D.
Pawlowski (each a "Guarantor" and collectively the "Guarantors") a duly
executed Guaranty and Surety Agreement substantially in the form of Exhibit J
hereto (as modified, supplemented or amended from time to time, the "Guaranty
Agreement").
5.20 Support Agreement. On or prior to the Initial Borrowing Date,
-----------------
the Lender shall have received from Christian A. Larsen and Janina D. Pawlowski
a duly executed Support Agreement substantially in the form of Exhibit K hereto
(as modified, supplemented or amended from time to time, the "Support
Agreement").
5.21 Intercreditor Agreement. Within sixty (60) days after the
-----------------------
Borrower shall have entered into any agreement with a lender pursuant to which
such lender agrees to make available to the Borrower a revolving warehouse line
of credit, the Borrower shall deliver to the Agent an
25
<PAGE> 31
Intercreditor Agreement substantially in the form of Exhibit L hereto, duly
executed by such lender and by the Borrower (as modified, supplemented or
amended from time to time, the "Intercreditor Agreement").
5.22 Treatment of Existing Liens. Within ten (10) days after the
---------------------------
Initial Borrowing Date, the Borrower shall have delivered to the Agent for
filing a proper amendment to financing statement (Form UCC-2) duly executed by
Silicon Valley Bank, evidencing the amendment of the original financing
statement filed by such lender to make clear that the collateral covered by such
financing statement does not include any of the Collateral.
The acceptance of the benefits of each Advance shall constitute a
representation and warranty by the Borrower to the Lender that all the
conditions specified in Sections 5.02, 5.08, 5.10 and 5.15 exist as of that
time. All of the Note, certificates and other documents and papers referred to
in this Section 5, unless otherwise specified, shall be delivered to the Agent
at the Office for the account of the Lender and shall be reasonably satisfactory
in form and substance to the Agent.
Section 6. Representations. Warranties and Agreements.
------------------------------------------
In order to induce the Lender to enter into this Agreement and to make
the Advances, the Borrower makes the following representations, warranties and
agreements as of the Effective Date, all of which shall survive the execution
and delivery of this Agreement and the Note and the making of the Advances (with
the execution and delivery of this Agreement and the making of each Advance
thereafter being deemed to constitute a representation and warranty that the
matters as specified in this Section 6 are true and correct in all respects on
and as of the date hereof and as of the date of such Advance, unless stated to
relate to a specific earlier date):
6.01 Corporate Status. Each of the Borrower and its Subsidiaries
----------------
(i) is a duly organized and validly existing corporation in good standing under
the laws of the jurisdiction of its incorporation, (ii) has the power and
authority to own its property and assets and to transact the business in which
it is engaged and (iii) is duly qualified as a foreign corporation and in good
standing in each jurisdiction where the ownership, leasing or operation of
property or the conduct of its business requires such qualification, except
where the failure to be so qualified would not have a material adverse effect on
the business and operations of the Borrower.
6.02 Corporate Power and Authority. The Borrower has the corporate
-----------------------------
power to execute, deliver and perform the terms and provisions of each of the
Credit Documents and has taken all necessary corporate action to authorize the
execution, delivery and performance by it of each of such Credit Documents. The
Borrower has duly executed and delivered each of the Credit Documents, and each
of such Credit Documents constitutes its legal, valid and binding obligation
enforceable in accordance with its terms, subject to the effect of applicable
bankruptcy and other similar laws affecting the rights of creditors generally
and the effect of equitable principles whether applied in an action at law or a
suit in equity.
6.03 No Violation. Neither the execution, delivery or performance
------------
by the Borrower of the Credit Documents, nor compliance by it with the terms and
provisions thereof, (i) will
26
<PAGE> 32
contravene any provision of any law, statute, rule or regulation or any order,
writ, injunction or decree of any court or governmental instrumentality, (ii)
will conflict or be inconsistent with or result in any breach of any of the
material terms, covenants, conditions or provisions of, or constitute a material
default under, or result in the creation or imposition of (or the obligation to
create or impose) any Lien other than a Lien permitted pursuant to Section 8.01
upon any of the property or assets of the Borrower pursuant to the terms of any
indenture, mortgage, deed of trust, credit agreement, loan agreement or any
other agreement, contract or instrument to which the Borrower is a party or by
which it or any of its property or assets is bound or to which it may be subject
or (iii) will violate any provision of the certificate of incorporation or
by-laws of the Borrower.
6.04 Governmental Approvals. No order, consent, approval, license,
----------------------
authorization or validation of, or filing, recording or registration with
(except as have been obtained or made prior to the Effective Date), or exemption
by, any governmental or public body or authority, or any subdivision thereof, is
required to authorize, or is required in connection with, (i) the execution,
delivery and performance of any Credit Document or (ii) the legality, validity,
binding effect or enforceability of any such Credit Document.
6.05 Financial Statements; Financial Condition; Undisclosed
------------------------------------------------------
Liabilities; etc. (a)
- ----------------
The consolidated and consolidating balance sheet of the Borrower and its
Consolidated Subsidiaries and the related consolidated and consolidating
statements of income and retained earnings and statements of cash flows of the
Borrower and its Consolidated Subsidiaries furnished to the Lender in accordance
with Section 5.07 hereof present fairly the consolidated and consolidating
financial condition of the Borrower and its Consolidated Subsidiaries at the
dates of such balance sheets and the consolidated and consolidating results of
the operations of the Borrower and its Consolidated Subsidiaries for the fiscal
periods covered by such statements of income and retained earnings and
statements of cash flows. All such financial statements have been prepared in
accordance with generally accepted accounting principles and practices in the
United States consistently applied. Since April 30, 1998 there has not been any
material adverse change in the business, operations, property, assets, condition
(financial or otherwise) or prospects of the Borrower.
(b) Except as fully reflected on the financial statements referred to
in Section 6.05(a), there will be as of the Effective Date no liabilities or
obligations with respect to the Borrower or any of its Subsidiaries of any
nature whatsoever (whether absolute, accrued, contingent or otherwise and
whether or not due) which, either individually or in the aggregate, would be
material to the Borrower or to the Borrower and its Subsidiaries taken as a
whole.
6.06 Litigation. There are no actions, suits or proceedings
----------
pending or threatened (i) with respect to any Credit Document or (ii) that could
materially and adversely affect the business, operations, property, assets,
condition (financial or otherwise) or prospects of the Borrower.
6.07 True and Complete Disclosure. All factual information (taken
----------------------------
as a whole) heretofore or contemporaneously furnished by or on behalf of the
Borrower to the Lender or the Agent (including, without limitation, all
information contained in the Credit Documents) for purposes of or in connection
with this Agreement, the Warehouse Security Agreement or any transaction
contemplated herein or therein is, and all other such factual information (taken
as a
27
<PAGE> 33
whole) hereafter furnished by or on behalf of the Borrower to the Lender or the
Agent will be, true and accurate in all material respects on the date furnished
to the Lender or the Agent and not incomplete by omitting to state any fact
necessary to make such information (taken as a whole) not misleading in any
material respect at such time in light of the circumstances under which such
information was provided.
6.08 Use of Proceeds; Margin Regulations. All proceeds of each
-----------------------------------
Advance will be used by the Borrower for the financing of the Borrower's
mortgage lending business; provided that no part of the proceeds of any Advance
--------
will be used by the Borrower to purchase or carry any Margin Stock or to extend
credit to others for the purpose of purchasing or carrying any Margin Stock.
Neither the making of any Advance nor the use of the proceeds thereof will
violate or be inconsistent with the provisions of Regulation G, T, U or X of the
Board of Governors of the Federal Reserve System.
6.09 Tax Returns and Payments. The Borrower and each of its
------------------------
Subsidiaries has filed all tax returns required to be filed by it and has paid
all income taxes payable by it which have become due pursuant to such tax
returns and all other taxes and assessments payable by it which have become due,
other than those not yet delinquent and except for those contested in good faith
and for which adequate reserves have been established. The Borrower and each of
its Subsidiaries has paid, or has provided adequate reserves (in the good faith
judgment of the management of the Borrower or such Subsidiary, as the case may
be) for the payment of, all federal, state and foreign income taxes applicable
for all prior fiscal years and for the current fiscal year to the date hereof.
6.10 Compliance with ERISA. Each Plan is in substantial compliance
---------------------
with ERISA and the Code; no Reportable Event has occurred with respect to a
Plan; no Plan is insolvent or in reorganization, no Plan has an Unfunded Current
Liability, and no Plan has an accumulated or waived funding deficiency or
permitted decreases in its funding standard account within the meaning of
Section 412 of the Code; neither the Borrower nor any ERISA Affiliate of the
Borrower has incurred any material liability to or on account of a Plan pursuant
to Section 409, 502(i), 502(1), 515, 4062, 4063, 4064, 4069, 4201 or 4204 of
ERISA or Section 4971 or 4975 of the Code or expects to incur any liability
under any of the foregoing sections on account of the termination of,
participation in or contributions to any such Plan; no proceedings have been
instituted to terminate any Plan; no condition exists which presents a material
risk to the Borrower or any ERISA Affiliate of incurring a liability to or on
account of a Plan pursuant to the foregoing provisions of ERISA and the Code; no
Lien imposed under the Code or ERISA on the assets of the Borrower exists or is
likely to arise on account of any Plan; and the Borrower may terminate
contributions to any other employee benefit plans maintained by it without
incurring any material liability to any Person interested therein.
6.11 Capitalization. Set forth on Schedule 6.11 is an accurate
--------------
and complete list of all Persons who own 5% or more of the voting stock of the
Borrower, together with the percentage ownership of each. All outstanding shares
of the Borrower's capital stock have been duly and validly issued, are fully
paid and non-assessable. The Borrower does not have outstanding any securities
convertible into or exchangeable for its capital stock or outstanding any rights
to subscribe for or to purchase, or any options for the purchase of, or any
agreements providing for
28
<PAGE> 34
the issuance (contingent or otherwise) of, or any calls, commitments or claims
of any character relating to, its capital stock except as set forth on Schedule
6.11 hereto.
6.12 Subsidiaries. Set forth on Schedule 6.12 is an accurate and
------------
all Subsidiaries of the Borrower and the percentage ownership by the Borrower in
each such Subsidiary on the Effective Date, together with a brief description of
the business of each such Subsidiary.
6.13 Compliance with Statutes, etc. The Borrower and each of its
-----------------------------
Subsidiaries is in compliance with all applicable statutes, regulations and
orders of, and all applicable restrictions imposed by, all governmental bodies,
domestic or foreign, in respect of the conduct of its business and the ownership
of its property, except such noncompliances as would not (i) in the aggregate,
have a material adverse effect on the business, operations, property, assets,
condition (financial or otherwise) or prospects of the Borrower and (ii) affect
in any respect the validity or enforceability of any Credit Document or the
Security Agent's rights in the Collateral.
6.14 Investment Company Act. Neither the Borrower nor any
----------------------
Subsidiary of the Borrower is an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
6.15 No Burdensome Agreement. Neither of the Borrower nor any
-----------------------
Subsidiary is a party to any indenture, loan or credit agreement or any lease or
other agreement or instrument or subject to any charter or corporate restriction
which by its terms would have a material adverse effect on the business,
condition (financial or otherwise), operations or properties of the Borrower or
such Subsidiary or on the ability of the Borrower to carry out its obligations
under the Note or the other Credit Documents to which it is a party.
6.16 Security Interests. The Warehouse Security Agreement creates,
------------------
as security for the Obligations, valid and enforceable security interests in and
Liens on all of the Collateral in favor of the Security Agent on behalf of the
Lender which are perfected and superior and prior to the rights of all third
Persons and subject to no other Liens (other than Liens permitted pursuant to
Section 8.01). The Borrower has, or will have at the time of pledge thereof,
good and marketable title to all of the Collateral, free and clear of all Liens
except those described in the preceding sentence.
6.17 Registration. The Borrower currently is, and will be at all
------------
times at which any Advance is outstanding hereunder, licensed, registered,
approved, qualified or otherwise authorized in good standing to the extent
required under applicable law, as a mortgage banker, mortgage broker, real
estate broker, servicer of mortgage loans or otherwise in each jurisdiction in
which the conduct of its business requires such licensing, registration,
approval, qualification or other authorization, including, without limitation,
as applicable, as a (i) GNMA approved seller and/or servicer of Mortgage Loans
and issuer of Mortgage-backed Securities guaranteed by GNMA, (ii) FNMA approved
seller and/or servicer of Mortgage Loans, eligible to originate, purchase, hold,
sell and service Mortgage Loans to be sold to FNMA, (iii) FHLMC approved seller
and/or servicer of Mortgage Loans, eligible to originate, purchase, hold, sell
and service Mortgage Loans to be sold to FHLMC, (iv) lender in good standing
under the VA loan guaranty program eligible to originate,
29
<PAGE> 35
purchase, hold, sell and service VA Loans, (v) HUD approved lender, eligible to
originate, purchase, hold, sell and service FHA Loans and (vi) licensed mortgage
banker in each state in which it originates Mortgage Loans. To the best of the
Borrower's knowledge, all appraisers providing services in connection with the
origination of Mortgage Loans by the Borrower have all licenses, registrations,
approvals and qualifications required by all applicable laws or regulations.
6.18 Representations Relating to the Mortgage Loans. (a) At all
----------------------------------------------
times during which a Mortgage Loan is pledged as Collateral for Advances
hereunder, such Mortgage Loan will (i) be an FHA Loan, a VA Loan, a Conforming
Loan, a Jumbo Loan, a State Loan, a Credit A- Loan, a Credit B Loan, a Credit C
Loan or a Credit D Loan; (ii) be an Eligible Mortgage Loan or an Eligible
Nonconforming Mortgage Loan and be free of any default and the Borrower will
have had no notice of any event which has occurred which may, with the passage
of time or the giving of notice, or both, become a default; (iii) comply with
the terms of this Agreement and with the relevant Purchase Commitment and/or
Master Commitment, if any; (iv) be a legal, valid and binding obligation of the
mortgagor and the mortgagee thereunder enforceable in accordance with its terms
and subject to no offset, defense or counterclaim, obligating such mortgagor to
make the payments specified therein, and each FHA Loan and each VA Loan will be
fully eligible for, and the Borrower will have complied with all applicable
requirements of law, rule or regulation in respect of, FHA insurance or VA
guaranty, respectively; (v) if such Mortgage Loan is an Eligible Nonconforming
Mortgage Loan, be subject to a Purchase Commitment, or if such Mortgage Loan is
an Eligible Mortgage Loan, be subject to a Purchase Commitment or Hedging
Contract or, if it is a Mortgage Loan that bears interest at an adjustable rate,
a Master Commitment which Purchase Commitment or Master Commitment is a legal,
valid and binding obligation of the Investor party thereto, is enforceable
against such Investor in accordance with its terms (subject to the effect of
applicable bankruptcy and other similar laws affecting the rights of creditors
generally and the effect of equitable principles whether applied in an action at
law or a suit in equity), and, except as is otherwise notified in writing by the
Borrower to the Lender and Agent, permits the assignment thereof to the Security
Agent; (vi) be owned by the Borrower and be subject to no Lien or claim
whatsoever, either legal or equitable, other than that granted to the Security
Agent for the benefit of the Lender; (vii) be fully disbursed, the final
disbursement to the mortgagor in connection therewith having been made no more
than 30 days prior to the date of pledge if such disbursement was made by the
Borrower (unless such Mortgage Loan is delivered as Collateral securing the
initial Advance made to the Borrower hereunder); (viii) not be modified (except
as to correction of clerical or scrivener errors), amended, superseded or
otherwise subject to any other agreement or contract of any kind with the
relevant mortgagor under such Mortgage Loan except to the extent such amendment,
modification or other agreement or contract has been disclosed in writing to the
Security Agent by the Borrower at the time of the pledge and does not affect the
salability of such Mortgage Loan pursuant to any applicable Master Commitment or
Purchase Commitment; (ix) be a valid first or second lien on the mortgaged
premises subject thereto; (x) if required by the Investor, have a title
insurance policy or binder, in ALTA form satisfactory to the Agent insuring the
priority of the Borrower's first or second lien therein subject only to (1) the
lien of the related first mortgage, if any, (2) the lien of current real
property taxes and assessments, (3) covenants, conditions and restrictions,
rights of way, easements and other matters of public record as of the date of
recording of the related mortgage or deed of trust, such exceptions appearing of
record being acceptable to mortgage lending institutions generally in the area
wherein the property subject
30
<PAGE> 36
thereto is located and (4) 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 related mortgage or deed of trust and (xi) not
have been selected for pledge hereunder utilizing procedures, other than those
necessary to comply with the representations and warranties set forth herein,
which are adverse to the interests of the Lender.
(b) At the time of the pledge of each Mortgage Loan, the Borrower will
have received with respect to each such Mortgage Loan (i) a hazard insurance
policy with a standard mortgagee clause in a form satisfactory to the Agent and
with extended coverage in an amount which is at least equal to the maximum
insurable value of the improvements securing such Mortgage Loan from time to
time or the principal balance owing on such Mortgage Loan, whichever is less and
(ii) a policy, or other satisfactory evidence, of flood insurance or
satisfactory documentation to demonstrate that the mortgaged premises are not
located in a special flood hazard area. Such documentation will be retained in
the Borrower's files relating to such Mortgage Loan.
(c) With respect to each Mortgage Loan pledged to the Security Agent,
the Borrower has fully complied with, and will fully comply with, or the
original mortgagee thereof has fully complied with and will fully comply with,
(A) all applicable state and federal laws and regulations, including but not
limited to (i) the Real Estate Settlement Procedures Act of 1974, (ii) the Equal
Credit Opportunity Act, (iii) the Federal Truth in Lending Act and Regulation Z
of the Board of Governors of the Federal Reserve System, (iv) any laws requiring
persons providing appraisals of property values to be properly licensed, and (v)
all other usury, disclosure, consumer credit protection or truth-in-lending laws
which may apply, and in each such case with all regulations promulgated in
connection therewith as the same may be from time to time amended and will
maintain sufficient documentary evidence in its file to substantiate such
compliance (including, without limitation, delivery of all necessary disclosure
statements) and (B) all of the terms and provisions of such Mortgage Loan and of
any contractual escrow arrangements applicable thereto.
6.19 Representations Relating to the Mortgage-backed Securities.
----------------------------------------------------------
At the time a Mortgage-backed Security is pledged as Collateral, such
Mortgage-backed Security will be (i) an Eligible Mortgage Loan free of any
default, (ii) subject to a Purchase Commitment which is a legal, valid and
binding obligation of the Investor party thereto, is enforceable against such
Investor in accordance with its terms, permits the assignment thereof to the
Security Agent and the Collateral Agent and may be enforced against such
Investor by the Security Agent or the Collateral Agent, (iii) comply with all of
the terms of such Purchase Commitment, (iv) a legal, valid and binding
obligation of the issuer thereof enforceable in accordance with its terms, and
(v) subject to no Lien or claim whatsoever, either legal or equitable, other
than that granted to the Security Agent for the benefit of the Lender and the
interest of the Investor under the related Purchase Commitment.
6.20 Insurance. The Borrower has blanket fidelity bond coverage
---------
and errors and omissions insurance coverage in such form, with such companies
and in such amounts as are in accordance with standards and requirements
satisfactory to the applicable Investor.
31
<PAGE> 37
6.21 Title to Property. The Borrower has good and marketable title
-----------------
to all of its property, the value of which is included in the financial
statements delivered pursuant hereto, subject to no Liens, encumbrances or
claims other than those disclosed on such financial statements.
6.22 No Recourse Sales. No commitment or other contractual
-----------------
arrangement pursuant to which the Borrower has sold or currently has a right to
sell Mortgage Loans to a third party provides for any recourse to the Borrower
except in the event of a breach of representations or warranties made in
connection with such sale.
6.23 Fictitious Names. Neither the Borrower nor any Subsidiary
----------------
of the Borrower operates or does business under any assumed, trade or fictitious
name.
Section 7. Affirmative Covenants.
---------------------
The Borrower covenants and agrees that as of the Effective Date, and
thereafter for so long as this Agreement is in effect and until the Commitment
has terminated, the Note is no longer outstanding and the Advances, together
with interest, Fees and all other Obligations, are paid in full:
7.01 Information Covenants. The Borrower will furnish to the Agent
---------------------
(unless otherwise indicated):
(a) Monthly Financial Statements. Within 30 days after the close
----------------------------
of each monthly accounting period of the Borrower, the consolidated
statements of financial condition of the Borrower and its Consolidated
Subsidiaries as at the end of such period, and the related consolidated
statements of income and retained earnings and statements of cash flows
for such period and for the elapsed portion of the fiscal year ended
with the last day of such period, setting forth comparative figures for
the related periods in the prior fiscal year, all of which shall be in
form and substance satisfactory to the Agent and certified as to
fairness of presentation by the Chief Financial Officer of the
Borrower, subject to normal year-end audit adjustments and accompanied
by a certificate from such financial officer to the effect that no
Default or Event of Default has occurred and is continuing, and a
statement as to the beneficial ownership of all of the issued and
outstanding capital stock of the Borrower as at the end of such period,
certified as accurate by such financial officer.
(b) Annual Financial Statements. Within 90 days after the close
---------------------------
of each fiscal year of the Borrower, the consolidated and consolidating
statements of financial conditions of the Borrower and its Consolidated
Subsidiaries as at the end of such fiscal year, and the related
consolidated and consolidating statements of income and retained
earnings and statements of cash flows for such fiscal year, in form and
substance satisfactory to the Agent and setting forth comparative
figures for the preceding fiscal year and certified, in the case of the
consolidated financial statements, by independent certified public
accountants reasonably acceptable to the Agent, together with a report
of such accounting firm stating that its regular audit of the financial
statements of the Borrower was conducted in accordance with generally
accepted auditing standards.
32
<PAGE> 38
(c) Management Letters. Promptly, and in no event later than
------------------
five days, after receipt by the Borrower thereof, a copy of any
"management letter" received by the Borrower from its certified public
accountants detailing any "material weaknesses in internal control"
noted by such accountants (as defined by the Financial Accounting
Standards Board).
(d) Officer's Certificates. At the time of the delivery of the
----------------------
financial statements provided for in Section 7.01(a) and (b), a
certificate of the Chief Financial Officer of the Borrower to the
effect that, to the best of his knowledge, no Default or Event of
Default has occurred and is continuing or, if any Default or Event of
Default has occurred and is continuing, specifying the nature and
extent thereof and any actions taken or proposed to be taken to cure
any such Default or Event of Default, which certificate shall set forth
the calculations required to establish whether the Borrower was in
compliance with the provisions of Sections 8.08 and 8.09, at the end of
such month or fiscal year, as the case may be.
(e) Notices. Promptly (and in no event later than five days
-------
following the occurrence thereof), notice of (i) the occurrence of any
event which constitutes a Default or Event of Default, detailing the
nature of such Default or Event of Default and any actions taken or
proposed to be taken to cure such Default or Event of Default, (ii) the
commencement of any action, suit or proceeding against the Borrower or
any of its Subsidiaries before any court, arbitrator or governmental
department, commission, board, bureau, agency or instrumentality which
(A) could result in liability or loss of $250,000 or more, in excess of
any applicable insurance coverage to the Borrower or such Subsidiary,
as the case may be, or (B) would otherwise materially adversely affect
the management or the condition or operations (financial or otherwise)
of the Borrower or any of its Subsidiaries, (iii) any change in any of
the President, Chief Executive Officer, Chief Financial Officer or
Director of Mortgage Banking Operations of the Borrower, or (iv) any
loss or any threatened loss known to the Borrower of any authorization,
qualification, license or permit issued by any governmental or
regulatory authority to the Borrower or any of its Subsidiaries the
loss of which could have a material adverse effect upon the financial
condition or business of the Borrower or any of its Subsidiaries.
(f) Reports Relating to Collateral. In respect of the Collateral,
------------------------------
bi-weekly or more frequently as Agent may, from time to time, request a
position valuation report from the Borrower in a form acceptable to the
Agent (the "Position Valuation Report").
(g) Monthly Servicing Reports. Within 30 days after the close of
-------------------------
each calendar month in which the Borrower owns a Servicing Portfolio, a
consolidated report of the Borrower providing a summary, for all
Mortgage Loans the servicing rights to which are owned by the Borrower,
regardless of whether such Mortgage Loans are pledged to the Lender, of
(i) the entities that own such Mortgage Loans, (ii) the original terms
of such Mortgage Loans and whether such Mortgage Loans bear interest at
a fixed rate or an adjustable rate, (iii) the weighted average interest
rate and the weighted average net servicing fee with respect to such
Mortgage Loans, (iv) whether any such Mortgage Loans were sold by the
Borrower with recourse and the nature of such recourse, (v) which of
such Mortgage Loans (A) are current and in good standing, (B) are more
than 30, 60 or 90 days past due,
33
<PAGE> 39
respectively, (C) are the subject of pending litigation, bankruptcy or
foreclosure proceedings, and (D) have been converted (through
foreclosure or other proceedings in lieu thereof) by the Borrower into
real estate owned by the Borrower, and (vi) any reserves established by
the Borrower for losses in respect of delinquent Mortgage Loans or real
estate owned by the Borrower.
(h) Other Reports and Filings. Promptly, and in any event within
-------------------------
10 days following the filing thereof, copies of all financial
information, proxy materials and other information and reports, if any,
which the Borrower shall file with the Securities and Exchange
Commission or any governmental agencies substituted therefor.
(i) Servicing Transactions. (i) Promptly, and in any event within
----------------------
10 days following the execution thereof, copies of any agreements
executed by the Borrower which provide for the sale by the Borrower to
an Investor of the rights to service any Mortgage Loan, which sale is
separate from the sale of the related Mortgage Loan, pledged to the
Security Agent pursuant to the terms of this Agreement and the
Warehouse Security Agreement and (ii) written notice not less than 10
days prior to any purchase or sale of mortgage servicing rights or any
other transaction which would result in greater than a 10 percent
increase or decrease in the aggregate unpaid principal balance of all
Mortgage Loans included in the Servicing Portfolio of the Borrower.
(j) Leases. Written notice not less than 10 days prior to any
------
agreement to rent or lease any real or personal property which would
result in aggregate payments thereunder by the Borrower (including,
without limitation, any property taxes paid as additional rent or lease
payments) in excess of $250,000.
(k) Capital Expenditures. Written notice not less than 10 days
-------------------
prior to any agreement by the Borrower pursuant to which the Borrower
intends to make any expenditure for fixed or capital assets (including,
without limitation, expenditures for maintenance and repairs which
should be capitalized in accordance with generally accepted accounting
principles and including capitalized lease obligations) which will
exceed $250,000.
(l) [Intentionally omitted]
(m) Commitment Default. Notice within 2 Business Days of any
------------------
default under, or of the termination, invalidation or cancellation of,
any Purchase Commitment or Master Commitment relating to any Mortgage
Loan or Mortgage-backed Security constituting Collateral.
(n) Collateral Servicing Report. Within five (5) Business Days
---------------------------
after the end of each calendar month, a report detailing the identities
of the entities other than the Borrower, if any, servicing any Mortgage
Loans pledged as Collateral hereunder or which secure a Mortgage-backed
Security pledged as Collateral hereunder.
34
<PAGE> 40
(o) Other Information. Promptly, and in any event within five
-----------------
(5) Business Days after the Borrower's receipt or filing thereof, (i)
copies of any notices or information given to or received from the
holders of any Indebtedness of the Borrower relating to any actual or
alleged default, demand for payment or acceleration of payment, or from
the PBGC or the United States Department of Labor in connection with
any matter arising with respect to ERISA, (ii) copies of all audits
completed by HUD, GNMA, FNMA, FHLMC or any other governmental agency or
Investor with respect to the Borrower, (iii) all Mortgage Bankers'
Financial Reporting Form Statement of Condition (designated as FHLMC
Form 1055 and FNMA Form 1002, respectively, and any successor thereto
or replacement thereof) (the "Mortgage Bankers' Reporting Forms") filed
by the Borrower with FHLMC or FNMA, (iv) copies of any uniform single
audit reports required or requested by FNMA or FHLMC, and (v) such
other information or documents (financial or otherwise) as the Agent or
the Lender may reasonably request.
(p) Credit Package Documents. Promptly upon the written request
------------------------
by the Agent, to the extent available, each of the documents listed in
Schedule 7.01(p) (collectively, the "Credit Package Documents"), as
applicable.
(q) Guarantors' Financial Information. (i) Within 90 days after
---------------------------------
the close of each calendar year, an updated personal financial
statement of each Guarantor and (ii) copies of each Guarantor's federal
income tax returns within 30 days after the filing date of each such
return.
7.02 Books, Records and Inspections. The Borrower will, and will
------------------------------
cause each of its Subsidiaries to, keep proper books of record and account in
which full, true and correct entries in conformity with generally accepted
accounting principles in the United States and all requirements of law shall be
made of all dealings and transactions in relation to its business and
activities. The Borrower will, and will cause each of its Subsidiaries to,
permit officers and designated representatives of the Agent or the Lender to
visit and inspect any of the properties of the Borrower or such Subsidiary, and
to examine the books of record and account of the Borrower or such Subsidiary
and discuss the affairs, finances and accounts of the Borrower or such
Subsidiary with, and be advised as to the same by, its and their officers,
employees and independent accountants, all at such reasonable times and
intervals and to such extent as the Agent or the Lender may request. Any such
inspection and/or examination may include an audit by the Agent of the servicing
of the Collateral and the Borrower's Servicing Portfolio and such procedures as
the Agent deems appropriate to confirm the reporting of Mortgage Loan balances.
7.03 Maintenance of Property, Insurance. The Borrower will, and
----------------------------------
will cause each of its Subsidiaries to, (i) keep all property necessary for the
operation of its business in good working order and condition, (ii) except as
otherwise provided in clause (iii) below, maintain with financially sound and
reputable insurance companies insurance in at least such amounts and against at
least such risks as are customarily insured against by companies in the same or
similar business, (iii) maintain fidelity bond coverage and errors and omissions
insurance coverage in accordance with standards and requirements reasonably
satisfactory to the applicable Investor and the Agent and (iv) furnish to the
Agent or the Lender, upon written request, full information as to
35
<PAGE> 41
the insurance carried. The provisions of this Section 7.03 shall be deemed to be
supplemental to, but not duplicative of, the provisions of any of the security
documents that require the maintenance of insurance.
7.04 Corporate Franchises. The Borrower will, and will cause each
--------------------
of its Subsidiaries to, do or cause to be done, all things necessary to preserve
and keep in full force and effect its existence and its material rights,
franchises, qualifications, licenses, permits and patents; provided, however,
--------- -------
that nothing in this Section 7.04 shall prevent the withdrawal by the Borrower
or any of its Subsidiaries of its qualification as a foreign corporation in any
jurisdiction where such withdrawal could not have a material adverse effect on
the business, operations, property, assets, condition (financial or otherwise)
or prospects of the Borrower or such Subsidiary.
7.05 Compliance with Statutes, etc. The Borrower will, and will
------------------------------
cause each of its Subsidiaries and will use commercially reasonable efforts to
cause each appraiser, correspondent, broker or other service provider that
participates with the Borrower in the origination or servicing of Mortgage Loans
to, comply with all applicable statutes, regulations and orders of, and all
applicable restrictions imposed by, all governmental bodies, domestic or
foreign, in respect of the conduct of its business and the ownership of its
property (including applicable statutes, regulations, orders and restrictions
relating to (1) licensing or registration (as described in Section 6.17 hereof)
and (2) environmental standards and controls), except such noncompliances as
could not (i) adversely affect in any manner the legality, validity or
enforceability of any Mortgage Loan, Mortgage-backed Security, Purchase
Commitment or Hedging Contract or (ii) in the aggregate, have a material adverse
effect on the business, operations, property, assets, condition (financial or
otherwise) or prospects of the Borrower or the Borrower and its Subsidiaries
taken as a whole.
7.06 ERISA. As soon as possible and, in any event, within 10 days
-----
after the Borrower or any of its Subsidiaries or ERISA Affiliates knows or has
reason to know any of the following, the Borrower will deliver to the Agent a
certificate of the Chief Financial Officer of the Borrower setting forth details
as to such occurrence and such action, if any, which the Borrower, such
Subsidiary or such ERISA Affiliate is required or proposes to take, together
with any notices required or proposed to be given to or filed with or by the
Borrower, such Subsidiary, such ERISA Affiliate, the PBGC, a Plan participant or
the Plan administrator with respect thereto; that a Reportable Event has
occurred; that an accumulated funding deficiency has been incurred or an
application may be or has been made to the Secretary of the Treasury for a
waiver or modification of the minimum funding standard (including any required
installment payments) or an extension of any amortization period under Section
412 of the Code with respect to a Plan; that a Plan has been or may be
terminated, reorganized, partitioned or declared insolvent under Title IV of
ERISA; that a Plan has an Unfunded Current Liability giving rise to a Lien under
ERISA; that proceedings may be or have been instituted to terminate a Plan; that
a proceeding has been instituted pursuant to Section 515 of ERISA to collect a
delinquent contribution to a Plan; or that the Borrower, any of its Subsidiaries
or ERISA Affiliates will or may incur any liability (including any contingent or
secondary liability) to or on account of the termination of or withdrawal from a
Plan under Section 4062, 4063, 4064, 4069, 4201 or 4204 of ERISA or with respect
to a Plan under Section 4971 or 4975 of the Code or Section 409, 502(i) or
502(1) of ERISA. The Borrower will deliver to the Agent a complete copy of the
annual report (Form 5500) of each Plan required to be
36
<PAGE> 42
filed with the Internal Revenue Service. In addition to any certificates or
notices delivered to the Agent pursuant to the first sentence hereof, copies of
annual reports and any other notices received by the Borrower or any of its
Subsidiaries required to be delivered to the Agent hereunder shall be delivered
to the Agent no later than 10 days after the later of the date such report or
notice has been filed with the Internal Revenue Service or the PBGC, given to
Plan participants or received by the Borrower or such Subsidiary.
7.07 Performance of Obligations. The Borrower will, and will
--------------------------
cause each of its Subsidiaries to, perform all of its obligations under the
terms of each mortgage, indenture, security agreement and other debt instrument
by which it is bound, except such non-performances as could not in the
aggregate, have a material adverse effect on the business, operations, property,
assets, condition (financial or otherwise) or prospects of the Borrower or of
the Borrower and its Subsidiaries taken as a whole.
7.08 Mortgage Loans. (a) The Borrower will not modify or waive
--------------
any term of any pledged Mortgage Loan or release any security or obligor, if as
a result thereof such Mortgage Loan would become, nor cause, through any
activity or inactivity, a Mortgage Loan to become, ineligible for FHA insurance
or VA guaranty, if applicable, or for purchase in accordance with the relevant
Master Commitment or Purchase Commitment. The Borrower will notify the Agent of
(i) any payment default in respect of any pledged Collateral which has continued
for 30 days, 60 days or 90 days, respectively, (ii) the occurrence of an
Insolvency Event of which the Borrower has knowledge in respect of an obligor on
any Mortgage Loan pledged as Collateral, (iii) the commencement of foreclosure
or similar proceedings in respect of the premises which secure any Mortgage Loan
pledged as Collateral and (iv) any other material default in any other term of
any pledged Collateral, such notice to be delivered not later than three (3)
Business Days following the occurrence thereof in the case of an event specified
in clauses (i) or (iii) and promptly upon the Borrower's receiving notice or
otherwise becoming aware thereof in the case of an event specified in clauses
(ii) or (iv).
(b) All FHA Loans, and VA Loans will comply in all respects with all
applicable requirements for purchase under the applicable GNMA or FNMA standard
form of selling contract for FHA insured and VA guaranteed loans and any
supplement thereto then in effect. All Conforming Mortgage Loans will comply in
all respects with all applicable requirements for purchase under the applicable
FNMA or FHLMC selling contract for Mortgage Loans of such type and any
supplement thereto then in effect. All Jumbo Loans will comply in all respects
with all applicable requirements for purchase under any Purchase Commitment
relating thereto. All State Loans will comply in all respects with all
applicable requirements for purchase by the state agency or instrumentality that
issued a Purchase Commitment in respect thereof. All Eligible Nonconforming
Mortgage Loans will comply in all respects with all applicable requirements for
purchase under any Purchase Commitment relating thereto. All Mortgage Loans will
be serviced and administered in accordance with all requirements of any Investor
that has issued a Purchase Commitment or a Master Commitment applicable thereto.
7.09 Payment of Taxes. The Borrower will pay and discharge all
----------------
taxes, assessments and governmental charges or liens imposed upon the Borrower
or upon the Borrower's income or
37
<PAGE> 43
profits, or upon any properties belonging to the Borrower, prior to the date on
which any penalties attach thereto, and all lawful claims which, if unpaid,
might become a Lien upon any such property.
7.10 Corporate Separateness. The Borrower will, and will cause
----------------------
each of its Subsidiaries to, take such actions as are necessary to keep its
operations and the operations of each of its Subsidiaries separate and apart
from each of the other's, including, without limitation, insuring that all
customary formalities regarding the corporate existence of the Borrower and each
such Subsidiary, including holding regular meetings and maintenance of its
current minute books, are followed.
7.11 Collateral. The Borrower will (a) warrant and defend the
----------
right, title and interest of the Lender and the Security Agent in and to the
Collateral against the claims and demands of all persons whomsoever; (b)
service, or cause to be serviced, all Mortgage Loans in accordance with the
requirements of the issuers of Master Commitments and Purchase Commitments
covering the same and all applicable FHA and VA requirements (including without
limitation taking all actions necessary to enforce the obligations of the
obligors under such Mortgage Loans) and service, or cause to be serviced, all
Mortgage Loans backing Mortgage-backed Securities in accordance with applicable
governmental requirements and the requirements of issuers of Purchase
Commitments covering the same; (c) hold all escrow funds collected in respect of
Mortgage Loans and mortgage loans backing Mortgage-backed Securities in trust,
without commingling the same with non-custodial funds, and apply the same for
the purposes for which such funds were collected; (d) comply in all respects
with the terms and conditions of all Master Commitments and Purchase
Commitments, and all extensions, renewals and modifications or substitutions
thereof or thereto, and deliver or cause to be delivered to the applicable
Investor the Mortgage Loans and Mortgage-backed Securities to be sold under each
Purchase Commitment not later than three (3) Business Days prior to the
expiration thereof; and (e) maintain, and, upon request, shall make available to
the Lender, the Agent or the Security Agent the originals, or copies in any case
where the original has been delivered to the Security Agent or to an Investor,
of its Mortgage Notes, Mortgages, Purchase Commitments, Master Commitments,
Hedging Contracts and all related Mortgage Loan documents and instruments, and
all files, surveys, certificates, correspondence, appraisals, computer programs,
tapes, discs, cards, accounting records and other information and data relating
to the Collateral.
7.12 Portfolio Hedging Arrangements. The Borrower will enter into
------------------------------
and maintain from time to time Hedging Contracts with respect to Mortgage Loans
held by it and commitments made by it to prospective Mortgage Loan obligors to
extend Mortgage Loans at specified rates of interest.
7.13 Borrowing Base Valuation Reports. The Agent will prepare and
--------------------------------
deliver to the Borrower weekly, or more frequently as the Agent may from time to
time determine, a report with respect to all Eligible Mortgage Loans, Eligible
Nonconforming Mortgage Loans and Liquid Assets pledged to the Security Agent as
of such date (a "Borrowing Base Valuation Report"). Unless the Borrower shall,
within 48 hours after receiving any such Borrowing Base Valuation Report, notify
the Agent that the Borrower disagrees with the information contained therein,
the Borrower shall be deemed to have certified to the Agent that, as of the date
of the Borrowing Base
38
<PAGE> 44
Valuation Report: (a) the calculations contained therein are accurate and have
been prepared in accordance with the terms and conditions of the Warehouse
Credit Agreement; and (b) no prepayment is required under the terms of Section
4.02 of the Warehouse Credit Agreement.
Section 8. Negative Covenants.
------------------
The Borrower covenants and agrees that as of the Effective Date, and
thereafter for so long as this Agreement is in effect and until the Commitment
has terminated, the Note is no longer outstanding and the Advances, together
with interest, Fees and all other Obligations, are paid in full, without the
prior written consent of the Lender:
8.01 Liens. The Borrower will not, and will not permit any of its
-----
Subsidiaries to, create, incur, assume or suffer to exist any Lien upon or with
respect to (i) any Collateral, or (ii) any right of the Borrower or any of its
Subsidiaries to service Mortgage Loans; provided that the provisions of this
--------
Section 8.01 shall not prevent the creation, incurrence, assumption or existence
of:
(a) Liens for taxes not yet due, or Liens for taxes being contested in
good faith and by appropriate proceedings for which adequate reserves
have been established;
(b) Liens created pursuant to the Warehouse Security Agreement; and
(c) Liens in favor of FNMA, GNMA or FHLMC on the right of the Borrower
to service Mortgage Loans sold to such agencies.
8.03 Dividends. (a) Upon the occurrence and during the continuance
---------
of any Default or Event of Default (determined after giving effect to any
proposed action of the Borrower), the Borrower will not, and will not permit any
of its Subsidiaries to, declare or pay any dividends, or return any capital, to
its stockholders or authorize or make any other distribution, payment or
delivery of property or cash to its stockholders as such, or redeem, retire,
purchase or otherwise acquire, directly or indirectly, for a consideration, any
shares of any class of its capital stock now or hereafter outstanding (or any
options or warrants issued by the Borrower or by such Subsidiary with respect to
its capital stock), or set aside any funds for any of the foregoing purposes, or
permit
39
<PAGE> 45
any of its Subsidiaries to purchase or otherwise acquire for a consideration any
shares of any class of the capital stock of the Borrower or such Subsidiary now
or hereafter outstanding (or any options or warrants issued by the Borrower or
such Subsidiary with respect to its capital stock), except that any Subsidiary
may pay dividends to the Borrower or to any Wholly-Owned Subsidiary of the
Borrower.
(b) The Borrower will not at any time declare or pay any dividends, or
return any capital, to its stockholders or authorize or make any other
distribution, payment or delivery of property or cash to its stockholders as
such, or redeem, retire, purchase or otherwise acquire, directly or indirectly,
for a consideration, any shares of any class of its capital stock now or
hereafter outstanding (or any options or warrants issued by the Borrower with
respect to its capital stock), or set aside any funds for any of the foregoing
purposes, or permit any of its Subsidiaries to purchase or otherwise acquire for
a consideration any shares of any class of the capital stock of the Borrower now
or hereafter outstanding (or any options or warrants issued by the Borrower with
respect to its capital stock), or pay any special distributions or bonuses not
in the ordinary course of business to any officer or employee that owns capital
stock of the Borrower, if after giving effect thereto the Adjusted Tangible Net
Worth of the Borrower would be less than the amount required by Section 8.09
hereof.
8.04 [Intentionally omitted]
8.05 Advances, Investments and Loans. The Borrower will not, and
-------------------------------
will not permit any of its Subsidiaries to, lend money or credit or make
advances to any Person, or purchase or acquire any stock, obligations or
securities of, or any other interest in, or make any capital contribution to,
any other Person, except for:
(a) Mortgage Loans or other loans extended in the ordinary
course of the Borrower's or any Subsidiary's mortgage banking
business; or
(b) cash, Cash Equivalents and Mortgage-backed Securities.
8.06 Transactions with Affiliates. The Borrower will not, and
----------------------------
will not permit any of its Subsidiaries to, enter into any transaction or series
of related transactions, whether or not in the ordinary course of business, with
any Affiliate of the Borrower, other than on terms and conditions substantially
as favorable to the Borrower or such Subsidiary as would be obtainable by the
Borrower or such Subsidiary at the time in a comparable arm's-length transaction
with a Person other than an Affiliate; provided, however, that the Borrower
-------- --------
will not, and will not permit any of its Subsidiaries to:
(a) use, furnish, or rely upon an insurance policy (including but not
limited to title insurance and hazard insurance) underwritten by or
issued by any Affiliate of the Borrower;
(b) use, furnish, or rely upon an appraisal issued by any Affiliate or
by any Person controlled by any Affiliate of the Borrower except with
respect to FHA Loans, VA Loans or State Loans; or
40
<PAGE> 46
(c) pledge any Mortgage Loan to the Lender under which the Borrower or
any Affiliate thereof is a mortgagor or guarantor for such Mortgage
Loan.
8.07 Capital Expenditures. The Borrower will not, and will not
--------------------
permit any of its Subsidiaries to, make any expenditure for fixed or capital
assets (including, without limitation, expenditures for maintenance and repairs
which should be capitalized in accordance with generally accepted accounting
principles and including capitalized lease obligations) other than such
expenditures made in the ordinary course of such Person's business in an amount
not in excess of $250,000.
8.08 Maximum Adjusted Leverage Ratio. The Borrower will not permit
-------------------------------
its Adjusted Leverage Ratio at any time during any fiscal year to be greater
than 15 to 1.
8.09 Minimum Adjusted Tangible Net Worth. The Borrower will not
-----------------------------------
permit its Adjusted Tangible Net Worth at any time during any fiscal year to be
less than $1,500,000.
8.10 [Intentionally omitted]
8.11 Modifications of Certificate of Incorporation, By-Laws,
--------------------------------------------------------
Certain Other Agreements and Collateral. The Borrower will not, without prior
- ---------------------------------------
written notice to the Lender, amend, modify or change its certificate of
incorporation (including, without limitation, by the filing or modification of
any certificate of designation) or by-laws, or any agreement entered into by it,
with respect to its capital stock, or enter into any new agreement with respect
to its capital stock. The Borrower will not, without the prior written consent
of the Lender, amend, modify or waive any of the terms of, or settle or
compromise any claim with respect to, any Collateral or any Collateral Document.
8.12 Limitation on Restrictions on Subsidiary Dividends and Other
------------------------------------------------------------
The Distributions.
- -----------------
Borrower will not, and will not permit any of its Subsidiaries to, directly or
indirectly, create or otherwise cause or suffer to exist or become effective any
encumbrance or restriction on the ability of any such Subsidiary to (a) pay
dividends or make any other distributions on its capital stock or any other
interest or participation in its profits owned by the Borrower or any Subsidiary
of the Borrower, or pay any Indebtedness owed to the Borrower or any Subsidiary
of the Borrower, (b) make loans or advances to the Borrower or (c) transfer any
of its properties or assets to the Borrower, except for such encumbrances or
restrictions existing under or by reasons of (i) applicable law, (ii) this
Agreement and (iii) customary provisions restricting subletting or assignment of
any lease governing a leasehold interest of the Borrower or any Subsidiary of
the Borrower.
8.13 Limitation on Issuances of Capital Stock by Subsidiaries.
--------------------------------------------------------
The Borrower will not permit any of its Subsidiaries to issue any capital stock
(including by way of sales of treasury stock) or any options or warrants to
purchase, or securities convertible into, capital stock, except for (i)
transfers and replacements of then outstanding shares of capital stock and (ii)
any issuance of shares after which the Borrower continues to own or control,
directly or indirectly, in the aggregate fifty-one percent (51%) or more of the
voting capital stock of such Subsidiary.
41
<PAGE> 47
8.14 Business. The Borrower will not, and will not permit any of
--------
its Subsidiaries to, without the prior written consent of the Lender (which
consent shall not be unreasonably withheld), engage (directly or indirectly) in
any business other than the business in which the Borrower or such Subsidiary,
respectively, is engaged on the Effective Date.
8.15 Portfolio Aging. The Borrower will not at any time permit the
---------------
aggregate principal amount of the Eligible Mortgage Loans then pledged as
Collateral that have an Origination Date that is more than 60 days prior to such
time, to exceed 0% of the aggregate principal amount of all Eligible Mortgage
Loans that are pledged as Collateral at such time and will not at any time
permit the aggregate principal amount of the Eligible Nonconforming Mortgage
Loans then pledged as Collateral that have an Origination Date that is more than
60 days prior to such time to exceed 0% of the aggregate principal amount of all
Eligible Nonconforming Mortgage Loans that are pledged as Collateral at such
time.
8.16 Minimum Current Ratio. The Borrower will not permit its
---------------------
Current Ratio to be less than 1.0 to 1.0 at any time during any fiscal year.
Section 9. Events of Default.
-----------------
Upon the occurrence of any of the following specified events (each an
"Event of Default"):
9.01 Payments. The Borrower shall (i) default in the payment when
--------
due of any principal of any Advance or (ii) default, and such default shall
continue unremedied for 3 or more days, in the payment when due of any interest
on any Advance or any Fees or any other amount owing hereunder or under any
Credit Document; or
9.02 Representations, etc. Any representation, warranty or
--------------------
statement made or deemed made by the Borrower herein or in any other Credit
Document or in any certificate delivered pursuant hereto or thereto or to the
Agent as part of the Agent's due diligence review of the Borrower shall prove to
be untrue in any material respect on the date as of which made or deemed made;
or
9.03 Covenants. The Borrower shall (i) default in the due
---------
performance or observance by it of any term, covenant or agreement contained in
Sections 7.01(e), 7.04, 7.05, 7.06, 7.07, 7.08 or 8 or (ii) default in the due
performance or observance by it of any term, covenant or agreement contained in
this Agreement (other than those referred to in Sections 9.01 and 9.02 and
clause (i) of this Section 9.03) and such default shall continue unremedied for
a period of 15 days; or
9.04 Default Under Other Agreements. (a) The Borrower or any of
------------------------------
its Subsidiaries shall (i) default in any payment of any Indebtedness pursuant
to which the Borrower is obligated in any manner in an amount in excess of
$250,000 (other than the Obligations) beyond the period of grace (not to exceed
30 days), if any, provided in the instrument or agreement under which such
Indebtedness was created or (ii) default in the observance or performance of any
agreement or condition relating to any such Indebtedness (other than the
Obligations) or contained in any instrument or agreement evidencing, securing or
relating thereto, or any other event shall occur or condition exist, the effect
of which default or other event or condition is to cause, or to permit the
42
<PAGE> 48
holder or holders of such Indebtedness (or a trustee or agent on behalf of such
holder or holders) to cause (determined without regard to whether any notice is
required), any such Indebtedness to become due prior to its stated maturity; or
(b) any Indebtedness (other than the Obligations) of the Borrower or any
Indebtedness of its Subsidiaries pursuant to which the Borrower is obligated in
any manner shall be declared to be due and payable, or required to be prepaid
other than by a regularly scheduled required prepayment or as a mandatory
prepayment (unless such required prepayment or mandatory prepayment results from
a default thereunder or an event of the type that constitutes an Event of
Default), prior to the stated maturity thereof; or
9.05 Default Under Agreements With Agent. The Borrower, or any of
-----------------------------------
its Subsidiaries, shall default under any contract, agreement or arrangement
between the Borrower, or such Subsidiary, and the Agent or any Affiliate of the
Agent, or the Borrower or such Subsidiary shall terminate, for any reason
whatsover (other than the failure of any such Mortgage Loan to be funded to the
obligor thereunder), any commitment of the Agent or any Affiliate of the Agent
to purchase Mortgage Loans originated or owned by the Borrower or such
Subsidiary; or
9.06 Bankruptcy, etc. An Insolvency Event shall occur with respect
---------------
to the Borrower or any of its Subsidiaries or any Guarantor or any Person who
has executed the Support Agreement; or
9.07 ERISA. Any Plan shall fail to satisfy the minimum funding
-----
standard required for any plan year or part thereof or a waiver of such standard
or extension of any amortization period is sought or granted under Section 412
of the Code, any Plan is, shall have been or is likely to be terminated or the
subject of termination proceeding under ERISA, any Plan shall have an Unfunded
Current Liability, or the Borrower or any of its Subsidiaries or ERISA
Affiliates has incurred or is likely to incur a liability to or on account of a
Plan under Section 409, 501(i), 501(1), 515, 4062, 4063, 4064, 4069, 4201 or
4204 of ERISA or Section 4971 or 4975 of the Code, and there shall result from
any such event or events the imposition of a Lien upon the assets of the
Borrower or any of its Subsidiaries, the granting of a security interest, or a
liability or a material risk of incurring a liability to the PBGC or a Plan or a
trustee appointed under ERISA or a penalty under Section 4971 of the Code, which
lien, security interest, liability or penalty, singly or in the aggregate
exceeds $100,000; or
9.08 Warehouse Security Agreement. The Warehouse Security
----------------------------
Agreement or any provision thereof shall cease to be in full force and effect,
or shall cease to give the Security Agent the Liens, rights, powers and
privileges purported to be created thereby, or the Borrower shall default in the
due performance or observance of any term, covenant or agreement on its part to
be performed or observed pursuant to the Warehouse Security Agreement; or
9.09 [Intentionally omitted]
9.10 Management. Steven M. Majerus shall cease to be actively
----------
involved in the management of the Borrower and its Subsidiaries with
substantially the same duties as currently performed and, within 90 days
thereafter, the Borrower shall have failed to replace such individual
43
<PAGE> 49
with a substitute reasonably satisfactory to the Lender and the Agent, based on
such individual's experience and background in mortgage banking; or
9.11 Judgments. One or more judgments or decrees shall be entered
---------
against the Borrower or any of its Subsidiaries involving in the aggregate for
the Borrower and its Subsidiaries a liability (not paid or fully covered by
insurance) of $100,000 or more, and all such judgments or decrees shall not have
been vacated, discharged or stayed or bonded pending appeal within 30 days after
the entry thereof; or
9.12 Material Adverse Change. A material adverse change shall
-----------------------
occur in the financial condition, operations or prospects of the Borrower or any
of its Subsidiaries or any Guarantor or any Person who has executed the Support
Agreement; or any material adverse action shall be taken by any state or federal
regulatory body or any court against the Borrower or any of its Subsidiaries
which may result in the loss of any agreement, permit or license of the Borrower
or any of its Subsidiaries, or otherwise limit the business or operations of the
Borrower or any of its Subsidiaries which loss or limitation would have a
material adverse effect on the financial condition, operations or prospects of
the Borrower;
then, and in any such event, and at any time thereafter, if any Event of Default
shall then be continuing, the Agent may, and upon the written request of the
Lender shall, by written notice to the Borrower, take any or all of the
following actions, without prejudice to the rights of the Agent, the Lender or
the holder of the Note to enforce its claims against the Borrower (provided,
--------
that, if an Event of Default specified in Section 9.06 shall occur with respect
to the Borrower, the result which would occur upon the giving of written notice
by the Agent to the Borrower as specified in clauses (i) and (ii) below shall
occur automatically without the giving of any such notice): (i) declare the
Commitment terminated, whereupon the Commitment of the Lender shall forthwith
terminate immediately and any Fees shall forthwith become due and payable
without any other notice of any kind; and (ii) declare the principal of and any
accrued interest in respect of all Advances and all Obligations to be, whereupon
the same shall become, forthwith due and payable without presentment, demand,
protest or other notice of any kind, all of which are hereby waived by the
Borrower.
9.13 Default Not a Condition of a 120-Day Demand. Notwithstanding
-------------------------------------------
any of the other terms of this Agreement, including, without limitation, the
preceding provisions of this Section 9, the Lender shall have the right to
demand payment of the outstanding Advances at any time, upon 120 days' prior
written notice to the Borrower, whether or not any Default or Event of Default
exists or the Expiry Date has occurred.
Section 10. The Agent.
---------
10.01 Authorization and Action. The Lender hereby appoints and
------------------------
authorizes the Agent to take such action as agent on its behalf and to exercise
such powers under this Agreement as are delegated to the Agent by the terms
hereof, together with such powers as are reasonably incidental thereto. The
Lender hereby delegates to the Agent all of its powers hereunder.
44
<PAGE> 50
9.14 Consolidation, Merger, Sale of Assets, etc. The Borrower
-------------------------------------------
shall, or shall permit any of its Subsidiaries which are engaged in the mortgage
banking business to, wind up, liquidate or dissolve its affairs or enter into
any transaction of merger or consolidation (except mergers or consolidations of
a Subsidiary into the Borrower, with the Borrower as the surviving corporation),
or convey, sell, lease or otherwise dispose of (or agree to do any of the
foregoing at any future time) all or any part of its property or assets which
are material (including, but not limited to, any rights to service Mortgage
Loans in the Borrower's Servicing Portfolio), individually or in the aggregate,
other than obsolete or worn out property, whether now owned or hereafter
acquired, other than in the ordinary course of business as presently conducted
and at fair market value, without the prior approval of the Lender or the Agent
(which approval shall not be reasonably withheld), except that the Borrower and
its Subsidiaries may, in the ordinary course of business, acquire Mortgage Loans
for resale and sell Mortgage Loans and Mortgage-backed Securities.
<PAGE> 51
10.02 Agent's Duties. The Agent shall follow its customary
--------------
standards, policies and procedures in performing its duties as Agent hereunder
and in performing such duties shall use that degree of care and attention that
the Agent exercises with respect to the administration of comparable financing
facilities that the Agent extends for its own account. Neither the Agent nor any
of its directors, officers, agents or employees shall be liable for any action
taken or omitted to be taken by it or them as Agent under or in connection with
this Agreement (including, without limitation, the Agent's servicing,
administering or collecting Collateral as Security Agent pursuant to the
Warehouse Security Agreement), except for its or their own willful misconduct,
gross negligence or bad faith. Without limiting the generality of the foregoing,
the Agent: (i) may consult with legal counsel, independent public accountants
and other experts selected by it and shall not be liable for any action taken or
omitted to be taken in good faith by it in accordance with the advice of such
counsel, accountants or experts; (ii) makes no warranty or representation to the
Lender and shall not be responsible to the Lender for any statements, warranties
or representations (whether written or oral) made by the Borrower in or in
connection with this Agreement; (iii) shall not be responsible to the Lender for
the due execution, legality, validity, enforceability, genuineness, sufficiency
or value of this Agreement, the Note, any other Credit Document, any Collateral
Document or any other instrument or document furnished pursuant hereto; and (iv)
shall incur no liability under or in respect of this Agreement by acting upon
any notice (including notice by telephone), consent, certificate or other
instrument or writing (which may be by telecopier, telegram, cable or telex)
believed by it to be genuine and signed or sent by the proper party or parties.
10.03 GE Capital Mortgage Services, Inc. and Affiliates. GE Capital
-------------------------------------------------
Mortgage Services, Inc. and its Affiliates may generally engage in any kind of
business with the Borrower, any of its Affiliates and any person who may do
business with or own securities of the Borrower or any of its Affiliates, all as
if GE Capital Mortgage Services, Inc. were not the Agent and without any duty to
account therefor to the Lender.
10.04 Successor Agent. The Agent may resign at any time by giving
---------------
written notice thereof to the Lender and the Borrower; provided, that each
Rating Agency shall have confirmed in writing that such resignation shall not
result in a withdrawal or reduction of the then current rating by such Rating
Agency of the Commercial Paper. Upon any such resignation, the Lender shall have
the right to appoint a successor Agent, subject to (i) the prior written
approval of such successor Agent by each LOC Provider and each Liquidity Lender
and (ii) receipt of written confirmation from each Rating Agency that such
appointment shall not result in a withdrawal or downgrading of the then current
credit rating of the Commercial Paper. If no successor Agent shall have been so
appointed by the Lender or shall have accepted such appointed within 15 days
after the retiring Agent's giving of notice of resignation, the Agent, on behalf
of the Lender, may appoint a successor Agent. Upon the acceptance of any
appointment as Agent hereunder by a successor Agent, such successor Agent shall
thereupon succeed to and become vested with all the rights, powers, privileges
and duties of the retiring Agent, and from such time the retiring Agent shall be
discharged from its duties and obligations under this Agreement. After any
retiring Agent's resignation hereunder as Agent, the provisions of this Section
10 shall inure to its benefit as to any actions taken or omitted to be taken by
it while it was Agent under this Agreement.
45
<PAGE> 52
Section 11. Miscellaneous.
-------------
11.01 Payment of Expenses; Indemnity. (a) Whether or not the
------------------------------
transactions contemplated hereby are consummated, in addition to the rights of
indemnification granted to the Indemnified Parties under Section 11.01(b)
hereof, the Borrower agrees to pay on demand all costs and expenses in
connection with the preparation, execution, delivery, modification, amendment,
administration and monitoring of the Credit Documents and the other documents to
be delivered thereunder (including the costs in respect of the perfection and
maintenance of the security interests and conducting due diligence with respect
to the Borrower and its business), including, without limitation, the fees and
out-of-pocket expenses of counsel for the Lender and the Agent, and of local
counsel who may be retained by the Lender and the Agent, with respect thereto
and with respect to advising the Lender and the Agent as to their rights and
remedies under the Credit Documents, and including all reasonable costs and
expenses in connection with the servicing and liquidation of the Collateral. The
Borrower further agrees to pay on demand all costs and expenses, if any
(including, without limitation, reasonable counsel fees and expenses), in
connection with the enforcement (whether through negotiations, workout, legal
proceedings or otherwise) of the Credit Documents and the other documents to be
delivered thereunder, including, without limitation, reasonable counsel fees and
expenses in connection with the enforcement of rights under this Section
11.01(a).
(b) (i) The Borrower shall reimburse the Lender, upon demand (which
demand shall contain reasonable details thereof), for all fees, expenses or
increased costs payable by the Lender to any Liquidity Lender pursuant to the
Liquidity Agreement due to either (x) the effectiveness of or the introduction
of, or any change in, or in the interpretation of, any law or regulation or (y)
compliance by such Liquidity Lender with any guideline or request from any
central bank or other governmental authority or official (whether or not having
the force of law), which subjects such Liquidity Lender (A) to an increase in
the cost of making, funding or maintaining any loan or any commitment under the
Liquidity Agreement or (B) to make a payment calculated by reference to the
principal of, or interest on, such loan or such commitment made by such
Liquidity Lender.
(ii) The Borrower shall reimburse the Lender upon demand (which
demand shall contain reasonable details thereof), for all fees, expenses or
increased costs payable by the Lender to any Liquidity Lender or any LOC
Provider (the Liquidity Lenders and the LOC Providers collectively referred to
in this Section 11.01(b) as the "Financial Institutions" and, individually, as a
"Financial Institution") pursuant to the Liquidity Agreement or the
Reimbursement Agreement, respectively, due to either (x) the effectiveness of or
the introduction of, or any change in, or in the interpretation of, any law or
regulation or (y) compliance by any Financial Institution with any guideline or
request from any central bank or other governmental authority or official
(whether or not having the force of law and including, in any event, any law,
regulation, interpretation, or guideline with respect to capital adequacy or
request in connection with any of the foregoing and any law, regulation,
interpretation, guideline or request contemplated by the report dated July, 1988
entitled "International Convergence of Capital Measurement and Capital
Standards" issued by the Basle Committee on Banking Regulations and Supervisory
Practices at the Bank for International Settlements) which has or would have the
effect of reducing the rate of return on the capital of such Financial
Institution, or any corporation controlling such Financial Institution, as a
46
<PAGE> 53
consequence of its obligations under the Liquidity Agreement, the Reimbursement
Agreement or the Letters of Credit, as the case may be, to a level below that
which such Financial Institution, or such controlling corporation, could have
otherwise achieved but for such adoption, change or compliance (taking into
consideration such Financial Institution's, or the respective controlling
corporation's, policies with respect to capital adequacy) or which has or would
have the effect of increasing the amount of capital required or expected to be
maintained by such Financial Institution, or such controlling corporation, as a
consequence of its obligations under the Liquidity Agreement, the Reimbursement
Agreement or the Letters of Credit, as the case may be.
(iii) The Borrower shall reimburse the Lender, upon demand (which
demand shall contain reasonable details thereof), for any increase in any sum
payable by the Lender to any Liquidity Lender under the Liquidity Agreement to
compensate such Liquidity Lender for deductions for Liquidity Taxes (as defined
below) applicable to such sum (including deductions for Liquidity Taxes
applicable to such increase in such sum) such that such Liquidity Lender shall
receive an amount equal to the sum it would have otherwise received had no such
deductions for Liquidity Taxes been made. As used in this Section 11.01(b), the
term "Liquidity Taxes" shall mean any and all present or future taxes, levies,
imposts, deductions, charges or withholdings, and all liabilities, with respect
to any sum payable under the Liquidity Agreement (but excluding taxes that would
not be imposed but for a connection between the Liquidity Lenders or the
Liquidity Agent (as the case may be) and the jurisdiction imposing such tax,
other than a connection arising by virtue of the activities of the Liquidity
Lenders or the Liquidity Agent (as the case may be) pursuant to or in respect of
the Liquidity Agreement or under any other Facility Document, including, without
limitation, the entering into, the loan of money or the extension of credit
pursuant to, the receipt of payments under, or the enforcement of, the Liquidity
Agreement or any other Facility Document).
(iv) The Borrower shall reimburse the Lender, upon demand (which
demand shall contain reasonable details thereof), for all costs or expenses
payable by the Lender under the Liquidity Agreement for any present or future
stamp, recording or documentary taxes or similar levies arising from any payment
made under the Liquidity Agreement or from the execution, delivery or
registration of, or otherwise with respect to, the Liquidity Agreement or the
promissory notes delivered by the Lender thereunder or from the execution,
delivery or registration of, or otherwise with respect to, the Liquidity
Agreement or such promissory notes.
(v) The Borrower shall reimburse the Lender, upon demand (which
demand shall contain reasonable details thereof), for any increase in any
payment payable by the Lender to any LOC Provider under the Reimbursement
Agreement to compensate such LOC Provider for deductions of LOC Taxes (as
defined below) such that such increase results in a yield to such LOC Provider
(after payment of all LOC Taxes) of interest or any other amounts payable under
the Reimbursement Agreement at the rates or in the amounts specified in the
Reimbursement Agreement. As used in this Section 11.01(b), the term "LOC Taxes"
shall mean any present or future stamp or other taxes, levies, imports, duties,
charges, fees, deductions, withholdings or restrictions or conditions of any
nature whatsoever, now or hereafter imposed, levied, collected, withheld or
assessed by any jurisdiction or by any political subdivision or taxing authority
thereof or therein in respect of any payment made under the Reimbursement
Agreement (but excluding, in
47
<PAGE> 54
the case of each LOC Provider, any tax imposed on or measured by the net income
of such LOC Provider pursuant to the laws of any jurisdiction (or any political
subdivision or taxing authority thereof or therein) in which the principal
office of such LOC Provider is located).
(vi) The Borrower shall reimburse the Lender, upon demand (which
demand shall contain reasonable details thereof), for all indemnities payable by
the Lender to any placement agents or dealers for the Commercial Paper.
(vii) In the event the Lender enters into agreements for the making
of advances to one or more borrowers other than the Borrower, the Lender shall
allocate the liability for the costs, expenses and other amounts referred to in
clauses (i) through (vi), inclusive, of this Section 11.01(b) and Section
11.01(c) to the Borrower and each other borrower who has so agreed, provided
--------
that if such costs, expenses or amounts are attributable to the Borrower or the
Credit Documents and not attributable to any other borrower, the Borrower shall
be solely liable for such costs, expenses and amounts.
(c) Without limiting any other rights which the Lender, the Agent, the
Security Agent, the LOC Providers, the Liquidity Lenders, the Collateral Agent,
the Depositary or any Affiliate of any thereof, as well as their respective
directors, officers, employees and agents (each, an "Indemnified Party") may
have hereunder or under applicable law, the Borrower hereby agrees to indemnify
each Indemnified Party from and against any and all claims, losses, damages,
expenses and liabilities (including reasonable attorneys' fees) (all of the
foregoing being collectively referred to as "Indemnified Amounts") arising out
of, relating to or resulting from this Agreement, any other Facility Document,
any Mortgage Loan, Mortgage-backed Security or other Collateral or the use of
any proceeds of Advances, excluding, however, Indemnified Amounts to the extent
(i) resulting from gross negligence or willful misconduct (as determined by a
final judgment of a court of competent jurisdiction) on the part of such
Indemnified Party or any Affiliate of such Indemnified Party which directly or
indirectly controls, is controlled by or is under common control with such
Indemnified Party or is a director or officer of such Indemnified Party or of an
Affiliate of such Indemnified Party or (ii) resulting from negligence (as
determined by a final judgment of a court of competent jurisdiction) on the part
of such Indemnified Party or any -Affiliate of such Indemnified Party which
directly or indirectly controls, is controlled by or is under common control
with such Indemnified Party or is a director or officer of such Indemnified
Party or of an Affiliate of such Indemnified Party, which negligence directly
and proximately results in the loss of a Mortgage Note, the receipt of which
Mortgage Note was previously acknowledged in writing by such Indemnified Party
and the loss of which Mortgage Note cannot be mitigated by the cooperative
efforts of the Borrower and the Indemnified Party. Without limiting or being
limited by the foregoing, the Borrower shall pay on demand to each Indemnified
Party any and all amounts necessary to indemnify such Indemnified Party from and
against any and all Indemnified Amounts relating to or resulting from:
(i) the making of an Advance secured by a pledge of a Mortgage
Loan or Mortgage-backed Security which is not at the date of
the creation of such security interest an Eligible Mortgage
Loan or an Eligible Nonconforming Mortgage Loan or
48
<PAGE> 55
which thereafter ceases to be an Eligible Mortgage Loan or an
Eligible Nonconforming Mortgage Loan;
(ii) reliance on any representation or warranty or statement
made or deemed made by the Borrower (or any of its officers)
under or in connection with any Credit Document which shall
have been incorrect when made;
(iii) the failure by the Borrower to comply with any
applicable law, rule or regulation with respect to any
Collateral, or the nonconformity of any Collateral with any
such applicable law, rule or regulation;
(iv) the failure to vest in the Security Agent under the
Warehouse Security Agreement a valid first priority security
interest in the Mortgage Loans, the Mortgage-backed Securities
and the other Collateral, except as otherwise permitted by
this Agreement;
(v) the failure to have filed, or any delay in filing,
financing statements or other similar instruments or documents
under the UCC of any applicable jurisdiction or other
applicable laws with respect to any Collateral, whether at the
time of any Advance or at any subsequent time;
(vi) any breach or violation, or alleged violation, of federal
or state securities laws in connection with the offering of
the Commercial Paper;
(vii) any investigation, litigation or proceeding related to
this Agreement or, any other Credit Document or the use of
proceeds of Advances or in respect of any Mortgage Loan or
other Collateral;
(viii) the loss, misplacement or destruction of any cashier's
check issued by the Lender in respect of any Advance after
receipt of such check by the closing agent, escrow agent,
title company, attorney or any other authorized party
identified in the Request for Advance relating to such
Advance, it being understood and agreed that, notwithstanding
the indemnity under this Section 11.01(c)(viii) or any such
loss, misplacement or destruction, the funds represented by
any such lost, misplaced or destroyed cashier's check shall
constitute an Advance hereunder; and
(ix) the making of any wire transfer to an incorrect account
or in an incorrect amount in accordance with instructions
received from the Borrower, it being understood and agreed
that, notwithstanding the indemnity under this Section
11.01(c)(ix), the funds represented by any such wire shall
constitute an Advance hereunder.
(d) If after the date hereof due to either (a) the effectiveness
or introduction of, or any change in, or any change in the interpretation of,
any law or regulation by any court or administrative or governmental authority
charged with administration thereof or (b) compliance
49
<PAGE> 56
with any guideline or request from any central bank or other governmental
authority or official (whether or not having the force of law and including, in
any event, any law, regulation or interpretation with respect to capital
adequacy or request in connection with any of the foregoing), there shall be an
increase in the cost to the Lender of making, funding or maintaining any Advance
or the Commitment hereunder or the Lender shall be required to make a payment
calculated by reference to the principal of, or interest on, any Advance made by
it or the Commitment (other than any such increased cost, reduction in the
amount receivable, or payment required to be made resulting from the imposition
or an increase in the rate of any Taxes unless such Taxes are payable by the
Borrower under Section 11.01(e) or there shall be an increase in the amount of
capital required or expected to be maintained by the Lender or any corporation
controlling the Lender and the Lender reasonably determines that the amount of
such capital is increased by or based upon the existence of the Lender's
agreement, in its discretion, to make or maintain Advances hereunder and other
similar agreements and facilities), then the Borrower shall, from time to time,
upon demand by the Lender, immediately pay to the Lender additional amounts
sufficient to compensate the Lender for any such increased cost or increase in
capital (to the extent the Lender reasonably determines such increase in capital
to be allocable to the existence of the Lender's agreements hereunder). A
certificate of an officer of the Lender as to such amounts (and the calculation
thereof) submitted to the Borrower shall be conclusive and binding for all
purposes, absent manifest error.
(e) Promptly upon (and in no event later than 10 days following)
notice from the Lender or the Agent to the Borrower, the Borrower agrees to pay,
prior to the date on which penalties attach thereto, all present and future
income, stamp and other taxes, levies, or costs and charges whatsoever imposed,
assessed, levied or collected on or in respect of an Advance and/or the
recording, registration, notarization or other formalization of an Advance or
the execution and delivery or otherwise with respect to the Agreement or the
other Credit Documents and/or any payments of principal, interest or other
amounts made on or in respect of an Advance (all such taxes, levies, costs and
charges being herein collectively called "Taxes"); provided that Taxes shall not
--------
include taxes imposed on or measured by the overall net income or receipts of
the Lender by the United States of America or any political subdivision or
taxing authority thereof or therein. The Borrower agrees to also pay such
additional amounts equal to increases in taxes payable by the Lender described
in the foregoing proviso, which increases arise solely from the receipt by the
Lender of payments made by the Borrower described in the immediately preceding
sentence of this Section 11.01(e). Promptly (and in no event later than 10 days)
after the date on which payment of any such Tax is due pursuant to applicable
law, the Borrower will, at the request of the Lender, furnish to the Lender
evidence, in form and substance satisfactory to the Lender, that the Borrower
has met its obligation under this Section 11.01(e). The Borrower agrees to
indemnify the Lender against, and reimburse the Lender on demand for, any Taxes,
as reasonably determined by the Lender in good faith. The Lender shall provide
the Borrower with appropriate receipts for any payments or reimbursements made
by the Borrower pursuant to this Section 11.01(e).
(f) Notwithstanding anything to the contrary provided herein, the
maximum aggregate amount that the Borrower shall be obligated to pay to the
Lender or to any Indemnified Party pursuant to the provisions of Sections
11.01(b), (d) and (e) shall be $250,000.
50
<PAGE> 57
11.02 Notices. Except as otherwise expressly provided herein, all
-------
notices and other communications provided for hereunder shall be in writing
(including telegraphic, telex, telecopier or cable communication) and mailed,
telegraphed, telexed, telecopied, cabled or delivered: if to the Borrower, the
Lender or the Agent, at its address specified opposite its signature below, or
at such other address as shall be designated by such party in a written notice
to the other parties hereto. All such notices and communications shall, when
mailed, telegraphed, telecopied or sent by overnight courier, be effective when
deposited in the mails, delivered to the telegraph company or overnight courier,
as the case may be, or sent by telecopier, except that notices and
communications given to the Agent or the Lender pursuant to Section 2 and
Section 4 shall not be effective until received by the Agent or the Lender, as
the case may be.
11.03 Benefit of Agreement. This Agreement shall be binding upon
--------------------
and inure to the benefit of and be enforceable by the respective successors and
assigns of the parties hereto; provided, however, that the Borrower may not
-------- --------
assign or transfer any of its rights or obligations hereunder without the prior
written consent of the Agent and the Lender. The Lender may at any time assign
any of its rights and obligations hereunder or under the Note.
11.04 Remedies Cumulative. No failure or delay on the part of the
-------------------
Agent or the Lender or the holder of the Note in exercising any right, power or
privilege hereunder or under any other Credit Document and no course of dealing
between the Borrower and the Agent or the Lender or the holder of the Note shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right, power or privilege hereunder or under any other Credit Document preclude
any other or further exercise thereof or the exercise of any other right, power
or privilege hereunder or thereunder. The rights, powers and remedies herein or
in any other Credit Document expressly provided are cumulative and not exclusive
of any rights, powers or remedies which the Agent or the Lender or the holder of
the Note would otherwise have. No notice to or demand on the Borrower in any
case shall entitle the Borrower to any other or further notice or demand in
similar or other circumstances or constitute a waiver of the rights of the Agent
or the Lender or the holder of the Note to any other or further action in any
circumstances without notice or demand.
11.05 Calculations; Computations. (a) The financial statements to
--------------------------
be furnished to the Lender pursuant hereto shall be made and prepared in
accordance with generally accepted accounting principles in the United States
consistently applied throughout the periods involved (except as set forth in the
notes thereto or as otherwise disclosed in writing by the Borrower to the
Lender); provided that, except as otherwise specifically provided herein, all
--------
computations determining compliance with Section 8 shall utilize accounting
principles and policies in conformity with those used to prepare the historical
financial statements referred to in Section 6.05(a).
(b) All computations of interest and the Fees hereunder shall be made
on the basis of a year of 360 days for the actual number of days occurring in
the period for which such interest or fees are payable.
11.06 Governing Law; Submission to Jurisdiction; Venue. (a) This
------------------------------------------------
Agreement and the other Credit Documents and the rights and obligation of the
parties hereunder and thereunder shall be construed in accordance with and be
governed by the law of the State of New York, without
51
<PAGE> 58
regard to principles of conflicts of laws. Any legal action or proceeding
against the Borrower with respect to this Agreement or any other Credit Document
may be brought in the courts of the State of New Jersey located in Camden County
or in the United States Federal courts located in Camden County, and, by
execution and delivery of this Agreement, the Borrower hereby irrevocably
accepts for itself and in respect of its property, generally and
unconditionally, the jurisdiction of the aforesaid courts.
(b) The Borrower hereby irrevocably waives any objection which it may
now or hereafter have to the laying of venue of any of the aforesaid actions or
proceedings arising out of or in connection with this Agreement or any other
Credit Document brought in the courts referred to in clause (a) above and hereby
further irrevocably waives and agrees not to plead or claim in any such court
that any such action or proceeding brought in any such court has been brought in
an inconvenient forum.
11.07 No Proceedings. The Borrower hereby covenants and agrees
--------------
that, prior to the date which is one year and one day after the payment in full
of all outstanding Commercial Paper, it will not institute against, or join any
other Person in instituting against, the Lender, any bankruptcy, reorganization,
arrangement, insolvency or liquidation proceedings or other similar proceeding
under the laws of the United States or any state of the United States.
11.08 Counterparts. This Agreement may be executed in any number
------------
of counterparts and by the different parties hereto on separate counterparts,
each of which when so executed and delivered shall be an original, but all of
which shall together constitute one and the same instrument. A set of
counterparts executed by all the parties hereto shall be lodged with the
Borrower and the Agent.
11.09 Effectiveness. This Agreement shall become effective on the
-------------
date (the "Effective Date") on which the Borrower, the Lender and the Agent
shall have signed a copy hereof (whether the same or different copies) and shall
have delivered the same to the Agent at its Office.
11.10 Headings Descriptive. The headings of the several sections
--------------------
and subsections of this Agreement are inserted for convenience only and shall
not in any way affect the meaning or construction of any provision of this
Agreement.
11.11 Amendment or Waiver. Neither this Agreement nor any other
-------------------
Credit Document nor any terms hereof or thereof may be changed, waived,
discharged or terminated unless such change, waiver, discharge or termination is
in writing signed by the Lender, the Agent and the Borrower.
11.12 Survival. All indemnities set forth herein including, without
--------
limitation, in Section 11.01 shall survive the execution and delivery of this
Agreement and the Note and the making and repayment of the Advances.
52
<PAGE> 59
Waiver of Jury Trial. THE LENDER, THE AGENT AND THE BORROWER BY
--------------------
KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE ??H OF THEM MAY HAVE TO A
TRIAL BY JURY OF, UNDER OR IN ??N WITH THIS AGREEMENT, THE NOTE AND ANY
AGREEMENT ??ATED TO BE EXECUTED IN CONJUNCTION HEREWITH, OR ANY COURSE ??JCT,
COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR ??OR ACTIONS OF ANY PARTY
RELATING HERETO OR THERETO. THIS ?? IS A MATERIAL INDUCEMENT FOR THE LENDER AND
THE AGENT TO ??TO THIS AGREEMENT.
WITNESS WHEREOF, the parties hereto have caused their duly authorized
officers to ??d deliver this Agreement as of the date first above written.
<TABLE>
<CAPTION>
E-LOAN, INC.
<S> <C>
??age Parkway, Suite 102
??CA 94568
??: Steven M. Majerus By /s/ Janina Pawlowski
?? No.: (925) 556-2614 Title: CEO
Capital Mortgage Services, Inc. COOPER RIVER FUNDING INC.
Executive Campus
?? Hill, NJ 08002
??ion: Martin A. Schroeter By /s/ Signature Illegible
??mile No.: (609) 661-7528 Title: Assistant Treasurer
GE CAPITAL MORTGAGE SERVICES, INC.,
??e Executive Campus as Agent
??ry Hill, NJ 08002
??tion: Martin A. Schroeter
??imile No.: (609) 661-7528 By /s/ Signature Illegible
Title: Vice President
</TABLE>
53
<PAGE> 60
AMENDED AND RESTATED NOTE
U.S. $25,000,000 ORIGINALLY ISSUED JUNE 24, 1998
AMENDED AND RESTATED AS OF APRIL 26, 1999
FOR VALUE RECEIVED, E-LOAN, INC., a corporation organized and existing
under the laws of California (the "Borrower"), hereby promises to pay to the
order of COOPER RIVER FUNDING INC., a Delaware corporation (the "Lender"), in
lawful money of the United States of America in immediately available funds on
the Expiry Date (as defined in the Warehouse Credit Agreement) the principal sum
of TWENTY FIVE MILLION United States Dollars ($25,000,000), or, if less, the
aggregate unpaid principal amount of all Advances (as defined in the Warehouse
Credit Agreement) made by the Lender to the Borrower pursuant to the Warehouse
Credit Agreement.
The Borrower promises also to pay interest on the unpaid principal amount
of each Advance from the date such Advance is made until paid in full, at the
interest rates, and at the times, as specified in the Warehouse Credit
Agreement.
This Note is the Note referred to in the Warehouse Credit Agreement dated
June 24, 1998, as amended (as so amended, the "Warehouse Credit Agreement"),
among the Borrower, the Lender and GE Capital Mortgage Services, Inc., as Agent,
and is entitled to the benefits thereof. This Note is secured by the Warehouse
Security Agreement.
This Note is subject to mandatory prepayment as provided in Section 4.02 of
the Warehouse Credit Agreement and, in case an Event of Default (as defined in
the Warehouse Credit Agreement) shall occur and be continuing, the principal of
and accrued interest on this Note may be declared to be due and payable in the
manner and with the effect provided in the Warehouse Credit Agreement.
The Borrower hereby waives diligence, presentment, protest, demand or
notice of every kind in connection with this Note.
This Note amends, restates and supersedes a Note in the principal amount
of $15,000,000 payable to the order of the Lender dated June 24, 1998 (the
"Original Note"). However, without duplication, this Amended and Restated Note
shall in no way extinguish the Borrower's unconditional obligation to repay all
indebtedness evidenced by the Original Note.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF
THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.
E-LOAN, INC.
By: /s/ Janina Pawlowski
------------------------
Name: Janina Pawlowski
----------------------
Title: President
---------------------
<PAGE> 1
Exhibit 10.26A
--------------
SECOND AMENDMENT TO LEASE
This SECOND AMENDMENT TO LEASE ("Second Amendment") is made and entered
into as of the 25th day of March, 1999, by and between CREEKSIDE SOUTH TRUST, a
Maryland business trust ("Landlord"), and E-LOAN, INC., a Delaware corporation
("Tenant").
R E C I T A L S
- - - - - - - -
A. Landlord and Tenant (which at that time was a California corporation)
entered into that certain Multi-Tenant Office Triple Net Lease dated as of
August 19, 1998 (the "Original Lease"), as amended by that certain First
Amendment to Lease dated September 11, 1998 (the "First Amendment"), pursuant
to which Landlord leased to Tenant and Tenant leased from Landlord certain
"Premises" as described in the Lease and located in that certain office
building located at 5875 Arnold Drive, Dublin, California (the "Building"). The
Original Lease and the First Amendment are collectively referred to herein as
the Lease.
B. Landlord and Tenant now desire to amend the Lease in certain respects,
including to modify and expand the Premises to include additional space in the
Building containing approximately 25,474 rentable square feet, as outlined on
Exhibit "A" attached hereto and incorporated herein by this reference (the
"Expansion Premises"), all upon the terms and conditions as hereinafter
provided.
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
covenants contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. Capitalized Terms. All capitalized terms when used herein shall have
the same meanings given such terms in the Lease unless expressly superseded by
the terms of this Second Amendment.
2. Addition of Expansion Premises. Notwithstanding any provisions of the
Lease, commencing on the Expansion Premises Commencement Date (as defined
below), the Premises are hereby modified and expanded to include the Expansion
Premises on the same terms and conditions set forth in the Lease, subject to
the modifications set forth in this Second Amendment.
3. Expansion Premises Commencement Date. The "Expansion Premises
Commencement Date" shall be June 1, 1999.
4. Term of Lease. Notwithstanding any provision of the Lease, the Term
of the Lease is hereby amended to expire on November 30, 2004.
5. Monthly Base Rent for the Expansion Premises. Commencing on the
Expansion Premises Commencement Date and otherwise in accordance with the
provisions of
<PAGE> 2
Section 3 of the Original Lease, Tenant shall pay to Landlord Total Monthly
Base Rent for the Expansion Premises and the Premises as set forth on the
Amended and Restated Rent Schedule attached hereto as Exhibit "C" ("Rent
Schedule"). Notwithstanding any provision of the Lease, for the period June 1,
1999 through July 14, 1999 Tenant may still receive Rent abatement for the
Premises, as provided in Section 3.1 and Section 6.1 of the Original Lease, to
the extent Tenant is not using the entire Premises. During this period, Rent
will be paid on actual space used subject to (a) a minimum of space leased in
the Premises as of May 15, 1999 plus 6,368.5 rentable square feet, and (b) a
maximum of 49,157.50 rentable square feet.
6. Tenant's Share of Operating Expenses. Subject to the Rent abatement,
as provided in Paragraph 5 above, commencing on the Expansion Premises
Commencement Date, Tenant's Share of Operating Expenses for the Expansion
Premises as set forth in Section 6 of the Lease shall be as follows:
<TABLE>
<CAPTION>
Amount of Rentable Square
Footage of Expansion
Premises for Which Tenant is
Paying Tenant's Share of Tenants Share for the
Date During Lease Term Operating Expenses Expansion Premises
- ---------------------- ----------------------------- ---------------------
<S> <C> <C>
6/1/-7/31/99 6,368.50 7.44%
8/1-9/30/99 12,737.00 14.88%
10/1-11/30/99 19,105.50 22.33%
12/1/99-11/30/04 25,474.00 29.77%
</TABLE>
7. Additional Allowance. Tenant shall continue to pay to Landlord the
Additional Allowance amount, as provided in Paragraph 2 of the First Amendment,
which is equal to Four Thousand Seven Hundred Fifty-Eight and 99/100 Dollars
($4,758.99) per month through October 31, 2003.
8. Condition of the Expansion Premises. Except as specifically set forth
in this Second Amendment and the Work Letter, Landlord shall not be obligated to
provide or pay for any improvement work or services related to the improvement
of the Expansion Premises. Tenant also acknowledges that Landlord has made no
representation or warranty regarding the condition of the Expansion Premises or
the Building, except as specifically set forth in this Second Amendment and the
Work Letter. Except for the work to be performed by Landlord as described in the
Work Letter, Tenant accepts the Expansion Premises in an "as is" condition.
9. Letter of Credit. Notwithstanding any provision of the Lease, the
amount of the Letter of Credit, as provided in Section 3.3.2 of the Original
Lease, shall be increased upon execution of this Second Amendment by Tenant to
One Million Two Hundred Fifty Thousand Dollars ($1,250,000).
-2-
<PAGE> 3
10. Broker. Notwithstanding anything to the contrary contained in the
Lease, Landlord and Tenant hereby warrant to each other that they have had no
dealings with any real estate broker or agent in connection with the
negotiation of this Second Amendment except for CB Richard Ellis, Inc. and John
Robbins & Associates (collectively, "Brokers"), and that the parties know of no
other real estate broker or agent who is entitled to a commission in connection
with Tenant's lease of the Expansion Premises. Landlord shall pay Brokers a
commission pursuant to separate agreements between Brokers and Landlord. Each
party agrees to indemnify and defend the other party against and hold the other
party harmless from any and all claims, demands, losses, liabilities, lawsuits,
judgments and costs and expenses (including, without limitation, reasonable
attorneys' fees) with respect to any leasing commission or equivalent
compensation alleged to be owing on account of any dealings with any real
estate broker or agent other than the Brokers, occurring by, through or under
the indemnifying party.
11. Counterparts. This Second Amendment may be executed in counterparts
with the same effect as if both parties hereto had executed the same document.
Both counterparts shall be construed together and shall constitute a single
Second Amendment.
12. No Further Modification. Except as set forth in this Second Amendment,
all of the terms and provisions of the Lease shall remain unmodified and in
full force and effect.
IN WITNESS WHEREOF, this Second Amendment has been executed as of the day
and year first above written.
"LANDLORD" CREEKSIDE SOUTH TRUST,
a Maryland business trust
By: /s/ Daniel D'Aniello
--------------------------------
Daniel D'Aniello
Its: Managing Director
"TENANT" E-LOAN, INC.,
a Delaware corporation
By: /s/ Chris Larsen
--------------------------------
Name: Chris Larsen
Its: CEO
By: /s/ F M Siskowski
--------------------------------
Name: Frank M Siskowski
Its: CFO
<PAGE> 4
Illustration of BUILDING C showing the Premises and the Expansion Premises.
35,577 RSF
<PAGE> 5
EXHIBIT "B"
WORK LETTER
Tenant acknowledges and agrees that the Expansion Premises are satisfactory
and shall be accepted by Tenant in its "AS IS" condition as of the date of
execution of this Lease and on the Commencement Date; provided, however, that
Landlord shall construct certain modifications to the interior of the Expansion
Premises pursuant to the Approved Working Drawings in accordance with the
following provisions of this Tenant Work Letter.
SECTION 1
CONSTRUCTION DRAWINGS FOR THE PREMISES
Landlord and Tenant will approve a detailed space plan for the construction
of certain improvements in the Expansion Premises, which space plan will be
prepared by an architect mutually acceptable to Landlord and Tenant (the "Final
Space Plan"). Based upon and in conformity with the Final Space Plan, Tenant
shall cause its architect and engineers to prepare and deliver to Landlord not
later than August 31, 1999, for Landlord's approval, detailed specifications and
engineered working drawings for the tenant improvements shown on the Final Space
Plan (the "Working Drawings"). The Working Drawings shall incorporate
modifications to the Final Space Plan as necessary to comply with the floor load
and other structural and system requirements of the Building. To the extent that
the finishes and specifications are not completely set forth in the Final Space
Plan for any portion of the tenant improvements depicted thereon, the actual
specifications and finish work shall be in accordance with the specifications
for the Building's standard improvement package items, as determined by Landlord
(the "Building Specifications"). Within three (3) business days after Landlord's
receipt of the Working Drawings, Landlord shall approve or disapprove the same,
which approval shall not be unreasonably withheld; provided, however, that
Landlord may only disapprove the Working Drawings to the extent such Working
Drawings are inconsistent with the Final Space Plan and the Building
Specifications and only if Landlord delivers to Tenant, within such three (3)
business days period, specific changes proposed by Landlord which are consistent
with the Final Space Plan and the Building Specifications. If any such revisions
are timely and properly proposed by Landlord, Tenant shall cause its architect
and engineers to revise the Working Drawings to incorporate such revisions and
submit the same for Landlord's approval in accordance with the foregoing
provisions, and the parties shall follow the foregoing procedures for approving
the Working Drawings until the same are finally approved by Landlord and Tenant.
Upon Landlord's and Tenant's approval of the Working Drawings, the same shall be
known as the "Approved Working Drawings". Once the Approved Working Drawings
have been approved by Landlord and Tenant, Tenant shall make no changes, change
orders or modifications thereto without the prior written consent of Landlord,
which consent may be withheld in Landlord's sole discretion if such change or
modification would: (i) increase the cost of designing or constructing the
Tenant Improvements above the cost of the tenant improvements depicted in the
Final Space Plan; (ii) be of a quality lower than the quality of the standard
EXHIBIT "B"
<PAGE> 6
improvement package items for the Building; and/or (iii) require any changes to
the base, shell and core work or structural improvements or systems of the
Building. The Final Space Plan, Working Drawings and Approved Working Drawings
shall be collectively referred to herein as, the "Construction Drawings". The
tenant improvements shown on the Approved Working Drawings shall be referred to
herein as the "Tenant Improvements".
SECTION 2
CONSTRUCTION AND COSTS
Landlord shall cause a general contractor (the "Contractor") mutually
approved by Landlord and Tenant to (i) obtain all applicable building permits
for construction of the Tenant Improvements, and (ii) construct the Tenant
Improvements as depicted on the Approved Working Drawings, in compliance with
such building permits and all applicable laws in effect at the time of
construction, including all environmental laws and the Americans with
Disabilities Act, and in good workmanlike manner. Landlord shall pay for the
cost of the design and construction of the Tenant Improvements, including space
planning, engineering, construction drawings, signage, construction
supervision, and any necessary permits, in an amount up to, but not exceeding,
Three Hundred Sixty-Six Thousand Six Hundred Seventy-Six and 68/100 Dollars
($366,676.68) which is equal to Thirty Dollars ($30.00) per Rentable Square
Foot of the Expansion Premises minus Three Hundred Ninety-Seven Thousand Five
Hundred Forty-Three and 32/100 Dollars ($397,543.32) owed to Landlord for the
initial tenant improvements constructed in the Premises, receipt of which is
hereby acknowledged, (the "Tenant Improvement Allowance"); provided, however,
that the Tenant Improvement Allowance shall not be used to pay the traffic
impact fee which shall be paid separately by Landlord. Tenant shall pay for all
costs in excess of the Tenant Improvement Allowance (the "Over Allowance
Amount"), which payment shall be made to Landlord in cash as follows: within
five (5) days after the Contractor has been selected and the construction
contract has been signed, Tenant shall pay to Landlord fifty percent (50%) of
the Over Allowance Amount with Tenant paying the remainder of the Over
Allowance Amount to Landlord upon receipt of invoice from Landlord throughout
the construction of the Tenant Improvements. In no event shall Landlord be
obligated to pay for any of Tenant's furniture, computer systems, telephone
systems, equipment or other personal property which may be depicted on the
Construction Drawings; such items shall be paid for by Tenant. Tenant shall be
entitled to receive as a credit against Rent any portion of the Tenant
Improvement Allowance not used to pay for the cost of the design and
construction of the Tenant Improvements.
SECTION 3
MISCELLANEOUS
Provided that Tenant and its agents do not interfere with Contractor's
work in the Building and the Expansion Premises, Contractor shall allow Tenant
access to the Expansion Premises prior to the Substantial Completion of the
Expansion Premises for the purpose of Tenant installing overstandard equipment,
furniture or fixtures (including Tenant's data and
EXHIBIT "B"
-2-
<PAGE> 7
telephone equipment) in the Expansion Premises. Prior to Tenant's entry into
the Expansion Premises as permitted by the terms of this Section 3, Tenant
shall submit a schedule to Landlord and Contractor, for their approval, which
schedule shall detail the timing and purpose of Tenant's entry. Tenant shall
hold Landlord harmless from and indemnify, protect and defend Landlord against
any loss or damage to the Expansion Premises or Property and against injury to
any persons caused by Tenant's actions pursuant to this Section 3.
<PAGE> 8
EXHIBIT "C"
-----------
AMENDED AND RESTATED RENT SCHEDULE
TOTAL MONTHLY BASE RENT:
<TABLE>
<CAPTION>
Total Amount of Average Total Amount of
Rentable Square Monthly Base Rent per
Footage of the Rentable Square Foot of Total Amount
Date during Premises and the the Premises and the of Base Rent for
Lease Term Expansion Premises Expansion Premises the Stated Period
---------- ------------------ ------------------ -----------------
<S> <C> <C> <C>
6/1-7/31/99 49,157.5 $1.25 $122,893.75
8/1-9/30/99 55,526.0 $1.25 $138,815.00
10/1-10/31/99 61,894.5 $1.25 $77,368.13
11/1-11/30/99 61,894.5 $1.28 $78,972.71
12/1/99-10/31/00 68,263.0 $1.27 $956,266.71
11/1/00-10/31/01 68,263.0 $1.31 $1,074,496.05
11/1/01-10/31/02 68,263.0 $1.35 $1,106,730.93
11/1/02-10/31/03 68,263.0 $1.39 $1,139,932.86
11/1/03-10/31/04 68,263.0 $1.43 $1,174,130.85
11/1/03-11/30/04 68,263.0 $1.48 $100,779.56
</TABLE>
<PAGE> 1
EXHIBIT 10.38
E-LOAN, INC.
LOAN AND SECURITY AGREEMENT
<PAGE> 2
TABLE OF CONTENTS
Page
1. DEFINITIONS AND CONSTRUCTION.........................................1
1.1 Definitions.................................................1
1.2 Accounting and Other Terms..................................7
2. LOAN AND TERMS OF PAYMENT............................................7
2.1 Credit Extensions...........................................7
2.2 Overadvances................................................9
2.3 Interest Rates, Payments, and Calculations..................10
2.4 Crediting Payments..........................................10
2.5 Fees........................................................10
2.6 Additional Costs............................................11
2.7 Term........................................................11
3. CONDITIONS OF LOANS..................................................11
3.1 Conditions Precedent to Initial Credit Extension............11
3.2 Conditions Precedent to all Credit Extensions...............12
4. CREATION OF SECURITY INTEREST........................................12
4.1 Grant of Security Interest..................................12
4.2 Delivery of Additional Documentation Required...............12
4.3 Right to Inspect............................................12
5. REPRESENTATIONS AND WARRANTIES.......................................13
5.1 Due Organization and Qualification..........................13
5.2 Due Authorization; No Conflict..............................13
5.3 No Prior Encumbrances.......................................13
5.4 Bona Fide Accounts..........................................13
5.5 Merchantable Inventory......................................13
5.6 Intellectual Property.......................................13
5.7 Name; Location of Chief Executive Office....................13
5.8 Litigation..................................................14
5.9 No Material Adverse Change in Financial Statements..........14
5.10 Solvency....................................................14
5.11 Regulatory Compliance.......................................14
5.12 Environmental Condition.....................................14
5.13 Taxes.......................................................14
5.14 Subsidiaries................................................15
5.15 Government Consents.........................................15
5.16 Full Disclosure.............................................15
6. AFFIRMATIVE COVENANTS................................................15
6.1 Good Standing...............................................15
6.2 Government Compliance.......................................15
6.3 Financial Statements, Reports, Certificates.................15
6.4 Inventory; Returns..........................................16
6.5 Taxes.......................................................16
6.6 Insurance...................................................16
6.7 Principal Depository........................................17
6.8 Quick Ratio.................................................17
i
<PAGE> 3
6.9 Profitability/Loss..........................................17
6.10 Liquidity, Debt Service Coverage............................17
6.11 Further Assurances..........................................17
7. NEGATIVE COVENANTS...................................................17
7.1 Dispositions................................................17
7.2 Changes in Business, Ownership, Management or Business
Locations...................................................17
7.3 Mergers or Acquisitions.....................................18
7.4 Indebtedness................................................18
7.5 Encumbrances................................................18
7.6 Distributions...............................................18
7.7 Investments.................................................18
7.8 Transactions with Affiliates................................18
7.9 Intellectual Property Agreements............................18
7.10 Subordinated Debt...........................................19
7.11 Inventory...................................................19
7.12 Compliance..................................................19
8. EVENTS OF DEFAULT....................................................19
8.1 Payment Default.............................................19
8.2 Covenant Default............................................19
8.3 Material Adverse Change.....................................20
8.4 Attachment..................................................20
8.5 Insolvency..................................................20
8.6 Other Agreements............................................20
8.7 Subordinated Debt...........................................20
8.8 Judgments...................................................20
8.9 Misrepresentations..........................................20
9. BANK'S RIGHTS AND REMEDIES...........................................21
9.1 Rights and Remedies.........................................21
9.2 Power of Attorney...........................................22
9.3 Accounts Collection.........................................22
9.4 Bank Expenses...............................................22
9.5 Bank's Liability for Collateral.............................23
9.6 Remedies Cumulative.........................................23
9.7 Demand; Protest.............................................23
10. NOTICES..............................................................23
11. CHOICE OF LAW AND VENUE..............................................23
12. GENERAL PROVISIONS...................................................24
12.1 Successors and Assigns......................................24
12.2 Indemnification.............................................25
12.3 Time of Essence.............................................25
12.4 Severability of Provisions..................................25
12.5 Amendments in Writing, Integration..........................25
12.6 Counterparts................................................25
12.7 Survival....................................................25
12.8 Confidentiality.............................................25
ii
<PAGE> 4
This LOAN AND SECURITY AGREEMENT is entered into as of December 9,
1998, by and between SILICON VALLEY BANK ("Bank") and E-LOAN, INC. ("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1.1 Definitions.
As used in this Agreement, the following terms shall
have the following definitions:
"Accounts" means all presently existing and hereafter
arising accounts, contract rights, and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the rendering of
services by Borrower, whether or not earned by performance, and any and all
credit insurance, guaranties, and other security therefor, as well as all
merchandise returned to or reclaimed by Borrower and Borrower's Books relating
to any of the foregoing.
"Advance" or "Advances" means a loan advance under
the Committed Revolving Line.
"Affiliate" means, with respect to any Person, any
Person that owns or controls directly or indirectly such Person, any Person that
controls or is controlled by or is under common control with such Person, and
each of such Person's senior executive officers, directors, partners and, for
any Person that is a limited liability company, such Persons, managers and
members.
"Bank Expenses" means all: reasonable costs or
expenses (including reasonable attorneys' fees and expenses) incurred in
connection with the preparation, negotiation, administration, and enforcement of
the Loan Documents; and Bank's reasonable attorneys' fees and expenses incurred
in amending, enforcing or defending the Loan Documents (including fees and
expenses of appeal or review, or those incurred in any Insolvency Proceeding),
whether or not suit is brought.
"Borrower's Books" means all of Borrower's books and
records including without limitation: ledgers; records concerning Borrower's
assets or liabilities, the Collateral, business operations or financial
condition; and all computer programs, or tape files, and the equipment,
containing such information.
"Borrowing Base" means, for any applicable date of
determination, an amount equal to eighty percent (80%) of Borrower's brokerage
and referral fee revenue, calculated on a trailing three-month rolling average
basis, as determined by Bank with reference to the most recent financial
statements of Borrower delivered pursuant to Section 6.3 hereof.
"Business Day" means any day that is not a Saturday,
Sunday, or other day on which banks in the State of California are authorized or
required to close.
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on Exhibit
A attached hereto.
1
<PAGE> 5
"Committed Revolving Line" means a credit extension
of up to One Million Five Hundred Thousand Dollars ($1,500,000).
"Committed Equipment Line" means a credit extension
of up to Three Million Five Hundred Thousand Dollars ($3,500,000).
"Contingent Obligation" means, as applied to any
Person, any direct or indirect liability, contingent or otherwise, of that
Person with respect to (i) any indebtedness, lease, dividend, letter of credit
or other obligation of another, including, without limitation, any such
obligation directly or indirectly guaranteed, endorsed, co-made or discounted or
sold with recourse by that Person, or in respect of which that Person is
otherwise directly or indirectly liable; (ii) any obligations with respect to
undrawn letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, however,
that the term "Contingent Obligation" shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determined amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith; provided, however, that such amount shall not in any event exceed the
maximum amount of the obligations under the guarantee or other support
arrangement.
"Copyrights" means any and all copyright rights,
copyright applications, copyright registrations and like protections in each
work or authorship and derivative work thereof, whether published or unpublished
and whether or not the same also constitutes a trade secret, now or hereafter
existing, created, acquired or held.
"Credit Extension" means each Advance, Equipment
Advance, Letter of Credit or any other extension of credit by Bank for the
benefit of Borrower hereunder.
"Current Assets" means, as of any applicable date,
all amounts that should, in accordance with GAAP, be included as current assets
on the consolidated balance sheet of Borrower and its Subsidiaries as at such
date.
"Current Liabilities" means, as of any applicable
date, all amounts that should, in accordance with GAAP, be included as current
liabilities on the consolidated balance sheet of Borrower and its Subsidiaries,
as at such date, plus, to the extent not already included therein, all
outstanding Credit Extensions made under this Agreement, including all
Indebtedness that is payable upon demand or within one year from the date of
determination thereof unless such Indebtedness is renewable or extendable at the
option of Borrower or any Subsidiary to a date more than one year from the date
of determination, but excluding Subordinated Debt.
"Debt Service Coverage" means, as measured quarterly
as of the last day of each fiscal quarter of Borrower, on a consolidated basis
determined in accordance with GAAP, the ratio of (a) an amount equal to the sum
of (i) net income for such quarter, plus (ii) depreciation and amortization of
intangible assets and other non-cash charges to income for such quarter plus
(iii) quarterly interest expense minus (iv) capitalized software expense for
such quarter to (b) an amount equal to the sum of (x) all scheduled repayments
and mandatory prepayments of principal on account of long-term Indebtedness for
such quarter plus (y) quarterly interest expense.
"Equipment" means all present and future machinery,
equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and
attachments in which Borrower has any interest.
"Equipment Advance" has the meaning set forth in
Section 2.1.5.
"Equipment Availability End Date" has the meaning set
forth in Section 2.1.5.
2
<PAGE> 6
"ERISA" means the Employment Retirement Income
Security Act of 1974, as amended, and the regulations thereunder.
"GAAP" means generally accepted accounting principles
as in effect in the United States from time to time.
"Indebtedness" means (a) all indebtedness for
borrowed money or the deferred purchase price of property or services, including
without limitation reimbursement and other obligations with respect to surety
bonds and letters of credit, (b) all obligations evidenced by notes, bonds,
debentures or similar instruments, (c) all capital lease obligations and (d) all
Contingent Obligations.
"Insolvency Proceeding" means any proceeding
commenced by or against any person or entity under any provision of the United
States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency
law, including assignments for the benefit of creditors, formal or informal
moratoria, compositions, extension generally with its creditors, or proceedings
seeking reorganization, arrangement, or other relief.
"Intellectual Property Collateral" means all of
Borrower's right, title and interest in and to the following:
(a) Copyrights, Trademarks, Patents, and Mask Works;
(b) Any and all trade secrets, and any and all
intellectual property rights in computer software and computer software products
now or hereafter existing, created, acquired or held;
(c) Any and all design rights which may be available
to Borrower now or hereafter existing, created, acquired or held;
(d) Any and all claims for damages by way of past,
present and future infringement of any of the rights included above, with the
right, but not the obligation, to sue for and collect such damages for said use
or infringement of the intellectual property rights identified above;
(e) All licenses or other rights to use any of the
Copyrights, Patents, Trademarks, or Mask Works, and all license fees and
royalties arising from such use to the extent permitted by such license or
rights;
(f) All amendments, renewals and extensions of any of
the Copyrights, Trademarks, Patents or Mask Works; and
(g) All proceeds and products of the foregoing,
including without limitation all payments under insurance or any indemnity or
warranty payable in respect of any of the foregoing.
"Inventory" means all present and future inventory in
which Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above.
"Investment" means any beneficial ownership of
(including stock, partnership interest or other securities) any Person, or any
loan, advance or capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as
amended, and the regulations thereunder.
3
<PAGE> 7
"Letter of Credit" means a letter of credit or
similar undertaking issued by Bank pursuant to Section 2.1.2.
"Letter of Credit Reserve" has the meaning set forth
in Section 2.1.2.
"Lien" means any mortgage, lien, deed of trust,
charge, pledge, security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement,
any note or notes executed by Borrower, and any other present or future
agreement entered into between Borrower and/or for the benefit of Bank in
connection with this Agreement, all as amended, extended or restated from time
to time.
"Mask Works" means all mask works or similar rights
available for the protection of semiconductor chips, now owned or hereafter
acquired.
"Material Adverse Effect" means a material adverse
effect on (i) the business operations or condition (financial or otherwise) of
Borrower and its Subsidiaries taken as a whole or (ii) the ability of Borrower
to repay the Obligations or otherwise perform its obligations under the Loan
Documents.
"Maturity Date" means September 8, 2002.
"Negotiable Collateral" means all of Borrower's
present and future letters of credit of which it is a beneficiary, notes,
drafts, instruments, securities, documents of title, and chattel paper.
"Obligations" means all debt, principal, interest,
Bank Expenses and other amounts owed to Bank by Borrower pursuant to this
Agreement or any other agreement, whether absolute or contingent, due or to
become due, now existing or hereafter arising, including any interest that
accrues after the commencement of an Insolvency Proceeding and including any
debt, liability, or obligation owing from Borrower to others that Bank may have
obtained by assignment or otherwise.
"Patents" means all patents, patent applications and
like protections, including without limitation improvements, divisions,
continuations, renewals, reissues, extensions and continuations-in-part of the
same.
"Payment Date" means the eighth (8th) calendar day of
each month, commencing on the first such date after the Closing Date and ending
on the Maturity Date.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising
under this Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and
disclosed in the Schedule;
(c) Indebtedness to trade creditors and with respect
to surety bonds and similar obligations incurred in the ordinary course of
business;
(d) Subordinated Debt;
(e) Indebtedness of Borrower to any Subsidiary and
Contingent Obligations of any Subsidiary with respect to obligations of Borrower
(provided that the primary obligations are not prohibited hereby), and
Indebtedness of any Subsidiary to any other Subsidiary and Contingent
Obligations of any Subsidiary with respect to obligations of any other
Subsidiary (provided that the primary obligations are not prohibited hereby);
(f) Indebtedness secured by Permitted Liens;
4
<PAGE> 8
(g) Capital leases or indebtedness incurred solely to
purchase equipment which is secured in accordance with clause (c) of "Permitted
Liens" below and is not in excess of the lesser of the purchase price of such
equipment or the fair market value of such equipment on the date of acquisition;
and
(h) Extensions, refinancings, modifications,
amendments and restatements of any of items of Permitted Indebtedness (a)
through (g) above, provided that the principal amount thereof is not increased
or the terms thereof are not modified to impose more burdensome terms upon
Borrower or its Subsidiary, as the case may be.
"Permitted Investment" means:
(a) Investments existing on the Closing Date
disclosed in the Schedule; and
(b) (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or any
State thereof maturing within one (1) year from the date of acquisition thereof,
(ii) commercial paper maturing no more than one (1) year from the date of
creation thereof and currently having the highest rating obtainable from either
Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii)
certificates of deposit maturing no more than one (1) year from the date of
investment therein issued by Bank;
(c) Investments consisting of the endorsement of
negotiable instruments for deposit or collection or similar transaction in the
ordinary course of business;
(d) Investments accepted in connection with Transfers
permitted by Section 7.1;
(e) Investments consisting of (i) compensation of
employees, officers and directors of Borrower or its Subsidiaries so long as the
Board of Directors of Borrower determines that such compensation is in the best
interests of Borrower, (ii) travel advances, employee relocation loans and other
employee loans and advances in the ordinary course of business, and (iii) loans
to employees, officers or directors relating to the purchase of equity
securities of Borrower or its Subsidiaries pursuant to employee stock purchase
plans or agreements approved by Borrower's Board of Directors;
(f) Investments (including debt obligations) received
in connection with the bankruptcy or reorganization of customers or suppliers
and in settlement of delinquent obligations of, and other disputes with,
customers or suppliers arising in the ordinary course of business;
(g) Investments pursuant to or arising under currency
agreements or interest rate agreements entered into in the ordinary course of
business;
(h) Investments consisting of notes receivable of, or
prepaid royalties and other credit extensions to, customers and suppliers who
are not Affiliates, in the ordinary course of business; provided that this
paragraph (i) shall not apply to Investments by Borrower in any Subsidiary;
(i) Investments constituting acquisitions permitted
under Section 7.3;
(j) Deposit accounts of Borrower in which Bank has a
Lien prior to any other Lien; and
(k) Deposit accounts of any Subsidiaries maintained
in the ordinary course of business.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and
disclosed in the Schedule or arising under this Agreement or the other Loan
Documents;
5
<PAGE> 9
(b) Liens for taxes, fees, assessments or other
governmental charges or levies, either not delinquent or being contested in good
faith by appropriate proceedings and as to which adequate reserves are
maintained on Borrower's Books in accordance with GAAP, provided the same have
no priority over any of Bank's security interests;
(c) Liens (i) upon or in any Equipment acquired or
held by Borrower or any of its Subsidiaries to secure the purchase price of such
Equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such Equipment, or (ii) existing on such equipment at the time of
its acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such Equipment;
(d) Liens on Equipment leased by Borrower or any
Subsidiary pursuant to an operating or capital lease in the ordinary course of
business (including proceeds thereof and accessions thereto) incurred solely for
the purpose of financing the lease of such Equipment (including Liens pursuant
to leases permitted pursuant to Section 7.1 and Liens arising from UCC financing
statements regarding leases permitted by this Agreement);
(e) Leases or subleases and licenses or sublicenses
granted to others in the ordinary course of Borrower's business not interfering
in any material respect with the business of Borrower and its Subsidiaries taken
as a whole, and any interest or title of a lessor, licensor or under any lease
or license, provided that such leases, subleases, licenses and sublicenses do
not prohibit the grant of the security interest granted hereunder;
(f) Liens on assets (including the proceeds thereof
and accessions thereto) that existed at the time such assets were acquired by
Borrower or any Subsidiary (including Liens on assets of any corporation that
existed at the time it became or becomes a Subsidiary); provided such Liens are
not granted in contemplation of or in connection with the acquisition of such
asset by Borrower or a Subsidiary;
(g) Liens arising from judgments, decrees or
attachments in circumstances not constituting an Event of Default under Section
8.8;
(h) Easements, reservations, rights-of-way,
restrictions, minor defects or irregularities in title and other similar charges
or encumbrances affecting real property not constituting a Material Adverse
Effect;
(i) Liens in favor of customs and revenue authorities
arising as a matter of law to secure payments of customs duties in connection
with the importation of goods;
(j) Liens that are not prior to the Lien of Bank
which constitute rights of set-off of a customary nature or banker's Liens with
respect to amounts on deposit, whether arising by operation of law or by
contract, in connection with arrangement entered in to with banks in the
ordinary course of business;
(k) Earn-out and royalty obligations existing on the
date hereof or entered into in connection with an acquisition permitted by
Section 7.3;
(l) Liens on insurance proceeds in favor of insurance
companies granted solely as security for financed premiums; and
(m) Liens incurred in connection with the extension,
renewal or refinancing of the indebtedness secured by Liens of the type
described in clauses (a), (c), (d), (e), (f) and (k) above, provided that any
extension, renewal or replacement Lien shall be limited to the property
encumbered by the existing Lien and the principal amount of the indebtedness
being extended, renewed or refinanced does not increase.
"Person" means any individual, sole proprietorship,
partnership, limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or governmental agency.
6
<PAGE> 10
"Prime Rate" means the variable rate of interest, per
annum, most recently announced by Bank, as its "prime rate," whether or not such
announced rate is the lowest rate available from Bank.
"Quick Assets" means, as of any applicable date, the
unrestricted cash; unrestricted cash-equivalents; net, billed accounts
receivable and investments with maturities of fewer than one year of Borrower
determined in accordance with GAAP.
"Responsible Officer" means each of the Chief
Executive Officer, the President, the Chief Financial Officer and the Controller
of Borrower.
"Revolving Maturity Date" means the date immediately
preceding the first anniversary of the Closing Date.
"Schedule" means the schedule of exceptions attached
hereto, if any.
"Subordinated Debt" means any debt incurred by
Borrower that is subordinated to the debt owing by Borrower to Bank on terms
acceptable to Bank (and identified as being such by Borrower and Bank).
"Subsidiary" means with respect to any Person,
corporation, partnership, company association, joint venture, or any other
business entity of which more than fifty percent (50%) of the voting stock or
other equity interests is owned or controlled, directly or indirectly, by such
Person or one or more Affiliates of such Person.
"Tangible Net Worth" means, as of any applicable
date, the consolidated total assets of Borrower and its Subsidiaries minus,
without duplication, (i) the sum of any amounts attributable to (a) goodwill,
(b) intangible items such as unamortized debt discount and expense, patents,
trade and service marks and names, copyrights and research and development
expenses except prepaid expenses, and (c) all reserves not already deducted from
assets, and (ii) Total Liabilities.
"Total Liabilities" means, as of any applicable date,
all obligations that should, in accordance with GAAP, be classified as
liabilities on the consolidated balance sheet of Borrower, including in any
event all Indebtedness, but specifically excluding Subordinated Debt.
"Trademarks" means any trademark and servicemark
rights, whether registered or not, applications to register and registrations of
the same and like protections, and the entire goodwill of the business of
Assignor connected with and symbolized by such trademarks.
1.2 Accounting and Other Terms.
All accounting terms not specifically defined herein
shall be construed in accordance with GAAP and all calculations and
determinations made hereunder shall be made in accordance with GAAP. When used
herein, the term "financial statements" shall include the notes and schedules
thereto. The terms "including" / "includes" shall always be read as meaning
"including (or includes) without limitation," when used herein or in any other
Loan Document.
2. LOAN AND TERMS OF PAYMENT
2.1 Credit Extensions.
Borrower promises to pay to the order of Bank, in
lawful money of the United States of America, the aggregate unpaid principal
amount of all Credit Extensions made by Bank to Borrower hereunder. Borrower
shall also pay interest on the unpaid principal amount of such Credit Extensions
at rates in accordance with the terms hereof.
7
<PAGE> 11
2.1.1 Revolving Advances
(a) Subject to and upon the terms and
conditions of this Agreement, Bank agrees to make Advances to Borrower in an
aggregate outstanding amount not to exceed (i) (a) the Committed Revolving Line
minus the Credit Card Sublimit minus the Merchant Services Sublimit, or (b) the
Borrowing Base, whichever is less, minus (ii) the face amount of all outstanding
Letters of Credit (including drawn but unreimbursed Letters of Credit);
provided, that Borrower shall not request or receive any Advances until Bank has
received Borrower's financial projections for the 1999 fiscal year. Subject to
the terms and conditions of this Agreement, amounts borrowed pursuant to this
Section 2.1.1 may be repaid and reborrowed at any time prior to the Revolving
Maturity Date.
(b) Whenever Borrower desires an Advance,
Borrower will notify Bank by facsimile transmission or telephone no later than
3:00 p.m. Pacific time, on the Business Day that the Advance is to be made. Each
such notification shall be promptly confirmed by a Payment/Advance Form in
substantially the form of Exhibit B hereto. Bank is authorized to make Advances
under this Agreement, based upon instructions received from a Responsible
Officer or a designee of a Responsible Officer, or without instructions if in
Bank's discretion such Advances are necessary to meet Obligations which have
become due and remain unpaid. Bank shall be entitled to rely on any telephonic
notice given by a person who Bank reasonably believes to be a Responsible
Officer or a designee thereof, and Borrower shall indemnify and hold Bank
harmless for any damages or loss suffered by Bank as a result of such reliance.
Bank will credit the amount of Advances made under this Section 2.1 to
Borrower's deposit account.
(c) The Committed Revolving Line shall
terminate on the Revolving Maturity Date, at which time all Advances under this
Section 2.1.1 shall be immediately due and payable.
2.1.2 Letters of Credit.
(a) Subject to the terms and conditions of
this Agreement, Bank agrees to issue or cause to be issued Letters of Credit for
the account of Borrower in an aggregate outstanding face amount not to exceed
(i) the lesser of (a) the Committed Revolving Line minus the Credit Card
Sublimit, minus the Merchant Services Sublimit, or (b) the sum of the Borrowing
Base plus $1,100,000, whichever is less, minus (ii) the then outstanding
principal balance of the Advances. Each Letter of Credit shall have an expiry
date no later than the Revolving Maturity Date. All Letters of Credit shall be,
in form and substance, acceptable to Bank in its sole discretion and shall be
subject to the terms and conditions of Bank's form of standard Application and
Letter of Credit Agreement.
(b) The obligation of Borrower to
immediately reimburse Bank for drawings made under Letters of Credit shall be
absolute, unconditional and irrevocable, and shall be performed strictly in
accordance with the terms of this Agreement and such Letters of Credit, under
all circumstances whatsoever. Borrower shall indemnify, defend, protect and hold
Bank harmless from any loss, cost, expense or liability, including, without
limitation, reasonable attorneys' fees, arising out of or in connection with any
Letters of Credit.
(c) Borrower may request that Bank issue a
Letter of Credit payable in a currency other than United States Dollars. If a
demand for payment is made under any such Letter of Credit, Bank shall treat
such demand as an Advance to Borrower of the equivalent of the amount thereof
(plus cable charges) in United States currency at the then prevailing rate of
exchange in San Francisco, California, for sales of that other currency for
cable transfer to the country of which it is the currency.
(d) Upon the issuance of any Letter of
Credit payable in a currency other than United States Dollars, Bank shall create
a reserve under the Committed Revolving Line for Letters of Credit against
fluctuations in currency exchange rates, in an amount equal to ten percent (10%)
of the face amount of such
8
<PAGE> 12
Letter of Credit. The amount of such reserve may be amended by Bank from time to
time to account for fluctuations in the exchange rate. The availability of funds
under the Committed Revolving Line shall be reduced by the amount of such
reserve for so long as such Letter of Credit remains outstanding.
2.1.3 Credit Card Sublimit.
Subject to the terms and conditions of this
Agreement, Bank agrees to issue or cause to be issued corporate credit cards for
the executives of Borrower in an aggregate credit limit not to exceed Five
Hundred Thousand Dollars ($500,000) (the "Credit Card Sublimit"). All agreements
executed in connection with the Credit Card Sublimit shall be, in form and
substance, acceptable to Bank, in its sole discretion.
2.1.4 Merchant Services Sublimit.
Subject to the terms and conditions of this
Agreement, Borrower may utilize up to an aggregate amount not to exceed One
Hundred Thousand Dollars ($100,000) (the "Merchant Services Sublimit") for
merchant credit card services provided by Bank as defined in that certain
Merchant Services Agreement provided to Borrower in connection herewith (a
"Merchant Service", or the "Merchant Services"). Any amounts actually paid by
Bank in respect of a Merchant Service or Merchant Services shall, when paid,
constitute an Advance under the Committed Revolving Line.
2.1.5 Equipment Advances.
(a) Subject to and upon the terms and
conditions of this Agreement, at any time from the date hereof through September
8, 1999 (the "Equipment Availability End Date"), Bank agrees to make advances
(each an "Equipment Advance" and, collectively, the "Equipment Advances") to
Borrower in an aggregate outstanding amount not to exceed the Committed
Equipment Line; provided, that Borrower shall not request or receive Equipment
Advances in excess of $1,000,000 in the aggregate until Bank has received
Borrower's financial projections for the 1999 fiscal year. To evidence the
Equipment Advance or Equipment Advances, Borrower shall deliver to Bank, within
thirty (30) days after the date of each Equipment Advance request, an invoice
for the equipment or software to be purchased. The Equipment Advances shall be
used only to purchase or refinance Equipment and software purchased on or after
April 1, 1998 and shall not exceed one hundred percent (100%) of the invoice
amount of such equipment or software approved from time to time by Bank,
excluding taxes, shipping, warranty charges, freight discounts and installation
expense.
(b) Interest shall accrue from the date of
each Equipment Advance at the rate specified in Section 2.3(a), and shall be
payable monthly for each month through the month in which the Equipment
Availability End Date falls. Any Equipment Advances that are outstanding on the
Equipment Availability End Date will be payable in thirty-six (36) equal monthly
installments of principal, plus all accrued interest, beginning on the Payment
Date of each month following the Equipment Availability End Date and ending on
the Maturity Date, at which time all amounts owing under this Agreement shall be
immediately due and payable. Equipment Advances, once repaid, may not be
reborrowed.
(c) When Borrower desires to obtain an
Equipment Advance, Borrower shall notify Bank (which notice shall be
irrevocable) by facsimile transmission to be received no later than 3:00 p.m.
Pacific time one (1) Business Day before the day on which the Equipment Advance
is to be made. Such notice shall be substantially in the form of Exhibit B. The
notice shall be signed by a Responsible Officer or its designee and include a
copy of the invoice for the Equipment to be financed.
2.2 Overadvances.
If, at any time or for any reason, the amount of
Obligations owed by Borrower to Bank pursuant to Section 2.1.1 of this Agreement
is greater than the lesser of (i) the Committed Revolving Line or (ii) the
Borrowing Base, Borrower shall immediately pay to Bank, in cash, the amount of
such excess. If, at any time or for any reason, the amount of Obligations owed
by Borrower to Bank pursuant to Section 2.1.1, 2.1.2, 2.1.3 and 2.1.4 is
9
<PAGE> 13
greater than the lesser of (i) the Committed Revolving Line or (ii) the
Borrowing Base plus $1,100,000, Borrower shall immediately pay to Bank, in cash,
the amount of such excess.
2.3 Interest Rates, Payments, and Calculations.
(a) Interest Rate. Except as set forth in Section
2.3(b), any Advances and/or Equipment Advances shall bear interest on the
average daily balance thereof, at a per annum rate equal to the Prime Rate plus
0.50%.
(b) Default Rate. All Obligations shall bear
interest, from and after the occurrence of an Event of Default, at a rate equal
to five (5) percentage points above the interest rate applicable immediately
prior to the occurrence of the Event of Default.
(c) Payments. Interest hereunder shall be due and
payable on each Payment Date. Borrower hereby authorizes Bank to debit any
accounts with Bank, including, without limitation, Account Number __________ for
payments of principal and interest due on the Obligations and any other amounts
owing by Borrower to Bank. Bank will notify Borrower of all debits which Bank
has made against Borrower's accounts. Any such debits against Borrower's
accounts in no way shall be deemed a set-off. Any interest not paid when due
shall be compounded by becoming a part of the Obligations, and such interest
shall thereafter accrue interest at the rate then applicable hereunder.
(d) Computation. In the event the Prime Rate is
changed from time to time hereafter, the applicable rate of interest hereunder
shall be increased or decreased effective as of 12:01 a.m. on the day the Prime
Rate is changed, by an amount equal to such change in the Prime Rate. All
interest chargeable under the Loan Documents shall be computed on the basis of a
three hundred sixty (360) day year for the actual number of days elapsed.
2.4 Crediting Payments.
Prior to the occurrence of an Event of Default, Bank
shall credit a wire transfer of funds, check or other item of payment to such
deposit account or Obligation as Borrower specifies. After the occurrence of an
Event of Default, the receipt by Bank of any wire transfer of funds, check, or
other item of payment, whether directed to Borrower's deposit account with Bank
or to the Obligations or otherwise, shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment in
respect of the Obligations unless such payment is of immediately available
federal funds or unless and until such check or other item of payment is honored
when presented for payment. Notwithstanding anything to the contrary contained
herein, any wire transfer or payment received by Bank after 12:00 noon Pacific
time shall be deemed to have been received by Bank as of the opening of business
on the immediately following Business Day. Whenever any payment to Bank under
the Loan Documents would otherwise be due (except by reason of acceleration) on
a date that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.
2.5 Fees.
Borrower shall pay to Bank the following:
(a) Facility Fee. A Facility Fee equal to Ten
Thousand Dollars ($10,000), which fee shall be due on the Closing Date and shall
be fully earned and non-refundable;
(b) Financial Examination and Appraisal Fees. Bank's
customary fees and out-of-pocket expenses for Bank's audits of Borrower's
Accounts, and for each appraisal of Collateral and financial analysis and
examination of Borrower performed from time to time by Bank or its agents;
10
<PAGE> 14
(c) Bank Expenses. Upon demand from Bank, including,
without limitation, upon the date hereof, all Bank Expenses incurred through the
date hereof, including reasonable attorneys' fees and expenses not in excess of
$2,500 and, after the date hereof, all Bank Expenses, including reasonable
attorneys' fees and expenses, as and when they become due.
2.6 Additional Costs.
In case any change in any law, regulation, treaty or
official directive or the interpretation or application thereof by any court or
any governmental authority charged with the administration thereof or the
compliance with any guideline or request of any central bank or other
governmental authority (whether or not having the force of law), in each case
after the date of this Agreement:
(a) subjects Bank to any tax with respect to payments
of principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for taxes
on the overall net income of Bank imposed by the United States of America or any
political subdivision thereof);
(b) imposes, modifies or deems applicable any deposit
insurance, reserve, special deposit or similar requirement against assets held
by, or deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with
respect to its performance under this Agreement,
and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank
the amount of such increase in cost, reduction in income or additional expense
as and when such cost, reduction or expense is incurred or determined, upon
presentation by Bank of a statement of the amount and setting forth Bank's
calculation thereof, all in reasonable detail, which statement shall be deemed
true and correct absent manifest error; provided, however, that Borrower shall
not be liable for any such amount attributable to any period prior to the date
of hundred eighty (180) days prior to the date of such statement.
2.7 Term.
Except as otherwise set forth herein, this Agreement
shall become effective on the Closing Date and, subject to Section 12.7, shall
continue in full force and effect for a term ending on the Maturity Date.
Notwithstanding the foregoing, Bank shall have the right to terminate its
obligation to make Credit Extensions under this Agreement immediately and
without notice upon the occurrence and during the continuance of an Event of
Default. Notwithstanding termination of this Agreement, Bank's lien on the
Collateral shall remain in effect for so long as any Obligations (excluding
Obligations under Section 2.6 and 12.2 to the extent they remain inchoate at the
time outstanding payment obligations are paid in full) are outstanding.
3. CONDITIONS OF LOANS
3.1 Conditions Precedent to Initial Credit Extension.
The obligation of Bank to make the initial Credit
Extension is subject to the condition precedent that Bank shall have received,
in form and substance satisfactory to Bank, the following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with
respect to articles, bylaws, incumbency and resolutions authorizing the
execution and delivery of this Agreement;
(c) financing statements (Forms UCC-1);
11
<PAGE> 15
(d) insurance certificate;
(e) payment of the fees and Bank Expenses then due
specified in Section 2.5 hereof; and
(f) such other documents, and completion of such
other matters, as Bank may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to all Credit Extensions.
The obligation of Bank to make each Credit Extension,
including the initial Credit Extension, is further subject to the following
conditions:
(a) timely receipt by Bank of the Payment/Advance
Form as provided in Section 2.1; and
(b) the representations and warranties contained in
Section 5 shall be true and correct in all material respects on and as of the
date of such Payment/Advance Form and on the effective date of each Credit
Extension as though made at and as of each such date, and no Event of Default
shall have occurred and be continuing, or would result from such Credit
Extension. The making of each Credit Extension shall be deemed to be a
representation and warranty by Borrower on the date of such Advance as to the
accuracy of the facts referred to in this Section 3.2(b).
4. CREATION OF SECURITY INTEREST
4.1 Grant of Security Interest.
Borrower grants and pledges to Bank a continuing
security interest in all presently existing and hereafter acquired or arising
Collateral in order to secure prompt payment of any and all Obligations and in
order to secure prompt performance by Borrower of each of its covenants and
duties under the Loan Documents. Except as set forth in the Schedule, such
security interest constitutes a valid, first priority security interest in the
presently existing Collateral, and will constitute a valid, first priority
security interest in Collateral acquired after the date hereof. Borrower
acknowledges that Bank may place a "hold" on any Deposit Account pledged as
Collateral to secure the Obligations, in each case, to the extent that a
security interest in such Collateral can be perfected by the filing of a
financing statement or, in the case of Collateral consisting of instruments,
documents, chattel paper or certificated securities, to the extent that Bank
takes possession of such Collateral. Bank agrees to execute and deliver to
Borrower from time to time such subordination agreements as Borrower may request
and as are necessary to give to other lenders which finance equipment for
Borrower a first priority security interest in the equipment financed so long as
the Liens and the Indebtedness incurred with respect to such equipment financing
are permitted under this Agreement. Notwithstanding termination of this
Agreement, Bank's Lien on the Collateral shall remain in effect for so long as
any Obligations are outstanding.
4.2 Delivery of Additional Documentation Required.
Borrower shall from time to time execute and deliver
to Bank, at the request of Bank, all Negotiable Collateral, all financing
statements and other documents that Bank may reasonably request, in form
satisfactory to Bank, to perfect and continue perfected Bank's security
interests in the Collateral and in order to fully consummate all of the
transactions contemplated under the Loan Documents.
4.3 Right to Inspect.
Bank (through any of its officers, employees, or
agents) shall have the right, upon reasonable prior notice, from time to time
during Borrower's usual business hours, to inspect Borrower's Books and
12
<PAGE> 16
to make copies thereof and to check, test, and appraise the Collateral in order
to verify Borrower's financial condition or the amount, condition of, or any
other matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 Due Organization and Qualification.
Borrower and each Subsidiary is a corporation duly existing
and in good standing under the laws of its state of incorporation and qualified
and licensed to do business in, and is in good standing in, any state in which
the conduct of its business or its ownership of property requires that it be so
qualified, except for states as to which any failure to so qualify would not
have a Material Adverse Effect.
5.2 Due Authorization; No Conflict.
The execution, delivery, and performance of the Loan Documents
are within Borrower's powers, have been duly authorized, and are not in conflict
with nor constitute a breach of any provision contained in Borrower's
Articles/Certificate of Incorporation or Bylaws, nor will they constitute an
event of default under any material agreement to which Borrower is a party or by
which Borrower is bound except to the extent that certain intellectual property
agreements prohibit the assignment of the rights thereunder to a third party
without the Borrower's or other party's consent and the Loan Documents
constitute an assignment. Borrower is not in default under any agreement to
which it is a party or by which it is bound, which default could reasonably be
expected to have a Material Adverse Effect.
5.3 No Prior Encumbrances.
Borrower has good and indefeasible title to the Collateral,
free and clear of Liens, except for Permitted Liens.
5.4 Bona Fide Accounts.
The Accounts are bona fide existing obligations. The service
or property giving rise to such Accounts has been performed or delivered to the
account debtor or to the account debtor's agent for immediate shipment to and
unconditional acceptance by the account debtor.
5.5 Merchantable Inventory.
All Inventory is in all material respects of good and
marketable quality, free from all material defects.
5.6 Intellectual Property.
Borrower is the sole owner of the Intellectual Property
Collateral, except for non-exclusive licenses granted by Borrower to its
customers in the ordinary course of business. Each of the Patents is valid and
enforceable, and no part of the Intellectual Property Collateral has been judged
invalid or unenforceable, in whole or in part, and no claim has been made that
any part of the Intellectual Property Collateral violates the rights of any
third party.
5.7 Name; Location of Chief Executive Office.
Except as disclosed in the Schedule, Borrower has not done
business and will not, without at least thirty (30) days prior written notice to
Bank, do business under any name other than that specified on the signature page
hereof. The chief executive office of Borrower is located at the address
indicated in Section 10 hereof.
13
<PAGE> 17
5.8 Litigation.
Except as set forth in the Schedule, there are no actions or
proceedings pending or, to Borrower's knowledge, threatened by or against
Borrower or any Subsidiary before any court or administrative agency in which an
adverse decision could reasonably be expected to have a Material Adverse Effect
or a material adverse effect on Borrower's interest or Bank's security interest
in the Collateral.
5.9 No Material Adverse Change in Financial Statements.
All consolidated financial statements related to Borrower and
any Subsidiary that have been delivered by Borrower to Bank fairly present in
all material respects Borrower's consolidated financial condition as of the date
thereof and Borrower's consolidated results of operations for the period then
ended. There has not been a material adverse change in the consolidated
financial condition of Borrower since the date of the most recent of such
financial statements submitted to Bank on or about the Closing Date.
5.10 Solvency.
The fair saleable value of Borrower's assets (including
goodwill minus disposition costs) exceeds the fair value of its liabilities; the
Borrower is not left with unreasonably small capital after the transactions
contemplated by this Agreement; and Borrower is able to pay its debts (including
trade debts) as they mature.
5.11 Regulatory Compliance.
Borrower and each Subsidiary has met the minimum funding
requirements of ERISA with respect to any employee benefit plans subject to
ERISA. No event has occurred resulting from Borrower's failure to comply with
ERISA that is reasonably likely to result in Borrower's incurring any liability
that could reasonably be expected to have a Material Adverse Effect. Borrower is
not an "investment company" or a company "controlled" by an "investment company"
within the meaning of the Investment Company Act of 1940. Borrower is not
engaged principally, or as one of its important activities, in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulations G, T and U of the Board of Governors of the Federal
Reserve System). Borrower has complied with all the provisions of the Federal
Fair Labor Standards Act. Borrower has not violated any statutes, laws,
ordinances or rules applicable to it, violation of which could have a Material
Adverse Effect.
5.12 Environmental Condition.
None of Borrower's or any Subsidiary's properties or assets
has ever been used by Borrower or any Subsidiary or, to the best of Borrower's
knowledge, by previous owners or operators, in the disposal of, or to produce,
store, handle, treat, release, or transport, any hazardous waste or hazardous
substance other than in accordance with applicable law; to the best of
Borrower's knowledge, none of Borrower's properties or assets has ever been
designated or identified in any manner pursuant to any environmental protection
statute as a hazardous waste or hazardous substance disposal site, or a
candidate for closure pursuant to any environmental protection statute; no lien
arising under any environmental protection statute has attached to any revenues
or to any real or personal property owned by Borrower or any Subsidiary; and
neither Borrower nor any Subsidiary has received a summons, citation, notice, or
directive from the Environmental Protection Agency or any other federal, state
or other governmental agency concerning any action or omission by Borrower or
any Subsidiary resulting in the release or other disposition of hazardous waste
or hazardous substances into the environment.
5.13 Taxes.
Borrower and each Subsidiary has filed or caused to be filed
all tax returns required to be filed on a timely basis, and has paid, or has
made adequate provision for the payment of, all taxes reflected therein, except
those being contested in good faith by proper proceedings with adequate reserves
under GAAP.
14
<PAGE> 18
5.14 Subsidiaries.
Borrower does not own any stock, partnership interest
or other equity securities of any Person, except for Permitted Investments.
5.15 Government Consents.
Borrower and each Subsidiary has obtained all
consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are necessary
for the continued operation of Borrower's business as currently conducted except
where the failure to obtain any such consent, approval or authorization, to make
any such declaration or filing, or to be given any such notice could not
reasonably be expected to have a Material Adverse Effect.
5.16 Full Disclosure.
No representation, warranty or other statement made
by Borrower in any certificate or written statement furnished to Bank contains
any untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements contained in such certificates or
statements not misleading (it being recognized by Bank that the projections and
forecasts provided by Borrower are not to be viewed as facts and that actual
results during the period or period covered by any such projections and
forecasts may differ from the projected or forecasted results).
6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of
all outstanding Obligations, and for so long as Bank may have any commitment to
make a Credit Extension hereunder, Borrower shall do all of the following:
6.1 Good Standing.
Borrower shall maintain its and each of its
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could reasonably be expected to have a Material Adverse
Effect. Borrower shall maintain, and shall cause each of its Subsidiaries to
maintain, to the extent consistent with prudent management of Borrower's
business, in force all licenses, approvals and agreements, the loss of which
could reasonably be expect to have a Material Adverse Effect.
6.2 Government Compliance.
Borrower shall meet, and shall cause each Subsidiary
to meet, the minimum funding requirements of ERISA with respect to any employee
benefit plans subject to ERISA. Borrower shall comply, and shall cause each
Subsidiary to comply, with all statutes, laws, ordinances and government rules
and regulations to which it is subject, noncompliance with which could
reasonably be expected to have a Material Adverse Effect or a material adverse
effect on the Collateral or the priority of Bank's Lien on the Collateral.
6.3 Financial Statements, Reports, Certificates.
Borrower shall deliver to Bank: (a) as soon as
available, but in any event within thirty (30) days after the end of each month,
a company prepared consolidated balance sheet and income statement covering
Borrower's consolidated operations during such period, in a form and certified
by an Officer of Borrower reasonably acceptable to Bank; (b) as soon as
available, but in any event within one hundred twenty (120) days after the end
of Borrower's fiscal year, audited consolidated financial statements of Borrower
prepared in accordance with GAAP, consistently applied, together with an
unqualified opinion on such financial statements of an independent certified
public accounting firm reasonably acceptable to Bank; (c) within five (5) days
of filing, copies of all statements, reports and notices sent or made available
generally by Borrower to its security holders or to any
15
<PAGE> 19
holders of Subordinated Debt and all reports on Form 10-K, 10-Q and 8-K filed
with the Securities and Exchange Commission; (d) promptly upon receipt of notice
thereof, a report of any legal actions pending or threatened against Borrower or
any Subsidiary that could result in damages or costs to Borrower or any
Subsidiary of One Hundred Thousand Dollars ($100,000) or more; (e) as soon as
available, but in any event not later than December 31, 1998, Borrower's
financial projections for the 1999 fiscal year, approved by Borrower's board of
directors; and (f) such budgets, sales projections, operating plans or other
financial information as Bank may reasonably request from time to time.
Within thirty (30) days after the last day of each
month, Borrower shall deliver to Bank with the monthly financial statements a
Compliance Certificate signed by a Responsible Officer in substantially the form
of Exhibit C hereto.
6.4 Inventory; Returns.
Borrower shall keep all Inventory in good and
marketable condition, free from all material defects. Returns and allowances, if
any, as between Borrower and its account debtors shall be on the same basis and
in accordance with the usual customary practices of Borrower, as they exist at
the time of the execution and delivery of this Agreement. Borrower shall
promptly notify Bank of all returns and recoveries and of all disputes and
claims, where the return, recovery, dispute or claim involves more than Fifty
Thousand Dollars ($50,000).
6.5 Taxes.
Borrower shall make, and shall cause each Subsidiary
to make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that Borrower or a Subsidiary has made such
payments or deposits; provided that Borrower or a Subsidiary need not make any
payment if the amount or validity of such payment is (i)contested in good faith
by appropriate proceedings, (ii) is reserved against (to the extent required by
GAAP) by Borrower and (iii) no lien other than a Permitted Lien results.
6.6 Insurance.
(a) Borrower, at its expense, shall keep the
Collateral insured against loss or damage by fire, theft, explosion, sprinklers,
and all other hazards and risks, and in such amounts, as ordinarily insured
against by other owners in similar businesses conducted in the locations where
Borrower's business is conducted on the date hereof. Borrower shall also
maintain insurance relating to Borrower's ownership and use of the Collateral in
amounts and of a type that are customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in such
form, with such companies, and in such amounts as are reasonably satisfactory to
Bank. All such policies of property insurance shall contain a lender's loss
payable endorsement, in a form satisfactory to Bank, showing Bank as an
additional loss payee thereof and all liability insurance policies shall show
the Bank as an additional insured, and shall specify that the insurer must give
at least twenty (20) days notice to Bank before canceling its policy for any
reason. At Bank's request, Borrower shall deliver to Bank certified copies of
such policies of insurance and evidence of the payments of all premiums
therefor. So long as no Event of Default has occurred and is continuing,
Borrower shall have the option of applying the proceeds of any casualty policy
to the replacement or repair of destroyed or damaged property; provided, that
after the occurrence and during the continuance of an Event of Default, all
proceeds payable under any such policy shall, at the option of Bank, be payable
to Bank to be applied on account of the Obligations.
16
<PAGE> 20
6.7 Principal Depository.
Borrower shall maintain its principal depository and
operating accounts with Bank.
6.8 Quick Ratio.
Borrower shall maintain, as of the last day of each
calendar month, a ratio of Quick Assets to Current Liabilities of at least 2.0
to 1.0.
6.9 Profitability/Loss.
Borrower shall not incur a loss of more than
$2,500,000 for the fiscal quarter ended December 31, 1998. Prior to February 15,
1999, Borrower and Bank shall agree upon minimum operating performance covenants
for the fiscal quarter ended March 31, 1999 and thereafter. If no agreement has
been made by such date, this Agreement shall automatically terminate, and all
Obligations owing hereunder shall be immediately due and payable.
6.10 Liquidity, Debt Service Coverage.
(a) Subject to the remainder of this section,
Borrower shall maintain, as of the last day of each calendar month, a Liquidity
Ratio of at least 2.0 to 1.0. Notwithstanding the foregoing, if Borrower attains
two consecutive quarters of profitability and a Debt Service Coverage of not
less than 1.5 to 1.0, then Liquidity Ratio will no longer be tested and instead
Borrower shall maintain, as of the last day of each of Borrower's fiscal
quarters, a Debt Service Coverage of at least 1.5 to 1.0. For purposes of this
Section, "Liquidity Ratio" means as of any date for which it is tested, the
ratio of (a) an amount equal to (i) cash and cash equivalents minus (ii) the
aggregate amount of outstanding Advances under Section 2.1.1 to (b) the
aggregate amount of outstanding Equipment Advances.
6.11 Further Assurances.
At any time and from time to time Borrower shall
execute and deliver such further instruments and take such further action as may
reasonably be requested by Bank to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any Credit
Extension hereunder shall be available and until payment in full of the
outstanding Obligations or for so long as Bank may have any commitment to make
any Advances, Borrower will not do any of the following:
7.1 Dispositions.
Convey, sell, lease, transfer or otherwise dispose of
(collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer, all
or any part of its business or property, other than Transfers (i) of inventory
in the ordinary course of business, (ii) of non-exclusive licenses and similar
arrangements for the use of the property of Borrower or its Subsidiaries in the
ordinary course of business, (iii) Transfers of worn-out or obsolete Equipment
or Equipment financed by other vendors, (iv) Transfers which constitute
liquidation of Investments permitted under Section 7.7, and (v) other Transfers
not otherwise permitted by this Section 7.1 not exceeding One Hundred Thousand
Dollars ($100,000) in the aggregate in any fiscal year.
7.2 Changes in Business, Ownership, Management or
Business Locations.
Engage in any business, or permit any of its
Subsidiaries to engage in any business, other than the businesses currently
engaged in by Borrower and any business substantially similar or related thereto
(or incidental thereto), or suffer a material change in Borrower's ownership or
management. Borrower will not,
17
<PAGE> 21
without at least thirty (30) days prior written notification to Bank, relocate
its chief executive office or add any new offices or business locations.
7.3 Mergers or Acquisitions.
Merge or consolidate, or permit any of its
Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person if no Event
of Default has occurred and is continuing or would exist after giving effect to
such action, provided that this Section 7.3 shall not apply to (i) the purchase
of inventory, equipment or intellectual property rights in any transaction
valued at less than One Hundred Thousand Dollars ($100,000) in the ordinary
course of business, (ii) transactions among Subsidiaries or among Borrower and
its Subsidiaries in which Borrower is the surviving entity, or (iii) such
transactions that do not involve an amount that in the aggregate exceeds Two
Million Dollars ($2,000,000) during the term of this Agreement.
7.4 Indebtedness.
Create, incur, assume or be or remain liable with
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5 Encumbrances.
Create, incur, assume or suffer to exist any Lien
with respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.
7.6 Distributions.
Pay any dividends or make any other distribution or
payment on account of or in redemption, retirement or purchase of any capital
stock, provided, that (i) Borrower may declare and make any dividend payment or
other distribution payable in its equity securities, (ii) Borrower may convert
any of its convertible securities into other securities pursuant to the terms of
such convertible securities or otherwise in exchange therefor and (iii) for so
long as an Event of Default has not occurred, Borrower may repurchase stock from
former employees of Borrower in accordance with the terms of repurchase or
similar agreements between Borrower and such employees.
7.7 Investments.
Directly or indirectly acquire or own, or make any
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.8 Transactions with Affiliates.
Directly or indirectly enter into or permit to exist
any material transaction with any Affiliate of Borrower except for transactions
that are in the ordinary course of Borrower's business, upon fair and reasonable
terms that are no less favorable to Borrower than would be obtained in an arm's
length transaction with a non-affiliated Person and except for transactions with
a Subsidiary that are upon fair and reasonable terms and transactions
constituting Permitted Investments.
7.9 Intellectual Property Agreements.
Borrower shall not permit the inclusion in any
material contract to which it becomes a party of any provisions that could or
might in any way prevent the creation of a security interest in Borrower's
rights and interests in any property included within the definition of the
Intellectual Property Collateral acquired under such contracts, except to the
extent that such provisions are necessary in Borrower's exercise of its
reasonable business judgment.
18
<PAGE> 22
7.10 Subordinated Debt.
Make any payment in respect of any Subordinated Debt,
or permit any of its Subsidiaries to make any such payment, except in compliance
with the terms of such Subordinated Debt, or amend any provision contained in
any documentation relating to the Subordinated Debt without Bank's prior written
consent.
7.11 Inventory.
Store the Inventory with a bailee, warehouseman, or
similar party unless Bank has received a pledge of any warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and except for such other locations as Bank may approve in writing,
Borrower shall keep the Inventory only at the location set forth in Section 10
hereof and such other locations of which Borrower gives Bank prior written
notice and as to which Borrower signs and files a financing statement where
needed to perfect Bank's security interest.
7.12 Compliance.
Become an "investment company" or a company
controlled by an "investment company," within the meaning of the Investment
Company Act of 1940, or become principally engaged in, or undertake as one of
its important activities, the business of extending credit for the purpose of
purchasing or carrying margin stock, or use the proceeds of any Advance for such
purpose; fail to meet the minimum funding requirements of ERISA, permit a
Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail
to comply with the Federal Fair Labor Standards Act or violate any other law or
regulation, which violation could have a Material Adverse Effect or a material
adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral, or permit any of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an
Event of Default by Borrower under this Agreement:
8.1 Payment Default.
If Borrower fails to pay, when due, any of the
Obligations;
8.2 Covenant Default.
(a) If Borrower fails to perform any obligation under
Sections 6.3, 6.6, 6.7, 6.8, 6.9, 6.10 or 6.11 or violates any of the covenants
contained in Article 7 of this Agreement, or
(b) If Borrower fails or neglects to perform, keep,
or observe any other material term, provision, condition, covenant, or agreement
contained in this Agreement, in any of the Loan Documents, or in any other
present or future agreement between Borrower and Bank and as to any default
under such other term, provision, condition, covenant or agreement that can be
cured, has failed to cure such default within ten (10) days after the occurrence
thereof; provided, however, that if the default cannot by its nature be cured
within the ten (10) day period or cannot after diligent attempts by Borrower be
cured within such ten (10) day period, and such default is likely to be cured
within a reasonable time, then Borrower shall have an additional reasonable
period (which shall not in any case exceed thirty (30) days) to attempt to cure
such default, and within such reasonable time period the failure to have cured
such default shall not be deemed an Event of Default (provided that no Advances
will be required to be made during such cure period);
19
<PAGE> 23
8.3 Material Adverse Change.
If there (i) occurs a material adverse change in the
business, operations, or condition (financial or otherwise) of Borrower or (ii)
is a material impairment of the prospect of repayment of any portion of the
Obligations or (iii) is a material impairment of the value or priority of Bank's
security interests in the Collateral;
8.4 Attachment.
If any material portion of Borrower's assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten (10) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10) days
after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Credit Extensions will be required to be made during such cure period);
8.5 Insolvency.
If Borrower becomes insolvent, or if an Insolvency
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within thirty (30) days
(provided that no Advances will be made prior to the dismissal of such
Insolvency Proceeding);
8.6 Other Agreements.
If there is a default in any agreement to which
Borrower is a party with a third party or parties resulting in a right by such
third party or parties, whether or not exercised, to accelerate the maturity of
any Indebtedness in an amount in excess of One Hundred Thousand Dollars
($100,000) or that could reasonably be expect to have a Material Adverse Effect;
8.7 Subordinated Debt.
If Borrower makes any payment on account of
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
8.8 Judgments.
If a judgment or judgments for the payment of money
in an amount, individually or in the aggregate, of at least Fifty Thousand
Dollars ($50,000) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of ten (10) days (provided that no Credit
Extensions will be made prior to the satisfaction or stay of such judgment); or
8.9 Misrepresentations.
If any material misrepresentation or material
misstatement exists now or hereafter in any warranty or representation set forth
herein or in any certificate or writing delivered to Bank by Borrower or any
Person acting on Borrower's behalf pursuant to this Agreement or to induce Bank
to enter into this Agreement or any other Loan Document.
20
<PAGE> 24
9. BANK'S RIGHTS AND REMEDIES
9.1 Rights and Remedies.
Upon the occurrence and during the continuance of an
Event of Default, Bank may, at its election, without notice of its election and
without demand, do any one or more of the following, all of which are authorized
by Borrower:
(a) Declare all Obligations, whether evidenced by
this Agreement, by any of the other Loan Documents, or otherwise, immediately
due and payable (provided that upon the occurrence of an Event of Default
described in Section 8.5 all Obligations shall become immediately due and
payable without any action by Bank);
(b) Cease advancing money or extending credit to or
for the benefit of Borrower under this Agreement or under any other agreement
between Borrower and Bank;
(c) Demand that Borrower (i) deposit cash with Bank
in an amount equal to the amount of any Letters of Credit remaining undrawn, as
collateral security for the repayment of any future drawings under such Letters
of Credit, and Borrower shall forthwith deposit and pay such amounts, and (ii)
pay in advance all Letters of Credit fees scheduled to be paid or payable over
the remaining term of the Letters of Credit;
(d) Liquidate any Exchange Contracts not yet settled
and demand that Borrower immediately deposit cash with Bank in an amount
sufficient to cover any losses incurred by Bank due to liquidation of the
Exchange Contracts at the then prevailing market price;
(e) Settle or adjust disputes and claims directly
with account debtors for amounts, upon terms and in whatever order that Bank
reasonably considers advisable;
(f) Without notice to or demand upon Borrower, make
such payments and do such acts as Bank considers necessary or reasonable to
protect its security interest in the Collateral. Borrower agrees to assemble the
Collateral if Bank so requires, and to make the Collateral available to Bank as
Bank may designate. Borrower authorizes Bank to enter the premises where the
Collateral is located, to take and maintain possession of the Collateral, or any
part of it, and to pay, purchase, contest, or compromise any encumbrance,
charge, or lien which in Bank's determination appears to be prior or superior to
its security interest and to pay all expenses incurred in connection therewith.
With respect to any of Borrower's premises, Borrower hereby grants Bank a
license to enter such premises and to occupy the same, without charge, in order
to exercise any of Bank's rights or remedies provided herein, at law, in equity,
or otherwise;
(g) Without notice to Borrower set off and apply to
the Obligations any and all (i) balances and deposits of Borrower held by Bank,
or (ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank;
(h) Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell (in the manner provided
for herein) the Collateral. Bank is hereby granted a non-exclusive, royalty-free
license or other right, solely pursuant to the provisions of this Section 9.1,
to use, without charge, Borrower's labels, patents, copyrights, mask works,
rights of use of any name, trade secrets, trade names, trademarks, service
marks, and advertising matter, or any property of a similar nature, as it
pertains to the Collateral, in completing production of, advertising for sale,
and selling any Collateral and, in connection with Bank's exercise of its rights
under this Section 9.1, Borrower's rights under all licenses and all franchise
agreements shall inure to Bank's benefit;
(i) Sell the Collateral at either a public or private
sale, or both, by way of one or more contracts or transactions, for cash or on
terms, in such manner and at such places (including Borrower's
21
<PAGE> 25
premises) as Bank determines is commercially reasonable, and apply the proceeds
thereof to the Obligations in whatever manner or order Bank deems appropriate;
(j) Bank may credit bid and purchase at any public
sale, or at any private sale as permitted by law; and
(k) Any deficiency that exists after disposition of
the Collateral as provided above will be paid immediately by Borrower.
(l) Bank shall have a non-exclusive, royalty-free
license to use the Intellectual Property Collateral to the extent reasonably
necessary to permit Bank to exercise its rights and remedies upon the occurrence
of an Event of Default.
9.2 Power of Attorney.
Effective only upon the occurrence and during the
continuance of an Event of Default, Borrower hereby irrevocably appoints Bank
(and any of Bank's designated officers, or employees) as Borrower's true and
lawful attorney to: (a) send requests for verification of Accounts or notify
account debtors of Bank's security interest in the Accounts; (b) endorse
Borrower's name on any checks or other forms of payment or security that may
come into Bank's possession; (c) sign Borrower's name on any invoice or bill of
lading relating to any Account, drafts against account debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to account
debtors; (d) make, settle, and adjust all claims under and decisions with
respect to Borrower's policies of insurance; (e) settle and adjust disputes and
claims respecting the accounts directly with account debtors, for amounts and
upon terms which Bank determines to be reasonable; (f) to file, in its sole
discretion, one or more financing or continuation statements and amendments
thereto, relative to any of the Collateral without the signature of Borrower
where permitted by law; and (g) to transfer the Intellectual Property Collateral
into the name of Bank or a third party to the extent permitted under the
California Uniform Commercial Code, provided Bank may exercise such power of
attorney to sign the name of Borrower on any of the documents described in
Section 4.2 regardless of whether an Event of Default has occurred. The
appointment of Bank as Borrower's attorney in fact, and each and every one of
Bank's rights and powers, being coupled with an interest, is irrevocable until
all of the Obligations have been fully repaid and performed and Bank's
obligation to provide advances hereunder is terminated.
9.3 Accounts Collection.
At any time from the date of this Agreement, Bank may
notify any Person owing funds to Borrower of Bank's security interest in such
funds and verify the amount of such Account. Borrower shall collect all amounts
owing to Borrower for Bank, receive in trust all payments as Bank's trustee,
and, if requested or required by Bank, immediately deliver such payments to Bank
in their original form as received from the account debtor, with proper
endorsements for deposit.
9.4 Bank Expenses.
If Borrower fails to pay any amounts or furnish any
required proof of payment due to third persons or entities, as required under
the terms of this Agreement, then Bank may do any or all of the following: (a)
make payment of the same or any part thereof; (b) set up such reserves under the
Committed Revolving Line as Bank deems necessary to protect Bank from the
exposure created by such failure; or (c) obtain and maintain insurance policies
of the type discussed in Section 6.6 of this Agreement, and take any action with
respect to such policies as Bank deems prudent. Any amounts so paid or deposited
by Bank shall constitute Bank Expenses, shall be immediately due and payable,
and shall bear interest at the then applicable rate hereinabove provided, and
shall be secured by the Collateral. Any payments made by Bank shall not
constitute an agreement by Bank to make similar payments in the future or a
waiver by Bank of any Event of Default under this Agreement.
22
<PAGE> 26
9.5 Bank's Liability for Collateral.
So long as Bank complies with its obligations under
Section 9207 of the Code, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of
loss, damage or destruction of the Collateral shall be borne by Borrower.
9.6 Remedies Cumulative.
Bank's rights and remedies under this Agreement, the
Loan Documents, and all other agreements shall be cumulative. Bank shall have
all other rights and remedies not expressly set forth herein as provided under
the Code, by law, or in equity. No exercise by Bank of one right or remedy shall
be deemed an election, and no waiver by Bank of any Event of Default on
Borrower's part shall be deemed a continuing waiver. No delay by Bank shall
constitute a waiver, election, or acquiescence by it. No waiver by Bank shall be
effective unless made in a written document signed on behalf of Bank and then
shall be effective only in the specific instance and for the specific purpose
for which it was given.
9.7 Demand; Protest.
Borrower waives demand, protest, notice of protest,
notice of default or dishonor, notice of payment and nonpayment, notice of any
default, nonpayment at maturity, release, compromise, settlement, extension, or
renewal of accounts, documents, instruments, chattel paper, and guarantees at
any time held by Bank on which Borrower may in any way be liable.
10. NOTICES
Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement or any other agreement entered
into in connection herewith shall be in writing and (except for financial
statements and other informational documents which may be sent by first-class
mail, postage prepaid) shall be personally delivered or sent by a recognized
overnight delivery service, by certified mail, postage prepaid, return receipt
requested, or by telefacsimile to Borrower or to Bank, as the case may be, at
its addresses set forth below:
If to Borrower: E-Loan, Inc.
6200 Village Parkway, Suite 102
Dublin, CA 94568
Attn: Frank M. Siskowski
FAX: (925) 556-2178
If to Bank: Silicon Valley Bank
3003 Tasman Drive
Santa Clara, CA 95054
Attn: Scott Wiebe
FAX: (408) 748-9478
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
11. CHOICE OF LAW AND VENUE
The Loan Documents shall be governed by, and construed in
accordance with, the internal laws of the State of California, without regard to
principles of conflicts of law. Each of Borrower and Bank hereby submits to the
exclusive jurisdiction of the state and Federal courts located in the County of
Santa Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF ANY OF THE LOAN
23
<PAGE> 27
DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT
CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER
CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH
PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL
COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS
12.1 Successors and Assigns.
(a) This Agreement shall bind and inure to the
benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights hereunder
may be assigned by Borrower without Bank's prior written consent, which consent
may be granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice to Borrower to sell, transfer, negotiate, or
grant participations in all or any part of, or any interest in, Bank's
obligations, rights and benefits hereunder, subject to the provisions of this
Section 12.1.
(b) Bank may sell, negotiate or grant participations
to other financial institutions in all or part of the obligations of the
Borrower outstanding under the Loan Documents, without notice to or the approval
of Borrower; provided that any such sale, negotiation or participation shall be
in compliance with the applicable federal and state securities laws and the
other requirements of this Section 12.1. Notwithstanding the sale, negotiation
or grant of participations, Bank shall remain solely responsible for the
performance of its obligations under this Agreement, and Borrower shall continue
to deal solely and directly with Bank in connection with this Agreement and the
other Loan Documents.
(c) The grant of a participation interest shall be on
such terms as Bank determines are appropriate, provided only that (1) the holder
of such a participation interest shall not have any of the rights of Bank under
this Agreement except, if the participation agreement so provides, rights to
demand the payment of costs of the type described in Section 2.6, provided that
the aggregate amount that the Borrower shall be required to pay under Section
2.6 with respect to any ratable share of the Committed Revolving Line or any
Advance (including amounts paid to participants) shall not exceed the amount
that Borrower would have had to pay if no participation agreements had been
entered into, and (2) the consent of the holder of such a participation interest
shall not be required for amendments or waivers of provisions of the Loan
Agreement other than those which (i) increase the amount of the Committed
Revolving Line, (ii) extend the term of this Agreement, (iii) decrease the rate
of interest or the amount of any fee or any other amount payable to Bank under
this Agreement, (iv) reduce the principal amount payable under this Agreement,
or (v) extend the date fixed for the payment of principal or interest or any
other amount payable under this Agreement.
(d) Bank may assign, from time to time, all or any
portion of the Committed Revolving Line to an Affiliate of Bank or to The
Federal Reserve Bank or, subject to the prior written approval of Borrower
(which approval will not be unreasonably withheld), to any other financial
institution; provided, that (i) the amount of the Committed Revolving Line being
assigned pursuant to each such assignment shall in no event be less than Five
Hundred Thousand Dollars ($500,000) and shall be an integral multiple of One
Hundred Thousand Dollars ($100,000) and (ii) the parties to each such assignment
shall execute and deliver to Borrower an assignment agreement in a form
reasonably acceptable to each. Upon such execution and delivery, from and after
the effective date specified in such assignment agreement (x) the assignee
thereunder shall be a party hereto and, to the extent that rights and
obligations hereunder have been assigned to it pursuant to such assignment
agreement, have the rights and obligations of a Bank hereunder and (y) Bank
shall, to the extent that rights and obligations hereunder have been assigned by
it pursuant to such assignment agreement, relinquish its rights and be released
from its obligations under this Agreement (other than pursuant to this Section
12.1(d)), and, in the case of an assignment agreement covering all or the
remaining portion of Bank's rights and obligations under this Agreement, Bank
shall cease to be a party hereto. In the event of an assignment hereunder, the
parties agree to amend this Agreement to
24
<PAGE> 28
the extent necessary to reflect the mechanical changes which are necessary to
document such assignment. Each party shall bear its own expenses (including
without limitation attorneys' fees and costs) with respect to such an amendment.
12.2 Indemnification.
Borrower shall indemnify, defend, protect and hold
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by the Loan Documents;
and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by
Bank as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under the Loan Documents, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 Time of Essence.
Time is of the essence for the performance of all
obligations set forth in this Agreement.
12.4 Severability of Provisions.
Each provision of this Agreement shall be severable
from every other provision of this Agreement for the purpose of determining the
legal enforceability of any specific provision.
12.5 Amendments in Writing, Integration.
This Agreement cannot be amended or terminated except
by a writing signed by Borrower and Bank. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.
12.6 Counterparts.
This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7 Survival.
All covenants, representations and warranties made in
this Agreement shall continue in full force and effect so long as any
Obligations (excluding Obligations under Section 2.6 and 12.2 to the extent they
remain inchoate at the time the outstanding payment Obligations are paid in
full) remain outstanding. The obligations of Borrower to indemnify Bank with
respect to the expenses, damages, losses, costs and liabilities described in
Section 12.2 shall survive until all applicable statute of limitations periods
with respect to actions that may be brought against Bank have run, provided that
so long as the obligations referred to in the first sentence of this Section
12.7 have been satisfied, and Bank has no commitment to make any Credit
Extensions or to make any other loans to Borrower, Bank shall release all
security interests granted hereunder and redeliver all Collateral held by it in
accordance with applicable law.
12.8 Confidentiality.
In handling any confidential information, Bank shall
exercise the same degree of care that it exercises with respect to its own
proprietary information of the same types to maintain the confidentiality of any
non-public information thereby received or received pursuant to this Agreement,
except that disclosure of such information may be made (i) to the subsidiaries
or affiliates of Bank in connection with their present or prospective business
relations with Borrower, (ii) to prospective transferees or purchasers of any
interest in the Loans, provided
25
<PAGE> 29
that they have entered into a comparable confidentiality agreement in favor of
Borrower and have delivered a copy to Borrower, (iii) as required by law,
regulations, rule or order, subpoena, judicial order or similar order, (iv) as
may be required in connection with the examination, audit or similar
investigation of Bank and (v) as Bank may deem appropriate in connection with
the exercise of any remedies hereunder. Confidential information hereunder shall
not include information that either: (a) is in the public domain or in the
knowledge or possession of Bank when disclosed to Bank, or becomes part of the
public domain after disclosure to Bank through no fault of Bank; or (b) is
disclosed to Bank by a third party, provided Bank does not have actual knowledge
that such third party is prohibited from disclosing such information.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
E-LOAN, INC.
By: /s/ Frank Siskowski
------------------------------------
Title: Chief Financial Officer
---------------------------------
SILICON VALLEY BANK
By: /s/ Scott M. Wiebe
------------------------------------
Title: Assistant Vice President
---------------------------------
26
<PAGE> 30
EXHIBIT A
The Collateral shall consist of all right, title and interest of
Borrower in and to the following:
(a) All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor vehicles
and trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above;
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs, computer
discs, computer tapes, literature, reports, catalogs, design rights, income tax
refunds, payments of insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and any
and all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower;
(e) All documents, cash, deposit accounts, securities, securities
entitlements, securities accounts, investment property, letters of credit,
certificates of deposit, instruments and chattel paper now owned or hereafter
acquired and Borrower's Books relating to the foregoing;
(f) All copyright rights, copyright applications, copyright
registrations and like protections in each work of authorship and derivative
work thereof, whether published or unpublished, now owned or hereafter acquired;
all trade secret rights, including all rights to unpatented inventions,
know-how, operating manuals, license rights and agreements and confidential
information, now owned or hereafter acquired; all mask work or similar rights
available for the protection of semiconductor chips, now owned or hereafter
acquired; all claims for damages by way of any past, present and future
infringement of any of the foregoing;
(g) All Borrower's Books relating to the foregoing and any and all
claims, rights and interests in any of the above and all substitutions for,
additions and accessions to and proceeds thereof.
A-1
<PAGE> 31
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE:
----------------------
FAX#: (408) 496-2426 TIME:
----------------------
FROM:
---------------------------------------------------------------------------
CLIENT NAME (BORROWER)
REQUESTED BY:
------------------------------------------------------------------
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE:
----------------------------------------------------------
PHONE NUMBER:
------------------------------------------------------------------
FROM ACCOUNT # TO ACCOUNT #
---------------- ----------------------------------
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
PRINCIPAL INCREASE (ADVANCE) $
-----------------------------------
PRINCIPAL PAYMENT (ONLY) $
-----------------------------------
INTEREST PAYMENT (ONLY) $
-----------------------------------
PRINCIPAL AND INTEREST (PAYMENT) $
-----------------------------------
OTHER INSTRUCTIONS:
------------------------------------------------------------
- --------------------------------------------------------------------------------
All representations and warranties of Borrower stated in the Loan and Security
Agreement are true, correct and complete in all material respects as of the date
of the telephone request for and Advance confirmed by this Borrowing
Certificate; provided, however, that those representations and warranties
expressly referring to another date shall be true, correct and complete in all
material respects as of such date.
BANK USE ONLY
TELEPHONE REQUEST:
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
- ----------------------------------- ----------------------------
Authorized Requester Phone #
- ----------------------------------- ----------------------------
Received By (Bank) Phone #
--------------------------------------
Authorized Signature (Bank)
B-1
<PAGE> 32
EXHIBIT C
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: E-LOAN, INC.
The undersigned authorized officer of E-Loan, Inc. hereby certifies
that in accordance with the terms and conditions of the Loan and Security
Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is in
complete compliance for the period ending _______________ with all required
covenants except as noted below and (ii) all representations and warranties of
Borrower stated in the Agreement are true and correct in all material respects
as of the date hereof. Attached herewith are the required documents supporting
the above certification. The Officer further certifies that these are prepared
in accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes. The Officer expressly acknowledges that no
borrowings may be requested by Borrower at any time or date of determination
that Borrower is not in compliance with any of the terms of the Agreement, and
that such compliance is determined not just at the date this certificate is
delivered.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER
"COMPLIES" COLUMN.
<TABLE>
<S> <C> <C>
REPORTING COVENANT REQUIRED COMPLIES
Monthly financial statements Monthly within 30 days Yes No
Annual (CPA Audited) FYE within 120 days Yes No
10-Q, 10-K and 8-K Within 5 days after filing with SEC Yes No
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
Maintain on the following Basis:
Minimum Quick Ratio (Monthly) 2.0:1.0 _____:1.0 Yes No
Liquidity Ratio (Monthly)(1) 2.0:1.0 _____:1.0 Yes No
Minimum Debt Service(Quarterly)(2) 1.5:1.0 _____:1.0 Yes No
Profitability: Quarterly $________(3) $________ Yes No
</TABLE>
(1)Converts to Debt Service Coverage after two consecutive quarters of Debt
Service Coverage of at least 1.5 to 1.0.
(2)Tested after conversion of Liquidity Ratio.
(3)No loss exceeding $2,500,000 for the fiscal quarter ended 12/31/98.
Subsequent operating performance covenants to be agreed upon by 2/15/99.
COMMENTS REGARDING EXCEPTIONS: See Attached.
Sincerely,
- ---------------------------------
SIGNATURE
- ---------------------------------
TITLE
- ---------------------------------
DATE
BANK USE ONLY
Received by:
----------------------------------------
AUTHORIZED SIGNER
Date:
-----------------------------------------------
Verified:
-------------------------------------------
AUTHORIZED SIGNER
Date:
-----------------------------------------------
Compliance Status: Yes No
D-1
<PAGE> 33
DISBURSEMENT REQUEST AND AUTHORIZATION
Borrower: E-Loan, Inc. Bank: Silicon Valley Bank
LOAN TYPE. This is a Variable Rate, Revolving Line of Credit of a principal
amount up to $1,500,000, and a Variable Rate, Equipment Line of Credit in a
principal amount up to $3,500,000.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for business.
SPECIFIC PURPOSE. The specific purpose of this loan is: working capital and
purchase of equipment.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be
disbursed until all of Bank's conditions for making the loan have been
satisfied. Please disburse the loan proceeds as follows:
<TABLE>
<CAPTION>
Revolving Line Equipment Line
<S> <C> <C>
Amount paid to Borrower directly: $ $
-------- -------
Undisbursed Funds $ $
-------- -------
Principal $ $
-------- -------
</TABLE>
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the
following charges:
<TABLE>
<S> <C>
Prepaid Finance Charges Paid in Cash: $
-----------
$10,000 Loan Fee
$ Accounts Receivables Audit
-----
Other Charges Paid in Cash: $
-----------
$ UCC Search Fees
-----
$ UCC Filing Fees
-----
$ Patent Filing Fees
-----
$ Trademark Filing Fees
-----
$ Copyright Filing Fees
-----
$ Outside Counsel Fees and Expenses (Estimate)
-----
Total Charges Paid in Cash $
-----------
</TABLE>
AUTOMATIC PAYMENTS. Borrower hereby authorizes Bank automatically to deduct from
Borrower's account numbered __________ the amount of any loan payment. If the
funds in the account are insufficient to cover any payment, Bank shall not be
obligated to advance funds to cover the payment.
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO BANK THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS
DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO BANK. THIS
AUTHORIZATION IS DATED AS OF DECEMBER 9, 1998.
BORROWER:
E-Loan, Inc.
- ----------------------------
Authorized Officer
<PAGE> 34
AGREEMENT TO PROVIDE INSURANCE
GRANTOR: E-Loan, Inc. BANK: Silicon Valley Bank
INSURANCE REQUIREMENTS. E-Loan, Inc. ("Grantor") understands that
insurance coverage is required in connection with the extending of a loan or the
providing of other financial accommodations to Grantor by Bank. These
requirements are set forth in the Loan Documents. The following minimum
insurance coverages must be provided on the following described collateral (the
"Collateral"):
Collateral: All Inventory, Equipment and Fixtures.
Type: All risks, including fire, theft and liability.
Amount: Full insurable value.
Basis: Replacement value.
Endorsements: Loss payable clause to Bank with stipulation
that coverage will not be cancelled or
diminished without a minimum of twenty (20)
days' prior written notice to Bank.
INSURANCE COMPANY. Grantor may obtain insurance from any insurance
company Grantor may choose that is reasonably acceptable to Bank. Grantor
understands that credit may not be denied solely because insurance was not
purchased through Bank.
FAILURE TO PROVIDE INSURANCE. Grantor agrees to deliver to Bank, on or
before closing, evidence of the required insurance as provided above, with an
effective date of December 9, 1998, or earlier. Grantor acknowledges and agrees
that if Grantor fails to provide any required insurance or fails to continue
such insurance in force, Bank may do so at Grantor's expense as provided in the
Loan and Security Agreement. The cost of such insurance, at the option of Bank,
shall be payable on demand or shall be added to the indebtedness as provided in
the security document. GRANTOR ACKNOWLEDGES THAT IF BANK SO PURCHASES ANY SUCH
INSURANCE, THE INSURANCE WILL PROVIDE LIMITED PROTECTION AGAINST PHYSICAL DAMAGE
TO THE COLLATERAL, UP TO THE BALANCE OF THE LOAN; HOWEVER, GRANTOR'S EQUITY IN
THE COLLATERAL MAY NOT BE INSURED. IN ADDITION, THE INSURANCE MAY NOT PROVIDE
ANY PUBLIC LIABILITY OR PROPERTY DAMAGE INDEMNIFICATION AND MAY NOT MEET THE
REQUIREMENTS OF ANY FINANCIAL RESPONSIBILITY LAWS.
AUTHORIZATION. For purposes of insurance coverage on the Collateral,
Grantor authorizes Bank to provide to any person (including any insurance agent
or company) all information Bank deems appropriate, whether regarding the
Collateral, the loan or other financial accommodations, or both.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT
TO PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED DECEMBER
9, 1998.
GRANTOR:
E-Loan, Inc.
x /s/ Frank Siskowski
------------------------------
Authorized Officer
FOR BANK USE ONLY
INSURANCE VERIFICATION
DATE: PHONE:
---------------------------------------- -----------------
AGENT'S NAME:
------------------------------------------------------------------
INSURANCE COMPANY:
-------------------------------------------------------------
POLICY NUMBER:
-----------------------------------------------------------------
EFFECTIVE DATES:
---------------------------------------------------------------
COMMENTS:
----------------------------------------------------------------------
<PAGE> 35
CORPORATE RESOLUTIONS TO BORROW
BORROWER: E-Loan, Inc.
I, the undersigned Secretary or Assistant Secretary of E-Loan, Inc.
(the "Corporation"), HEREBY CERTIFY that the Corporation is organized and
existing under and by virtue of the laws of the State of .
I FURTHER CERTIFY that attached hereto as Attachments 1 and 2 are true
and complete copies of the Certificate of Incorporation and Bylaws of the
Corporation, each of which is in full force and effect on the date hereof.
I FURTHER CERTIFY that at a meeting of the Directors of the Corporation
(or by other duly authorized corporate action in lieu of a meeting), duly called
and held, at which a quorum was present and voting, the following resolutions
were adopted:
BE IT RESOLVED, that ANY ONE (1) of the following named officers,
employees, or agents of this Corporation, whose actual signatures are shown
below:
NAMES POSITIONS ACTUAL SIGNATURES
- ------------------------- ------------------- ----------------------------
Christian Larsen CEO /s/ Chris Larsen
- ------------------------- ------------------- ----------------------------
Janina Pawlowski President /s/ Janina Pawlowski
- ------------------------- ------------------- ----------------------------
Frank Siskowski CFO /s/ Frank Siskowski
- ------------------------- ------------------- ----------------------------
- ------------------------- ------------------- ----------------------------
acting for an on behalf of this Corporation and as its act and deed be, and they
hereby are, authorized and empowered:
BORROW MONEY. To borrow from time to time from Silicon Valley Bank
("Bank"), on such terms as may be agreed upon between the officers, employees,
or agents and Bank, such sum or sums of money as in their judgment should be
borrowed, without limitation, including such sums as are specified in that
certain Loan and Security Agreement dated as of December 9, 1998 (the "Loan
Agreement").
EXECUTE NOTES. To execute and deliver to Bank the promissory note or
notes of the Corporation, on Bank's forms, at such rates of interest and on such
terms as may be agreed upon, evidencing the sums of money so borrowed or any
indebtedness of the Corporation to Bank, and also to execute and deliver to Bank
one or more renewals, extensions, modifications, refinancings, consolidations,
or substitutions for one or more of the notes, or any portion of the notes.
GRANT SECURITY. To grant a security interest to Bank in the Collateral
described in the Loan Agreement, which security interest shall secure all of the
Corporation's Obligations, as described in the Loan Agreement.
NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness payable
to or belonging to the Corporation or in which the Corporation may have an
interest, and either to receive cash for the same or to cause such proceeds to
be credited to the account of the Corporation with Bank, or to cause such other
disposition of the proceeds derived therefrom as they may deem advisable.
1
<PAGE> 36
LETTERS OF CREDIT; FOREIGN EXCHANGE. To execute letters of credit
applications, foreign exchange agreements and other related documents pertaining
to Bank's issuance of letters of credit and foreign exchange contracts.
ISSUE WARRANTS. To issue warrants to purchase the Corporation's capital
stock, for such series and number, and on such terms, as an officer of the
Corporation shall deem appropriate.
FURTHER ACTS. In the case of lines of credit, to designate additional
or alternate individuals as being authorized to request advances thereunder, and
in all cases, to do and perform such other acts and things, to pay any and all
fees and costs, and to execute and deliver such other documents and agreements
as they may in their discretion deem reasonably necessary or proper in order to
carry into effect the provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to
these resolutions and performed prior to the passage of these resolutions are
hereby ratified and approved, that these Resolutions shall remain in full force
and effect and Bank may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Bank. Any such notice
shall not affect any of the Corporation's agreements or commitments in effect at
the time notice is given.
I FURTHER CERTIFY that the officers, employees, and agents named above
are duly elected, appointed, or employed by or for the Corporation, as the case
may be, and occupy the positions set forth opposite their respective names; that
the foregoing Resolutions now stand of record on the books of the Corporation;
and that the Resolutions are in full force and effect and have not been modified
or revoked in any manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on 12/11, 1998 and
attest that the signatures set opposite the names listed above are their genuine
signatures.
CERTIFIED TO AND ATTESTED BY:
X /s/ Chris Larsen
------------------------------
2
<PAGE> 1
EXHIBIT 10.41
JOINT VENTURE AGREEMENT
by and between
SOFTBANK CORP.
and
E-LOAN, INC.
MARCH 31, 1999
<PAGE> 2
JOINT VENTURE AGREEMENT
This JOINT VENTURE AGREEMENT ("AGREEMENT") is made as of March 31, 1999,
by and between E-LOAN, Inc., a Delaware corporation ("E-LOAN"), and SOFTBANK
CORP., a Japanese corporation ("SOFTBANK"). E-LOAN and SOFTBANK are hereunder
also referred to collectively as the "PARTIES" and individually as a "PARTY."
RECITALS
A. SOFTBANK is a leading provider of information and distribution
services in Japan and worldwide as infrastructure for the digital information
industry.
B. E-LOAN is an electronic commerce company serving consumers and the
home loan industry through a comprehensive Internet loan marketplace in which
consumers can, by accessing an online site, identify appropriate loan providers
and lenders can identify interested consumers.
C. The Parties desire to form a joint venture to pursue the Business, as
hereafter defined.
NOW THEREFORE, for valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the Parties hereby agree as follows:
AGREEMENT
1. DEFINITIONS
1.1 "AFFILIATE" means any Person: (a) that is controlled by, controls,
or is under common control with a Party (collectively, a "CONTROLLED PERSON");
or (b) that is controlled by, controls, or is under common control with any such
Controlled Person, in each case for so long as such control continues; provided,
however, that for purposes of Section 3.2(a) Affiliates of SOFTBANK shall
include Persons in which SOFTBANK owns, directly or indirectly, at least thirty
percent (30%) of the outstanding voting shares, regardless of whether such
control actually exists. For purposes of this definition and the definition of
Fund in Section 1.20, "CONTROL" shall mean the possession, directly or
indirectly, of power to direct or cause the direction of management or policies
(whether through ownership of securities or other ownership interests, by
contract or otherwise).
1.2 "ANNUAL PLAN" means a business operations plan detailing the
Company's goals and procedures for personnel, technical, financial,
administrative, marketing, and other significant activities for the Company's
next succeeding fiscal year, as approved each year and revised from time to time
by the Board.
1.3 "APPLICABLE LAW" means, as to any Person, any statute, law, rule,
regulation, directive, treaty, judgment, order, decree or injunction of any
Governmental Authority that is applicable to or binding upon such Person or any
of its properties.
1.4 "ARTICLES" means the articles of incorporation of the Company in the
form of attached Exhibit 1.4, as amended from time to time.
<PAGE> 3
1.5 "BOARD" means the board of directors of the Company.
1.6 "BUSINESS" means the business of the Company as described in the
Articles, from time to time.
1.7 "BUSINESS DAY" means a day on which commercial banks in California
and Japan are generally open to conduct their regular banking business.
1.8 "CLOSING DATE" is defined in Section 3.2(a).
1.9 "COMMERCIAL CODE" means the Commercial Code of Japan, as amended and
in effect from time to time.
1.10 "COMMON STOCK" means common stock of the Company as authorized by
the Articles.
1.11 "COMPANY" is defined in Section 3.1.
1.12 "COMPANY INTEREST" means, as to any Person, the percentage interest
represented by the Securities then held by such Person divided by all then
outstanding Securities (on an as-converted to Common Stock basis).
1.13 "CONFIDENTIAL INFORMATION" is defined in Section 5.2(a).
1.14 "CONSULTING SERVICES AGREEMENT" means the Consulting Services
Agreement to be entered into between SOFTBANK and the Company on the Closing
Date in the form of attached Exhibit 1.14, as amended from time to time.
1.15 "CORPORATE AUDITOR" means a corporate auditor (Kansa-yaku) of the
Company with the powers and duties as specified in the Commercial Code.
1.16 "DIRECTOR" means a director of the Company with the powers and
duties as specified in the Commercial Code and the Articles.
1.17 "DISCLOSING PARTY" is defined in Section 5.2(a).
1.18 "EFFECTIVE DATE" means the date of this Agreement.
1.19 "ESTABLISHMENT DATE" is defined in Section 3.1.
1.20 "FUND" means any investment fund controlled by SOFTBANK or any
SOFTBANK Affiliate.
1.21 "GOVERNMENTAL AUTHORITY" means any domestic or foreign government,
governmental authority, court, tribunal, agency or other regulatory,
administrative or judicial agency, commission or organization, and any
subdivision, branch or department of any of the foregoing.
1.22 "LAUNCH DATE" is defined in Section 3.1.
<PAGE> 4
1.23 "LICENSE AGREEMENT" means the License Agreement to be entered into
between E-LOAN and the Company on the Closing Date in the form of attached
Exhibit 1.23, as amended from time to time.
1.24 "PARTNERS" means such Persons as SOFTBANK deems strategically
important to the success of the Company and proposes to include in the SOFTBANK
Group pursuant to Section 3.2(a).
1.25 "PARTY" and "PARTIES" are defined in the opening paragraph of this
Agreement.
1.26 "PERSON" means a natural individual, Governmental Authority,
partnership, firm, corporation, or other business association.
1.27 "PRESIDENT" means the president of the Company with the powers and
duties as specified in the Commercial Code and the Articles.
1.28 "RECEIVING PARTY" is defined in Section 5.2(a).
1.29 "SECURITIES" means all outstanding shares of Common Stock, and any
other equity securities of the Company or instruments exercisable for or
convertible into Common Stock.
1.30 "SB FINANCE" means SOFTBANK Finance Corporation, a wholly-owned
Japanese subsidiary of SOFTBANK.
1.31 "SOFTBANK GROUP" is defined in Section 3.2(a).
1.32 "SPECIAL EXCEPTIONS LAW" means the law pertaining to Special
Exceptions to the Commercial Code concerning Auditors of Companies (Kabushiki
Kaisha).
1.33 "TERRITORY" means Japan and the Republic of South Korea.
1.34 "TERM" is defined in Section 7.1.
1.35 "TRANSACTION DOCUMENTS" means this Agreement, the Articles, the
License Agreement, and the Consulting Services Agreement.
1.36 "TRANSFERRED SHARES" is defined in Section 3.2(a).
2. PURPOSE OF JOINT VENTURE
The Parties hereby associate themselves in a joint venture relationship
which shall have as its principal purpose the establishment and development of
the Business. The Business will be limited initially to (1) developing,
marketing and providing an online loan and mortgage marketplace for consumers
and the loan and mortgage industry in Japan and the Republic of Korea, including
developing localized versions of the E-LOAN's U.S. services and providing
information about the availability and terms of loans for distribution to end
users in the Territory and providing an electronic means to apply for such loans
and complete the loan process and (2) activities incidental thereto.
<PAGE> 5
3. ESTABLISHMENT AND CAPITALIZATION OF THE COMPANY
3.1 Establishment. The Parties agree that the joint venture contemplated
by this Agreement shall be carried out exclusively through a newly-formed
Japanese kabushiki kaisha initially established by SOFTBANK (the "COMPANY"). The
Company's corporate name shall be "E-Loan Kabushiki Kaisha" in Japanese and
"E-Loan Japan K.K." in English. The Parties shall use commercially reasonable
efforts to cause the Establishment Date to occur on or before May 1, 1999 and
the Launch Date to occur on or before a date to be agreed upon by the Parties
after consultations with Governmental Authorities in the Territory. For the
purposes of this Agreement, "ESTABLISHMENT DATE" means the date on which the
Company is established in accordance with the Commercial Code and "LAUNCH DATE"
means the date on which the Company commences commercial operations.
3.2 Capitalization.
(a) Initial Capitalization. The Company shall, as of the
Establishment Date, have authorized capital stock consisting of one class of
shares designated as Common Stock with the rights set forth in the Articles. The
Articles shall initially provide for 40,000 authorized shares of Common Stock
with par value of Yen50,000 per share. At least five (5) Business Days prior to
the Closing Date, SOFTBANK shall notify E-LOAN in writing of the SOFTBANK
Affiliates, Funds and Partners which SOFTBANK proposes to include among the
initial SOFTBANK shareholders of the Company (the "SOFTBANK GROUP"). The
Company's initial equity shall be funded as follows:
(i) SOFTBANK Initial Subscription. On or prior to the
Establishment Date, SOFTBANK shall subscribe for 10,000 shares of Common Stock,
representing a one-hundred-percent (100%) Company Interest, for an aggregate
purchase price of Yen500,000,000.
(ii) E-LOAN Purchase. On a date within fifteen (15) days
after the Establishment Date mutually agreed by the Parties (the "CLOSING
DATE"), SOFTBANK shall (x) sell to E-LOAN, and E-LOAN shall purchase from
SOFTBANK, 4,000 shares of Common Stock representing a forty-percent (40%)
Company Interest (the "TRANSFERRED SHARES") for an aggregate purchase price of
Yen200,000,000 and (y) sell to the members of the SOFTBANK Group (other than
SOFTBANK) up to 6,000 shares of Common Stock, subject in each case to the
SOFTBANK Group member agreeing in writing to be bound by the terms hereof.
SOFTBANK covenants that, at all times through the Closing Date, SOFTBANK shall
own the Transferred Shares beneficially and of record, free and clear of all
adverse claims.
(b) Certain Deliveries. On or before the Closing Date, and as a
condition to the purchase and sale of the Transferred Shares:
(i) the Establishment Date shall have occurred;
(ii) SOFTBANK shall have executed and delivered the
Consulting Services Agreement to the Company;
(iii) The Parties shall have agreed on the royalty rate
payable to E-LOAN under the License Agreement and E-LOAN shall have executed and
delivered the License Agreement to the Company;
<PAGE> 6
(iv) SOFTBANK shall have caused the Company to (A) execute
and deliver the License Agreement to E-LOAN and (B) execute and deliver the
Consulting Services Agreement to SOFTBANK; and
(v) each Party shall have received one original of each of
the fully executed Transaction Documents.
(c) Acknowledgment of Agreement; Delivery of Share Certificates.
Promptly after the Closing Date, SOFTBANK shall cause the Company (i) to deliver
to each Party its written acknowledgment of, and agreement to abide by, the
terms of this Agreement, and (ii) at the request of either SOFTBANK or E-LOAN,
to promptly issue and deliver to the SOFTBANK Group and to E-LOAN share
certificates representing the shares of Common Stock purchased pursuant to this
Section 3.2.
3.3 Preemptive Rights; Financial Assistance.
(a) Preemptive Rights. Each Party shall at all times have a
preemptive right to purchase a pro rata portion (equal to such Party's then
current Company Interest) of any new issuances of Common Stock or other
Securities (other than issuances pursuant to an incentive stock option plan
established pursuant to Section 3.4). The Company agrees to notify each Party in
writing of any proposed new issuance of Securities to which such preemptive
rights apply. Each Party shall notify each other Party and the Company, within
ten (10) Business Days after receipt of such notice, of its decision to
participate in any proposed new issuance of Securities (failure to so respond
during such period constituting an election not to participate). In the event
that a Party elects not to subscribe for such Party's full pro rata share of any
newly issued Securities, the other Party shall be entitled to purchase any of
the unsubscribed Securities. All new issuances of shares of Common Stock
pursuant to this Section 3.3 shall be made at a price equal to or greater than
par. The preemptive rights granted pursuant to this Section 3.3(a) shall cease
to be of any further force or effect upon the closing of an initial public
offering of Securities.
(b) Financial Assistance. The Board may, by written notice to the
Parties pursuant to the terms of this Agreement, request that the Parties
provide additional financial assistance to the Company, including in the form of
credit support or loans, and, in such event, if such Party agrees to provide
such additional financial assistance (either directly or through its designees
to the Board), such Party shall make such financial assistance available to the
Company pro rata in accordance with its respective Company Interest and the
Company Interests of all Parties so approving such financial assistance.
3.4 Incentive Stock Option Plan. The Parties agree that an incentive
stock option plan providing for reasonable grants of incentive stock options to
the employees of the Company, E-LOAN and SOFTBANK would be beneficial to the
Company, and agree to cooperate in good faith with a view towards establishing
such a plan within twelve (12) months after the Closing Date on terms mutually
agreed by the Parties. The Securities allocated to an incentive stock option
plan shall not, initially, represent more than a ten percent (10%) Company
Interest. Any Securities allocated to an incentive stock option plan shall be
newly issued and, accordingly, shall dilute the Parties' respective Company
Interests on a pro rata basis.
3.5 SOFTBANK Group Company Interest. The Parties acknowledge that it is
SOFTBANK's intent that, subject to dilution in the event that it elects not to
exercise its
<PAGE> 7
preemptive rights pursuant to Section 3.3(a), the SOFTBANK Group's Company
Interest (on a fully-diluted basis taking into account any shares reserved for
issuance pursuant to the Stock Option Plan) shall, at all times prior to
Company's initial public offering, be not less than fifty and one-tenth percent
(50.1%).
3.6 Additional Party. The Parties acknowledge that, in order for the
Company to effectively pursue the Business in the Territory, it may be necessary
or desirable to bring one or more additional Persons into the joint venture
relationship established hereunder (each an "ADDITIONAL PARTY"). Notwithstanding
any provision hereof to the contrary, SOFTBANK may, in its discretion, sell up
to a total of [*] shares of Common Stock to one or more Additional Parties
provided that, in each case, SOFTBANK provides E-LOAN with notice of the sale.
If E-LOAN has not, prior to [*], expanded its U.S. service to include electronic
means to apply for [*] and complete the [*] processing, then SOFTBANK shall have
the right to propose one or more Additional Parties that provide such services
and E-LOAN will offer to sell such Additional Parties either (i) [*] shares of
Common Stock or (ii) such lesser number of shares of Commons Stock as would
leave E-LOAN, after the closing of the proposed sales, with [*] Company
Interest, at a price not exceeding the sum of (A) Yen50,000/share plus (B)
interest on the total amount paid by E-LOAN for the shares being transferred
calculated at a rate of five percent (5%) per annum and the actual number of
days elapsed from the Closing Date to and including the closing of the sale of
such shares to the Additional Parties. Any such sale by SOFTBANK or E-LOAN to an
Additional Party shall be subject to the Additional Party's written agreement to
be bound by the terms hereof. Upon the closing of any such sale, each Additional
Party shall be deemed a Party for all purposes hereof.
4. OPERATION AND MANAGEMENT OF THE COMPANY
4.1 Operation of the Company. Each Party agrees to take all actions
necessary to ensure that the Company shall be operated in accordance with the
terms of this Agreement and the other Transaction Documents, including, without
limitation, to vote all Securities held by it (and to cause all Securities held
by its permitted transferees under Section 8 to be voted) to effect the terms
hereof.
4.2 Board of Directors. The Company will be managed by the Board in
accordance with the terms of this Agreement and Applicable Law. The Board shall
initially consist of five (5) Directors, three (3) of whom shall be appointed by
SOFTBANK and two (2) of whom shall be appointed by E-LOAN. If E-LOAN's Company
Interest at any time decreases to less than twenty percent (20%), the Parties
shall cause the Board constituency to be adjusted within thirty (30) Business
Days of such decrease so that only one (1) Director is appointed by E-LOAN.
4.3 Removal; Reappointment of Directors. Any Director may be removed for
cause in accordance with Applicable Law. In addition, each Party having the
right to appoint a Director pursuant to this Section 4 shall also have the
right, in its sole discretion, to remove such Director at any time, effective
upon delivery of written notice to the Company, the Director to be removed and
to the other Party. In the case of a vacancy in the office of a Director for any
reason (including removal pursuant to the preceding sentence), the vacancy shall
be filled by the Party that appointed the Director in question.
4.4 Board Meetings. The President shall have the authority to convene
Board meetings, including the authority to specify the time and place of such
meetings. Directors
*Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 8
may attend Board meetings in person or by any other means of attendance
permitted under the Commercial Code, provided, however, that (a) the Board shall
meet at least once during each semi-annual fiscal period and (b) written notice
of all Board meetings shall be given not less than ten (10) Business Days in
advance of each meeting (which ten (10) Business Day period may be shortened by
written waiver of Directors or actual attendance by Directors, without
objection, at a Board meeting). Board meetings shall be conducted in the
Japanese language (with English interpretation) and minutes of such meetings
shall be prepared by the Company in Japanese and English and distributed to each
Director promptly following each meeting. Proposals or reports brought before
any Board meeting for information or action (including without limitation the
Company's annual and semi-annual financial statements) shall be prepared in
Japanese and English (provided that E-LOAN shall bear the expense of translating
any financial statements into English).
4.5 Board Quorum; Resolutions. A quorum shall be deemed to exist for
purposes of Board actions so long as at least three (3) Directors are present.
Any action, determination or resolution of the Board shall require the
affirmative vote of a majority of Directors present at a meeting at which a
valid quorum pursuant to this Section 4.5 is present.
4.6 E-LOAN Approval Rights. Notwithstanding any other provision of this
Agreement, in addition to approval by the Board, E-LOAN's prior written approval
(either in the form of a written consent or in the form of E-LOAN's Director(s)
voting in favor of such action at a duly held Board meeting) shall be required
for any of the actions described in attached Exhibit 4.6. In the event the
actions identified in Exhibit 4.6 are required by the Commercial Code to be
approved by the Company's shareholders, then authorization shall require an
affirmative vote of each of SOFTBANK and E-LOAN in their capacities as
shareholders of the Company.
4.7 Representative Director. The Company's day-to-day operations will be
managed by the President, who shall be the Representative Director of the
Company in accordance with the Articles. The President shall be elected by the
Board from among the Directors nominated by SOFTBANK pursuant to Section 4.2.
SOFTBANK shall have the right, exercisable in its sole discretion, to remove and
replace the President at any time, effective upon the delivery of written notice
to the Company, the President and E-LOAN.
4.8 Corporate Auditors. The Company shall have three (3) Corporate
Auditors, each of whom shall be appointed by SOFTBANK (one (1) of whom shall
serve on a full-time basis). A Corporate Auditor may be removed for cause in
accordance with Applicable Law. SOFTBANK shall also have the right, exercisable
in its sole discretion, to remove and replace any Corporate Auditor at any time,
effective upon the delivery of written notice to the Company, the Corporate
Auditor to be removed and E-LOAN.
4.9 Shareholders' Meetings. Shareholders of the Company shall receive
notice of each shareholders' meeting at least thirty (30) calendar days before
the scheduled date of such meeting. The Company shall have at least one
shareholders' meeting each calendar year. Such meeting will take place in Tokyo,
Japan at such time and place as is determined by the Board. Meetings shall be
conducted in the Japanese language (with English interpretation), and minutes of
such meetings shall be prepared by the Company in Japanese and English.
4.10 Annual Plan. The Company's President shall prepare, and the Board
shall approve, an Annual Plan with respect to each fiscal year of the Company no
later than sixty
<PAGE> 9
(60) days prior to the commencement of the fiscal year, provided, however, that
the initial Annual Plan shall be approved promptly following the Effective Date
and shall cover the period from the Establishment Date until the end of the
first full fiscal year of the Company. The Board shall cause the Company to
conduct its operations in accordance with the Annual Plan, which shall set forth
in reasonable detail certain financial performance goals, including, without
limitation, with respect to revenues, profits, return on net assets and return
on equity for the period subject thereto.
4.11 Financial Statements and Accounting Records. Financial statements
for the Company, including, without limitation, a balance sheet, income
statement, statement of cash flows and statement of shareholders' equity, shall
be submitted by the Company to each of the Parties (a) within sixty (60) days
after the end of the first six (6) months of each fiscal year for such six (6)
month period and (b) within eighty (80) days after the end of each fiscal year
for such year. Each of the annual financial statements shall be audited and
certified by an internationally recognized accounting firm (which will act as an
independent auditor under the Special Exceptions Law) retained by the Company,
selected by SOFTBANK and approved by E-LOAN, which approval shall not be
unreasonably withheld. All financial statements shall be prepared in accordance
with generally accepted accounting principles in Japan and in reasonable detail,
and shall contain such financial data as SOFTBANK and E-LOAN may deem necessary
in order to keep the Parties advised of the Company's financial status (although
quarterly statements need not include footnotes and may be subject to year-end
adjustments). The Company shall, at E-LOAN's request, provide E-LOAN with such
financial information as E-LOAN may reasonably deem necessary for purposes of
complying with its periodic reporting obligations under U.S. securities law and
shall cooperate with E-LOAN in connection therewith, including cooperating with
the Company's accounting firm in preparing quarterly financial statements
requested by E-LOAN; provided, that E-LOAN shall bear any costs incurred in
preparing or providing such information, including, without limitation, in
preparing quarterly financial statements for the Company and reconciling the
Company's financial statements with U.S. generally accepted accounting
principles for such purposes.
4.12 Right of Inspection. During the regular office hours of the
Company, and upon reasonable notice to the Company, each Party that maintains at
least a twenty percent (20%) Company Interest shall have (a) full access to all
properties, books of account, and records of the Company, and (b) the right to
make copies from such books and records at its own expense. Any information
obtained by the Parties through exercise of rights granted under this Section
4.12 shall, to the extent constituting Confidential Information hereunder, be
subject to the confidentiality provisions set forth in Section 5.2.
4.13 Translations. The Company shall prepare English translations of any
minutes of any Board or shareholder meetings initially prepared in Japanese.
Such translations shall be prepared by either the Company's own staff, or an
outside translation service, at the Company's election and expense. If there is
any discrepancy between the Japanese version of any minutes and the English
translation thereof, the Japanese version shall control.
5. ADDITIONAL COVENANTS
5.1 Cooperation. In accordance with the License Agreement, E-LOAN shall
(a) provide the Company with an exclusive license, under all of its intellectual
property rights (including, without limitation, its software, operations and
procedures, brands, trademarks, patents and know-how), sufficient to conduct the
Business and (b) make a sufficient number
<PAGE> 10
of its personnel available to provide the Company with such technical support as
it may reasonably require to localize E-LOAN's online technology for use in the
Territory, all as provided in the License Agreement. In accordance with the
Consulting Services Agreement, SOFTBANK shall provide consulting services to the
Company regarding (a) necessary Japanese regulatory approvals required for the
Business, (b) strategic business opportunities relating to the Business and (c)
the staffing, management and operation of the Company, all as provided in the
Consulting Services Agreement. Except for reimbursement of reasonable
out-of-pocket expenses incurred in connection with the foregoing services, the
Company shall not be required to pay any royalties or other fees other than as
provided in the License Agreement or the Consulting Services Agreement;
provided, however, that if the Company fails to complete its initial public
offering prior to the fourth (4th) anniversary of the Effective Date, royalties
shall be payable under the License Agreement and consulting fees shall be
payable under the Consulting Services Agreement, in an equal amount, calculated
as a percentage of the Company's gross revenues agreed upon by the Parties and
approved by the Board, such amounts to be payable quarterly from and after the
fourth (4th) anniversary of the Effective Date.
5.2 Confidentiality.
(a) The Parties recognize that, in connection with the
performance of this Agreement, each Party (in such capacity, the "DISCLOSING
PARTY") may disclose "Confidential Information" (as defined below) to the other
Party (the "RECEIVING PARTY"). For purposes of this Agreement "CONFIDENTIAL
INFORMATION" means (i) proprietary information (whether owned by the Disclosing
Party or a third party to whom the Disclosing Party owes a non-disclosure
obligation) regarding the Disclosing Party's business or (ii) information which
is marked as confidential at the time of disclosure to the Receiving Party, or
if in oral form, is identified as confidential at the time of oral disclosure
and reduced in writing or other tangible (including electronic) form including a
prominent confidentiality notice and delivered to the Receiving Party within
thirty (30) days of disclosure. "Confidential Information" shall not include
information which: (A) was known to the Receiving Party at the time of the
disclosure by the Disclosing Party; (B) has become publicly known through no
wrongful act of the Receiving Party; (C) has rightfully been received by the
Receiving Party from a third party; or (D) has been independently developed by
the Receiving Party. The Receiving Party agrees (x) not to use any such
Confidential Information for any purpose other than in the performance of its
obligations under this Agreement or any Transaction Document and (y) not to
disclose any such Confidential Information, except (1) to its employees (and in
the case of SOFTBANK, employees of other members of the SOFTBANK Group) who are
reasonably required to have the Confidential Information in connection herewith
or with any of the other Transaction Documents, (2) to its agent,
representatives, lawyers and other advisers that have a need to know such
Confidential Information and (3) pursuant to, and to the extent of, a request or
order by a Governmental Authority. The Receiving Party agrees to take all
reasonable measures to protect the secrecy and confidentiality of, and avoid
disclosure or unauthorized use of, the Disclosing Party's Confidential
Information.
(b) Each Party acknowledges and agrees that (i) its obligations
under this Section 5.2 are necessary and reasonable to protect the other Party
and its business, (ii) any violation of these provisions could cause irreparable
injury to the other Party for which money damages would be inadequate, and (iii)
as a result, the other Party shall be entitled to obtain injunctive relief
against the threatened breach of the provisions of this Section 5.2
<PAGE> 11
without the necessity of proving actual damages. The Parties agree that the
remedies set forth in this Section 5.2 are in addition to and in no way preclude
any other remedies or actions that may be available at law or under this
Agreement.
5.3 Confidentiality of Agreement; Publicity. Each Party agrees that the
terms and conditions of this Agreement and the Transaction Documents shall be
treated as confidential information and that no reference thereto shall be made
thereto without the prior written consent of the other Party (which consent
shall not be unreasonably withheld) except (a) as required by Applicable Law
including, without limitation, by the U.S. Securities and Exchange Commission
and Japanese Governmental Authorities, (b) to its accountants, banks, financing
sources, lawyers and other professional advisors, provided that such parties
undertake in writing (or are otherwise bound by rules of professional conduct)
to keep such information strictly confidential, (c) in connection with the
enforcement of this Agreement, (d) in connection with a merger, acquisition or
proposed merger or acquisition, or (e) pursuant to joint press releases prepared
in good faith. The Parties will consult with each other, in advance, with regard
to the terms of all proposed press releases, public announcements and other
public statements with respect to the transactions contemplated hereby.
5.4 Noncompetition. During the Term, neither Party shall, directly or
(other than through the Company) indirectly, offer brokerage services which (i)
are targeted principally at Persons residing in the Territory and (ii) enable
consumers to receive loan or mortgage quotes or to apply for loans and mortgages
online; provided, however, that (a) nothing in this Agreement or the other
Transaction Documents shall be deemed to preclude or limit SOFTBANK or its
Affiliates from holding any equity interest in, or doing business with third
parties who, currently or in the future, provide such services in the Territory
(so long as such business does not involve SOFTBANK directly sourcing online
loan or mortgage services to Persons in the Territory), (b) nothing in this
Agreement or the other Transaction Documents shall be deemed to preclude or
limit either Party, or its Affiliates, from offering brokerage services which
are targeted principally at Persons in the Territory and which relate to
consumer finance, and (c) SOFTBANK shall not be deemed in breach hereof by
virtue of any services provided by SOFTBANK's joint ventures with Yahoo!,
OnSale, E*TRADE, Sonnet, Geocities, Cybercash, Morningstar, InsWeb or
broadcast.com provided that SOFTBANK has not advised or provided assistance with
respect to the online loan or mortgage services. In the event that this
Agreement is terminated due to a Party's breach (including, without limitation,
if SOFTBANK is the terminating Party, a breach by E-LOAN under the License
Agreement), the breaching Party's obligations pursuant to this Section 5.4 shall
remain in effect for a period of twenty-four (24) months following such
termination.
5.5 Regulatory Approvals. SOFTBANK shall be primarily responsible for
assisting the Company to obtain such approvals, consents and similar actions
from Governmental Authorities in Japan, and E-LOAN shall be primarily
responsible for assisting the Company to obtain such approvals, consents and
similar actions from Governmental Authorities in the United States, as may be
necessary or appropriate in order to consummate the transactions contemplated
under the Transaction Documents. Each Party shall provide such assistance as the
other Party may reasonably request in connection with such consents and
approvals.
<PAGE> 12
6. WARRANTIES OF THE PARTIES
6.1 Warranties of SOFTBANK. SOFTBANK hereby represents and warrants to
E-LOAN that, as of the Effective Date and as of the Closing Date, the following
statements are and shall be true and correct:
(a) Organization. SOFTBANK is a corporation duly organized and
validly existing under the laws of Japan, and has the corporate power and
authority to enter into and perform this Agreement and the Consulting Services
Agreement.
(b) Authorization. All corporate action on the part of SOFTBANK
necessary for the authorization, execution and delivery of this Agreement and
the Consulting Services Agreement and for the performance of all of its
obligations hereunder and thereunder has been taken, and this Agreement and the
Consulting Services Agreement when fully executed and delivered, shall each
constitute a valid, legally binding and enforceable obligation of SOFTBANK.
(c) Government and Other Consents. Other than any licenses,
permits, certifications or authorizations which may be required in connection
with the Business, as to which SOFTBANK makes no representation, no consent,
authorization, license, permit, registration or approval of, or exemption or
other action by, any Governmental Authority, or any other Person, is required in
connection with SOFTBANK's execution, delivery and performance of this Agreement
or the Consultant Services Agreements, or if any such consent is required,
SOFTBANK has satisfied the applicable requirements.
(d) Effect of Agreement. SOFTBANK's execution, delivery and
performance of this Agreement and the Consulting Services Agreement will not (i)
violate the Articles of Incorporation of SOFTBANK or any provision of Applicable
Law, (ii) violate any judgment, order, writ, injunction or decree of any court
applicable to SOFTBANK, (iii) have any effect on the compliance of SOFTBANK with
any applicable licenses, permits or authorizations which would materially and
adversely affect SOFTBANK, (iv) result in the breach of, give rise to a right of
termination, cancellation or acceleration of any obligation with respect to
(presently or with the passage of time), or otherwise be in conflict with any
term of, or affect the validity or enforceability of, any agreement or other
commitment to which SOFTBANK is a party and which would materially and adversely
effect SOFTBANK, or (v) result in the creation of any lien, pledge, mortgage,
claim, charge or encumbrance upon any assets of SOFTBANK; provided, however,
that regulatory approval may be required in connection with conducting the
Business and SOFTBANK makes no representation with respect to any such
approvals.
(e) Litigation. There are no actions, suits or proceedings
pending or, to SOFTBANK's knowledge, threatened, against SOFTBANK before any
Governmental Authority which question SOFTBANK's right to enter into or perform
this Agreement or the Consulting Services Agreement, or which question the
validity of this Agreement or any of the other Transaction Documents.
6.2 Warranties of E-LOAN. E-LOAN hereby represents and warrants to
SOFTBANK that, as of the Effective Date and as of the Closing Date, the
following statements are and shall be true and correct:
<PAGE> 13
(a) Organization. E-LOAN is a corporation duly organized and
validly existing under the laws of Delaware. E-LOAN has the corporate power and
authority to enter into and perform this Agreement and the License Agreement.
(b) Authorization. All corporate action on the part of E-LOAN
necessary for the authorization, execution and delivery of this Agreement and
the License Agreement and for the performance of all of its obligations
hereunder and thereunder has been taken, and this Agreement and the License
Agreement, when fully executed and delivered, shall each constitute a valid,
legally binding and enforceable obligation of E-LOAN.
(c) Government and Other Consents. Other than any licenses,
permits or authorizations which may be required in connection with the Business,
as to which E-LOAN makes no representation, no consent, authorization, license,
permit, registration or approval of, or exemption or other action by, any
Governmental Authority, or any other Person, is required in connection with
E-LOAN's execution, delivery and performance of this Agreement or the License
Agreement, or if any such consent is required, E-LOAN has satisfied any
applicable requirements.
(d) Effect of Agreement. E-LOAN's execution, delivery and
performance of this Agreement and the License Agreement will not (i) violate the
Certificate of Incorporation of E-LOAN or any provision of Applicable Law, (ii)
violate any judgment, order, writ, injunction or decree of any court applicable
to E-LOAN, (iii) have any effect on the compliance of E-LOAN with any applicable
licenses, permits or authorizations which would materially and adversely affect
E-LOAN, (iv) result in the breach of, give rise to a right of termination,
cancellation or acceleration of any obligation with respect to (presently or
with the passage of time), or otherwise be in conflict with, any term of, or
affect the validity or enforceability of any agreement or other commitment to
which E-LOAN is a party and which would materially and adversely affect E-LOAN,
or (v) result in the creation of any lien, pledge, mortgage, claim, charge or
encumbrance upon any assets of E-LOAN; provided, however, that regulatory
approvals may be required in connection with conducting the Business and E-LOAN
makes no representation with respect to any such approvals.
(e) Litigation. There are no actions, suits or proceedings
pending or, to E-LOAN's knowledge, threatened, against E-LOAN before any
Governmental Authority which question E-LOAN's right to enter into or perform
this Agreement or the License Agreement, or which question the validity of this
Agreement or any of the other Transaction Documents.
7. TERM AND TERMINATION
7.1 Term. This Agreement shall be effective as of the Effective Date,
and shall continue in effect until terminated pursuant to Section 7.2 (the
"TERM").
7.2 Termination. This Agreement may be terminated as follows:
(a) Upon the mutual written agreement of SOFTBANK and E-LOAN.
(b) By either SOFTBANK or E-LOAN, effective immediately upon
written notice to the other Party, if the other Party breaches any material
provision of this Agreement or of any of the other Transaction Documents and
such breach continues for a
<PAGE> 14
period of thirty (30) days after the delivery of written notice of the default,
describing the default in reasonable detail.
(c) By either SOFTBANK or E-LOAN, effective immediately upon
written notice to the other Party and the Company, in the event that the other
Party is dissolved, liquidated or declared bankrupt or a voluntary or
involuntary bankruptcy filing is made by such Party.
(d) By SOFTBANK, effective immediately upon written notice to
E-LOAN, in the event that the Company has elected to terminate the License
Agreement in accordance with its terms.
(e) By E-LOAN, effective immediately upon written notice to
SOFTBANK, in the event that E-LOAN has elected to terminate the License
Agreement in accordance with its terms.
7.3 Effect. Upon termination of this Agreement, the Parties shall
negotiate in good faith a possible purchase by one or more Parties of all
outstanding Securities held by the other Parties or the sale of the Company to a
third party. In the event that, notwithstanding their good faith negotiations,
the Parties are unable to agree upon such a purchase or sale within thirty (30)
days of the notice of termination, the Parties shall cooperate to cause the
Company to be liquidated as promptly as practical in accordance with Applicable
Law. The rights and obligations of the Parties under Sections 5.2, 5.3, 5.4 (to
the extent provided therein), this Section 7.3, and Sections 7.4, 7.5 and 9
shall survive any termination of this Agreement.
7.4 Return of Confidential Information. Upon the termination of this
Agreement, each Party, at its own cost, shall promptly return to the Disclosing
Party any and all documents and materials constituting or containing
Confidential Information of the Disclosing Party which are in its possession or
control, or at its option, shall destroy such documents and materials and
certify such destruction in writing to the Disclosing Party.
7.5 Continuing Liability. Termination of this Agreement for any reason
shall not release any Party from any liability or obligation which has already
accrued as of the effective date of such termination, and shall not constitute a
waiver or release of, or otherwise be deemed to prejudice or adversely affect,
any rights, remedies or claims, whether for damages or otherwise, which a Party
may have hereunder, at law, equity or otherwise or which may arise out of or in
connection with such termination.
8. TRANSFER RESTRICTIONS
8.1 General Restriction. Subject to Section 8.2, each Party agrees to
hold its Securities during the Term and, except as otherwise specifically
provided in this Agreement or agreed to in writing by the other Party, not to
sell, transfer, assign, hypothecate or in any way alienate any of such Party's
Securities or any right or interest therein except to an Affiliate of such
Party. In the case of any transfer permitted hereunder, the transferring Party
shall deliver to the other Party (a) at least ten (10) Business Days prior to
such transfer, a written notice stating its intention to transfer the Securities
to be transferred, the name of the transferee, whether such transferee is an
Affiliate, the number of Securities to be transferred, and the price and other
material terms and conditions of the transfer, and (b) except as otherwise
specifically provided herein, on or prior to the effective date of the transfer
and in a
<PAGE> 15
form reasonably acceptable to the other Party and its counsel, the transferee's
written acknowledgement of and agreement to be bound by, and to vote the
transferred Securities at all times in accordance with, the terms of this
Agreement. E-LOAN acknowledges that SOFTBANK is in the process of forming SB
Finance for the purpose, among other things, of holding certain of its
investments in internet-related business ventures. E-LOAN agrees that upon the
formation and qualification of SB Finance, SOFTBANK may transfer its Securities
to SB Finance, provided that (1) SOFTBANK notifies E-LOAN of the proposed
transfer and (2) SB Finance agrees in writing to be bound by the terms hereof.
8.2 Transfers to Party Employees. Notwithstanding the provisions of
Section 8.1, each Party shall, upon written notice to the Company and the other
Party, have the right to transfer to such Party's employees (and, in the case of
SOFTBANK, to any SOFTBANK Group member's employees), such number of its
Securities as it may elect from time to time. Any such transfers shall not
affect the transferring Party's Company Interest for purposes of Section 4.2 for
so long as the employees own such Securities.
8.3 Initial Public Offering. The foregoing restrictions shall cease to
be of any further force or effect upon the closing date of an initial public
offering of Securities.
8.4 Board Approval. The Parties shall cause each Director it has
appointed to vote to approve any transfer of Securities in accordance with this
Section 8.
9. GENERAL PROVISIONS
9.1 Governing Law; Dispute Resolution. The validity, construction and
enforceability of this Agreement shall be governed by and construed in
accordance with the laws of Japan. All disputes between the Parties arising out
of this Agreement shall be settled by the Parties amicably through good faith
discussions upon the written request of either Party. In the event that any such
dispute cannot be resolved thereby within a period of sixty (60) days after such
notice has been given, such dispute shall be finally settled by arbitration in
Tokyo, Japan, using the English language, and in accordance with the rules then
in effect of the Japan Commercial Arbitration Association. The arbitrator(s)
shall have the authority to grant specific performance, and to allocate between
the Parties the costs of arbitration in such equitable manner as the
arbitrator(s) may determine. The prevailing Party in the arbitration shall be
entitled to receive reimbursement of its reasonable expenses incurred in
connection therewith. Judgement upon the award so rendered may be entered in any
court having jurisdiction or application may be made to such court for judicial
acceptance of any award and an order of enforcement, as the case may be.
Notwithstanding the foregoing, either Party shall have the right to institute a
legal action in a court of proper jurisdiction for injunctive relief and/or a
decree for specific performance pending final settlement by arbitration.
9.2 Notices and Other Communications. Any and all notices, requests,
demands and other communications required or otherwise contemplated to be made
under this Agreement shall be in writing and in English and shall be provided by
one or more of the following means and shall be deemed to have been duly given
(a) if delivered personally, when received, (b) if transmitted by facsimile
originating in Japan, on the date of transmission with receipt of a transmittal
confirmation, (c) if transmitted by facsimile originating in the United States,
on the first (1st) Business Day following receipt of a transmittal confirmation,
or (d) if by international courier service, on the fourth (4th) Business Day
following the date of deposit with such courier service, or such earlier
delivery
<PAGE> 16
date as may be confirmed in writing to the sender by such courier service. All
such notices, requests, demands and other communications shall be addressed as
follows:
If to SOFTBANK:
SOFTBANK CORP.
24-1 Nihonbashi-Hakozakicho
Chuo-ku, Tokyo 103-8501
Attention: Mr. Yoshitaka Kitao
Hitoshi Hasegawa, Esq.
Telephone: 81-3-5642-8376
Facsimile: 81-3-5641-3402
with a copy (which copy shall not constitute notice) to:
Morrison & Foerster LLP
AIG Building, 7th Floor
1-1-3 Marunouchi,
Chiyoda-ku, Tokyo 100-0005, Japan
Attention: Ken Siegel, Esq.
Telephone: 81-3-3214-6522
Facsimile: 81-3-3214-6512
If to E-LOAN:
E-Loan, Inc.
5875 Arnold Road, Suite 100
Dublin, CA 94568
U.S.A.
Attention: Doug Galen
Telephone: 925-241-2400
Facsimile: 925-241-2614
with a copy (which copy shall not constitute notice) to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, CA 94304
U.S.A.
Attention: Ken Clark, Esq.
Telephone: 650-493-9300
Facsimile: 650-493-6811
or to such other address or facsimile number as a Party may have specified to
the other Party in writing delivered in accordance with this Section 9.2.
9.3 Language. This Agreement is in the English language only, which
language shall be controlling in all respects, and all versions hereof in any
other language shall be for accommodation only and shall not be binding upon the
Parties. All communications and notices to be made or given pursuant to this
Agreement shall be in the English language.
<PAGE> 17
9.4 Severability. If any provision in this Agreement shall be found or
be held to be invalid or unenforceable (including, without limitation, as a
result of objections by the Japanese Fair Trade Commission) then the meaning of
said provision shall be construed, to the extent feasible, so as to render the
provision enforceable, and if no feasible interpretation would save such
provision, it shall be severed from the remainder of this Agreement which shall
remain in full force and effect unless the severed provision is essential and
material to the rights or benefits received by any Party. In such event, the
Parties shall use best efforts to negotiate, in good faith, a substitute, valid
and enforceable provision or agreement which most nearly affects the Parties'
intent in entering into this Agreement.
9.5 References; Subject Headings. Unless otherwise indicated, references
to Sections and Exhibits herein are to Sections of, and Exhibits to, this
Agreement. The subject headings of the Sections of this Agreement are included
for the purpose of convenience of reference only, and shall not affect the
construction or interpretation of any of its provisions.
9.6 Further Assurances. The Parties shall each perform such acts,
execute and deliver such instruments and documents, and do all such other things
as may be reasonably necessary to accomplish the transactions contemplated in
this Agreement.
9.7 Expenses. Each of the Parties will bear its own costs and expenses,
including, without limitation, fees and expenses of legal counsel, accountants,
brokers, consultants and other representatives used or hired in connection with
the negotiation and preparation of this Agreement and consummation of the
transactions contemplated hereby. All such expenses incurred by the Company
shall be borne by the Company to the maximum extent permitted by Applicable Law
including, without limitation, expenses relating to the formation of the
Company, any transfer taxes for transfer of the Company stock to the Parties,
registration charges, taxes, fees and expenses relating to required governmental
or regulatory approvals, notary fees and legal fees and expenses.
9.8 No Waiver. No waiver of any term or condition of this Agreement
shall be valid or binding on a Party unless the same shall have been set forth
in a written document, specifically referring to this Agreement and duly signed
by the waiving Party. The failure of a Party to enforce at any time any of the
provisions of this Agreement, or the failure to require at any time performance
by one or both of the other Parties of any of the provisions of this Agreement,
shall in no way be construed to be a present or future waiver of such
provisions, nor in any way affect the ability of a Party to enforce each and
every such provision thereafter.
9.9 Entire Agreement; Amendments. The terms and conditions contained in
this Agreement (including the Exhibits hereto) and the Transaction Documents
constitute the entire agreement between the Parties and supersede all previous
agreements and understandings, whether oral or written, between the Parties with
respect to the subject matter hereof. No agreement or understanding amending
this Agreement shall be binding upon any Party unless set forth in a written
document which expressly refers to this Agreement and which is signed and
delivered by duly authorized representatives of each Party.
9.10 Assignment. Neither Party shall assign this Agreement (a) without
the other Party's prior written consent, except that a Party may assign this
Agreement to a Person into which such Party has merged or which has otherwise
succeeded to all or substantially all of such Party's business or assets and (b)
which has assumed in writing or by operation of law, the assigning Party's
obligations under this Agreement, provided, however, that the assigning
<PAGE> 18
Party shall remain liable for the assignee's performance of its obligations
hereunder. Notwithstanding the foregoing, SOFTBANK may assign all of its rights
and obligations hereunder to SB Finance in connection with a transfer of its
Securities to SB Finance in accordance with Section 8.1. This Agreement shall
inure to the benefit of, and shall be binding upon, the Parties and their
respective permitted successors and assigns.
9.11 No Agency. The Parties are independent contractors. Nothing
contained herein or done in pursuance of this Agreement shall constitute any
Party the agent of any other Party for any purpose or in any sense whatsoever.
9.12 No Beneficiaries. Nothing herein express or implied, is intended to
or shall be construed to confer upon or give to any person, firm, corporation or
legal entity, other than the Parties and their Affiliates who hold Securities
(and, in the case of SOFTBANK, any other member of the SOFTBANK Group), any
interests, rights, remedies or other benefits with respect to or in connection
with any agreement or provision contained herein or contemplated hereby.
9.13 Effective Date of Transaction Documents. The Transaction Documents
other than this Agreement shall become effective concurrently with consummation,
on the Closing Date, of the transactions described in Section 3.2.
9.14 Counterparts. This Agreement may be executed in any number of
counterparts, and each counterpart shall constitute an original instrument, but
all such separate counterparts shall constitute only one and the same
instrument.
IN WITNESS WHEREOF, the Parties have caused their respective duly
authorized representatives to execute this Agreement as of the Effective Date.
SOFTBANK CORP. E-Loan, Inc.
By: /s/ YOSHITAKA KITAO By: /s/ DOUG GALEN
-------------------------------- -------------------------------------
Yoshitaka Kitao Doug Galen
Executive Vice President and CFO Vice President, Business Development
and Sales
<PAGE> 19
EXHIBIT 1.4
Company Articles of Incorporation
[Exhibit 1.4 IS WRITTEN IN JAPANESE]
<PAGE> 20
EXHIBIT 1.14
Consulting Services Agreement
<PAGE> 21
CONSULTING SERVICES AGREEMENT
This CONSULTING SERVICES AGREEMENT ("AGREEMENT") is made as of
_________, 1999, (the "EFFECTIVE DATE") by and between E-Loan Japan K.K., a
Japanese corporation (the "COMPANY"), and SOFTBANK CORP., a Japanese corporation
("SOFTBANK"). The Company and SOFTBANK are hereunder also referred to
collectively as the "PARTIES" and individually as a "PARTY."
RECITALS
A. SOFTBANK is a leading provider of information and distribution
services in Japan and worldwide as infrastructure for the digital information
industry.
B. Pursuant to a Joint Venture Agreement dated as of March 31, 1999 (the
"JV AGREEMENT") between SOFTBANK and E-LOAN, Inc., a Delaware corporation
("E-LOAN"), E-LOAN and SOFTBANK have established the Company for the purpose of
providing a comprehensive Internet marketplace in which customers in Japan can,
by accessing an online site, identify loan providers and lenders can identify
interested consumers (as more fully described in the JV Agreement, the
"BUSINESS"). All capitalized terms used herein without definition shall have the
meanings set forth in the JV Agreement.
C. SOFTBANK has agreed to provide certain consulting services to the
Company relating to the Business on the terms and conditions set forth in this
Agreement.
NOW THEREFORE, for valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the Parties hereby agree as follows:
AGREEMENT
1. CONSULTING SERVICES
SOFTBANK agrees to provide the consulting services (the "SERVICES")
described in attached Exhibit A on the terms, and subject to the conditions, set
forth herein.
2. CONSULTING FEE
SOFTBANK shall provide the Services to the Company free of charge,
except for reimbursement of SOFTBANK's reasonable out-of-pocket expenses;
provided, however, that if the Company fails to complete an initial public
offering of its Securities by the fourth (4th) anniversary of the Effective Date
(as defined above), then from and after such time the Company shall pay to
SOFTBANK a service fee, agreed upon by SOFTBANK and the Company, calculated as a
percentage of the Company's gross revenues during each fiscal quarter after such
anniversary. Any fees hereunder (a) shall be denominated in yen, (b) shall be
payable quarterly, in arrears, within twenty (20) days of the end of each
calendar quarter and (c) shall be accompanied by a statement setting forth the
basis for the fee calculation. If the Company fails to pay any amount when due
hereunder, the Company shall pay late charges of 1.5% per month, but in no event
more than the highest rate permitted by applicable law.
<PAGE> 22
3. REPRESENTATIONS OF THE PARTIES
Each Party hereby represents and warrants to the other Party that, as of
the date hereof, the following statements are true and correct:
3.1 Organization. Such Party is a corporation duly organized and validly
existing under the laws of Japan, and has the corporate power and authority to
enter into and perform this Agreement.
3.2 Authorization. All corporate action on the part of such Party
necessary for the authorization, execution and delivery of this Agreement and
for the performance of all of its obligations hereunder has been taken, and this
Agreement when fully executed and delivered, shall each constitute a valid,
legally binding and enforceable obligation of such Party.
3.3 Effect of Agreement. Such Party's execution, delivery and
performance of this Agreement will not (a) violate the Articles of Incorporation
of such Party or any provision of any law, statute, rule or regulation to which
such Party is subject, (b) violate any judgment, order, writ, injunction or
decree of any court applicable to such Party, or (c) have any effect on the
compliance of such Party with any applicable licenses, permits or authorizations
which would materially and adversely affect such Party.
4. TERM AND TERMINATION
4.1 Term. This Agreement shall be effective as of the Effective Date and
shall continue in full force and effect until and unless terminated pursuant to
Section 4.2.
4.2 Termination.
4.2.1 Default. If E-LOAN or the Company fails to perform, in any
material respect, any of its material obligations hereunder or under any other
Transaction Document, and if such default continues for a period of thirty (30)
days after the date the defaulting party first receives written notice of such
default, then SOFTBANK shall have the right to terminate this Agreement
effective immediately upon written notice to E-LOAN and the Company.
4.2.2 Bankruptcy. If either SOFTBANK or the Company is dissolved,
liquidated or declared bankrupt, or a voluntary or involuntary bankruptcy filing
is made by or with respect to such Party and remains unstayed and undismissed
for a period of sixty (60) days after filing (a "BANKRUPTCY EVENT"), then the
Party not subject to the Bankruptcy Event shall have the right to terminate this
Agreement, effective immediately upon notice to the other Party.
4.2.3 Obligations on Termination. The provisions of Sections 5
(Confidentiality) and 6 (General Provisions) shall survive any termination of
this Agreement. The termination of this Agreement will not release either Party
from any liability incurred prior to termination.
5. CONFIDENTIALITY
5.1 Confidential Information. The Parties recognize that, in connection
with the performance of this Agreement, each Party (in such capacity, the
"DISCLOSING PARTY") may disclose Confidential Information (as defined below) to
the other Party (the "RECEIVING
<PAGE> 23
PARTY"). For purposes of this Agreement "CONFIDENTIAL INFORMATION" means (a)
proprietary information (whether owned by the Disclosing Party or a third party
to whom the Disclosing Party owes a non-disclosure obligation) regarding the
Disclosing Party's business or (b) information which is marked as confidential
at the time of disclosure to the Receiving Party, or if in oral form, is
identified as confidential at the time of oral disclosure and reduced in writing
or other tangible (including electronic) form including a prominent
confidentiality notice and delivered to the Receiving Party within thirty (30)
days of disclosure. "Confidential Information" shall not include information
which: (i) was known to the Receiving Party at the time of the disclosure by the
Disclosing Party; (ii) has become publicly known through no wrongful act of the
Receiving Party; (iii) has rightfully been received by the Receiving Party from
a third party; or (iv) has been independently developed by the Receiving Party.
The Receiving Party agrees (A) not to use any such Confidential Information for
any purpose other than in the performance of its obligations under this
Agreement or any Transaction Document and (B) not to disclose any such
Confidential Information, except (1) to its employees (and in the case of
SOFTBANK, employees of other members of the SOFTBANK Group) who are reasonably
required to have the Confidential Information in connection herewith or with any
of the other Transaction Documents, (2) to its agent, representatives, lawyers
and other advisers that have a need to know such Confidential Information and
(3) pursuant to, and to the extent of, a request or order by a governmental
authority. The Receiving Party agrees to take all reasonable measures to protect
the secrecy and confidentiality of, and avoid disclosure or unauthorized use of,
the Disclosing Party's Confidential Information.
5.2 Injunction. Each Party acknowledges and agrees that (a) its
obligations under Section 5.1 are necessary and reasonable to protect the other
Party and its business, (b) any violation of these provisions could cause
irreparable injury to the other Party for which money damages would be
inadequate, and (c) as a result, the other Party shall be entitled to obtain
injunctive relief against the threatened breach of the provisions of Section 5.1
without the necessity of proving actual damages. The Parties agree that the
remedies set forth in this Section 5.2 are in addition to and in no way preclude
any other remedies or actions that may be available at law or under this
Agreement.
6. GENERAL PROVISIONS
6.1 Governing Law; Dispute Resolution. The validity, construction and
enforceability of this Agreement shall be governed by and construed in
accordance with the laws of Japan. All disputes between the Parties arising out
of this Agreement shall be settled by the Parties amicably through good faith
discussions upon the written request of either Party. In the event that any such
dispute cannot be resolved thereby within a period of sixty (60) days after such
notice has been given, such dispute shall be finally settled by arbitration in
Tokyo, Japan, using the English language, and in accordance with the rules then
in effect of the Japan Commercial Arbitration Association. The arbitrator(s)
shall have the authority to grant specific performance, and to allocate between
the Parties the costs of arbitration in such equitable manner as the
arbitrator(s) may determine. The prevailing party in the arbitration shall be
entitled to receive reimbursement of its reasonable expenses incurred in
connection therewith. Judgment upon the award so rendered may be entered in any
court having jurisdiction or application may be made to such court for judicial
acceptance of any award and an order of enforcement, as the case may be.
6.2 Notices and Other Communications. Any and all notices, requests,
demands and other communications required or otherwise contemplated to be made
under this Agreement
<PAGE> 24
shall be in writing and in English and shall be provided by one or more of the
following means and shall be deemed to have been duly given (a) if delivered
personally, when received, (b) if transmitted by facsimile, on the date of
transmission with receipt of a transmittal confirmation, or (c) if by
international courier service, on the fourth (4th) Business Day following the
date of deposit with such courier service, or such earlier delivery date as may
be confirmed to the sender by such courier service. All such notices, requests,
demands and other communications shall be addressed as follows:
If to SOFTBANK:
SOFTBANK CORP.
24-1 Nihonbashi-Hakozakicho
Chuo-ku, Tokyo 103-8501
Attention: Mr. Yoshitaka Kitao
Hitoshi Hasegawa, Esq.
Telephone: 81-3-5642-8376
Facsimile: 81-3-5641-3402
with a copy to (which shall not constitute notice):
Morrison & Foerster LLP
AIG Building, 7th Floor
1-1-3 Marunouchi,
Chiyoda-ku, Tokyo 100-0005, Japan
Attention: Ken Siegel, Esq.
Telephone: 81-3-3214-6522
Facsimile: 81-3-3214-6512
If to the Company:
_________________________
_________________________
_________________________
Attention: ___________
Telephone: ___________
Facsimile: ___________
or in each case to such other address or facsimile number as a Party may have
furnished to the other Party in writing delivered in accordance with the terms
of this Section 6.2.
6.3 Language. This Agreement is in the English language only, which
language shall be controlling in all respects, and all versions hereof in any
other language shall be for accommodation only and shall not be binding upon the
Parties hereto. All communications and notices to be made or given pursuant to
this Agreement shall be in the English language.
6.4 Severability. If any provision in this Agreement shall be found or
be held to be invalid or unenforceable (including without limitation objections
by the Japanese Fair Trade Commission) then the meaning of said provision shall
be construed, to the extent feasible, so as to render the provision enforceable,
and if no feasible interpretation would save such provision, it shall be severed
from the remainder of this Agreement which shall remain in full force and effect
unless the severed provision is essential and material to the rights or benefits
<PAGE> 25
received by any Party. In such event, the Parties shall use best efforts to
negotiate, in good faith, a substitute, valid and enforceable provision or
agreement which most nearly affects the Parties' intent in entering into this
Agreement.
6.5 References; Subject Headings. Unless otherwise indicated, references
to Sections and Exhibits herein are to Sections of, and Exhibits to, this
Agreement. The subject headings of the Sections of this Agreement are included
for the purpose of convenience of reference only, and shall not affect the
construction or interpretation of any of its provisions.
6.6 Further Assurances. The Parties shall each perform such acts,
execute and deliver such instruments and documents, and do all such other things
as may be reasonably necessary to accomplish the transactions contemplated in
this Agreement.
6.7 No Waiver. No waiver of any term or condition of this Agreement
shall be valid or binding on a Party unless the same shall have been set forth
in a written document, specifically referring to this Agreement and signed by
the waiving Party. The failure of a Party to enforce at any time any of the
provisions of this Agreement, or the failure to require at any time performance
by one or both of the other Parties of any of the provisions of this Agreement,
shall in no way be construed to be a present or future waiver of such
provisions, nor in any way affect the ability of a Party to enforce each and
every such provision thereafter.
6.8 Entire Agreement; Amendments. The terms and conditions contained in
this Agreement (including the Exhibits hereto) and the documents referred to
herein constitute the entire agreement between the Parties and supersede all
previous agreements and understandings, whether oral or written, between the
Parties with respect to the subject matter hereof. No agreement amending this
Agreement shall be binding upon any Party unless set forth in a written document
which expressly refers to this Agreement and which is signed by and delivered by
duly authorized representatives of each Party.
6.9 Assignment. Neither Party shall assign this Agreement (a) without
the other Party's prior written consent, and (b) only in such case if the
assignee agrees in writing to be bound irrevocably and unconditionally by the
terms hereof; provided, however, that the assigning Party shall remain liable
for the assignee's performance of its obligations hereunder. Notwithstanding the
foregoing, SOFTBANK may assign all of its rights and obligations hereunder to SB
Finance in connection with a transfer of its Securities to SB Finance in
accordance with Section 8.1 of the JV Agreement. This Agreement shall inure to
the benefit of, and shall be binding upon, the Parties and their respective
permitted successors and assigns.
6.10 No Agency. The Parties are independent contractors. Nothing
contained herein or done in pursuance of this Agreement shall constitute any
Party the agent of any other Party for any purpose or in any sense whatsoever.
6.11 Counterparts. This Agreement may be executed in any number of
counterparts, and each counterpart shall constitute an original instrument, but
all such separate counterparts shall constitute only one and the same
instrument.
<PAGE> 26
IN WITNESS WHEREOF, the Parties have caused their respective duly
authorized representatives to execute this Agreement as of the Effective Date.
SOFTBANK CORP. E-Loan Japan K.K.
By:______________________________ By:______________________________________
Yoshitaka Kitao [Name]
Executive Vice President and CFO [Title]
<PAGE> 27
EXHIBIT A
CONSULTING SERVICES
1. Consult with the Company concerning the government approvals that may
be reasonably necessary or appropriate for the Company to obtain in connection
with the conduct of the Business, or any extension thereof, and assist the
Company in maintaining such approvals.
2. Acquire information regarding, and consult concerning, strategic
business opportunities relating to the Business.
3. Consult with the Company on staffing, management and operation of the
Company.
<PAGE> 28
EXHIBIT 1.23
License Agreement
<PAGE> 29
LICENSE AND SERVICES AGREEMENT BETWEEN
E-LOAN, INC. AND E-LOAN JAPAN
This LICENSE AND SERVICES AGREEMENT (this "AGREEMENT") is entered into
as of ___________, 1999, (the "EFFECTIVE DATE") by and between E-Loan, a
California corporation with offices at 540 University Avenue, Suite 350, Palo
Alto, California, 94301 ("E-LOAN"), and E-LOAN JAPAN K.K., a kabushiki kaisha
organized under the laws of Japan with offices at _____________ ("LICENSEE").
BACKGROUND
A. E-Loan is engaged in an Internet-based marketing business in the
United States in which E-Loan acts as an on-line mortgage originator, offering
automated loan application process flows that allow Internet users to apply for
and obtain home mortgages and related services quickly and at substantially
reduced fees.
B. E-Loan wishes to provide Licensee with certain licenses to E-Loan's
Software (as defined below), technology, and trademarks, and certain development
and technical support services.
NOW, THEREFORE, in consideration of the mutual promises and upon the
terms and conditions set forth below, the parties agree as follows:
1. DEFINITIONS.
1.1 "AFFILIATE" of a party means any entity controlled by, controlling,
or under common control with such party, where "control" means ownership, either
direct or indirect, of more than 50% of the equity interest entitled to vote for
the election of directors or equivalent governing body.
1.2 "DERIVATIVE WORK" means a "derivative work" or "compilation" within
the meaning of such terms under the United States Copyright Act, 17 U.S.C.
Section 101 et seq.
1.3 "DOCUMENTATION" means any instructions, manuals or other materials,
including without limitation on-line help files, regarding the development,
installation, maintenance or use of the Software, which have been delivered by
E-Loan to Licensee under this Agreement.
1.4 "E-LOAN BRAND" means (i) the "E-Loan" trademark, service mark and
logo, and the Licensee Domain, and (ii) all other marks that E-Loan uses for its
on-line mortgage origination business in the United States during the term of
this Agreement and any derivations of such marks developed for use in and/or
registered in the Territory, for purposes of the Local Business.
1
<PAGE> 30
1.5 "E-LOAN TECHNOLOGY" shall mean the Software, Documentation, and all
proprietary techniques, processes, methods, applications, know-how, content,
data, technical information and other technology or information, that E-Loan,
presently or in the future, owns or has the right to license to Licensee.
1.6 "LICENSEE DOMAIN" means the Uniform Resource Locator
http:\\____________.
1.7 "ERROR" means a material, reproducible failure of the Software to
perform in substantial conformity with the functional specifications in the
Documentation.
1.8 "GLOBAL BRAND PROTOCOLS" means the procedures for use of the E-Loan
Brand set forth in EXHIBIT B, as modified from time to time by E-Loan upon 90
days prior notice to Licensee.
1.9 "SITE LAUNCH DATE" means the date Licensee makes the World Wide Web
site for the Local Business generally available on the World Wide Web.
1.10 "LOCAL BUSINESS" means a business developing, marketing and
providing an online mortgage and/or car loan marketplace for consumers in the
Territory, including developing localized versions of E-Loan's U.S. services and
providing information about the availability and terms of such mortgages and car
loans for distribution to end users in the Territory and related activities
necessary to conduct such business. It is understood that the Local Business
includes the foregoing only to the extent the same pertains to (i) mortgages for
which the underlying real property is located in the Territory; and (ii) car
loans that are offered solely to residents of the Territory and are
collateralized by automobiles located in the Territory.
1.11 "LOCAL COUNTRY LICENSEES" means parties other than Licensee that
are similarly situated users of the E-Loan Software and the E-Loan Brand outside
the Territory.
1.12 "LOCALIZED VERSION" means a Derivative Work of the Software or
Documentation, that retain the core functionality of the Software, or
Documentation, but incorporates the language, currency, user interfaces, look
and feel or functional variations required or appropriate to conduct the Local
Business in the Territory, which Derivative Works are created by or for
Licensee.
1.13 "LOCALIZE", or "LOCALIZATION" means any modifications to the
Software or Documentation necessary to create a Localized Version.
1.14 "SOFTWARE" means E-Loan's existing proprietary Software products
specified on EXHIBIT A, in source code or object code form (as specified in
EXHIBIT A), together with any Error corrections, new revisions, updates or
upgrades thereof provided to Licensee pursuant to this Agreement.
1.15 "TERM" has the meaning defined in Section 10.1 below.
1.16 "TERRITORY" means Japan and the Republic of South Korea.
2
<PAGE> 31
2. GRANT OF LICENSE.
2.1 LICENSE. Subject to the terms and conditions of this Agreement,
E-Loan hereby grants to Licensee an exclusive, perpetual, royalty-free,
non-sublicensable, non-transferable license under the E-Loan Technology to use,
copy, display, and create Derivative Works of the E-Loan Technology, in each
case solely for the operation of the Local Business, solely within the
Territory. In this Section 2.1(a), "exclusive" means only that E-Loan shall not
for its own account, nor grant to any third party in the Territory a license to,
use, copy, display, create Derivative Works of, or otherwise exploit the E-Loan
Technology in connection with the operation of the Local Business in the
Territory.
2.2 COPIES. Licensee may: (a) make copies of the Software as necessary
for backup or archival purposes, (b) retain a reasonable number of copies of any
portions of the Software delivered in source code form as necessary for
production purposes, and (c) make and retain such copies of the E-Loan
Technology as reasonably necessary for Licensee to use the E-Loan Technology in
connection with the Local Business. Except as otherwise set forth herein,
Licensee may not copy, distribute, reproduce, use or allow access to the E-Loan
Technology. Whenever Licensee is permitted to copy or reproduce all or any part
of the E-Loan Technology, any titles, copyright notices, patent notices, or
other proprietary markings must be reproduced. Licensee shall not alter or
remove any of E-Loan's copyright notices, patent notices, or other proprietary
notices affixed to the E-Loan Technology by E-Loan.
2.3 OWNERSHIP. E-Loan owns all right, title and interest in and to the
E-Loan Technology. All rights not expressly granted hereunder are reserved to
E-Loan. Licensee shall not reverse engineer any portions of the Software not
provided in source code format; however, such prohibition will only be effective
to the extent allowable under local law. Subject to E-Loan's ownership of the
E-Loan Technology, the Software and the Documentation, Licensee owns all right,
title and interest in and to all Derivative Works of the Software and
Documentation made by Licensee (or by third parties on behalf of Licensee),
including Localizations, in accordance with this Agreement. Upon completion of
any such Derivative Work by or under authority of Licensee, Licensee shall
disclose to E-Loan a copy of such Derivative Work. Any such disclosure of a
Derivative Work consisting of software must be in both executable object code
and source code format. Licensee hereby grants to E-Loan a non-exclusive,
perpetual, irrevocable, sublicensable license to use, reproduce, modify,
perform, display and transmit such Derivative Works outside the Territory.
2.4 SOFTWARE LOCALIZATIONS. Except as otherwise set forth in Section 3.1
regarding the Initial Localization Services, as between the parties, Licensee is
responsible for any changes to the Software or Documentation necessary to
Localize them in accordance with the operation of the Local Business. All such
Localization must be either: (i) performed by E-Loan; or (ii) performed by
Licensee, or by its independent contractor in accordance with Section 9.4.
2.5 ERROR CORRECTIONS, UPDATES AND UPGRADES. During the first four (4)
years after the Effective Date, E-Loan shall deliver to Licensee any Error
corrections, updates, upgrades, enhancements or future versions of or to the
Software or Documentation that E-Loan makes generally available to its other
Local Country Licensees outside the United States without charge, to the extent
the same are applicable to the Local Business or (b) as the parties otherwise
3
<PAGE> 32
agree; in the case of (a), no later than the time when such Error corrections,
updates, upgrades, enhancements or future versions are first released to any
such other Local Country Licensee. Following such four (4) year period, for so
long as E-Loan owns at least 20% of the outstanding shares of Licensee, E-Loan
shall continue to deliver to Licensee such Error corrections, updates, upgrades,
enhancements or future versions of or to the Software or Documentation subject
to the payment by Licensee to E-Loan of a fee in consideration therefor, such
fee not to exceed the lowest fee charged to any of E-Loan's other Local Country
Licensees for similar services.
2.6 LICENSE RESTRICTIONS. Licensee shall not:
(a) sell, lease, license, sublicense or distribute the E-Loan
Technology except in accordance with this Agreement;
(b) provide, disclose, divulge or make available to, or permit
use of the E-Loan Technology by any third party without E-Loan's prior written
consent, except as specifically authorized by this Agreement and except to the
extent such use or disclosure is inherent in the normal operation of the Local
Business with respect to users of the World Wide Web Site for the Local
Business, which use or disclosure is substantially similar to the use or
disclosure made by E-Loan by means of its World Wide Web Site in the U.S.; or
(c) use the E-Loan Technology for any purpose except as expressly
provided for in this Agreement.
2.7 DELIVERY OF E-LOAN TECHNOLOGY. As soon as practical after the
Effective Date, E-Loan shall deliver to Licensee the Software and Documentation,
and representations of the E-Loan Brand necessary or appropriate for the
Licensee's operation of the Local Business in the Territory.
3. MAINTENANCE AND SUPPORT.
3.1 INITIAL LOCALIZATION SERVICES. If and as requested by Licensee and
agreed by E-Loan, E-Loan shall provide initial services to Localize the Software
(the "INITIAL LOCALIZATION SERVICES") in accordance with the initial work plan
set forth in EXHIBIT [D], at no charge other than reasonable out-of-pocket
expenses incurred in connection with providing the technical support services,
which shall be reimbursed by Licensee within thirty (30) days of an invoice
therefor.
3.2 TECHNICAL SUPPORT. E-Loan shall provide Licensee technical staff
with technical support to assist Licensee with the use of the Software,
according to the escalation procedures described in EXHIBIT E, at no charge
other than reasonable out-of-pocket expenses incurred in connection with
providing the technical support services, which shall be reimbursed by Licensee
within thirty (30) days of an invoice therefor.
3.3 PROJECT MANAGERS. Each party shall designate a project manager to
administer technical support under this Agreement. The parties shall coordinate
all support work under this Agreement through such project managers. Each party
may change its project manager upon written notice.
4
<PAGE> 33
3.4 PRODUCT MANAGERS. Each party shall designate a product manager to be
responsible for trademark, branding, marketing, and related issues under this
Agreement. The parties shall coordinate all support work under this Agreement
through such product managers. Each party may change its product manager upon
written notice.
4. ROYALTIES AND OTHER OBLIGATIONS.
4.1 ROYALTIES. Licensee shall pay to E-Loan an annual royalty in
consideration of the rights granted to Licensee under this Agreement equal to
___ percent (__%) of Licensee's gross revenues up to a maximum of _______ yen
per year, payable annually in arrears within sixty (60) days after the end of
Licensee's fiscal year (for the then-ended fiscal year); provided, however,
that if Licensee fails to complete an initial public offering of its securities
by the fourth (4th) anniversary of the Effective Date, then from and after such
time Licensee shall pay to Licensor a royalty, agreed upon between Licensee and
Licensor, calculated as a percentage of Licensee's gross revenue during each
fiscal quarter after such anniversary.
4.2 AUDITS. Licensee shall keep and maintain complete and accurate
records of the transactions underlying the payments to be made hereunder, and
shall allow, upon two (2) weeks written notice, a certified public accountant
reasonably acceptable to both parties during office hours and no more than once
per year, to inspect and make extracts or copies of such records for the purpose
of ascertaining the correctness of such payments. If any such examination and
audit discloses any deficiency of 5% or more, Licensee shall pay, in addition to
such deficiency, the costs of such examination and audit.
4.3 LICENSEE OBLIGATIONS. Licensee shall use reasonable commercial
efforts to promote sales of mortgages and related services through the Local
Business. Licensee shall operate the Local Business solely in accordance with
the laws, regulations, and other legal requirements applicable to the Local
Business.
4.4 HYPERLINKS. The parties will discuss in good faith establishing
appropriate hypertext links to each other's web sites.
4.5 TERRITORY AND SALES. The parties acknowledge that in any
Internet-based marketing system it is not possible to exclude all inquiries or
business from outside a geographic territory. E-Loan acknowledges that certain
incidental promotion of and/or access to the World Wide Web site for the Local
Business may occur outside the Territory and agrees that the same will not
constitute a breach of this Agreement, and Licensee similarly acknowledges that
certain incidental promotion of and/or access to the World Wide Web site for
E-Loan's business may occur within the Territory and agrees that the same will
not constitute a breach of this Agreement. Licensee shall use reasonable
efforts, to the extent legally permitted, to avoid territorial conflicts between
Licensee and Local Country Licensees, by responding to inquiries or orders for
sales of products or services from persons outside the Territory as required by
the laws of the Territory, and by communicating any such orders to E-Loan for
referral, if appropriate, to Local Country Licensees. E-Loan shall use
reasonable efforts to resolve any channel conflicts with Local Country Licensees
relating to such inquiries. E-Loan shall use reasonable efforts to communicate
to Licensee any inquiries or orders for sales of residential mortgages received
by E-Loan or its Local Country Licensees from persons within the Territory.
4.6 REPORTS. No more frequently than once per calendar month, as
reasonably requested by E-Loan, Licensee will provide to E-
5
<PAGE> 34
Loan, in a format reasonably acceptable to E-Loan, a summary report of the
number of completed loan applications, rate quotations and web site page visits.
5. WARRANTY AND DISCLAIMER.
5.1 E-LOAN WARRANTY.
(a) SOFTWARE PERFORMANCE. E-Loan hereby represents and warrants
to Licensee that during the Term, the Software in the form delivered to Licensee
will perform in substantial accordance with the Documentation.
(b) YEAR 2000 COMPLIANCE. E-Loan hereby represents and warrants
to Licensee that the Software in the form delivered to Licensee is Year 2000
Compliant. "YEAR 2000 COMPLIANT" means that the Software, when used in
accordance with the Documentation and with the hardware and operating systems
approved by E-Loan, will: (a) initiate and operate; (b) correctly store,
represent, process and output dates; (c) not cause or result in an abnormal
termination or ending or degradation of performance or any other adverse effect
on performance; and (d) correctly process dates input by a user; in each case
when processing data containing dates in the year 2000 and in any preceding and
following years, including leap years, provided that all third party products
that exchange date data with the Software do so in a form and format compatible
with the Software.
(c) REMEDIES. If the Software does not perform as warranted under
Sections 5.1(a) or 5.1(b), E-Loan shall, at no charge to Licensee, use
reasonably diligent efforts to correct the Software, or provide a patch or
workaround, in accordance with the escalation procedures in EXHIBIT E, and
include the correction thereof in the next error correction released by E-Loan
and provided to Licensee under Section 2.5. The foregoing are Licensee's
exclusive remedies for breach of the warranties provided in Sections 5.1(a)
through (c). The warranty will apply only if the then-current version of the
Software, or otherwise the most recent version of the Software which has been
provided by E-Loan to Licensee, has been properly installed and used at all
times and in accordance with the instructions for use; provided that the
preceding limitation shall apply only if the most recent version of the Software
supplied by E-Loan provides all of the material functionality of the version it
replaces.
(d) CORPORATE WARRANTY. E-Loan represents and warrants to
Licensee that E-Loan has full power, right and authority to enter into this
Agreement, to carry out its obligations under this Agreement, and to grant the
rights granted to Licensee herein, and that this Agreement is valid, binding and
enforceable against it (subject to applicable principles of equity and
bankruptcy and insolvency laws);
(e) NO CONFLICT. E-Loan represents and warrants that the
execution of this Agreement, the granting of the rights and licenses to Licensee
herein, and the performance of its obligations hereunder does not and will not
(i) violate the Articles of Incorporation of By-laws of E-Loan or any provision
of any U.S. law, statue, rule or regulation to which it is subject; (ii) violate
any judgement, order, writ, injunction or decree of any court applicable to
E-Loan; or (iii) conflict with or violate any other agreement into which E-Loan
has entered; excluding in the
6
<PAGE> 35
case of (i) and (ii), however, any regulatory approvals that may be required in
connection with operating the Local Business in the Territory.
(f) RIGHTS; NON-INFRINGEMENT. E-Loan represents and warrants that
it has the rights to grant the licenses herein, and that the use of the Software
and Documentation in accordance with the terms of this Agreement do not and will
not infringe or misappropriate any copyrights or trade secrets of any third
party or, to the best of E-Loan's knowledge as of the Effective Date, any
trademark, patent or other intellectual property or proprietary rights of any
third party.
(g) NO CLAIMS. E-Loan represents and warrants that, to the best
of its knowledge except as disclosed to Licensee or Softbank with respect to the
Local Brand in Korea, no proceedings have been instituted or are pending or
threatened that challenge the rights of E-Loan in the Territory in respect of
the E-Loan Technology or the E-Loan Brand, other than any such claims or demands
that individually or in the aggregate will not have a material adverse effect on
the financial condition or results of the operations of E-Loan.
(h) SERVICE WARRANTY. E-Loan represents and warrants that all
services provided to Licensee under this Agreement will be performed in a
professional and competent manner in accordance with industry standards.
(i) ALL NECESSARY TECHNOLOGY DELIVERED. E-Loan represents and
warrants that the E-Loan Technology delivered to Licensee under this Agreement
includes all of the E-Loan Technology which E-Loan presently owns or has the
ability to license to Licensee.
5.2 LICENSEE CORPORATE WARRANTY. Licensee represents and warrants to
E-Loan that Licensee has full power, right and authority to enter into this
Agreement and to carry out its obligations under this Agreement, and that this
Agreement is valid, binding and enforceable against it (subject to applicable
principles of equity and bankruptcy and insolvency laws).
5.3 DISCLAIMER. EXCEPT FOR THE EXPRESS LIMITED WARRANTY SET FORTH IN
SECTION 5.1 ABOVE, THE SOFTWARE AND DOCUMENTATION ARE PROVIDED "AS-IS" AND
WITHOUT WARRANTY OF ANY KIND, WHETHER EXPRESS, IMPLIED, STATUTORY OR OTHERWISE.
E-LOAN HEREBY DISCLAIMS ANY WARRANTY THAT THE OPERATION OF THE SOFTWARE WILL BE
UNINTERRUPTED OR ERROR-FREE. E-LOAN SPECIFICALLY DISCLAIMS ALL IMPLIED
WARRANTIES OF NONINFRINGEMENT, MERCHANTABILITY, AND FITNESS FOR A PARTICULAR
PURPOSE WITH RESPECT TO THE SOFTWARE, DOCUMENTATION AND ANY SERVICES PROVIDED BY
E-LOAN HEREUNDER.
5.4 ADDITIONAL DISCLAIMER. The success of the business venture
contemplated to be undertaken by Licensee by virtue of this Agreement is
speculative and depends, to a large extent, upon the ability of Licensee as an
independent business operator and the active participation of Licensee in the
daily affairs of the Local Business, as well as other factors. E-Loan hereby
disclaims any representation or warranty, express, or implied, as to the
potential success of the business venture contemplated by this Agreement.
7
<PAGE> 36
6. TRADEMARKS AND DOMAIN NAMES.
6.1 TRADEMARKS. E-Loan hereby grants to Licensee the exclusive right to
use the E-Loan Brand for the purpose of conducting the Local Business in the
Territory. The above license will include without limitation the right to
indicate to the public that Licensee is an authorized licensee of E-Loan and to
advertise Licensee's products and services in connection with the Local Business
in the Territory under the E-Loan Brand. Licensee shall fully comply with the
Global Brand Protocols in relation to Licensee's use of the E-Loan Brand. All
representations of the E-Loan Brand that Licensee intends to use must first be
submitted to E-Loan for approval of design, color and other details, subject to
the following limitations: (a) E-Loan's approval will not be unreasonably
withheld or delayed; (b) such approval, once given, will not be withdrawn
without a reasonable notice period to implement necessary changes; and (c) once
E-Loan has approved a particular use, Licensee need not re-submit for approval
any substantially identical use.
6.2 RESTRICTIONS. Except as set forth in this Section 6, nothing
contained in this Agreement will be deemed to grant to Licensee any right, title
or interest in or to the E-Loan Brand. If Licensee, in the course of exercising
its rights hereunder, acquires any goodwill or reputation in the E-Loan Brand,
all such goodwill or reputation will automatically vest in E-Loan when and as,
on an ongoing basis, such acquisition of goodwill or reputation occurs, as well
as at the expiration or termination of this Agreement, without any separate
payment or other consideration of any kind to Licensee, and Licensee agrees to
take such actions as are reasonably necessary, at E-Loan's expense, to effect
such vesting, including without limitation the transfer to E-Loan of rights in
any filings or registrations made under Section 6.3. Upon termination of this
Agreement, Licensee shall immediately cease to use the E-Loan Brand, and the
Licensee Domain, and shall change its name to eliminate any reference to
"E-Loan." In the event that Licensee intentionally challenges, or intentionally
assists a third party in challenging, any part of the E-Loan Brand, or the
registration thereof, or seeks to obtain rights in the E-Loan Brand by seeking
registration thereof or otherwise, E-Loan, following thirty (30) days written
notice and an opportunity to cure or cease such actions, may terminate this
Agreement upon written notice to Licensee.
6.3 TRADEMARK REGISTRATIONS IN THE TERRITORY. Licensee shall advise
E-Loan regarding the appropriate registrations or filings appropriate to protect
the use of the E-Loan Brand in the Territory. E-Loan shall make, and Licensee
shall cooperate with E-Loan to make, such registrations or filings with the
appropriate authorities and thereafter seek to register such other trademarks
and service marks in the Territory descriptive of the E-Loan Brand and/or the
Local Business, in English, Japanese and/or Korean, as Licensee may reasonably
request from time to time.. E-Loan shall pay all costs or fees associated with
such filing, and all such trademarks and service marks shall be owned by E-Loan
and deemed part of the E-Loan Brand.
6.4 REGISTERED USER AGREEMENTS. E-Loan shall cooperate with Licensee to
make any registrations or filings with the appropriate authorities referenced in
Section 6.3, including without limitation entering into registered user
agreements with respect to the E-Loan Brand pursuant to applicable trademark law
requirements in the Territory. Licensee will be responsible for proper filing of
registered user agreements with appropriate government authorities and shall pay
all costs or fees associated with such filing.
8
<PAGE> 37
6.5 NAME BRANDING; PRODUCT PROTECTION. On any promotional materials used
or disseminated by Licensee relating to the Local Business, Licensee shall
display the E-Loan Brand. Licensee shall use the E-Loan Brand as the sole brand
for, and not to use any trademark, service mark, trade name or similar
identifiers other than the E-Loan Brand in connection with, the Local Business.
Where both Licensee's marks and the E-Loan Brand are displayed, the marks will
be presented equally legibly, and in a size and style in accordance with the
Global Brand Protocols.
6.6 DOMAIN NAMES. E-Loan hereby grants to Licensee the right to use the
Licensee Domain, solely for the operation of a Local Business. E-Loan shall,
prior to the Site Launch Date, register the Licensee Domain name with InterNIC
or its successor Internet name assignment authority, or its then-current
counterparts in the Territory, and shall pay the registration fees for one year,
it being understood that E-Loan shall be the owner of the Licensee Domain.
Thereafter, Licensee shall in a timely fashion renew such registration with such
authority at its own expense each time such registration becomes due during the
Term, it being understood that E-Loan retains ownership of such Licensee Domain.
6.7 QUALITY CONTROL. The nature and quality of all goods, services and
promotional materials used by Licensee hereunder must conform to the standards
set by E-Loan. E-Loan shall have the right to monitor the quality of such goods,
services and promotional materials and Licensee shall assist E-Loan in
monitoring quality by making available to E-Loan, upon E-Loan's request, samples
and demonstrations of such use.
7. LIMITATION OF LIABILITY.
EXCEPT FOR LIABILITY FOR THIRD PARTY CLAIMS ARISING OUT OF SECTIONS
8 OR 9, IN NO EVENT WILL EITHER PARTY HAVE ANY LIABILITY FOR ANY INDIRECT,
INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES, HOWEVER CAUSED AND ON ANY THEORY
OF LIABILITY, WHETHER FOR BREACH OF CONTRACT, TORT OR OTHERWISE, ARISING OUT OF
OR RELATED TO THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO, LOSS OF ANTICIPATED
PROFITS, LOSS OF DATA, OR LOSS OF USE, EVEN IF SUCH PARTY HAS BEEN ADVISED OF
THE POSSIBILITY OF SUCH DAMAGES.
8. INDEMNIFICATION.
8.1 E-LOAN INDEMNITY. E-Loan shall indemnify, defend and hold harmless
Licensee, and its Affiliates, officers, directors, employees, shareholders,
consultants and agents against any liability, cost or expense (including, but
limited to, attorney's fees) resulting from any claim, action or allegation by a
third party which, if true, would result in the breach of the representations
and warranties by E-Loan in Section 5.1, and shall pay any final judgments
awarded or settlements entered into (provided such settlements have been
approved by Licensee, such approval not to be unreasonably withheld) as a result
of such claim, action or allegation; provided that Licensee gives prompt written
notice to E-Loan of any such claim, action or allegation of infringement and
gives E-Loan the authority to proceed as contemplated herein. E-Loan will have
the exclusive right to defend any such claim, action or allegation and, subject
to Licensee's reasonable approval, make settlements thereof, and Licensee may
not settle or
9
<PAGE> 38
compromise such claim, action or allegation, except with the prior written
consent of E-Loan. Licensee shall give such assistance and information as E-Loan
may reasonably require, at E-Loan's expense, to settle, or oppose such claims.
In the event any breach of warranty under Section 5.1 results in a claim of
infringement or misappropriation, or E-Loan believes that such a claim may be
brought, E-Loan may, at its sole option and expense:
(a) procure for Licensee the right to continue use of the
infringing or misappropriated materials; or
(b) modify or amend the infringing or misappropriated materials,
or replace the infringing or misappropriated materials with other materials
having substantially the same functionality and performance.
The foregoing obligations will not apply to the extent the infringement or
misappropriation arises as a result of modifications to the Software or
Documentation not made by or for E-Loan unless such modifications were made
expressly at the direction of, and in accordance with, instructions by E-Loan.
The foregoing states the entire liability of E-Loan with respect to infringement
of any patent, copyright, trademark, trade secret or other proprietary right.
8.2 LICENSEE INDEMNITY. Licensee shall indemnify, defend and hold
harmless E-Loan, and its Affiliates, officers, directors, employees,
shareholders, consultants and agents against any liability, cost or expense
(including, but limited to, attorney's fees), resulting from the operation by
Licensee of the Local Business (except for those claims, actions and allegations
for which E-Loan is responsible pursuant to Section 8.1 above, and except to the
extent such liability, damages, cost or expense results from a breach by E-Loan
of any terms of conditions of this Agreement), and shall pay any final judgments
awarded or settlements entered into (provided such settlements have been
approved by E-Loan, such approval not to be unreasonably withheld); provided
that E-Loan gives prompt written notice to Licensee of any claim, action or
allegation relating thereto and gives Licensee the authority to proceed as
contemplated herein. Licensee will have the exclusive right to defend any such
claim, action or allegation and, subject to E-Loan's reasonable approval, make
settlements thereof, and E-Loan may not settle or compromise such claim, action
or allegation, except with the prior written consent of Licensee. E-Loan shall
give such assistance and information as Licensee may reasonably require, at
Licensee's expense, to settle or oppose such claims.
8.3 PROSECUTION OF INFRINGERS. E-Loan and Licensee shall give each other
written notice of any acts of infringement by third parties involving
intellectual property rights relating to the Localized Version, Software,
Documentation, or E-Loan Brand anywhere in the Territory of which E-Loan or
Licensee has knowledge, and the parties shall consult together with a view to
determine the course of action, if any, to be taken in such circumstances.
E-Loan will have the right to take action to enforce such rights. If E-Loan does
not undertake reasonable efforts to enforce such rights, then Licensee may take
such actions at Licensee's expense, as agreed by Licensee and E-Loan. Each party
shall render to the other any assistance requested by the other in proceedings
against an infringer within the Territory brought in accordance with this
Section 8.3, at the other party's expense. Any damages that might be awarded
will, after deduction of actual costs, be awarded to the party that undertakes
legal action.
10
<PAGE> 39
9. CONFIDENTIAL INFORMATION.
9.1 OBLIGATIONS. The parties acknowledge and agree that proprietary or
nonpublic information disclosed by one party (the "DISCLOSING PARTY") to the
other party (the "RECEIVING PARTY") directly or indirectly, which information is
marked as "proprietary" or "confidential" or, if disclosed orally, is designated
as confidential or proprietary at the time of disclosure and reduced in writing
or other tangible (including electronic) form that includes a prominent
confidentiality notice and delivered to the Receiving Party within thirty (30)
days of disclosure, constitutes the confidential and proprietary information
("CONFIDENTIAL INFORMATION") of the Disclosing Party. The Receiving Party shall
retain in confidence and not disclose to any third party any Confidential
Information of the Disclosing Party without the Disclosing Party's express
written consent, and the Receiving Party shall not use such Confidential
Information except to exercise the rights and perform its obligations under this
Agreement. Without limiting the foregoing, each party shall use at least the
same procedures and degree of care which it uses to protect its own Confidential
Information of like importance, and in no event less than reasonable care. The
parties agree that the Software and Documentation, and all information contained
in the Exhibits hereto, will be deemed the Confidential Information of E-Loan.
9.2 EXCEPTIONS. Notwithstanding the foregoing, Confidential Information
will not include information to the extent that, in each case, such information
is demonstrated by written documentation:
(a) was already known the Receiving Party, to the extent such
information was so known by the Receiving Party without an obligation of
confidentiality, at the time of disclosure hereunder;
(b) was generally available to the public or otherwise part of
the public domain at the time of its disclosure to the Receiving Party
hereunder;
(c) became generally available to the public or otherwise part of
the public domain after its disclosure and other than through any act or
omission of the Receiving Party in breach of this Agreement; or
(d) was subsequently lawfully disclosed to the receiving party by
a person other than a party or developed by the Receiving Party without
reference to any information or materials disclosed by the Disclosing Party.
9.3 SOURCE CODE PROTECTIONS. Licensee shall not under any circumstances
provide the source code for the Software in any manner to a third party, except
as expressly provided under Section 9.4 below. Licensee shall reproduce and
shall not obscure or remove any proprietary rights notice on any copy or
Derivative Work of the source code for the Software. In addition, each copy or
Derivative Work of the source code for the Software must be marked as the
confidential and proprietary property of E-Loan to which access is restricted,
and Licensee shall keep and use the source code for the Software solely at
Licensee's secure development facilities under password protection. Licensee
agrees to limit access to the source code for the Software twenty-four hours a
day, and strictly to those employees or Contractors to whom access is reasonably
necessary in order to carry out the permitted uses of the source code for the
11
<PAGE> 40
Software hereunder. Licensee shall keep records of all persons who have access
to the source code for the Software. At E-Loan's request, Licensee agrees to
provide such records to E-Loan for review.
9.4 CONTRACTORS. Licensee may appoint a third party contractor
("CONTRACTOR") to assist Licensee in Licensee's operation of the Local Business;
provided, however, that any such Contractor's access to and use of the E-Loan
Technology (including the Localized Version): (a) will only be permitted
pursuant to a signed written agreement between Licensee and such Contractor that
contains terms at least as restrictive as those set forth in this Section 9, (b)
protects E-Loan's proprietary rights in the E-Loan Technology to the degree set
forth in this Agreement, (c) grants the Contractor no rights in the E-Loan
Technology or any modification, enhancement or Derivative Work thereof, and (d)
establishes E-Loan as a third party beneficiary with full legal right to enforce
such agreement against the Contractor ("CONTRACTOR AGREEMENT"). Licensee shall
indemnify and hold harmless E-Loan against any losses arising out of any failure
of its Contractor's to enter into a Contractor Agreement in accordance with this
Section 9.4.
9.5 NOTIFICATION OF SECURITY BREACH. Licensee shall notify E-Loan
promptly in the event of any breach of its security of which Licensee becomes
aware, under conditions in which it would appear that the trade secrets
contained in the source code for the Software or the Localized Version were
prejudiced or exposed to loss. Licensee shall, upon request of E-Loan, take all
other reasonable steps necessary to recover any compromised trade secrets
disclosed to or placed in the possession of Licensee by virtue of this
Agreement. The cost of taking such steps will be borne solely by Licensee.
9.6 INJUNCTIVE RELIEF. In the event of breach of the provisions of
Section 9.1 or 9.3, the non-breaching party may have no adequate remedy at law
and will be entitled to seek immediate injunctive and other equitable relief,
without the necessity of showing actual money damages.
10. TERM AND TERMINATION.
10.1 TERM. This Agreement and the licenses granted hereunder will be
effective as of the Effective Date and will continue in full force and effect
indefinitely (the "TERM"), unless terminated as set forth in this Section 10.
10.2 TERMINATION.
(a) In the event that either party defaults in the performance of
a material obligation under this Agreement, then the non-defaulting party may
provide written notice to the defaulting party indicating: (i) the nature and
basis of such default with reference to the applicable provisions of this
Agreement; and (ii) the non-defaulting party's intention to terminate this
Agreement. In the event that such material default is not cured within ninety
(90) days after such notice the non-defaulting party may terminate this
Agreement upon written notice to the breaching party.
12
<PAGE> 41
(b) This Agreement will terminate automatically in the event that
that certain Joint Venture Agreement between E-Loan and SOFTBANK CORP. dated as
of ________, 1999 (the "JOINT VENTURE AGREEMENT") is terminated, except as
otherwise agreed in writing.
10.3 EFFECT OF TERMINATION.
(a) SURVIVAL. The terms and conditions of the following Sections
will survive termination or expiration of this Agreement: 1, 2.3, 2.6, 5.3, 5.4,
6.2, 7, 8, 9, 10.3, 12, 13 and 14. In addition, the termination or expiration of
this Agreement shall not relieve either party of any liability that accrued
prior to such termination or expiration. Except as expressly provided in this
Section 10.3, all other provisions of this Agreement shall terminate upon the
expiration or termination hereof. Upon termination of this Agreement, Licensee
shall cease to exercise all rights and licenses granted under this Agreement and
shall cease using "E-Loan" in its corporate name.
(b) RETURN OF MATERIALS. Within 30 days after the date of
termination or discontinuance of this Agreement for any reason whatsoever,
Licensee shall, at E-Loan's option, return or destroy any copies of the
Software, Documentation, Localized Versions (excluding those portions of such
versions that only represent Localizations owned by Licensee under this
Agreement), and any Confidential Information of E-Loan in its possession that is
in tangible form. Licensee shall furnish E-Loan with a certificate signed by an
executive officer of Licensee verifying that the same has been done.
10.4 LICENSE IF E-LOAN ENTERS BANKRUPTCY. If, at any time during the
Term, E-Loan: (a) files a voluntary petition in bankruptcy under Chapter 7 or 11
United States Code (the "BANKRUPTCY CODE"); or (b) has an involuntary petition
in bankruptcy filed against it under Chapter 7 of the Bankruptcy Code, which
petition is not dismissed within ninety (90) days, Licensee may elect to retain
its right in the licenses granted in this Agreement, subject to the terms of
this Agreement, in accordance with Chapter 3, Section 365(n) of the Bankruptcy
Code. The licenses granted in this Agreement will be deemed licenses of
"intellectual property" under Section 365(n) of the Bankruptcy Code.
11. NONASSIGNMENT/BINDING AGREEMENT. Neither this Agreement, nor any rights
under this Agreement, may be assigned or otherwise transferred by Licensee, in
whole or in part, whether voluntary, or by operation of law, including by way of
sale of assets, merger or consolidation, without the prior written consent of
E-Loan. E-Loan may assign all its rights and obligations under this Agreement to
an Affiliate of E-Loan, or to an entity that succeeds to substantially all of
the business or assets of E-Loan. Any permitted assignee must agree in writing
to be bound by all the terms and conditions of this Agreement. Subject to the
foregoing, this Agreement will be binding upon and inure to the benefit of the
parties and their respective successors and assigns. In the event this Agreement
is assigned to a third party that succeeds to substantially all of the business
or assets of E-Loan, in a transaction in which the shareholders of E-Loan
immediately prior to such transaction own less than 50% of the outstanding
shares of the successor entity immediately after the transaction, then
notwithstanding any other provision of this Agreement, the Software,
Documentation, E-Loan Technology and the E-Loan Brand shall not include any
subject matter owned or controlled by the acquiring entity prior to such
assignment or that is made or acquired by such acquiring entity after the date
of such assignment,
13
<PAGE> 42
except to the extent that such subject matter is utilized by such acquiring
entity in the operation of E-Loan's business.
12. NOTICES AND OTHER COMMUNICATIONS. Any and all notices, requests,
demands and other communications required or otherwise contemplated to be made
under this Agreement shall be in writing and in English and shall be provided by
one or more of the following means and shall be deemed to have been duly given
(a) if delivered personally, when received, (b) if transmitted by facsimile
originating in Japan, on the date of transmission with receipt of a transmittal
confirmation, (c) if transmitted by facsimile originating in the United States,
on the first (1st) business day following receipt of a transmittal confirmation,
or (d) if by international courier service, on the fourth (4th) business day
following the date of deposit with such courier service, or such earlier
delivery date as may be confirmed in writing to the sender by such courier
service. All such notices, requests, demands and other communications shall be
addressed as follows:
If to LICENSEE:
E-Loan Japan K.K.
24-1 Nihonbashi-Hakozakicho
Chuo-ku, Tokyo 103-8501
Japan
Attention: Mr. Masayoshi Son
Hitoshi Hasegawa, Esq.
Telephone: +81-3-5642-8376
Facsimile +81-3-5641-3402
with a copy (which copy shall not constitute notice) to:
Morrison & Foerster LLP
AIG Building, 7th Floor
1-1-3 Marunouchi,
Chiyoda-ku, Tokyo 100-0005
Japan
Attention: Ken Siegel, Esq.
Telephone: +81-3-3214-6522
Facsimile: +81-3-3214-6512
14
<PAGE> 43
If to E-LOAN:
E-Loan, Inc.
540 University Ave., Suite 350
Palo Alto, CA 94301
U.S.A.
Attention: Doug Galen
Telephone: (650) 847-3707
Facsimile: (650) 847-3710
with a copy (which copy shall not constitute notice) to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, CA 94304-1050
U.S.A.
Attention: Kenneth A. Clark, Esq.
Telephone: (650) 493-9300
Facsimile: (650) 493-6811
or to such other address or facsimile number as a party may have specified to
the other party in writing delivered in accordance with this Section 12.
13. NON-SOLICITATION. Each party acknowledges and agrees that the employees and
consultants of the other party are a valuable asset of such party and are
difficult to replace. Accordingly, each party (the "SOLICITING PARTY") agrees
that, for the Term and for a period of two years thereafter, it will not
actively solicit any employee, independent contractor, or consultant of the
other party to become an employee or consultant of the Soliciting Party.
14. MISCELLANEOUS.
14.1 NO WAIVER; AMENDMENT. Any waiver of the provisions of this
Agreement or of a party's rights or remedies under this Agreement must be in
writing to be effective. Failure, neglect, or delay by a party to enforce the
provisions of this Agreement or its rights or remedies at any time will not be
construed and will not be deemed to be a waiver of such party's rights under
this Agreement and will not in any way affect the validity of the whole or any
part of this Agreement or prejudice such party's right to take subsequent
action. This Agreement may not be amended, except by a writing signed by both
parties.
14.2 SEVERABILITY. If any provision in this Agreement shall be found or
be held to be invalid or unenforceable (including, without limitation, as a
result of objections by the Japanese Fair Trade Commission) then the meaning of
said provision shall be construed, to the extent feasible, so as to render the
provision enforceable, and if no feasible interpretation would save such
provision, it shall be severed from the remainder of this Agreement which shall
remain in full force and effect unless the severed provision is essential and
material to the rights or benefits received by any party. In such event, the
parties shall use best efforts to negotiate, in good faith,
15
<PAGE> 44
a substitute, valid and enforceable provision or agreement which most nearly
affects the parties' intent in entering into this Agreement.
14.3 ENTIRE AGREEMENT. This Agreement (including the Exhibits and any
addenda hereto signed by both parties) and the other documents referred to
herein, contain the entire agreement of the parties with respect to the subject
matter of this Agreement and supersedes all previous communications,
representations, understandings and agreements, either oral or written, between
the parties with respect to said subject matter.
14.4 CONSENT. Unless expressly provided otherwise in this Agreement, any
prior consent that is required hereunder may be granted or withheld in the sole
and absolute discretion of the party whose consent is required.
14.5 CURRENCY. All payments contemplated hereby or made by the parties
in connection herewith will be made in the lawful currency of the United States
of America. Any calculation under this Agreement that requires conversion of yen
or any other non-U.S. currency to U. S. dollars shall be made at the buying rate
for U.S. dollars as set forth in the U.S. version of the Wall Street Journal,
West Coast edition, on the date that payment is made ("EXCHANGE RATE").
Notwithstanding the foregoing, if any payment due from Licensee to E-Loan is not
made when due, Licensee shall pay E-Loan the greater of (i) the amount based on
the Exchange Rate calculated as of the date when payment became due and (ii) the
amount based on the Exchange Rate calculated as of the date when payment is
actually made, in each case together with interest thereon at the prime rate as
reported by the Wall Street Journal, West Coast edition.
14.6 EXPORT RESTRICTIONS. Licensee understands that E-Loan is subject to
regulation by agencies of the U.S. government, including, but not limited to,
the U.S. Department of Commerce, which prohibit export or diversion of certain
technical products to certain countries. Licensee warrants that it will comply
in all respects with the Export Administration Regulations and all other export
or re-export restrictions applicable to the technology and Documentation
licensed hereunder. Further, Licensee shall cooperate as requested by E-Loan to
ensure compliance with any export restrictions or licenses relating to the
Software. Notwithstanding the foregoing, it is understood and agreed that the
rights and licenses granted herein are limited to the extent that E-Loan may
grant such rights and licenses under applicable law.
14.7 PUBLICITY. Each of the parties hereto agrees not to disclose to any
third party the financial terms of this Agreement without the prior written
consent of the other party hereto, except to advisors, investors and others on a
need-to-know basis under circumstances that reasonably ensure the
confidentiality thereof, or to the extent required by law. Notwithstanding the
foregoing, the parties shall agree upon a press release to announce the
execution of this Agreement, together with a corresponding Question & Answer
outline for use in responding to inquiries about the Agreement; thereafter, the
parties may each disclose to third parties the information contained in such
press release and Question & Answer outline without further approval.
14.8 RIGHTS AND REMEDIES. No exercise or enforcement by either party of
any right or remedy under this Agreement will preclude the enforcement by such
party of any other right or remedy under this Agreement or that such party is
entitled by law to enforce.
16
<PAGE> 45
14.9 RELATIONSHIP BETWEEN PARTIES; THIRD-PARTY BENEFICIARY. E-Loan and
Licensee shall at all times and for all purposes be deemed to be independent
contractors and neither party, nor either party's employees, representatives,
subcontractors or agents, shall have the right or power to bind the other party.
This Agreement shall not itself create or be deemed to create a joint venture,
partnership or similar association between E-Loan and Licensee or either party's
employees, subcontractors or agents. E-Loan expressly acknowledges and agrees
that SOFTBANK CORP. is a beneficiary of this Agreement and shall have the right
to enforce its terms against E-Loan.
14.10 COUNTERPARTS. This Agreement may be executed in counterparts, each
of which so executed will be deemed to be an original and such counterparts
together will constitute one and the same agreement.
14.11 GOVERNING LAW. This Agreement will be interpreted and construed in
accordance with the laws of the State of California and the United States of
America, without regard to conflict of law principles and excluding the 1980
United Nations Convention on Contracts for the International Sale of Goods.
14.12 LANGUAGE. This Agreement is in the English language only, which
language will be controlling in all respects, and all versions hereof in any
other language shall not be binding on the parties hereto. All communications
and notices to be made or given pursuant to this Agreement will be in the
English language.
14.13 FORCE MAJEURE. Neither party will be liable for damages or
penalties or held in default for delay in delivery or performance or for failure
to give notice of delay when the delay is due to the elements, acts of God,
delays in transportation or delivery, or any other causes beyond the reasonable
control of such party; provided, however, that cause beyond the reasonable
control of such party do not include any order, regulation or written directive
of such party.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by duly
authorized representatives on the dates set forth below.
E-LOAN, INC. ("E-Loan") [E-LOAN JAPAN] ("Licensee")
By:_______________________________ By:______________________________________
Name:_____________________________ Name:____________________________________
Title:____________________________ Title:___________________________________
17
<PAGE> 46
EXHIBIT A
SOFTWARE
The following E-Loan modules in the form currently in use by E-Loan as of the
Effective Date:
[ ] Rate Searching Engine
[ ] Loan Comparison
[ ] Template Process to build web sites
[ ] E-TRACK-- monitor the status of the loan, which includes:
Log-ins
Automated emails
[ ] Interface with loan processing software
[ ] Display of loan information
[ ] Marketing Survey Components
[ ] Report Server with reports for:
Operations
Web Site Info
[ ] Forms Printing Engine
[ ] Rate Loading Engine
[ ] "Smart" Online Application Process
[ ] Rate Watch/Loan Monitoring Technology with Automated Emails
[ ] Calculators
"Licensee": "E-Loan":
By:_______________________________ By:______________________________________
Print Name:_______________________ Print Name:______________________________
Title:____________________________ Title:___________________________________
18
<PAGE> 47
EXHIBIT B
E-LOAN'S GLOBAL BRAND PROTOCOLS
1. E-Loan's advertising tag line is: "A better way to get a loan." This tag line
must be used in all advertising, and must be prominently displayed at all places
where E-Loan's logo is placed. No other tag lines should be used in connection
with the E-LOAN trademark or logo.
2. These trademark usage guidelines apply to the authorized use of all of the
trademarks, service marks and logos of E-Loan in connection with E-Loan's
products and services, in advertisements, labels, product guides, catalogs,
brochures, instruction manuals, customer communications, press releases,
packaging, electronic communications and all other uses of E-Loan trademarks.
For convenience, "trademarks" include registered or unregistered trademarks,
service marks or brand names of E-Loan.
3. Before you may use E-Loan trademarks, you must obtain E-Loan's prior review
and written approval, in its reasonable discretion, of the form, content and
context of any intended use. This does not apply if the use is a customary
incidental use in advertising, but in that case, proper attribution to E-Loan as
the trademark owner is required.
3. The following general rules apply:
[ ] Spell the trademark correctly and do not abbreviate it.
[ ] Use capitalization consistently.
[ ] Use a standard appearance for the trademark.
[ ] Use a proper trademark notice at least once, the first time the E-LOAN
trademark appears: we prefer you to use the notice each time the trademark
is used. Use (R) for registered trademarks, "TM" for unregistered
trademarks, and "SM" for unregistered service marks. If you have any
questions about which marks are registered, ask us.
[ ] Use the trademark only as a brand name in conjunction with a specific
product or service, e.g., E-LOAN mortgage services. " E-LOAN " alone is
not appropriate. Use the trademark only as an adjective modifying a
generic product ("the E-LOAN Internet mortgage service"), and never as a
noun or a verb ("an E-LOAN ").
[ ] Always give E-Loan attribution as the trademark owner any time E-LOAN
trademarks are used, e.g., " E-LOAN is a registered trademark of E-LOAN,
Inc".
5. Notify E-Loan immediately of any improper, confusing or unauthorized use of
the E-LOAN trademarks by anybody. You should not take any action which leads a
third party to think the E-LOAN trademarks are owned by you, or which might
adversely impact E-Loan's reputation. You are expected to use the E-LOAN
trademarks at all times in a manner consistent with trademark laws.
19
<PAGE> 48
6. When you use the logo, please adhere to the following specifications:
(a) The Logo should be reproduced in the following colors: Pantone 343 CV
(100%), Pantone 145 CV (80%). All elements of the Logo must be used. The
logotype is in the font "Custom." Downloadable samples are available at E-Loan's
web site at URL: _____________.
(b) Clear Space: To maintain the characteristic of the Logo, it must be
surrounded by clear space. This space should be free of any type or graphic of
any kind. The amount of clear space around the Logo should be the height of the
"E" in the logotype on the sides and bottom.
(c) Size Requirements: The Logo should never be reproduced smaller than 8 mm
high and 32 mm wide in print. The Logo is measured from the tip of the outline
to the bottom of the type. For on-screen usage, the minimum size of the Logo is
23 pixels high and 90 pixels wide.
(d) Usage on Colored/Textured Backgrounds: When placing the E-LOAN Logo on a
solid background other than black or white, the background color must not
visually interfere with the colors of the logo. For example, the background must
not be of any of the colors ______________ or any CMYK combination of these
colors. However, the E-LOAN logotype can be black or white (please refer to
downloadable files). When placing the logo on a textured background, the overall
coloration of the background must be light enough so that the logo can be seen
clearly.
"Licensee": "E-Loan":
By:_______________________________ By:______________________________________
Print Name:_______________________ Print Name:______________________________
Title:____________________________ Title:___________________________________
20
<PAGE> 49
EXHIBIT C
SERVICES AGREEMENT
AGREEMENT FOR CONSULTING BY E-LOAN
This Agreement for Consulting ("AGREEMENT") is made and entered into as
of the ___ day of _______, 199__ by and between E-Loan, Inc., a _________
corporation with offices at 540 University Avenue, Suite 350, Palo Alto,
California, 94301 ("E-LOAN"), and [E-LOAN JAPAN K.K.], a kabushiki kaisha
organized under the laws of Japan with offices at _____________ ("LICENSEE")
("LICENSEE"). The Licensee desires to retain E-Loan as an independent contractor
to perform certain development and consulting services for the Licensee as
described in the License and Services Agreement between the parties dated
___________ ("LICENSE AND SERVICES AGREEMENT"), and E-Loan is willing to perform
such services on terms set forth more fully below. In consideration of the
mutual promises contained herein, the parties agree as follows:
1. SERVICES.
(a) WORK ORDERS. The parties may from time to time agree upon
certain software development and related services to be provided by E-Loan under
this Agreement ("SERVICES"). The parties shall develop a description of such
Services in reasonable detail ("WORK ORDER") in a form substantially as set
forth in the form of Work Order attached hereto as Exhibit A. E-Loan shall
perform for Licensee the services described in each Work Order on the terms and
conditions set forth therein. The parties acknowledge that Licensee may have
certain obligations under each Work Order, and all of E-Loan's obligations will
be subject to the prompt performance of Licensee's obligations thereunder.
(b) CHANGE ORDERS. Any changes to Specifications are subject to
mutual agreement.
2. COMPENSATION.
(a) SERVICES. Licensee shall pay E-Loan for performing the
Services as shown in the Work Order.
(b) EXPENSES. The Licensee shall also reimburse E-Loan for the
reasonable actual travel and living expenses of its personnel engaged in the
performance of Services at locations other than E-Loan facilities, together with
other reasonable out-of-pocket expenses incurred in connection with performance
of the Services. E-Loan shall adhere to any travel policy reasonably promulgated
by Licensee, provided that E-Loan may incur expenses up to a total of ________
dollars without Licensee's prior approval.
(c) PAYMENTS. E-Loan shall invoice Licensee for all amounts on or
after the due date. Payment terms will be net [thirty (30)] days. Any amounts
due E-Loan under this Agreement not received by the date due will be subject to
a service charge of one and one-half
21
<PAGE> 50
percent (1.5%) per month, or the maximum charge permitted by law, whichever is
less. Any payment terms set forth in the applicable Work Order will take
precedence over this Section 2(c).
3. CONFIDENTIALITY. All information disclosed under this Agreement will
be deemed Confidential Information of E-Loan pursuant to Section 9 of the
License and Services Agreement.
4. OWNERSHIP.
(a) THIRD PARTY MATERIALS. For all materials designated as "THIRD
PARTY MATERIALS" on the Work Order, the parties hereby agree that such materials
may be necessary for Licensee to use the Licensee Materials or E-Loan Materials,
and Licensee will be solely responsible for obtaining necessary licenses to the
Third Party Materials.
(b) LICENSEE MATERIALS. E-Loan and Licensee agree that all
deliverables, inventions, materials, and other work product developed under this
Agreement, and all intellectual property rights relating thereto, including, but
not limited to, all patent, copyright, trade secret and trademark rights
("LICENSEE MATERIALS"), will be owned by Licensee. E-Loan hereby assigns,
transfers and conveys, and agrees to assign, transfer and convey all right,
title and interest in and to the Licensee Materials to the full extent of
E-Loan's ownership interest therein, including the right to commence and
maintain all causes of action relating thereto and to retain any proceeds or
enjoy any remedies resulting from such causes of action. E-Loan agrees to
execute such written instruments and do such other acts, at Licensee's expense,
as may be necessary or useful in the opinion of Licensee to obtain and/or
enforce Licensee's rights in the Licensee Materials. E-Loan hereby irrevocably
appoints Licensee and any of its officers as the E-Loan's attorney-in-fact to
execute all such instruments and do all such acts in the event E-Loan fails to
do so. To the extent, if any, that, notwithstanding the foregoing, E-Loan
retains any right, title or interest with respect to the Licensee Materials,
E-Loan hereby grants to Licensee a perpetual, irrevocable, exclusive, fully
paid-up, royalty-free, transferable, assignable and sublicensable worldwide
right and license to copy, use, display, distribute and create derivative works
of the Licensee Materials. E-Loan further waives any "moral" rights or other
rights with respect to attribution of inventorship or integrity of the licensed
Licensee Materials that E-Loan may have under any applicable law or under any
legal theory.
5. TERM AND TERMINATION.
(a) TERM. This Agreement will commence on the date first written
above and will continue indefinitely or as provided below.
(b) TERMINATION. The Licensee may terminate this Agreement or any
Work Order at any time upon giving ten (10) days' prior written notice thereof
to E-Loan, provided, however, that Licensee shall pay E-Loan for any Services
performed up to the effective date of termination, and, promptly upon E-Loan's
request, pay all of E-Loan's sunk costs related to any terminated Work Order,
including without limitation any cancellation payments to third parties to
terminate contracts entered into by E-Loan in reliance upon the Work Order.
E-Loan shall deliver any work in process promptly after such payments. Such work
in process will be provided "as is," and will not be subject to the warranty in
Section 8. Either party may terminate
22
<PAGE> 51
this Agreement upon thirty (30) days' notice of any uncured material breach of
this Agreement by the other party.
(c) SURVIVAL. Upon such termination all rights and duties of the
parties toward each other shall cease except Sections 3, 4, 7, 8, 9, 10, 11, and
12 will survive termination of this Agreement.
6. ASSIGNMENT. Neither this Agreement nor any right hereunder or
interest herein may be assigned or transferred by either party without the
express written consent of the other, except to a permitted assignee of the
License and Services Agreement.
7. INDEPENDENT CONTRACTORS. Nothing in this Agreement shall in any way
be construed to constitute E-Loan as an agent, employee or representative of the
Licensee, but E-Loan shall perform the Services hereunder as an independent
contractor.
8. WARRANTY AND DISCLAIMER.
(a) The warranties set forth in Sections 5.1 of the License and
Services Agreement and the indemnification obligation set forth in Section 8.1
of the License and Services Agreement shall apply to the Licensee Materials.
(b) OTHER THAN AS EXPLICITLY SET FORTH IN THIS SECTION 8, E-LOAN
DISCLAIMS ALL IMPLIED WARRANTIES, INCLUDING ANY AND ALL IMPLIED WARRANTIES OF
TITLE MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND NON-INFRINGEMENT.
9. LIMITATION OF REMEDIES AND DAMAGES. EXCEPT WITH REGARD TO LIABILITY
ARISING UNDER SECTION 8(a), EACH PARTY'S LIABILITY ARISING HEREUNDER WILL BE
LIMITED TO FEES PAID BY LICENSEE HEREUNDER. NEITHER PARTY WILL BE LIABLE FOR ANY
CONSEQUENTIAL, INCIDENTAL, OR INDIRECT DAMAGES, INCLUDING WITHOUT LIMITATION
DAMAGES FOR LOSS OF BUSINESS PROFITS AND/OR BUSINESS INTERRUPTION, WHETHER
FORESEEABLE OR NOT, AND WHETHER ARISING IN CONTRACT, TORT, OR NEGLIGENCE, EVEN
IF A REPRESENTATIVE OF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES. THESE LIMITATIONS SHALL APPLY NOTWITHSTANDING ANY FAILURE OF ESSENTIAL
PURPOSE OF ANY LIMITED REMEDY.
10. ENTIRE AGREEMENT. This Agreement, together with the License and
Services Agreement between the parties and the Exhibits hereto and thereto form
the entire agreement of the parties and supersede any prior agreements between
them with respect to the subject matter hereof.
11. MISCELLANEOUS. Section 14 of the License and Services Agreement is
hereby incorporated herein by reference, and shall apply to this Agreement as if
set forth herein in its entirety.
12. WAIVER. Waiver of any term or provision of this Agreement or
forbearance to enforce any term or provision by either party shall not
constitute a waiver as to any subsequent
23
<PAGE> 52
breach or failure of the same term or provision or a waiver of any other term or
provision of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
"Licensee": "E-Loan":
By:_______________________________ By:______________________________________
Print Name:_______________________ Print Name:______________________________
Title:____________________________ Title:___________________________________
24
<PAGE> 53
EXHIBIT A
WORK ORDER FORMAT
Services to be performed by E-Loan:
Compensation of E-Loan:
(a) Rate of pay: per
(b) Total payment limitation:
(c) Advance payment:
(d) Expenses authorized for reimbursement by the Licensee:
(e) Other:
(f) Expected duration of project:
"Licensee": "E-Loan":
By:_______________________________ By:______________________________________
Print Name:_______________________ Print Name:______________________________
Title:____________________________ Title:___________________________________
25
<PAGE> 54
EXHIBIT D
WORK ORDER FOR INITIAL LOCALIZATION SOFTWARE DEVELOPMENTS
SPECIFICATIONS: [TO BE PROVIDED BY LICENSEE]
"Licensee": "E-Loan":
By:_______________________________ By:______________________________________
Print Name:_______________________ Print Name:______________________________
Title:____________________________ Title:___________________________________
26
<PAGE> 55
EXHIBIT E
E-LOAN TECHNICAL SUPPORT ESCALATION PROCEDURES
There will be one named primary technical support contact and one named backup
support contact. All requests for technical support must come from the primary
support contact. In the event the primary contact is not available, the backup
contact may submit the technical support request. The primary support contact
will be _________________________ and the backup support contract will be
____________________________.
Changes to the primary and/or backup support contacts must be received by E-Loan
or Licensee in writing 1 business day prior to them being effective.
[ESCALATION PROCEDURES WILL BE ADDED BELOW, WITH A CHART LISTING TYPES OF ERRORS
AND RESPONSES]
E-Loan will provide help desk support (i.e. other than reporting of Errors) by
pager and call-back from the hours of____________ to______________ Pacific Time
on U.S. business days. E-Loan will handle all help desk inquiries during other
hours by U.S. next business day email or fax back.
"Licensee": "E-Loan":
By:_______________________________ By:______________________________________
Print Name:_______________________ Print Name:______________________________
Title:____________________________ Title:___________________________________
27
<PAGE> 56
EXHIBIT 4.6
Actions Requiring E-LOAN Consent
Notwithstanding any other provision of this Agreement, each of the
following acts will require E-LOAN's prior written consent, which consent or
notice of non-consent shall be provided within ten (10) Business Days after
receipt of notice of the Company's intent to take such action:
FOR SO LONG AS E-LOAN OWNS NOT LESS THAN A TWENTY PERCENT (20%) COMPANY
INTEREST:
(1) The adoption, amendment or repeal of any article of the Articles (i)
providing E-LOAN with protective voting rights, (ii) designating the Company's
corporate name or business or (iii) effecting any change in the Company's
capital structure (other than an amendment increasing the Company's authorized
capital or otherwise necessary in connection with such an increase);
(2) The declaration or payment of any dividend or other distribution
with respect to Securities;
(3) Any merger or consolidation of the Company, whether or not the
Company is the surviving entity, or any sale of all or substantially all of the
Company's assets;
(4) The Company's investment of capital in, or acquisition of, any
interest in another entity;
(5) The change of the Company's principal business;
(6) Any new issuance of Securities to any Person other than a Party
(except as provided in Section 3.2 or Section 3.4); and
(7) Any new financial assistance requested by the Board pursuant to
Section 3.3(b).
FOR SO LONG AS E-LOAN OWNS ANY COMPANY INTEREST:
(8) The sale, sublicense, encumbrance or any other transfer of any
proprietary rights by the Company; and
(9) Any amendment to the License Agreement.
<PAGE> 1
Exhibit 10.42
E-LOAN, INC.
STOCK PURCHASE AGREEMENT
May 20, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Purchase and Sale of
Stock..................................................................................... 1
1.1 Sale and Issuance of Stock........................................................... 1
1.2 The Closing.......................................................................... 1
2. Representations and Warranties of the Company............................................. 1
2.1 Organization and Good Standing....................................................... 1
2.2 Authorization........................................................................ 1
2.3 Valid Issuance of Stock.............................................................. 2
2.4 Litigation........................................................................... 2
2.5 Properties........................................................................... 2
2.6 Compliance with Other Documents...................................................... 2
3. Representations and Warranties of the Investor............................................ 2
3.1 Authorization........................................................................ 2
3.2 Investigation........................................................................ 2
3.3 Accredited Investor.................................................................. 2
3.4 Purchase Entirely for Own Account.................................................... 3
4. Conditions to the Investor's Obligation at Closing........................................ 3
4.1 Representations and Warranties....................................................... 3
4.2 Securities Laws...................................................................... 3
4.3 Authorizations....................................................................... 3
4.4 Initial Public Offering of Common Stock.............................................. 3
5. Conditions to the Company's Obligations at Closing........................................ 3
5.1 Representations and Warranties....................................................... 3
5.2 Securities Laws...................................................................... 3
5.3 Authorizations....................................................................... 3
5.4 Initial Public Offering of Common Stock.............................................. 4
5.5 Payment of Purchase Price............................................................ 4
6. Covenants of the Company and the Investor................................................. 4
6.1 Agreement Not to Transfer............................................................ 4
6.2 Market Stand-Off..................................................................... 4
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C> <C>
6.3 Notice of Intention to Transfer...................................................... 4
6.4 Voting Agreements.................................................................... 5
7. Miscellaneous............................................................................. 5
7.1 Governing Law........................................................................ 5
7.2 Survival; Additional Securities...................................................... 5
7.3 Successors and Assigns............................................................... 5
7.4 Entire Agreement..................................................................... 5
7.5 Notices.............................................................................. 6
7.6 Amendments and Waivers............................................................... 6
7.7 Legal Fees........................................................................... 6
7.8 Expenses............................................................................. 6
7.9 Titles and Subtitles................................................................. 6
7.10 Counterparts......................................................................... 6
7.11 Severability......................................................................... 6
7.12 Confidentiality...................................................................... 6
</TABLE>
-ii-
<PAGE> 4
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT is made as of the 20th day of May 1999, by
and between E-Loan, Inc., a Delaware corporation (the "Company") and Forum
Holdings, Inc. (the "Investor").
WHEREAS, the Investor has indicated a desire to purchase $12,500,000 of
shares of Common Stock from the Company at a price per share equal to the price
of the Company's Common Stock at the time of the Company's initial public
offering.
WHEREAS, the Company has indicated a desire to sell $12,500,000 of shares
of Common Stock to the Investor and has agreed to register such shares under the
Securities Act of 1933, as amended (the "Securities Act") on the terms set forth
herein.
WHEREAS, the Company and the Investor have agreed that this Agreement shall
constitute the entire understanding and agreement between the parties with
regard to the subject matter hereof.
NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock.
1.1 Sale and Issuance of Stock. Subject to the terms and conditions
of this Agreement, the Company agrees to sell to the Investor and the Investor
agrees to purchase from the Company $12,500,000 shares of the Company's Common
Stock (the "Stock").
1.2 The Closing. The purchase and sale of the Stock shall be held at
the Company's offices concurrently with the closing of the Company's initial
public offering (the "IPO") or, if later, upon satisfaction or waiver of each of
the conditions set forth in Sections 4 and 5 (the "Closing"). At the Closing,
the Company will deliver the Stock to the Investor against payment of the
purchase price therefor by check payable to the order of the Company or by wire
transfer. The per share purchase price for the Stock shall be equal to the per
share price paid by the public for the Company's Common Stock in the IPO, less
any underwriter discounts and commissions.
2. Representations and Warranties of the Company. The Company hereby
represents and warrants to the Investor that:
2.1 Organization and Good Standing. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has all requisite corporate power and authority to carry on its
business as now conducted.
2.2 Authorization. All corporate action on the part of the Company,
its officers, directors and stockholders necessary for the authorization,
execution and delivery of this Agreement, the performance of all obligations of
the Company hereunder, and the authorization, issuance and delivery of the Stock
has been taken or will be taken prior to the Closing, subject to laws of general
-1-
<PAGE> 5
application relating to bankruptcy, insolvency and the relief of debtors and by
general principles of equity.
2.3 Valid Issuance of Stock. The Stock, when issued, sold and
delivered in accordance with the terms hereof for the consideration expressed,
will be duly and validly issued, fully paid and nonassessable and, based in part
upon the representations of the Investor in this Agreement, will be issued in
compliance with all applicable federal and state securities laws.
2.4 Litigation. Except as set forth in the Company's registration
statement prepared in connection with the IPO, as filed with the Securities and
Exchange Commission ("SEC") and amended from time to time (the "Registration
Statement"), there are no actions, proceedings or investigations pending or, to
the best of Company's knowledge, any basis therefor or threat thereof, against
or affecting the Company, that, either in any case or in the aggregate, would
result in any material adverse change in the business, financial condition, or
results of operations of the Company.
2.5 Properties. To the best of the Company's knowledge (but without
having conducted any special investigation), the Company has (i) good and
marketable title to its properties and assets and has good title to all its
leasehold interests, and (ii) sufficient title, license and/or ownership of all
patents, trademarks, service marks, trade names, copyrights, trade secrets,
information, proprietary rights and processes necessary for its business as now
conducted on the date hereof.
2.6 Compliance with Other Documents. The execution and delivery of
this Agreement, consummation of the transactions contemplated hereby, and
compliance with the terms and provisions hereof will not conflict with or result
in a breach of the terms and conditions of, or constitute a default under the
Restated Certificate or Bylaws of the Company or of any contract or agreement to
which the Company is now a party, except where such conflict, breach or default
of any such contract or agreement, either individually or in the aggregate,
would not have a material adverse effect on the Company's business, financial
condition or results of operations.
3. Representations and Warranties of the Investor. The Investor hereby
represents and warrants that:
3.1 Authorization. This Agreement constitutes the valid and legally
binding obligation of the Investor, enforceable in accordance with its terms,
subject to laws of general application relating to bankruptcy, insolvency and
the relief of debtors and by general principles of equity.
3.2 Investigation. The Investor acknowledges that it has had an
opportunity to discuss the business, affairs and current prospects of the
Company with the Company's president. The Investor further acknowledges having
had access to information about the Company that it has requested or considers
necessary for purposes of purchasing the Stock.
3.3 Accredited Investor. The Investor is an "accredited investor" as
such term is defined in Regulation D adopted by the SEC.
-2-
<PAGE> 6
3.4 Purchase Entirely for Own Account. This Agreement is made with
the Investor in reliance upon the Investor's representation to the Company,
which by the Investor's execution of this Agreement the Investor hereby
confirms, that the Stock will be acquired for investment for the Investor's own
account, not as a nominee or agent, and not with a view to the resale or
distribution of any part thereof, and that the Investor has no present intention
of selling, granting any participation in, or otherwise distributing the same.
4. Conditions to the Investor's Obligation at Closing. The obligation of
the Investor to purchase the Stock at the Closing is subject to the fulfillment
to the Investor's satisfaction on or prior to the Closing of the following
conditions:
4.1 Representations and Warranties. The representations and
warranties made by the Company in Section 2 hereof shall be true and correct
when made, and shall be true and correct as of the Closing with the same force
and effect as if they had been made on and as of such date, subject to changes
contemplated by this Agreement.
4.2 Securities Laws. The offer and sale of the Stock to the Investor
pursuant to this Agreement shall be exempt from the registration requirements of
the Securities Act and qualification requirements of all applicable state
securities laws.
4.3 Authorizations. All authorizations, approvals or permits, if any,
of any governmental authority or regulatory body that are required in connection
with the lawful issuance and sale of the Stock pursuant to this Agreement shall
have been duly obtained and shall be effective on and as of the Closing.
4.4 Initial Public Offering of Common Stock. The initial public
offering of the Company's Common Stock shall have occurred.
5. Conditions to the Company's Obligations at Closing. The obligation of
the Company to sell the Stock at the Closing is subject to the fulfillment to
the Company's satisfaction on or prior to the Closing of the following
conditions:
5.1 Representations and Warranties. The representations and
warranties of the Investor contained in Section 3 hereof shall be true as of the
Closing with the same force and effect as if they had been made on and as of
such date, subject to changes contemplated by this Agreement.
5.2 Securities Laws. The offer and sale of the Stock to the Investor
pursuant to this Agreement shall be exempt from the registration requirements of
the Securities Act qualification requirements of all applicable state securities
laws.
5.3 Authorizations. All authorizations, approvals or permits, if any,
of any governmental authority or regulatory body that are required in connection
with the lawful issuance and sale of the Stock pursuant to this Agreement shall
have been duly obtained and shall be effective on and as of the Closing.
-3-
<PAGE> 7
5.4 Initial Public Offering of Common Stock. The initial public
offering of the Company's Common Stock shall have occurred.
5.5 Payment of Purchase Price. The Investor shall have delivered to
the Company the purchase price for the Stock as set forth in Section 1.2 hereof.
6. Covenants of the Company and the Investor.
6.1 Agreement Not to Transfer.
(a) Prior to the first anniversary of the Closing, the Investor
shall not, directly or indirectly, Transfer or offer to Transfer any shares of
the Stock other than to affiliates who agree to be bound by the terms of this
Agreement, unless the Company consents to such Transfer and the transferee
agrees to be bound by this Agreement.
(b) In order to enforce the Transfer Restrictions, the Company
may impose stop-transfer instructions with respect to the Stock until the end of
the restricted period.
(c) As used in this Agreement, the term "Transfer" shall mean
any sale, transfer, assignment, hypothecation, encumbrance or other disposition,
whether voluntary or involuntary, of shares of the Stock. In the case of a
hypothecation, the Transfer shall be deemed to occur both at the time of the
initial pledge and at any pledgee's sale or a sale by any secured creditor or a
retention by the secured creditor of the pledged shares of the Stock in complete
or partial satisfaction of the indebtedness for which the shares of the Stock
are security.
6.2 Market Stand-Off. In addition to the Transfer Restrictions (which
shall in no way be limited by the following), in connection with any
underwritten public offering by the Company of its equity securities pursuant to
an effective registration statement filed under the Securities Act, the Investor
shall not Transfer or offer to Transfer any shares of the Stock without the
prior written consent of the Company and its underwriters. Such restriction (the
"Market Stand-Off") shall be in effect for such period of time from and after
the effective date of the final prospectus for the offering as may be requested
by the Company or such underwriters; provided, however, that (i) such Market
Stand-Off shall not exceed one hundred eighty (180) days, and (ii) the Investor
shall be subject to the Market Stand-Off only if the officers, directors and
other stockholders of the Company are also subject to similar restrictions. In
order to enforce the Market Stand-Off, the Company may impose stop-transfer
instructions with respect to the Stock until the end of the applicable stand-off
period.
6.3 Notice of Intention to Transfer. In the event the Investor plans
to Transfer shares of the Stock in one or more transactions, the Investor shall
inform the Company of such intention to Transfer such shares fifteen (15) days
prior to such Transfer. Investor shall agree that any transfer, sale or other
disposition of the Company's Common Stock shall be through an orderly
disposition, including, at the request of the Company, through a broker-dealer
recommended by the Company.
-4-
<PAGE> 8
6.4 Voting Agreements. The following provision will be applicable at
any time the Investor owns or controls in excess of 9.5% of the Voting
Securities (as defined below): In the event that the Board of Directors of the
Company approves a sale of substantially all of the assets or capital stock of
the Company or a merger in which the Company would not be the surviving
corporation, the Investor agrees to vote all shares of Voting Securities owned
by it with respect to such sale of substantially all of the assets or capital
stock or merger in the same proportion as the votes cast by all other
stockholders of the Company entitled to vote on such matter (other than the
Investor) at such time as such matter is presented for a vote of the
stockholders of the Company. The Investor, as a holder of Voting Securities,
shall be present, in person or by proxy, at all meetings of stockholders of the
Company so that all shares of Voting Securities beneficially owned by it may be
counted for the purpose of determining the presence of a quorum at such
meetings. For purposes of this Agreement, (i) the term "Voting Securities" shall
refer to all securities of the Company entitled to vote generally for the
election of directors, and (ii) the term "beneficial ownership" shall have the
meaning set forth in Rule 13d-3 under the Exchange Act.
7. Miscellaneous.
7.1 Governing Law. This Agreement shall be governed in all respects
by the laws of the State of Delaware, without regard to the conflict of law
provisions thereof.
7.2 Survival; Additional Securities. The representations and
warranties set forth in Sections 2 and 3 shall survive until the Closing. The
covenants and agreements set forth in Section 6 shall survive in accordance with
their terms. Any new, substituted or additional securities which are by reason
of any stock split, stock dividend, recapitalization or
reorganizationdistributed with respect to the Stock ("Stock Distributions")
shall be immediately subject to the covenants and agreements set forth in
Section 6 to the same extent the Stock is at such time covered by such
provisions.
7.3 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the respective successors and assigns of the parties hereto. Nothing in
this Agreement, express or implied, is intended to confer upon any party other
than the parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement. Notwithstanding anything to the
contrary contained herein, the covenants set forth in Section 6 shall not be
binding upon any entity (other than an affiliate of the Investor) which acquires
any shares of the Stock or a Stock Distribution in a transaction permitted
hereunder.
7.4 Entire Agreement. This Agreement constitutes the entire
understanding and agreement between the parties with regard to the subject
matter hereof.
7.5 Notices. Except as otherwise provided, all notices and other
communications required or permitted hereunder shall be in writing, shall be
effective when given, and shall in any event be deemed to be given upon receipt
or, if earlier, (i) five (5) days after deposit with the U.S. postal service or
other applicable postal service, if delivered by first class mail, postage
prepaid, (ii)
-5-
<PAGE> 9
upon delivery, if delivered by hand, (iii) one (1) business day after the day of
deposit with Federal Express or similar overnight courier, freight prepaid, if
delivered by overnight courier or (iv) one (1) business day after the day of
facsimile transmission, if delivered by facsimile transmission with copy by
first class mail, postage prepaid, and shall be addressed, (a) if to the
Investor, at the Investor's address set forth below its signature, or at such
other address as the Investor shall have furnished to the Company in writing, or
(b) if to the Company, at its address as set forth below its signature, or at
such other address as the Company shall have furnished to the Investor in
writing.
7.6 Amendments and Waivers. Any term of this Agreement may be amended
and the observance of any term of the Agreement may be waived (either generally
or in a particular instance and either retroactively or prospectively) only with
the written consent of the Company and the Investor.
7.7 Legal Fees. In the event of any action at law, suit in equity or
arbitration proceeding in relation to this Agreement or the Stock or any Stock
Distribution, the prevailing party shall be paid by the other party a reasonable
sum for the attorneys' fees and expenses incurred by such prevailing party.
7.8 Expenses. Irrespective of whether the Closing is effected, the
Company and the Investor shall each pay their own costs and expenses incurred
with respect to the negotiation, execution, delivery and performance of this
Agreement.
7.9 Titles and Subtitles. The titles of the paragraphs and
subparagraphs of this Agreement are for convenience of reference only and are
not to be considered in construing this Agreement.
7.10 Counterparts. This Agreement may be executed in counterparts,
each of which shall be an original, but all of which together shall constitute
one instrument.
7.11 Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
7.12 Confidentiality. The parties hereto agree that, except with the
prior written permission of the other party, it shall at all times keep
confidential and not divulge, furnish, or make accessible to anyone any
confidential information, knowledge, or data concerning or relating to the
business or financial affairs of such other party to which said party has been
or shall become privy by reason of this Agreement, discussions or negotiations
relating to this Agreement, or the performance of its obligations hereunder.
[Signature Page to Follow]
-6-
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year hereinabove first written.
E-LOAN, INC.
5875 Arnold Road
Dublin, CA 94568
/s/ Chris Larsen
- --------------------------------
By: Chris Larsen
Title: Chief Financial Officer
Forum Holdings, Inc.
/s/ Jean Bernard Tullio
- --------------------------------
By: Jean Bernard Tullio
Title:
-7-
<PAGE> 1
EXHIBIT 11.1
SCHEDULE RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
1996 1997 1998 1998 1999
---------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net loss $ (110,044) $ (1,374,493) $(11,172,054) $ (1,330,953) $(11,381,081)
Accretion for mandatorily redeemable
preferred stock -- (41,667) (1,013,352) (125,000) (517,192)
---------- ------------ ------------ ------------ ------------
Net loss for common stockholders $ (110,044) $ (1,416,160) $(12,185,406) $ (1,455,953) $(11,898,273)
----------- ------------ ------------ ------------ ------------
Weighted average number of common shares
outstanding - basic and diluted 12,255,000 12,262,002 12,400,284 12,323,250 12,598,378
----------- ------------ ------------ ----------- ------------
Net loss per share - basic and diluted $(0.01) $(0.12) $(0.98) $(0.12) $(0.94)
====== ====== ====== ====== ======
</TABLE>
<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
May 21, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 9,141,367
<SECURITIES> 0
<RECEIVABLES> 411,058
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 52,426,754
<PP&E> 2,719,516
<DEPRECIATION> 353,952
<TOTAL-ASSETS> 55,523,256
<CURRENT-LIABILITIES> 44,024,519
<BONDS> 0
21,393,002
502,383
<COMMON> 26,867
<OTHER-SE> (11,713,202)
<TOTAL-LIABILITY-AND-EQUITY> 34,130,254
<SALES> 0
<TOTAL-REVENUES> 6,831,546
<CGS> 0
<TOTAL-COSTS> 18,176,926
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 758,031
<INCOME-PRETAX> (11,172,054)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,172,054)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,172,054)
<EPS-PRIMARY> (0.98)
<EPS-DILUTED> 0
</TABLE>
