<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 29, 1998
Registration No. 333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
__________________________
NATIONAL MORTGAGE CORPORATION
(Exact Name Of Registrant As Specified In Its Governing Instruments)
7600 East Orchard Road, Suite 330 S
Englewood, Colorado 80111-4943
(303) 721-7211
(303) 741-8131 (Telecopy)
(Address, Including Zip Code, And Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
_______________________
Howard J. Glicksman, Esq.
General Counsel
Plaza Tower One, Suite 1200
6400 South Fiddler's Green Circle
Englewood, Colorado 80111
(303) 741-0100
(303) 741-6944 (Telecopy)
(Name, Address, Including Zip Code and Telephone Number,
Including Area Code, of Agent For Service)
______________________
With Copies To:
George C. Howell, III, Esq. James A. Blalock III, Esq.
Hunton & Williams Andrews & Kurth L.L.P.
Riverfront Plaza, East Tower 1701 Pennsylvania Avenue, Suite 200
951 East Byrd Street Washington, D.C. 20006
Richmond, Virginia 23219-4074 (202) 662-2700
(804) 788-8200 (202) 662-2739 (Telecopy)
(804) 788-8218 (Telecopy)
________________________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
_______________________
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share............ 7,705,000 $16.00 $123,280,000 $36,367.60
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock Purchase Warrants.................... 7,705,000 (3) (3) -
- ------------------------------------------------------------------------------------------------------------------------------------
Representative's Warrants......................... 231,150 (4) (4) -
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.01 per share,
issuable upon exercise of Common Stock
Purchase Warrants (5)............................ 7,705,000 $16.00 $123,280,000 $36,367.60
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.01 per share,
issuable upon exercise of Representative's
Warrants(5)...................................... 231,150 $16.00 $ 3,698,400 $ 1,091.03
====================================================================================================================================
Total........................................... $250,258,400.00 $73,826.23
====================================================================================================================================
</TABLE>
(1) Assumes exercise of an over-allotment option granted to the Underwriters to
purchase 1,005,000 Units.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a).
(3) Included in the Units at no additional cost.
(4) To be issued to Stifel, Nicolaus & Company, Incorporated in connection with
the Offering at no cost.
(5) This Registration Statement also covers any additional shares of Common
Stock which may become issuable by virtue of the anit-dilution provisions
of the Common Stock Purchase Warrants and Representative's Warrants. No
additional registration fee is included for these shares.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 29, 1998
-----------------------------------------
PROSPECTUS
6,700,000 UNITS
[LOGO] National Mortgage Corporation
EACH UNIT TO CONSIST OF ONE SHARE OF COMMON STOCK AND ONE STOCK PURCHASE WARRANT
National Mortgage Corporation ("NMC" and, together with its subsidiaries,
the "Company"), a Colorado corporation formed in 1991, is a fully-integrated
non-conforming mortgage lender operating as a self-managed real estate
investment trust ("REIT"). The Company originates, purchases, holds for
investment and services primarily first-lien single-family residential non-
conforming or sub-prime mortgage loans and intends to finance these mortgage
loans through the issuance of long-term non-recourse collateralized mortgage
obligations ("CMOs"). The Company intends to build and manage a portfolio of
single-family residential mortgage loans and selectively acquired mortgage-
backed securities and other related mortgage assets (collectively, "Mortgage
Assets") to create attractive risk-adjusted returns through its tax-advantaged
REIT structure.
All of the Securities offered pursuant to this Prospectus (the "Offering")
are being sold by National Mortgage Corporation. Each Unit consists of one share
of Common Stock, par value $.01 per share (the "Common Stock"), and one Common
Stock Purchase Warrant (together with the Representative's Warrants, the
"Warrants"). The Warrants included in the Units are not detachable from the
Common Stock until six months after the closing of this Offering. See
"Description of Securities." Each Warrant entitles the holder to purchase one
share of Common Stock (a "Warrant Share"), subject to certain anti-dilution
adjustments. The Warrants will become exercisable six months after the initial
closing of this Offering and will remain exercisable until 5:00 p.m. New York
Time on the third anniversary of the date such Warrants first become
exercisable, at an exercise price equal to the initial pubic offering price for
the Units. See "Underwriting." For purposes of this Prospectus, the Units, the
Common Stock, the Warrants and the Warrant Shares are referred to collectively
as the "Securities" unless the context indicates otherwise.
Prior to the closing of this Offering, there has been no public market for
the Securities. It is currently estimated that the initial public offering price
will be between $14 and $16 per Unit. See "Underwriting" for information
relating to the factors considered in determining the initial public offering
price. The Company intends to apply for listing of the Units, the Warrants and
the Common Stock under the symbols " .U", " .WS" and " ", respectively, on the
.
____________________________
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED
HEREBY, INCLUDING:
. The Company's history of net losses.
. Taxation of the Company as a regular corporation if it fails to
qualify as a REIT.
. The intense competition in the non-conforming mortgage lending
industry. Unexpected or rapid changes in interest rates, which will
affect the Company's ability to earn a spread between interest
received on its loans and the cost of its borrowings.
. The generally higher levels of realized loss associated with the
greater risk of delinquency and foreclosure on non-conforming mortgage
loans.
. The Company's dependence on limited funding sources and wholesale
brokers and correspondents.
. The potential conflicts of interest that could arise due to the
Company's relationship with The Chotin Group Corporation, which is
beneficially owned by the Company's chairman, who owns all of the
Company's outstanding preferred stock and who will own % of the Common
Stock after the Offering assuming no exercise of the Warrants.
. The possible ineffectiveness of the Company's proposed hedging
strategies.
. The substantial leverage to be used by the Company, which may cause
losses.
. The restrictions on ownership of Common Stock, which may deter third
parties from seeking control of or acquiring the Company.
____________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit...................... $ $ $
- ----------------------------------------------------------------------------------
Total (3) (4)................. $ $ $
==================================================================================
</TABLE>
(1) Excludes value of Warrants to be issued to Stifel, Nicolas & Company,
Incorporated to purchase 201,000 shares of Common Stock (231,150 shares of
Common Stock if the Underwriters' over-allotment option is exercised) at an
exercise price equal to the initial public offering price (the
"Representative's Warrants"). The Company and certain of its affiliates
have agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the Underwriters a 30-day option to purchase from
the Company up to 1,005,000 additional Units, at the Price to Public less
the Underwriting Discounts, solely to cover over-allotments, if any. See
"Underwriting." If the Underwriters exercise such option in full, the Price
to Public, Underwriting Discount and Proceeds to Company will be $ , $ ,
and $ , respectively.
(4) The Underwriters have agreed to reserve up to 5% of the Units offered
hereby for sale to certain persons associated with the Company, including
employees, officers and Directors of the Company and affiliates and their
families, at the Price to Public. See "Underwriting."
____________________________
The Securities are offered by the Underwriters subject to receipt and
acceptance by them, prior sale and the Underwriters' right to reject any order
in whole or in part and to withdraw, cancel or modify the offer without notice.
It is expected that delivery of certificates representing the Securities will be
made at the office of Stifel, Nicolaus & Company, Incorporated in St. Louis,
Missouri on or about , 1998.
STIFEL, NICOLAUS & COMPANY PIPER JAFFRAY INC.
INCORPORATED
MAY ___, 1998
<PAGE>
[Artwork map of the continental United States and Alaska and Hawaii,
appears here indicating, as of March 31, 1998, (I) the corporate headquarters
office of the Company located in Denver, Colorado; (II) the regional offices of
the Company located in (1) Newport Beach, California, (2) Denver, Colorado, (3)
Atlanta, Georgia and (4) Warwick, Rhode Island; (III) the branch offices of the
Company located in (1) Phoenix, Arizona, (2) Salt Lake City, Utah, (3)
Pittsburgh, Pennsylvania, (4) Landover, Maryland and (5) Fort Lee, New Jersey
and (IV) the locations of account executives, who originate loans outside of
branch and regional offices, including California, Colorado, Connecticut,
Florida, Massachusetts, Missouri, North Carolina, Rhode Island, Utah and
Virginia; (V) the 43 states in which the Company is licensed for purposes of
mortgage lending; (VI) the three states in which the Company is licensed only
for servicing; and (VII) the four states in which the Company is not licensed
for mortgage lending or servicing.]
<PAGE>
__________________
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OR
THE UNITS. SUCH TRANSACTIONS MAY INCLUDE STABILIZING BIDS AND PURCHASES IN THE
OPEN MARKET, OVER-ALLOTMENTS, SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
__________________
CAUTIONARY STATEMENT
THIS PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS," WHICH CAN BE
IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL,"
"SHOULD," "EXPECT," "ANTICIPATE," "ESTIMATE" OR "CONTINUE" OR THE NEGATIVES
THEREOF OR OTHER VARIATIONS THEREON OR OTHER COMPARABLE TERMINOLOGY. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DESCRIBED IN SUCH
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH UNDER THE CAPTION "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
__________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SUMMARY..................................................................... 1
The Company.............................................................. 1
Summary Risk Factors..................................................... 2
Business Strategies...................................................... 4
Overview.............................................................. 4
Mortgage Production and Servicing Strategies.......................... 5
Portfolio Management Strategies....................................... 7
Competitive Advantages................................................... 8
Tax Status of the Company................................................ 8
Dividend Policy and Distributions........................................ 9
The Offering............................................................. 10
Summary Consolidated Financial and Other Data............................ 12
RISK FACTORS................................................................ 15
Operating Risks.......................................................... 15
History of Net Losses; Limited Relevance of
Historical Performance............................................ 15
Intense Competition in the Non-Conforming
Mortgage Lending Industry.......................................... 15
Uncertainty as to the Company's Ability to
Implement its Growth Strategy...................................... 16
Interest Rate Fluctuations May Adversely Affect
Results of Operations.............................................. 16
Variations in Anticipated Mortgage Prepayment Results of
Rates May Adversely Affect
Operations......................... ............................... 17
Non-Conforming Mortgage Lending Exposes the
Company to Greater Risks than Traditional
Lending............................................................ 17
Substantial Leverage and Potential Net Losses in
Connection with Borrowings......................................... 18
Impact of Decline in Market Value of Mortgage
Assets; Margin Calls............................................... 18
Inability to Access Adequate Funding Sources on
Favorable Terms May Affect Results of
Operations......................................................... 18
Adverse Changes in General Economic Conditions
Can Affect Adversely the Company's
Business........................................................... 19
Loss Exposure on Single-Family Mortgage
Assets............................................................. 19
Appropriate Investments May Not Be Available
and Full Investment of Net Proceeds May Be
Delayed............................................................ 20
Failure to Hedge Effectively Against Interest Rate
Changes May Adversely Affect Results of
Operations......................................................... 20
Potential Adverse Effect of the Use of Financial
Instruments in Hedging............................................. 21
Dependence on Key Personnel for Successful
Operations; Limitations on Experience of Senior
Management......................................................... 21
Dependence Upon Independent Brokers and
Correspondents..................................................... 21
Certain Relationships; Potential Conflicts of
Interest........................................................... 22
Introduction of New Loan Products May Adversely
Affect Future Results of Operations................................ 22
Loss of Servicing Rights and Suspension of Future
Cash Flows......................................................... 22
Lack of Geographic Diversification.................................... 23
Illiquidity of Investments............................................ 23
Tax, Legal and Regulatory Risks.......................................... 23
Consequences of Failure to Maintain REIT
Status............................................................. 23
Failure to Satisfy Distribution Requirements
Will Result in the Imposition of Corporate
Income or Excise Tax............................................... 23
Certain of the Company's Investments May
Generate Taxable Income in Excess of
Current Cash Receipts.............................................. 24
Adverse Tax Legislation and Administrative and
Judicial Decisions................................................. 24
Laws and Regulations May Adversely Affect
Mortgage Lending Operations........................................ 24
Potential Litigation; Elimination of Lender
Payments to Brokers Could Adversely Affect
Results of Operations.............................................. 25
Consequences of Failure to Qualify for Investment
Company Act Exemption.............................................. 25
Risks of Investment in the Units in the Offering......................... 26
Immediate Dilution.................................................... 26
Ownership Limit May Restrict Business
Combination Opportunities.......................................... 26
Certain Anti-Takeover Considerations.................................. 26
Absence of Public Trading Market...................................... 27
Possible Volatility of Price for Securities........................... 27
Preferred Stock; Limitations on Dividends............................. 27
Effect on Price of Securities Eligible for Future
Sale............................................................... 28
Effect of Potential Future Offerings.................................. 28
Plans Should Consider ERISA Risks of Investing in
Securities......................................................... 29
USE OF PROCEEDS............................................................. 29
DIVIDEND POLICY AND DISTRIBUTIONS........................................... 29
DIVIDEND REINVESTMENT PLAN.................................................. 30
DILUTION.................................................................... 30
CAPITALIZATION.............................................................. 32
SELECTED FINANCIAL AND OTHER DATA........................................... 33
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS............................................................ 36
Overview................................................................. 36
Results of Operations................................................. 37
Liquidity and Capital Resources....................................... 46
Inflation and Interest Rates.......................................... 48
Year 2000 Compliance.................................................. 49
Certain Accounting Pronouncements..................................... 49
BUSINESS.................................................................... 51
Overview................................................................. 51
Mortgage Lending Operations.............................................. 52
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Market Overview....................................................... 52
Specific Loan Production and Expansion
Strategies......................................................... 54
Underwriting and Quality Control Strategy............................. 65
Loan Servicing Strategy............................................... 75
Portfolio Management..................................................... 79
General............................................................... 79
Issuance of Collateralized Mortgage Obligations....................... 80
Retained Interests in Securitized Loans............................... 80
Acquisition of Mortgage Assets from Third
Parties............................................................ 81
Financing for Mortgage Lending Operations and
Mortgage Asset Acquisitions........................................ 81
Portfolio Risk Management............................................. 82
Taxable Subsidiaries..................................................... 86
Employees................................................................ 86
Properties............................................................... 86
Potential Litigation..................................................... 87
MANAGEMENT.................................................................. 88
Directors and Executive Officers...................................... 88
Other Senior Officers................................................. 89
Committees of the Board of Directors.................................. 90
Non-Employee Directors Compensation................................... 90
Executive Compensation................................................ 91
Management Compensation and Employment
Agreements......................................................... 92
Shared Employees and Overhead with TCG................................ 94
1998 Incentive Plans.................................................. 94
401(k) Plan........................................................... 99
Compensation Committee Interlocks and
Insider Participation.............................................. 99
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.............................................................100
The TCG Agreement.....................................................100
Financing and Investment Banking Relationships
with Conti and Greenwich...........................................100
Other Transactions....................................................101
Other Relationships...................................................102
Indemnification of Directors, Officers and
Employees..........................................................102
PRINCIPAL STOCKHOLDERS......................................................103
DESCRIPTION OF SECURITIES...................................................104
General...............................................................104
Common Stock..........................................................104
Preferred Stock.......................................................104
Warrants..............................................................105
Restrictions on Ownership and Transfer................................106
Reports to Stockholders...............................................109
Transfer Agent........................................................109
Listing of the Securities.............................................109
CERTAIN PROVISIONS OF COLORADO LAW AND
NMC'S ARTICLES OF INCORPORATION AND
BYLAWS....................................................................109
Number of Directors, Removal, Filing
Vacancies..........................................................109
Amendment.............................................................110
Advance Notice of Director Nominations and
New Business.......................................................110
Limitations on Liability..............................................110
Indemnification of Directors and Officers.............................110
SHARES ELIGIBLE FOR FUTURE SALE.............................................111
FEDERAL INCOME TAX CONSIDERATIONS...........................................112
General...............................................................113
Taxation of NMC.......................................................113
Requirements for Qualification........................................114
Income Tests..........................................................115
Asset Tests...........................................................118
Distribution Requirements.............................................119
Failure to Qualify....................................................120
Taxation of Taxable U.S. Stockholders.................................120
Capital Gains and Losses..............................................122
Information Reporting Requirements and Backup
Withholding........................................................122
Taxation of Tax-Exempt Stockholders...................................123
Taxation of Non-U.S. Stockholders.....................................124
Other Tax Considerations..............................................125
Proposed Tax Legislation..............................................125
ERISA CONSIDERATIONS........................................................126
Employee Benefit Plans, Tax-Qualified
Retirement Plans, and IRAs.........................................127
Status of the Company under ERISA.....................................127
UNDERWRITING................................................................128
LEGAL MATTERS...............................................................131
EXPERTS.....................................................................131
AVAILABLE INFORMATION.......................................................131
GLOSSARY....................................................................A-1
INDEX TO FINANCIAL STATEMENTS...............................................F-1
</TABLE>
ii
<PAGE>
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SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Unless the context
otherwise requires, all references to the "Company" herein refer to National
Mortgage Corporation ("NMC") and its subsidiaries and their respective
operations. Moreover, unless otherwise indicated, the information presented
herein assumes that the Underwriters' over-allotment option is not exercised and
that there is no exercise of the Warrants, including the Representative's
Warrants. Further, use of the term "non-conforming" herein refers to matters
relating to single-family residential "non-conforming" or "sub-prime" mortgage
loans." See "Glossary" beginning on page A-1 for definition of certain
capitalized terms used in this Prospectus.
THE COMPANY
National Mortgage Corporation is a fully-integrated non-conforming mortgage
lender that operates as a self-managed REIT. The Company originates, purchases,
holds for investment and services primarily first-lien residential sub-prime
mortgage loans ("Non-Conforming Loans") secured by liens on one- to four-family
residential properties (hereinafter referred to as "single family" loans). The
Company intends to finance these mortgage loans through the issuance of long-
term non-recourse collateralized mortgage obligations ("CMOs"). Non-Conforming
Loans are mortgage loans made to borrowers who are unable (or, in some cases,
unwilling) to obtain mortgage financing from conventional mortgage loan sources,
because their credit profiles do not meet Fannie Mae or Freddie Mac credit
underwriting standards, generally for reasons of credit impairment, income
qualification or credit history. The Company intends to build and manage a
portfolio of single-family residential mortgage loans (particularly Non-
Conforming Loans) and selectively acquired mortgage-backed securities ("MBS")
and other related mortgage assets (collectively, "Mortgage Assets") to create
attractive risk-adjusted returns through its tax-advantaged REIT structure.
The Company was formed in 1991 to acquire the assets of its predecessor,
which had been in business since 1948 and primarily originated and serviced
mortgage loans made to borrowers whose credit profiles generally conformed to
Fannie Mae and Freddie Mac credit underwriting standards ("Conforming Loans").
In 1993, the Company shifted its business focus and commenced non-conforming
mortgage lending and servicing operations in order to take advantage of the more
attractive risk-adjusted returns the Company believes are available in the non-
conforming mortgage lending market.
The Company currently acquires its mortgage loans by (i) originating
mortgage loans through independent licensed mortgage brokers ("brokers"), (ii)
purchasing mortgage loans from Company-approved mortgage bankers and financial
institutions ("correspondents") and (iii) originating mortgage loans directly to
consumers pursuant to its "direct-to-consumer" retail lending program, which was
initiated in September 1997. During 1997, the Company funded $425.9 million in
mortgage loans, 68.0% of which were originated through 585 brokers in 39 states
and the District of Columbia and 31.6% of which were acquired from 83
correspondents in 30 states and the District of Columbia. See "Business--
Mortgage Lending Operations--Specific Loan Production and Expansion Strategies--
'Channel-Dependent' Lending." Although the Company's underwriting guidelines
include five levels of credit risk classification, 83.8% of the principal
balance of the Non-Conforming Loans funded by the Company in 1997 were made to
borrowers within the Company's "A" and "A minus" credit grades, its two highest
credit classification levels (loans with such credit grades are referred to as
"Higher Credit Non-Conforming Loans"). See "Business--Mortgage Lending
Operations--Underwriting and Quality Control Strategy--Underwriting Guidelines."
The Company controls the underwriting of its wholesale mortgage loan production.
Until late 1996, the Company had disposed of most of its Non-Conforming
Loan production through whole loan sale transactions with third parties. In
most cases, the Company's loans were securitized by the loan purchasers. In
1997, the Company conducted two securitizations of its Non-Conforming Loans,
which were structured as sales, and therefore generated gains, for financial
accounting purposes. The Company believes the securitization markets are
generally familiar with, and accept, its Non-Conforming Loans. In the future,
the Company plans to finance its portfolio of mortgage loans primarily through
the issuance of long-term non-recourse
- --------------------------------------------------------------------------------
1
<PAGE>
________________________________________________________________________________
CMOs in securitization transactions that are treated as borrowings for financial
accounting purposes. The Company believes that this strategy will cause its
earnings to be generally more stable than those of companies that report
earnings from securitizations using gain-on-sale treatment for financial
accounting purposes, because (i) the Company will record the residual and
subordinated interests that it retains in pools of loans it securitizes
("Retained Interests") at a value based on the lesser of cost or fair market
value, rather than at a higher value based on assumed valuation parameters that
may not prove to be accurate, (ii) the Company will report net interest or
"spread" income over time as it is actually earned, which will result in less
speculative earnings than those associated with securitizations that receive
gain-on-sale financial accounting treatment, and (iii) the Company's earnings
will be dependent on the overall size of the Company's mortgage loan portfolio
rather than on quarterly loan production, which may vary from time to time.
In the future, the Company intends to:
. build a portfolio of Mortgage Assets and maximize its risk-adjusted
returns on that portfolio by:
. increasing its loan production and broadening its product mix by
(i) expanding existing capacity and the geographic base of its
wholesale Non-Conforming Loan production, (ii) expanding its
retail loan origination capabilities, and (iii) offering new loan
products to targeted groups of consumers;
. acquiring other non-conforming mortgage lending companies or
certain operations of such companies, including retail mortgage
lending operations and wholesale networks in geographic areas
where the Company wishes to expand, and acquiring loan production
generally meeting the Company's underwriting guidelines from
third parties;
. investing in Retained Interests in securitized loan pools
comprised of its own Non-Conforming Loans and by strategic
acquisitions of other Mortgage Assets meeting investment
guidelines approved by the Board of Directors, including residual
and subordinated interests in securitized mortgage loans
originated by third parties ("Third Party Residuals");
. Secure long-term non-recourse financing for its loan production
by issuing CMOs backed by its mortgage loans in transactions that
are treated as borrowings for financial accounting purposes,
thereby avoiding the earnings volatility associated with
securitizations that receive gain-on-sale accounting treatment;
. continue to service its own Non-Conforming Loan production, and
operate as "Special Servicer" with respect to certain acquired
Mortgage Assets, in order to enhance its ability to manage the
risks associated with its Non-Conforming Loans and such Mortgage
Assets.
For further summary information about the Company and its business
strategies, see "--Business Strategies" below.
SUMMARY RISK FACTORS
Prior to making an investment decision, prospective investors should
carefully consider all of the information set forth in this Prospectus and, in
particular, should evaluate the factors set forth in "Risk Factors." Those
factors include:
History of Net Losses; Limited Relevance of Historical Performance. While
the Company was profitable in 1997, the Company has reported net losses five of
the first six years since its inception. The operating income reported for the
two profitable years was comprised chiefly of earnings generated from
securitizations receiving gain-on-sale accounting treatment and gains from whole
loan sales. The Company does not intend to structure
________________________________________________________________________________
2
<PAGE>
________________________________________________________________________________
future securitizations to utilize gain-on-sale accounting or to conduct material
whole loan sales. Consequently, the Company's historical operating performance
may be of limited relevance in predicting its future performance.
Consequences of Failure to Maintain REIT Status. If NMC fails to qualify
or maintain its qualification as a REIT, NMC will be subject to federal income
tax as a Subchapter C corporation, which would decrease cash available for
distribution to shareholders.
Uncertainty as to the Company's Ability to Implement its Growth Strategy.
There can be no assurance that the Company will successfully obtain or apply the
human, operational and financial resources needed to manage its growth strategy,
which consists of both internal expansion and new acquisitions. Failure by the
Company to do so could have a material adverse effect on the Company's results
of operations and financial condition.
Intense Competition in the Non-Conforming Mortgage Lending Industry. The
Company will face intense competition, primarily from other independent mortgage
lenders and certain other mortgage REITs.
Interest Rate Fluctuations May Adversely Affect Results of Operations. The
Company's results of operations are likely to be adversely affected during any
period of unexpected or rapid changes in interest rates.
Variations in Anticipated Mortgage Prepayment Rates May Adversely Affect
Results of Operations. Higher than anticipated prepayments would generally
accelerate the amortization of the Company's origination costs, reduce servicing
fee income and expose the Company to reinvestment risk, all of which would
negatively impact results of operations.
Higher Delinquency and Loss Rates with Non-Conforming Mortgage Borrowers.
The failure of the Company to address adequately the higher delinquency and loss
risks associated with non-conforming lending generally could have a material
adverse impact on the Company's results of operations, financial condition and
business prospects.
Substantial Leverage. The Company intends to borrow a substantial portion
of the market value of its Mortgage Assets. If the returns on the Mortgage
Assets purchased with borrowed funds fail to cover the costs of its borrowings,
the Company likely would experience net losses from such Mortgage Assets.
Valuation of Financial Assets Subject to Adjustments. Certain market
conditions may impair the carrying value of capitalized servicing rights and
MBS, which would have a negative impact on earnings.
Potential Lack of Adequate Funding Sources. Any failure to renew its
warehouse financing arrangements or to obtain adequate financing through
alternative facilities could have a material adverse effect on the Company's
lending operations, financial condition and business prospects.
Dependence on Key Personnel and Limitations on Experience of Senior
Management. The Company is dependent upon senior management to carry out its
business plans and objectives. Senior management has substantial experience in
managing non-conforming mortgage lending and servicing operations; however,
senior management has limited prior experience in managing a REIT or a publicly-
held company.
Dependence Upon Independent Brokers and Correspondents. The loss of a
significant number of brokers or correspondents could have a material adverse
effect on the Company's volume of loan originations and purchases and a
resulting material adverse effect on the Company's results of operations and
financial condition.
Certain Relationships; Potential Conflicts of Interest. Steven B. Chotin,
as the chairman and largest shareholder of the Company and the indirect
beneficial owner of 100% of the Company's preferred stock, will be in a position
to influence the Company's operations and affairs. While conflicts of interest
could arise if Mr. Chotin or his affiliates were presented with business
opportunities that could benefit both the Company and another affiliate of Mr.
Chotin, Mr. Chotin and his affiliates have agreed to grant the Company a right
of first refusal, subject to termination as described herein, with respect to
acquisitions of one- to four-family residential mortgage loans
________________________________________________________________________________
3
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(including Non-Conforming Loans) and related Mortgage Assets and other business
opportunities relating primarily to such mortgage loans. See "--Competitive
Advantages" below.
Failure to Hedge Effectively Against Interest Rate Changes May Adversely
Affect Results of Operations. Hedging strategies involve risk and may not be
effective in reducing the Company's exposure to interest rate changes.
Moreover, compliance with REIT provisions of the Code may prevent the Company
from effectively implementing optimal hedging strategies.
Market Factors May Limit the Company's Ability to Acquire Mortgage Assets
at Yields That Are Favorable Relative to Borrowing Costs. The market for
acquiring Mortgage Assets is highly competitive. At times, the Company may not
be able to acquire sufficient Mortgage Assets at prices that will allow the
Company to earn an acceptable spread over its cost of funds. In such times, the
Company will earn a lower return on its capital.
Immediate Dilution. After giving effect to the estimated underwriting
discounts and estimated offering expenses, assuming no value for or exercise of
the Warrants, purchasers of the Units in the Offering will experience immediate
dilution in net tangible book value of approximately $_______ per share of
Common Stock issued in the Offering, assuming an initial offering price of $15
per share (the midpoint of the estimated range of the initial offering price).
Restrictions on Ownership of Capital Stock. The ownership requirement for
REIT qualification may inhibit market activity and the resulting opportunity for
the holders of the Securities to receive the premium for their Securities that
might otherwise exist in the absence of such restrictions.
Potential Litigation. While the Company endeavors to comply with all state
and federal laws, including RESPA, there can be no assurance that the Company
will not be subject to lawsuits relating to its lending or servicing activities.
BUSINESS STRATEGIES
OVERVIEW
The Company's business can be divided into two general categories: (i)
funding and servicing of single-family residential mortgage loans, particularly
Non-Conforming Loans; and (ii) management of a portfolio of Mortgage Assets,
including Non-Conforming Loans and Retained Interests in Non-Conforming Loans
funded by the Company, and other Mortgage Assets that may be selectively
acquired by the Company through secondary market purchases.
The Company's goal generally is to produce and acquire mortgage loans and
other Mortgage Assets that generate interest income in an aggregate amount that
exceeds (i) the interest costs of financing the assets, (ii) the costs of
producing or acquiring the assets, and (iii) the credit losses that will
inevitably be incurred on some portion of the assets. This excess interest
income, or "spread," will be available to support the Company's overhead
expenses and, to the extent not so expended, will represent profit that will for
the most part be distributed to stockholders as dividends. The Company's overall
strategy is to maximize profitability by producing and acquiring Mortgage Assets
that are best suited to the Company's goal of maximizing spread income over
time. The Company intends to focus its efforts on locating, producing and
acquiring Mortgage Assets (i) that have risk-adjusted interest rates high enough
to maximize spreads over borrowing and production costs, (ii) for which the
spread income is likely to have a significant duration, so that the spread
income continues to be earned over time and the associated production and
acquisition costs can be amortized over a longer period, (iii) that are priced
at levels commensurate with the levels of credit risk assumed with respect to
the assets, (iv) that can be produced in quantities sufficient to create
economies of scale to justify the related production costs, and (v) that can be
managed efficiently through the Company's servicing and portfolio management
operations.
The Company intends to focus its loan production efforts on loan products
that it identifies as best suited to the Company's overall goals. Through
research, experience and product testing, the Company seeks to understand
________________________________________________________________________________
4
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________________________________________________________________________________
the consumers who will be most likely to borrow from the Company and identify
the loan products that are in demand. The Company tests its production channels
to determine the best means of reaching the markets for its loan products (as
well as assessing the costs and efficiency of various production channels). In
evaluating a type of Mortgage Asset or prospective targeted consumer group, the
Company will analyze, among other things, the likelihood of defaults, losses and
prepayments on the Mortgage Asset proposed to be produced or acquired and the
internal costs involved in producing and holding the Mortgage Asset or in
reaching that consumer group. The Company intends to use its experienced
servicing operation to manage the credit risks inherent in the Mortgage Assets
it ultimately chooses to produce and acquire.
To implement its objectives as described in this Prospectus, the Company
has assembled an experienced senior management team. The Company recently hired
James A. Weissenborn as Chief Executive Officer and Kevin J. Nystrom as Chief
Financial Officer. This new senior management team has significant experience
operating mortgage lending businesses and managing mortgage-related asset
portfolios. See "Management." The Company believes that the experience of Mr.
Weissenborn and Mr. Nystrom complements the previous experience of the Company's
management in non-conforming mortgage lending and accessing the secondary
mortgage markets. In addition, the Company will share certain employees with
The Chotin Group Corporation ("TCG"), a company wholly-owned by Steven B.
Chotin. TCG has extensive experience with the mortgage loan securitization and
CMO markets and in acquiring and holding Mortgage Assets. As a result, the
Company believes that it is well positioned to avail itself of substantial
opportunities for growth in the evolving non-conforming mortgage loan market.
MORTGAGE PRODUCTION AND SERVICING STRATEGIES
The Company places great emphasis on its mortgage lending operation
primarily as a source of Non-Conforming Loans for the Company's portfolio. The
Company plans to improve profitability by, in general, increasing the net
interest spread from its loan production. This can be accomplished by (i)
lowering the production costs of its mortgage loans, (ii) effectively managing
the risks (including credit and prepayment risks) inherent in its mortgage
loans, and (iii) increasing the volume of its loan production, particularly Non-
Conforming Loans that produce higher risk-adjusted returns, in order to create
economies of scale that better leverage the Company's overhead and produce more
interest income overall.
Specific Strategies in Mortgage Lending Operations
The Company seeks to (i) generate a broader product mix to help manage
risks through creating a more balanced portfolio, (ii) increase the volume of
its loan production generally, and (iii) identify and produce the types of loan
products that best serve the Company's overall strategies for maximizing
profitability. The Company's wholesale production is derived from its network
of brokers and correspondents, who have typically focused on Higher Credit Non-
Conforming Loans and loans made to finance purchases and refinancings of
residential real estate ("Purchase Money/Refinancing Loans"). While the Company
intends to continue the expansion of its "channel dependent" wholesale lending,
a major component of the Company's business plan involves increased focus on new
"customer directed" lending strategies. The Company's strategies to accomplish
these goals include:
. "Channel-Dependent" Lending. The Company intends to employ the following
strategies in expanding its wholesale loan production:
. Expansion of Existing Wholesale Lending Platform. The Company
intends to take advantage of its existing wholesale lending platform
and strengths inherent in its existing mortgage lending
infrastructure to expand its wholesale loan production volume
through utilization of excess capacity at its existing offices.
. Continued Geographic Expansion of Wholesale Platform. The Company is
organized in a geographically evolving "hub and spoke" structure.
The Company currently has four regional office hubs, each of which
serves the needs of the account executives located in the regional
office, in the branch offices, if any, within the related region,
and in smaller markets within the
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5
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region where no branch office has yet been established. In recent
years, the Company has successfully expanded the geographic scope of
its wholesale lending operations to penetrate new markets and
further penetrate existing markets. The Company intends to continue
the expansion of its wholesale lending operations by, among other
things, opening new branch offices in its existing regions to
complete the development of its "hub and spoke" structure in those
regions, and by opening new regional office "hubs" in the future.
. Bulk Acquisition of Mortgage Loans. The Company may
opportunistically acquire bulk packages of mortgage loans from other
lenders. The prices for bulk acquisitions may generally be higher
than the prices the Company pays for its wholesale loan production
from brokers and correspondents, but, under certain circumstances,
management may elect to make such purchases in order to increase
loan production generally or to improve the execution of its CMO
financing transactions. Such loans will be re-underwritten by the
Company to ensure general compliance with the Company's underwriting
guidelines.
. "Customer-Directed" Lending Initiatives. In addition to expanding its
existing "channel-dependent" lending, the Company intends to implement
programs that focus on reaching specific groups of consumers who have not
been adequately reached through its existing wholesale lending operations.
. Marketing to Home Equity Loan Borrowers. The Company will intensify
its pursuit of consumers who seek loans to consolidate and refinance
non-mortgage debt and to finance home improvements, education and
other consumer needs ("Home Equity Loans"). The Company believes
there are many potential Non-Conforming Loan borrowers seeking Home
Equity Loans. Home Equity Loans comprised 40.8% of the Company's
aggregate loan production for 1997. The Company intends to penetrate
this segment of the market more effectively in the future, initially
by building on its relationships with brokers and correspondents who
serve Home Equity Loan borrowers.
. New Loan Products. The Company is also considering expanding its
product lines during 1998 and 1999 to include (i) home equity lines
of credit ("HELOCs") secured by second liens on residential
properties, (ii) second-lien home equity mortgage loans ("HELs"),
(iii) loans secured by manufactured housing units, and (iv)
Conforming Loans. Management believes that the types of borrowers
who would be likely to use HELOCs and HELs, and, to some extent,
borrowers under loans secured by manufactured housing, are similar
to the types of consumers who currently utilize the Company's
existing Non-Conforming Loan products. A conforming lending presence
would enable the Company to offer a full range of loan products to
its customers, and would position the Company to refinance Non-
Conforming Loans for borrowers who improve their credit sufficiently
to qualify for Conforming Loans.
. Retail Lending. The Company believes that development of a strong
retail origination capability will be important to the success of
its movement into customer-directed segments of the non-conforming
mortgage market. In September 1997, the Company initiated a direct-
to-consumer retail lending program. The Company is currently
targeting five metropolitan areas for telemarketing and radio and
news print advertising. This initiative is still relatively new.
. Acquisition of Third-Party Lending Operations and Loan Production. In the
fragmented sub-prime mortgage market, the Company expects to encounter
opportunities to purchase some or all of the operations or loan production
of other non-conforming mortgage companies, including some who, due to
recent upheaval in the market, may not have access to sufficient capital to
continue funding their operations effectively. The Company intends to
acquire other non-conforming mortgage lending companies or certain
operations of such companies, on a selective basis in cases where such
acquisitions would complement or supplement the Company's existing
business. In addition, the Company plans to enter into strategic alliances
with smaller non-conforming mortgage companies on a selective basis. Under
these alliances, the Company would acquire exclusive or preferential rights
to purchase these smaller companies' loan
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6
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production. Such arrangements may involve flow purchase agreements or the
extension by the Company of "warehouse" credit facilities linked to loan
production delivery requirements, as well as other types of arrangements.
Loan Servicing
Collectively, the Company and its predecessor have nearly 50 years of
experience in servicing mortgage loans. The Company has placed particular
emphasis on servicing Non-Conforming Loans since the inception of its non-
conforming mortgage lending operations in 1993. The Company intends to retain
the servicing rights on most of its future mortgage loan production and to
attempt to acquire special servicing loss mitigation rights with respect to
certain acquired Mortgage Assets. Through servicing, the Company believes that
it can enhance its ability to manage the risks associated with its Non-
Conforming Loans and other Mortgage Assets, rather than merely being a passive
investor in these assets. Also, by increasing the size of its servicing
portfolio, the Company believes it can capitalize on its servicing expertise and
the economies of scale associated with servicing to enhance the Company's
overall profitability and financial strength. See "Business--Mortgage Lending
Operations--Loan Servicing Strategy."
PORTFOLIO MANAGEMENT STRATEGIES
The Company plans to invest in and manage a portfolio of Mortgage Assets,
including primarily Non-Conforming Loans and Retained Interests in Non-
Conforming Loans funded by the Company through its mortgage lending operations,
but also other mortgage-related assets, including Residual Interests, which the
Company may selectively acquire from time to time through purchases in the
secondary market. The Company will make its investments in a manner designed to
maximize its aggregate spread income over time, focusing on Mortgage Assets that
(i) generate sufficient interest income to support a spread over borrowing costs
acceptable to management, (ii) are likely to continue generating interest income
for a significant duration, (iii) are subject to levels of risk of credit losses
commensurate with the yields thereon, and (iv) can be acquired and managed
efficiently.
The Company plans to finance its adjustable-rate mortgage loans primarily
through the issuance of long-term non-recourse CMOs secured by these mortgage
loans, and will hold Retained Interests representing the right to receive future
cash flow from these securitized loans in excess of amounts required to be paid
to investors in the related CMOs. Adjustable-rate mortgage loans comprised
86.5% of the Company's loan production for 1997. The Company no longer intends
to structure its securitizations to receive the gain-on-sale financial
accounting treatment that was applied in connection with its two 1997
securitizations, because it believes the earnings reported pursuant to that
accounting treatment are inherently speculative. By instead structuring its
securitizations as CMO financing transactions, the Company will report net
interest or spread income over time as it is actually earned rather than
reporting gains based in part on estimated present values of Retained Interests
at the time of securitization. The Company expects either to hold its fixed-
rate loan production in a short-term warehouse credit facility or to contribute
such production to a taxable subsidiary, which may sell such loans in secondary
market whole loan sale transactions from time to time, until the Company's
fixed-rate loan production volume is large enough to be financed efficiently in
CMO transactions. See "Federal Income Tax Considerations--Proposed Tax
Legislation" for a discussion of limits that may be placed on the Company's
future use of taxable subsidiaries.
The Company also may from time to time selectively acquire leveraged
Mortgage Assets from third parties, including Third Party Residuals meeting the
Company's investment guidelines, and hold these assets for investment. See
"Business--Portfolio Management--Acquisition of Mortgage Assets from Third
Parties."
The Company will finance its origination and acquisition of mortgage loans
over the short term, pending securitization, primarily through borrowings under
warehouse lines of credit. Initially, the Company expects to utilize proceeds
of the Offering to make selective acquisitions of Mortgage Assets (including
Third Party Residuals) from third parties, but, after this capital has been
fully deployed, the Company will explore other financing options for continuing
the growth of the Company's portfolio of Mortgage Assets. In particular, the
Company may finance a portion of its acquisition and holding of Mortgage Assets
through reverse repurchase arrangements with management-approved institutional
lenders. See "Business--Portfolio Management--Financing for Mortgage
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7
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Lending Operations and Mortgage Asset Acquisitions." The Company's portfolio
will be designed to generate spread income in the amount by which the interest
income earned on its Mortgage Assets exceeds the interest costs of the
borrowings under which the Company leverages its portfolio. See "Business--
Portfolio Management--Portfolio Risk Management."
COMPETITIVE ADVANTAGES
The REIT tax status of NMC is a primary distinction between the Company and
many of its competitors. The Company will attempt to maximize its after-tax
return advantage over non-REIT financial companies by holding Mortgage Assets
and earning REIT-qualifying income over time. Management will operate the
Company in a manner designed to maximize tax efficiency, and will utilize
taxable subsidiaries only to the extent necessary to maintain NMC's REIT status,
and to the extent permitted under law. NMC will not have voting control over
the activities of its taxable subsidiaries.
The Company believes that it is unlike many of its competitors because it
generates most of its mortgage loan production itself, at a total cost generally
lower than the cost it would incur if those mortgage loans were purchased in the
secondary market. In addition, by underwriting, funding and servicing its loans
directly, the Company believes that it has greater control over the loans in its
portfolio than those of its competitors who primarily purchase whole loans in
the secondary mortgage market. The Company is a fully-integrated organization,
which is self-advised and self-managed. Due to this integration, there are no
potential conflicts between the interests of the mortgage lending operation and
the portfolio management operation. Such conflicts can arise in REITs where the
mortgage lending operation is owned by the sponsor of the REIT and where an
affiliate of the sponsor manages the REIT under a contract that provides for
fees based in whole or in part on asset size rather than return on equity or
stockholder returns. In addition, Steven B. Chotin, TCG and entities wholly-
owned or controlled, directly or indirectly, by Mr. Chotin or TCG (collectively,
the "Chotin Affiliates"), intend to conduct all of their one- to four-family
mortgage loan operations and investments in assets representing interests in
such loans through the Company. All of the Chotin Affiliates have agreed to
grant the Company a right of first refusal with respect to the acquisition of
all one- to four-family residential mortgage loans (including Non-Conforming
Loans) and related Mortgage Assets that are considered for purchase by any
Chotin Affiliate. This right of first refusal will remain in force as long as
either Steven B. Chotin is Chairman of the Company's Board of Directors or the
Chotin Affiliates own more than 5% of the Company's outstanding shares of Common
Stock, and in any event until three years following the completion of the
Offering, unless a party unaffiliated with TCG or Mr. Chotin acquires a majority
of the Company's outstanding Common Stock or substantially all of the Company's
assets. Finally, the interests of the Chotin Affiliates are generally aligned
with those of the Company's other stockholders as a result of the continuing
ownership by the Chotin Affiliates of ______% of the Company's Common Stock and
100% of the Company's preferred stock. See "Risk Factors -- Operating Risks --
Certain Relationships; Potential Conflicts of Interest."
Consistent with management's belief in the importance of consistent
earnings, the Company no longer intends to engage in securitization transactions
that receive gain-on-sale accounting treatment, and instead plans to structure
its future securitizations as non-recourse CMO financings for financial
accounting and tax purposes. By employing this methodology, the Company's
management believes that over the long term the Company will produce a tax-
advantaged stream of income and a more stable dividend flow to stockholders than
will be available to stockholders of mortgage companies that report earnings
based on the present value of Retained Interests, because the Company's earnings
will be dependent on the aggregate size of its portfolio of Mortgage Assets,
rather than on quarterly mortgage loan production levels and market trends in
valuing Retained Interests.
TAX STATUS OF THE COMPANY
NMC intends to qualify and will elect to be taxed as a REIT under sections
856 through 860 of the Code. If NMC qualifies for taxation as a REIT and
distributes at least 95% of its taxable income each year (with certain
exceptions), it generally will not be subject to federal corporate income tax on
its taxable income that is distributed to its stockholders. A REIT is subject
to a number of organizational and operational requirements. Although NMC does
not intend to request a ruling from the Internal Revenue Service (the "Service")
as to its REIT status, NMC has
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8
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received an opinion of its legal counsel that it will qualify as a REIT
commencing with its 1998 taxable year. This opinion is based on certain
assumptions and representations about the Company's ongoing businesses and
investment activities and other matters. No complete assurance can be given that
the Company will be able to comply with such assumptions and representations in
the future. Furthermore, such opinion is not binding on the Service or on any
court. NMC's failure to qualify as a REIT or to distribute at least 95% of its
taxable income (with certain exceptions) in any taxable year would render the
Company subject to federal income tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate rates and distributions
to NMC's stockholders would not be deductible. Even if NMC qualifies for
taxation as a REIT and generally distributes at least 95% of its taxable income
each year, NMC may be subject to certain federal, state and local taxes on its
income and property. In connection with NMC's election to be taxed as a REIT,
NMC's Articles of Incorporation impose restrictions on the ownership (actual or
constructive) and transfer of the Common Stock. See "Risk Factors--Investment in
the Units in the Offering--Ownership Limit May Restrict Business Combination
Opportunities" and "Description of Securities--Restrictions on Ownership and
Transfer."
DIVIDEND POLICY AND DISTRIBUTIONS
NMC generally intends to distribute to stockholders each year at least 95%
of its taxable income (which in some years may exceed net income as determined
in accordance with generally accepted accounting principles) in order to qualify
as a REIT under the Code. Subsequent to the closing of this Offering, NMC
expects to declare quarterly dividends on its Common Stock, to the extent
amounts are available for the payment of Common Stock dividends after payment of
all accrued and unpaid dividends on NMC's Series I Preferred Stock, which accrue
quarterly at 8.00% per annum on a preference amount of $2.1 million. See "Risk
Factors--Investment in the Units in the Offering--Preferred Stock; Limitations
on Dividends." NMC currently intends to distribute annually any taxable income
remaining after the distribution of the dividends on the Series I Preferred
Stock and the regular quarterly dividends in a special Common Stock dividend on
or prior to the date of the first regular quarterly dividend payment date of the
following taxable year. All distributions will be made by NMC at the discretion
of the Board of Directors and will depend on the taxable income and financial
condition of the Company, maintenance of REIT status and such other factors as
the Board of Directors deems relevant.
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THE OFFERING
<TABLE>
<S> <C>
Units Offered by the Company/(1)(2)/......... 6,700,000
Units to be Outstanding after the closing of
the Offering/(1)(2)/........................ 6,700,000
Common Stock to be Outstanding after the
closing of the Offering/(2)(3)(4)/.......... ________ shares
Common Stock Purchase Warrants to be
Outstanding after the closing of the
Offering/(2)(5)/............................ 6,901,000
Use of Proceeds.............................. Approximately $________ million
of the net proceeds of the
Offering will be used to repay
amounts outstanding or otherwise
due or payable under the
Company's existing credit
facilities, including up to $5
million drawn under a bridge line
of credit provided by KeyBank
National Association and
guaranteed by Steven B. Chotin.
The remaining net proceeds are
expected to be used for working
capital and general corporate
purposes, and to fund the
Company's expansion and
acquisition strategies, including
possible acquisitions of other
non-conforming mortgage lending
companies and/or certain
operational segments of such
companies, and selective
acquisitions of other Mortgage
Assets. Pending use of these
remaining net proceeds, they will
be invested in short-term liquid
investments consistent with
maintaining NMC's qualification
as a REIT or deployed to reduce
indebtedness from time to time.
See "Use of Proceeds."
Exchange Symbol
.U
For the Units............................. ------
For the Common Stock(6)................... ______
For the Warrants(6)....................... .WS
------
</TABLE>
______________________
(1) Each Unit consists of one share of Common Stock and one Warrant.
(2) Assumes that the Underwriters' over-allotment option to purchase up to an
additional 1,005,000 Units to cover over-allotments is not exercised. See
"Underwriting."
(3) Does not include (i) shares of Common Stock that may be issued upon the
exercise of the Warrants included in the Units, (ii) ________ shares of
Common Stock reserved for issuance pursuant to the 1998 Incentive Plans, or
(iii) 201,000 shares (231,150 if the Underwriters' over-allotment option is
exercised) of Common Stock reserved for issuance upon the exercise of the
Representative's Warrants. See "Underwriting" and "Management."
(4) Includes _____ shares of Common Stock that will be issued upon the exercise
of warrants issued by the Company to ContiTrade Services, L.L.C., a
subsidiary of ContiFinancial Corporation ("Conti"), and an affiliate of
Greenwich Capital Markets, Inc. ("Greenwich"), in consideration for certain
credit facilities these institutions have made available to the Company.
Conti and Greenwich are expected to exercise these warrants upon completion
of the Offering. See "Management--1998 Incentive Plans," "Certain
Relationships and Related Transactions--Financing and Investment Banking
Relationships with Conti and Greenwich" and "Shares Eligible for Future
Sale."
(5) Exercisable at the initial public offering price. Includes the
Representative's Warrants. The Warrants included with the Units are
detachable from the Common Stock six months after the closing of the
Offering.
(6) The Common Stock and Warrants will not be separately listed and traded until
the Warrants are detachable from the Common Stock.
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The Company's principal executive office and mailing address is located at
7600 East Orchard Road, Harlequin Plaza, Suite 330S, Englewood, Colorado 80111-
4943, and its phone number is (303) 721-7211.
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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
The financial data set forth below should be read in conjunction with the
Financial Statements of the Company and related Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------- ----------------------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Revenues:
Interest income $ 2,160 $ 3,395 $ 9,907 $ 1,578 $ 3,358
Interest expense 1,440 2,530 7,293 1,245 2,682
------- ------- ------- ------- -------
Net interest income 720 865 2,614 333 676
Gain on sale of mortgage loans:
Whole loan sales 7,130 4,155 3,268 1,421 1,645
Securitizations - - 9,203 - -
Unrealized loss on trading securities - - (1,035) - 322
Loan servicing fees 2,158 2,353 2,966 596 1,081
------- ------- ------- ------- -------
Total Revenues 10,008 7,373 17,016 2,350 3,724
Expenses:
Operating expenses 6,908 7,472 13,886 2,048 4,098
Provision for credit losses 142 552 730 173 245
Management fees /(1)/ 1,890 - - - -
Amortization of mortgage servicing rights 758 643 616 136 329
Impairment of mortgage servicing rights - 277 - - -
Other interest expense 26 109 438 25 295
------- ------- ------- ------- -------
Total Expenses 9,724 9,053 15,670 2,382 4,967
Income (loss) before provision for income taxes 284 (1,680) 1,346 (32) (1,243)
Provision for income taxes 438 - - - -
------- ------- ------- ------- -------
Net income (loss) (154) (1,680) 1,346 (32) (1,243)
Less preferred stock dividends (586) - (94) - (60)
------- ------- ------- ------- -------
Income (loss) available to common
shareholders $ (740) $(1,680) $ 1,252 $ (32) $(1,303)
======= ======= ======= ======= =======
Pro forma per share data /(2)/:
Net income (loss) per share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
------------------------------------- ------------------------
1995 1996 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents $ 1,980 $ 613 $ 1,843 $ 871
Mortgage loans/(3)/ $ 5,382 $ 64,773 $ 120,413 $ 157,941/(4)/
Retained securitization interests $ - $ - $ 18,826 $ 19,765
Mortgage servicing rights/(5)/ $ 2,421 $ 2,016 $ 3,413 $ 3,573
Total assets $ 14,446 $ 77,257 $ 150,894 $ 194,201
Warehouse financing facilities $ 5,029 $ 64,554 $ 119,288 $ 156,068
Residual financing facilities $ - $ - $ 11,127 $ 11,029
Working capital facilities $ - $ 1,020 $ 3,900 $ 3,900
Convertible subordinated debt facility $ - $ - $ 6,660 $ 9,810
Total liabilities $ 8,112 $ 72,703 $ 144,551 $ 189,161
Series I Preferred Stock, redeemable $ - $ - $ 2,100 $ 2,100
</TABLE>
________________________________________________________________________________
12
<PAGE>
________________________________________________________________________________
<TABLE>
<S> <C> <C> <C> <C>
Stockholder's equity $ 6,334 $ 4,554 $ 4,243 $ 2,940
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- ------------------------------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Pro forma per share data /(2)/
Book value
Basic
Diluted
Shares outstanding
Basic
Diluted
OPERATING DATA:
Volume of loans funded:/(6)/
Originated through Brokers $102,170 $177,000 $289,445 $ 50,462 $ 49,020
Purchased from Correspondents 24,277 30,544 134,580 11,354 47,995
Retail originations - - 1,902 - 1,123
-------- -------- -------- ------------ ------------
Total $126,447 $207,544 $425,927 $ 61,816 $ 98,138
======== ======== ======== ============ ============
Loans sold:
Whole loan sales $185,979 $145,900 $125,913 $ 31,528 $ 59,576
Securitizations - - 238,784 - -
-------- -------- -------- ------------ ------------
Total $185,979 $145,900 $364,697 $ 31,528 $ 59,576
======== ======== ======== ============ ============
Certain characteristics of loans funded:
Average principal balance per loan at $ 98 $ 117 $ 118 $ 118 $ 124
origination
Weighted average loan-to-value ratio/(7)/ 68.2% 77.4% 79.2% 78.4% 79.2%
Loan fundings by product type/(6)/:
Adjustable-rate loans ("ARMs")/(8)/
Six-Month LIBOR $ 88,376 $125,470 $119,151 $ 28,606 $ 18,353
Two-Year Fixed $ 117 $ 42,009 $244,785 $ 25,221 $ 64,644
Three-Year Fixed $ 22,102 $ 9,363 $ 4,534 $ 781 $ 1,333
Fixed-rate loans $ 15,852 $ 30,702 $ 57,457 $ 7,208 $ 13,808
Weighted average interest rates:
ARMs/(9)/ 10.6% 10.2% 9.9% 9.9% 9.8%
Fixed-rate 11.2% 11.3% 10.5% 10.9% 10.2%
Margin over LIBOR (ARMs)/(9)/ 5.5% 5.6% 5.9% 5.8% 5.8%
Servicing Portfolio principal balance/(10)/:
Non-Conforming Loans $178,743 $230,458 $458,497 $ 235,989 $ 462,966
Conforming Loans 312,736 294,257 254,192 287,169 240,480
-------- -------- -------- ------------ ------------
Total $491,479 $524,715 $712,689 $ 523,158 $ 703,446
======== ======== ======== ============ ============
Delinquency data for Non-Conforming Loan
servicing portfolio as of period end:
Total principal balance/(10)/ $178,743 $230,458 $458,497 $ 235,989 $ 462,966
30 to 59 day delinquencies as a
percentage of total principal
balance/(11)/ 5.13% 3.55% 3.34% 2.15% 3.16%
60 to 89 day delinquencies as a
percentage of total principal
balance/(11)/ 0.46% 0.12% 0.24% 0.27% 0.26%
90 or more day delinquencies as a
percentage of total principal
balance/(11)/ 0.82% 1.90% 1.01% 1.91% 1.02%
Total delinquencies as a percentage of
total principal balance/(11)/ 6.41% 5.57% 4.60% 4.33% 4.44%
Foreclosures as a percentage of total
principal balance/(11)/ 4.54% 4.42% 3.56% 3.58% 4.09%
Average total principal balance/(12)/ $177,084 $203,276 $310,734 $ 215,197 $ 369,484
Total losses on loans as a percentage of
average total principal balance 0.10% 0.78% 0.52% 0.83%/(13)/ 0.43%/(13)/
Delinquency data for Conforming Loan
servicing portfolio as of period end:
Total principal balance/(10)/ $312,736 $294,257 $254,192 $ 287,169 $ 240,480
</TABLE>
________________________________________________________________________________
13
<PAGE>
________________________________________________________________________________
<TABLE>
<S> <C> <C> <C> <C> <C>
30 to 59 day delinquencies as a
percentage of total principal balance/(11)/ 1.53% 1.55% 1.98% 0.70% 1.26%
60 to 89 day delinquencies as a
percentage of total principal balance/(11)/ 0.30% 0.16% 0.32% 0.21% 0.36%
90 or more day delinquencies as a
percentage of total principal balance/(11)/ 0.52% 0.42% 0.41% 0.33% 0.46%
Total delinquencies as a percentage
of total principal balance/(11)/ 2.35% 2.13% 2.71% 1.24% 2.08%
Foreclosures as a percentage of total
principal balance/(11)/ 0.59% 1.60% 1.45% 1.48% 1.79%
Average total principal balance/(12)/ $312,809 $302,419 $279,060 $ 299,515 $ 267,964
Total losses on loans as a percentage of
average total principal balance - 0.05% 0.04% 0.05%/(13)/ 0.06%/(13)/
</TABLE>
__________________
(1) Before July 1995, the Company paid fees to an unrelated third party for
facilities use, office administration and general administrative services
with respect to what is now the Company's Rhode Island office. Some of
these fees were discontinued in July 1995 and the rest of these fees were
discontinued in December 1995 as the costs of such operations were assumed
by the Company.
(2) Reflects _________ for ________ stock split to be effected upon closing of
the Offering.
(3) Net of reserves for losses established for such loans.
(4) The estimated fair value of the mortgage loans at March 31, 1998 was $5.1
million higher than their net carrying values on such date. The excess of
the fair value over the net carrying value represents unrealized holding
gains on the Company's assets.
(5) Includes the capitalized cost of mortgage servicing rights net of
amortization of such rights.
(6) Where applicable, information is based on principal balance of loans as of
date of origination or purchase by the Company (except loan-to-value ratio,
which is presented as of date of origination).
(7) The original loan-to-value ratio of a mortgage loan is determined by
dividing the amount of the loan by the lesser of the purchase price or the
appraised value of the mortgaged property at origination.
(8) ARMs include loans bearing interest rates that remain fixed for two or
three years after the date of origination and then are adjustable semi-
annually. These loans are called "Two Year Fixed" and "Three Year Fixed" in
the table. The interest rate shown is a weighted average of interest rates
as of the dates of origination of the ARM loans.
(9) The margin for a loan is a fixed amount set for the life of the loan,
which, when added to the index (as described below) determines the interest
rate on the loan (subject to interest rate floors, ceilings and caps). The
index used by the Company is the London Interbank Offered Rate for six-
month U.S. dollar deposits ("LIBOR"), as published each Monday in The Wall
Street Journal. Fixed-rate loans have no margin because such loans are not
tied to an index.
(10) Principal balance shown is as of the end of each period. For additional
information regarding the Company's Non-Conforming and Conforming Loan
servicing portfolio, including delinquency and loss information, see
"Business--Mortgage Lending Operations--Loan Servicing Strategy."
(11) Percentages are expressed based upon the total outstanding principal
balance as of the end of the indicated period.
(12) Calculated by summing the actual outstanding principal balances as of the
end of each month and dividing the total by the number of months in the
applicable period.
(13) Annualized.
________________________________________________________________________________
14
<PAGE>
RISK FACTORS
An investment in the Securities involves certain risks. Prospective
investors should carefully consider the following risk factors, in addition to
the other information contained in this Prospectus, in evaluating an investment
in the Securities. This Prospectus contains "forward-looking statements" that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in the following risk
factors and elsewhere in this Prospectus.
OPERATING RISKS
HISTORY OF NET LOSSES; LIMITED RELEVANCE OF HISTORICAL PERFORMANCE
Prior to 1997, the Company had generated losses in five out of the last
seven years. Although the Company had net income of $1.3 million during 1997,
that net income was comprised chiefly of earnings generated from securitizations
receiving gain-on-sale accounting treatment and gains from whole loan sales.
The Company does not intend to structure future securitizations to utilize gain-
on-sale accounting to generate earnings because of the inherently speculative
nature of those earnings. Consequently, the Company's historical operating
performance may be of limited relevance in predicting its future performance.
In addition, the historical delinquency, foreclosure and loss experience of
the Non-Conforming Loans funded by the Company to date, which consist mostly of
Higher Credit Non-Conforming Loans, may not be indicative of the future
performance of the Company's Non-Conforming Loan portfolio, particularly as the
Company offers new loan products and in the event the Company originates and
acquires a larger percentage of lower credit quality Non-Conforming Loans.
Increases in delinquency, foreclosure or loss rates could have a material
adverse effect on the Company's results of operations and financial condition.
INTENSE COMPETITION IN THE NON-CONFORMING MORTGAGE LENDING INDUSTRY
As an originator and purchaser of mortgage loans, the Company faces intense
competition, primarily from commercial banks, savings and loans, other
independent mortgage lenders, and certain other mortgage REITs. Many of these
competitors are substantially larger and have considerably greater financial,
technical and marketing resources than the Company and may have lower costs of
funds than the Company. Furthermore, the non-conforming mortgage market
continues to attract additional competitors with the effect of increasing
funding costs and reducing the net interest income that may be realized by the
Company. Companies entering into the mortgage lending business through mortgage
brokers and correspondents typically would be required to make a substantially
smaller commitment of capital and personnel resources than they would entering a
direct lending business. This relatively low barrier to entry may permit new
competitors to enter this market quickly. In addition, greater investor
acceptance of securities backed by Non-Conforming Loans and greater availability
of information regarding the prepayment and default experience of Non-Conforming
Loans creates greater efficiencies in the market for such securities. These
efficiencies may create a desire among investors for larger transactions, giving
companies with higher volumes of originations than the Company a competitive
advantage. A more efficient market for such securities may lead certain
investors who currently invest in Non-Conforming Loans to purchase securities
backed by other types of assets where potential returns may be higher.
In the future, the Company may face competition from government-sponsored
entities that may enter the non-conforming mortgage market. Existing or new
loan purchase programs may be expanded by Fannie Mae, Freddie Mac or the
Government National Mortgage Association ("Ginnie Mae") to include Non-
Conforming Loans. For example, in May of 1997, Freddie Mac began a non-
conforming program by guaranteeing securities collateralized by Non-Conforming
Loans originated by a financial institution.
As the Company expands into additional geographic markets and expands its
product offerings, it will face competition with respect to the acquisition of
Non-Conforming Loans from lenders with established positions in these locations
and with significant experience with such products. Competition can take place
on various levels, including convenience in obtaining a loan, service,
marketing, origination channels and pricing.
15
<PAGE>
Increased competition could have the possible effects of (i) reducing the
volume of the Company's loan originations, (ii) reducing the Company's ability
to charge its customary fees and interest rates to borrowers, (iii) increasing
the demand and cost for the Company's experienced personnel and increasing the
likelihood that such personnel will be recruited by the Company's competitors,
(iv) increasing the direct and indirect costs of the Company in acquiring and
originating loans and (v) lowering the industry standard for non-conforming
underwriting guidelines (for example, by providing for less stringent loan-to-
value ratios and/or debt-to-income ratios) as competitors attempt to increase or
maintain market share in the face of increased competition. There can be no
assurance that the Company will be able to continue to compete successfully in
the markets it serves or expand to other markets. Inability to compete
successfully would have a material adverse effect on the Company's results of
operations and financial condition.
UNCERTAINTY AS TO THE COMPANY'S ABILITY TO IMPLEMENT ITS GROWTH STRATEGY
The Company's continued growth and expansion will place additional
pressures on the Company's personnel and systems. Any future growth may be
limited by, among other things, the Company's need for continued funding
sources, access to capital markets, ability to retain and attract qualified
personnel, sensitivity to economic slowdowns, fluctuations in interest rates and
competition from other mortgage and specialty finance companies and from new
market entrants. There can be no assurance that the Company will successfully
obtain or apply the human, operational and financial resources needed to manage
a developing and expanding business. Failure by the Company to manage its
growth effectively, or to sustain its historical levels of performance in credit
analysis and transaction structuring with respect to the increased loan
origination and purchase volume, could have a material adverse effect on the
Company's results of operations and financial condition.
A principal component of the Company's business strategy to expand Non-
Conforming Loan production is the acquisition of other non-conforming mortgage
lending companies or operations. The successful execution of this acquisition
strategy will depend on the Company's ability to (i) identify acceptable
acquisition candidates in strategic geographic markets, (ii) consummate the
transaction and maintain and expand loan production with respect to such
acquired entity or operations, (iii) integrate the acquired entity or operations
into the Company's operations, quality control systems, financial reporting and
management structure, and (iv) eliminate redundancies in operations arising from
acquisitions that could impair the Company's operating efficiencies. There can
be no assurance that the Company will execute its acquisition strategy or that
the human and financial resources dedicated to this strategy will not adversely
affect the results of operations or financial condition of the Company.
INTEREST RATE FLUCTUATIONS MAY ADVERSELY AFFECT RESULTS OF OPERATIONS
The Company's results of operations are likely to be adversely affected
during any period of unexpected or rapid changes in interest rates. The
Company's profitability may be directly affected by the levels of and
fluctuations in other interest rates, which affect the Company's ability to earn
a spread between interest received on its mortgage loans and other Mortgage
Assets and the cost of its borrowings. For example, a substantial or sustained
increase in interest rates could adversely affect the ability of the Company to
fund Non-Conforming Loans in expected volumes necessary to support fixed
overhead expense levels and will negatively impact the value of fixed-rate loans
held in inventory by the Company. Decreases in interest rates could cause loans
in the portfolio to prepay more quickly. This could result in the Company
accelerating the amortization of the premium it paid for the mortgage loans and,
therefore, decreasing net interest income. In addition, if loans underlying the
Company's Mortgage Assets prepay more quickly than expected as a result of
decreasing interest rates (or any other reason), the Company may be required to
decrease the value at which it carries such Mortgage Assets, which would result
in a charge against earnings for the related period. A significant decline in
interest rates could decrease the size of the Company's loan servicing portfolio
(and associated servicing fee income) by increasing the level of loan
prepayments.
Rising short-term interest rates will have an especially pronounced adverse
effect with respect to the Company's fixed-rate mortgage loans and Mortgage
Assets because the increased debt service requirements on the Company's short-
term borrowings caused by the interest rate increase would not be offset by a
corresponding increase in the interest rate on such loans or assets, which could
slow origination activity and growth of the Company's operations. A rapid
increase in short-term interest rates would also affect the Company with respect
to its adjustable-rate mortgage loans ("ARMs")
16
<PAGE>
because the rates on those loans are reset only semi-annually (on a rolling
basis depending on the month in which the loans were originated), whereas the
interest rates on the Company's borrowing facilities are reset monthly or more
frequently. Accordingly, in a period of increasing interest rates, the Company
could experience a decrease in net interest income or a net loss because the
interest rates on borrowings could adjust faster than the interest rates on the
Company's ARMs or Mortgage Assets backed by ARMs. Moreover, ARMs are typically
subject to periodic and lifetime interest rate caps that limit the amount an ARM
interest rate can change during any given period. The Company's borrowings are
not likely to be subject to similar restrictions. Hence, in a period of rapidly
increasing interest rates, the Company could also experience a decrease in net
interest income or a net loss in the absence of effective hedging because the
interest rates on borrowings could increase without limitation while the
interest rates on the Company's ARMs and Mortgage Assets backed by ARMs would be
limited by caps. Further, some ARMs may be subject to periodic payment caps that
result in some portion of the interest accruing on the ARM being deferred and
added to the principal outstanding. This could result in receipt by the Company
of less cash income on its ARMs than is required to pay interest on the related
borrowings, which will not have such payment caps. See "Risk Factors -- Failure
to Hedge Effectively Against Interest Rate Changes May Adversely Affect Results
of Operations."
VARIATIONS IN ANTICIPATED MORTGAGE PREPAYMENT RATES MAY ADVERSELY AFFECT RESULTS
OF OPERATIONS
Mortgage loan prepayment rates vary from time to time and may cause changes
in the amount of the Company's net interest income and the valuation of the
Company's Mortgage Assets. Prepayments of mortgage loans and Mortgage Assets
backed by mortgage loans usually can be expected to increase when mortgage
interest rates fall below the then-current interest rates on such mortgage loans
and decrease when mortgage interest rates exceed the then-current interest rate
on the mortgage loans, although such effects are not predictable. Prepayment
experience also may be affected by the geographic location of the properties
securing the mortgage loans, the credit standing of borrowers, the assumability
of the mortgage loans, conditions in the housing and financial markets,
competition, and general economic conditions. In addition, prepayments on ARMs
are affected by the ability of the borrowers to convert ARMs to fixed-rate loans
and by conditions in the fixed-rate mortgage market. If the interest rates on
ARMs increase at a rate greater than the interest rates on fixed-rate mortgage
loans, prepayments on ARMs may tend to increase. The Company will seek to
minimize prepayment risk through a variety of means, which may include (to the
extent capable of being implemented at reasonable cost at various points in
time) structuring a diversified portfolio with a variety of prepayment
characteristics, investing in and originating mortgage loans with prepayment
prohibitions and penalties, and investing in certain MBS structures that have
prepayment protection. See "Business -- Portfolio Management -- Portfolio Risk
Management -- Prepayment Risk." No strategy can completely insulate the Company
from prepayment risks arising from the effects of interest rate changes.
Changes in anticipated prepayment rates of Mortgage Assets could affect the
Company in several adverse ways. Faster than anticipated prepayment of any
Mortgage Asset that had been purchased at a premium by the Company would
generally result in a faster than anticipated write-off of any remaining
capitalized premium amount and costs incurred in funding and acquiring its
mortgage loans. As a result, this will reduce the Company's net interest
income. In addition, to the extent the prepayments increase at a time when
interest rates have decreased, the Company may not be able to reinvest such
amounts in similar yielding Mortgage Assets. Conversely, if the prepayment
rates are slower than anticipated in times of generally increasing interest
rates, the average life of such Mortgage Assets may be extended beyond periods
for which the Company had anticipated, resulting in difficulty in effectively
hedging any increase in short-term borrowing rates relating to the Company's
financings of such assets.
Borrowers under Non-Conforming Loans are frequently in a position to
receive economic gain from refinancing due to improving their mortgage and
consumer credit profiles through timely payments on outstanding loans. As a
result, a non-conforming borrower may be able to lower the rate on his or her
home loan without a change in interest rates, so the prepayment experience of
Non-Conforming Loans may be less predictable than that of Conforming Loans.
NON-CONFORMING MORTGAGE LENDING EXPOSES THE COMPANY TO GREATER RISKS THAN
TRADITIONAL LENDING
Lenders in the non-conforming mortgage banking industry make loans to
borrowers who have impaired or limited credit histories, limited documentation
of income and higher debt-to-income ratios than conforming mortgage lenders
allow. Loans made to non-conforming mortgage borrowers generally entail a
higher risk of delinquency and
17
<PAGE>
foreclosure than loans made to borrowers with better credit and may result in
higher levels of realized loss. Moreover, in the event the Company increases its
fundings of Non-Conforming Loans in its lower credit classifications to provide
a higher risk-adjusted return for the Company, there can be no assurance that
the Company will be successful in managing the higher risks associated with such
lower credit loans. The failure of the Company to address the risks of non-
conforming lending adequately, through appropriate loan pricing, servicing and
collection procedures, maintenance and oversight of underwriting guidelines or
otherwise, would have a material adverse impact on the Company's results of
operations, financial condition and business prospects. Even if the Company
adequately addresses these risks, the poor performance of other non-conforming
mortgage and consumer finance lenders could negatively affect the price of the
Securities. See "Risk Factors -- Investment in the Units in the Offering --
Possible Volatility of Price for Securities."
SUBSTANTIAL LEVERAGE AND POTENTIAL NET LOSSES IN CONNECTION WITH BORROWINGS
The Company's operations are expected to be highly leveraged. Initially,
the Company intends to finance its acquisition of Mortgage Assets with a portion
of the proceeds of the Offering and, thereafter, primarily by borrowing against
or "leveraging" its existing portfolio and using the proceeds to acquire
additional Mortgage Assets. If the returns on the Mortgage Assets purchased
with borrowed funds fail to cover the cost of the borrowings, the Company will
experience net interest losses. In addition, due to increases in haircuts
(i.e., the discount from face value applied by a lender or purchaser with
respect to the Company's Mortgage Assets), decreases in the market value of the
Company's Mortgage Assets, increases in interest rate volatility, unavailability
of financing in the market, adverse circumstances that may arise from time to
time in the lending market and other factors, the Company may not be able to
achieve the degree of leverage it believes to be optimal, which may cause the
Company to be less profitable than it might be otherwise. The Company will use
investment guidelines, established by the Board of Directors from time to time,
to manage the leverage employed in its balance sheet. See "Business --
Portfolio Management -- Financing for Mortgage Lending Operations and Mortgage
Asset Acquisitions."
IMPACT OF DECLINE IN MARKET VALUE OF MORTGAGE ASSETS; MARGIN CALLS
A decline in the market value of the Company's portfolio of Mortgage Assets
may limit the Company's ability to borrow or result in lenders initiating margin
calls (i.e., requiring a pledge of cash or additional Mortgage Assets or a
reduction of amounts borrowed to re-establish the ratio of the amount of the
borrowing to the value of the collateral). The Company could be required to
sell Mortgage Assets under adverse market conditions in order to maintain
liquidity. If these sales were made at prices lower than the amortized cost of
the Mortgage Assets, the Company would experience losses. A default by the
Company under its collateralized borrowings could also result in a liquidation
of the collateral, including any cross-collateralized assets, and a resulting
loss of the difference between the value of the collateral and the amount
borrowed. To the extent the Company is compelled to liquidate Mortgage Assets
that are qualifying assets for purposes of the 75% asset test ("Qualified REIT
Assets") to repay borrowings, the Company may be subject to a penalty tax on the
gains from such sales, which may cause the Company to fail to comply with the
income and asset tests, ultimately jeopardizing NMC's status as a REIT. See
"Federal Income Tax Considerations -- Requirements for Qualification," "--
Income Tests" and "-- Asset Tests." Failure to maintain REIT status would
eliminate the Company's competitive advantage over non-REIT competitors and
subject the Company to federal corporate income taxation. See "Risk Factors --
Tax, Legal and Regulatory Risks -- Consequences of Failure to Maintain REIT
Status."
INABILITY TO ACCESS ADEQUATE FUNDING SOURCES ON FAVORABLE TERMS MAY AFFECT
RESULTS OF OPERATIONS
The Company's mortgage lending and investment objectives depend on its
ability to obtain funding from time to time in sufficient amounts and on
favorable terms through borrowings and additional equity offerings. The Company
funds substantially all of the loans that it originates or purchases through
borrowings under secured revolving lines of credit. These borrowings are in
turn repaid primarily with the proceeds received by the Company from financing
the loans through the issuance of non-recourse CMOs and whole loan sales. The
Company currently is dependent upon one lender to provide the primary credit
facility for its ARM loan purchases and originations. To the extent that the
Company is not successful in replacing its existing warehouse financing, it
would not be able to hold a large volume of loans pending securitization and
therefore would have to curtail its loan production activities. Achieving the
Company's objective to increase the size of its Mortgage Asset portfolio also
will be dependent on the
18
<PAGE>
Company's ability to borrow money and to renew or replace maturing borrowings on
favorable terms. The Company has not made any borrowing arrangements at the
present time with respect to future Mortgage Asset investments and there can be
no assurance that the Company will be able to enter into such arrangements
enabling it to borrow money on favorable terms. The Company's inability to
borrow adequate funds on favorable terms would have a material adverse effect on
the Company's results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
Adverse changes in the securitization market could impair the Company's
ability to acquire and finance mortgage loans through CMO issuances on a
favorable or timely basis. Any such impairment could have a material adverse
effect upon the Company's results of operations and financial condition. In
addition, in order to gain access to the securitization market, the Company
expects for the foreseeable future to rely upon credit enhancements provided by
one or more monoline insurance carriers. Any substantial reductions in the size
or availability of the securitization market for the Company's loans, or the
unwillingness of insurance companies to provide credit enhancement for the
Company's non-recourse CMO issuances could have a material adverse effect upon
the Company's results of operations and financial condition.
Finally, the Company also intends to raise capital by undertaking future
equity offerings. There can be no assurance that the Company will successfully
and economically raise the capital it will require through such offerings. See
"Risk Factors -- Investment in the Units in the Offering -- Effect of Potential
Future Offerings."
ADVERSE CHANGES IN GENERAL ECONOMIC CONDITIONS CAN AFFECT ADVERSELY THE
COMPANY'S BUSINESS
The Company's success is dependent upon the general economic conditions in
the geographic areas in which the Company makes or acquires loans or in which a
substantial number of the obligors underlying its mortgage investments are
located. Adverse changes in the national economic conditions or in the economic
conditions of the regions in which the Company conducts substantial business
likely would have an adverse effect on interest rates, loan origination volume,
and the value of the real estate underlying the loans or Mortgage Assets, and,
accordingly, the Company's business, income and ability to make distributions to
its shareholders.
Delinquencies, foreclosures and losses generally occur with greater
frequency during economic slowdowns or recessions. Because non-conforming
borrowers are typically unable to obtain mortgage financing from conventional
mortgage sources, the actual rates of delinquencies, foreclosures and losses on
Non-Conforming Loans could be higher under adverse economic conditions than
those currently experienced in the mortgage lending industry in general. In
addition, in an economic slowdown or recession, the Company's actual costs of
servicing loans may increase without an increase in the servicing fees paid to
the Company because the Company would have to expend resources attempting to
collect a higher than usual number of delinquent loans. Any sustained period of
such increased delinquencies, foreclosures or losses, or of increased costs of
servicing could adversely affect the Company's results of operations and
financial condition.
LOSS EXPOSURE ON SINGLE-FAMILY MORTGAGE ASSETS
The investment portfolio of the Company will consist primarily of single-
family mortgage loans or Mortgage Assets evidencing interests in single-family
mortgage loans. The Company will be subject to the risk of loss on mortgage
loans it holds prior to securitization resulting from borrower defaults,
typically without the benefit of any credit enhancement. Following
securitization, the Company generally will bear the risk of loss on any such
Mortgage Assets it acquires through its mortgage lending business to the extent
of its Retained Interest or that it purchases in the secondary mortgage market
to the extent of its initial investment. With respect to the MBS the Company
acquires in the secondary market, the credit risk to the Company will be
reduced or eliminated only to the extent such securities are either Agency
Certificates or generally structured with one or more types of credit
enhancement. To the extent third parties have been contracted to provide the
credit enhancement, the Company is dependent in part upon the creditworthiness
and claims-paying ability of the insurers, the timeliness of reimbursement in
the event of a default on the underlying obligations and, in senior/subordinated
securitization structures, the size and extent of subordinate credit support
classes. Further, the insurance coverage for various types of losses is limited
in amount and losses in excess of the limitation would be borne by
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the Company. Credit risks associated with Non-Conforming Loans and MBS backed by
Mortgage Assets representing interests in Non-Conforming Loans generally will be
greater than those associated with Conforming Loans.
The Company generally does not intend to obtain credit enhancements such as
mortgage pool or special hazard insurance for its single-family mortgage loans
prior to their securitization in non-recourse CMO transactions. Accordingly,
during the time it holds such mortgage loans, the Company will be subject to
risks of borrower defaults, bankruptcies and losses that are not covered by
standard hazard insurance (such as those occurring from earthquakes or floods).
In the event of a default on any single-family mortgage loan held by the
Company, including defaults resulting from declining property values and
worsening economic conditions, the Company would bear the risk of loss of
principal to the extent of any deficiency between the value of the related real
property and the amount owing on the mortgage loan. Defaulted mortgage loans
would also cease to be eligible collateral for borrowing or securitization and
would have to be financed by the Company out of other funds until ultimately
liquidated, resulting in increased financing costs and reduced net income or a
net loss.
APPROPRIATE INVESTMENTS MAY NOT BE AVAILABLE AND FULL INVESTMENT OF NET PROCEEDS
MAY BE DELAYED
The Company's net income depends, in large part, on the Company's ability
to acquire Mortgage Assets at favorable spreads over the Company's borrowing
costs. In acquiring Mortgage Assets, the Company competes with other mortgage
REITs, securities dealers, savings and loan associations, banks, mortgage
bankers, insurance companies, mutual funds, other lenders, Ginnie Mae, Fannie
Mae, Freddie Mac and other entities purchasing Mortgage Assets. In addition,
there are several mortgage REITs similar to the Company, and others may be
organized in the future. The effect of the existence of additional mortgage
REITs may be to increase competition for the available supply of Mortgage Assets
suitable for purchase by the Company. The Company will also face competition
for financing sources, and the effect of the existence of additional mortgage
REITs may be to deny the Company access to sufficient funds to carry out its
business strategy and/or to increase the cost of funds to the Company.
Despite management's experience in the acquisition of Mortgage Assets and
its relationships with various mortgage suppliers, there can be no assurance
that the Company will be able to acquire sufficient Mortgage Assets from
mortgage suppliers at spreads above the Company's cost of funds. Investors must
rely upon the ability of Company management to identify appropriate investment
opportunities, and will not have an opportunity to evaluate relevant economic,
financial and other information regarding the Company's future investments at
the time they are made.
There can be no assurance that the Company will identify Mortgage Assets
that meet its investment criteria in a timely manner, or that any such assets,
once acquired, will produce a return on the Company's investment. A delay may
occur between the time the Units are sold in this Offering and the time the
proceeds of this Offering are utilized by the Company, which could result in a
delay in the receipt by a shareholder of the benefits, if any, of an investment
in the Company. Pending use of remaining net proceeds, they will be deployed to
reduce indebtedness or invested in REIT-qualified short-term liquid investments
that the Company believes will have low investment risk, but that the Company
does not anticipate will produce substantial investment returns. See "Use of
Proceeds."
FAILURE TO HEDGE EFFECTIVELY AGAINST INTEREST RATE CHANGES MAY ADVERSELY AFFECT
RESULTS OF OPERATIONS
Although the Company has employed only limited hedging strategies in the
past, it intends to enter into more involved hedging strategies in an effort to
lessen the risk to its portfolio of mortgage loans and other Mortgage Assets and
related debt from interest rate fluctuations, particularly in the event it holds
fixed-rate mortgage loans for an extended period prior to securitization. These
hedging strategies may include interest rate swaps, the purchase or sale of
interest rate collars, caps or floors, options and interest-only MBS ("IOs").
There can be no assurance that the Company's hedging strategies will have the
desired beneficial impact on the Company's results of operations or financial
condition. Moreover, no hedging strategy can completely insulate the Company
from the risks associated with changes in interest rates and prepayment rates.
Hedging involves risk and typically involves cost, including transaction
costs. Such costs increase dramatically as the period covered by the hedging
increases and during periods of rising and volatile interest rates. The Company
may increase its hedging activity and, thus, increase its hedging costs, during
such periods when interest rates
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are volatile or rising and hedging costs have increased. See "Business --
Portfolio Management -- Portfolio Risk Management -- Interest Rate Risk."
Federal tax laws applicable to REITs may prevent the Company from effectively
implementing hedging strategies that the Company determines, absent such
restrictions, would best insulate the Company from the risks associated with
changing interest rates and prepayments. See "Federal Income Tax
Considerations -- Requirements for Qualification" and "-- Income Tests."
POTENTIAL ADVERSE EFFECT OF THE USE OF FINANCIAL INSTRUMENTS IN HEDGING
In the event that the Company purchases interest rate caps or other
interest rate agreements to hedge against lifetime and periodic rate or payment
caps, and the provider of interest rate agreements becomes financially unsound
or insolvent, the Company may be forced to unwind its interest rate agreements
with such provider and may take a loss on such interest rate agreements.
Although the Company intends to purchase interest rate agreements only from
financially sound institutions and to monitor the financial strength of such
institutions on a periodic basis, no assurance can be given that the Company can
avoid such third party risks.
The Company will be subject to legal risk in entering into interest rate
swap and cap agreements. Although the Company intends to take precautions to
assure the legality of each interest rate swap and cap agreement, no assurance
can be given as to the enforceability of these agreements. An agreement that is
not enforceable may subject the Company to unexpected interest rate risk and
have a material adverse affect on results of operations.
The Company also will be subject to basis risk in entering into interest
rate swap and cap agreements. Basis risk occurs as the performance of hedged
financing sources vary from expectations and differ from the performance of the
hedging instrument. For instance, the Company may hedge its borrowing to
mitigate interest rate risk of Mortgage Assets that are fixed or based on
different indices or that reprice at different times. Although the hedging item
may reduce interest rate risk, borrowers may prepay at speeds that vary from
initial expectation. Absent proper monitoring, the Company could have a hedging
instrument in place without an underlying financing source, the consequence of
which may be a material adverse effect on results of operations.
DEPENDENCE ON KEY PERSONNEL FOR SUCCESSFUL OPERATIONS; LIMITATIONS ON EXPERIENCE
OF SENIOR MANAGEMENT
The success of the Company's operations depends, to a large extent, upon
the management, lending and credit analysis, hedging and risk analysis and
business skills of the current senior level management of the Company. If
members of the current senior level management were for some reason unable to
perform their duties or were, for any reason, to leave the Company, there can be
no assurance that the Company would be able to find capable replacements.
Although senior level management has significant experience in the non-
conforming mortgage lending and servicing operations, it has limited prior
experience in managing a REIT or a publicly held company. There can be no
assurance that the Company and its management will be able to implement
successfully the policies and strategies the Company intends to pursue.
DEPENDENCE UPON INDEPENDENT BROKERS AND CORRESPONDENTS
The Company depends largely on independent mortgage brokers and, to a
lesser extent, on correspondent lenders, for its originations and purchases of
mortgage loans. Substantially all of the brokers and correspondents with whom
the Company does business deal with multiple loan originators and purchasers who
compete for each prospective borrower and loan. The Company competes with these
loan originators for the independent brokers' business based upon price, loan
fees and costs, service and other factors and for the correspondents' business
based primarily on price and service. The Company's competitors also seek to
establish relationships with the same brokers and correspondents with whom the
Company deals, none of whom is obligated by contract or otherwise to continue to
do business with the Company. Accordingly, there can be no assurance that the
Company will be successful in maintaining its existing relationships or
expanding its broker and correspondent networks. The Company's future results
may become more exposed to fluctuations in the volume and cost of acquiring its
mortgage loans resulting from competition from other prospective purchasers of
such loans. The loss of a significant number of any of these brokers or
correspondents or the increase in cost of their loans due to competitive
pressures could have a material adverse effect on the Company's volume of loan
originations and purchases and a resulting material adverse effect on the
Company's
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results of operations and financial condition. See "Business -- Mortgage Lending
Operations -- Specific Loan Production and Expansion Strategies -- 'Channel
Dependent' Lending."
CERTAIN RELATIONSHIPS; POTENTIAL CONFLICTS OF INTEREST
Steven B. Chotin, as Chairman of the Board and largest shareholder of the
Company and the indirect beneficial holder of 100% of the Company's preferred
stock, will be in a position to exercise influence over the operations and
affairs of the Company. Mr. Chotin is also the sole shareholder of TCG. Mr.
Chotin and TCG have agreed, on behalf of themselves and the other Chotin
Affiliates, to present certain business opportunities they may encounter in the
one- to four-family residential mortgage market to the Company. TCG also has
agreed to share with the Company certain of its senior officers (including Mr.
Chotin) and other personnel and related overhead expenses. While conflicts of
interest could arise if such officers and personnel were presented with
corporate opportunities that could benefit both the Company and TCG, TCG has
agreed to grant the Company a right of first refusal with respect to
acquisitions of one- to four-family residential mortgage loans and related
Mortgage Assets that are considered for purchase by TCG or the Chotin
Affiliates. The Independent Directors will review all transactions and
arrangements entered into by the Company with TCG and the other Chotin
Affiliates to ensure that they are in the best interests of the Company.
Although TCG has agreed to grant to the Company a right of first access to Mr.
Chotin and other shared employees of TCG and the Company, if the operations of
TCG need immediate attention, there can be no assurance that Mr. Chotin or such
employees will not have competing demands for their time.
Mr. Chotin also indirectly owns 43% of Merchants Mortgage & Trust
Corporation, LLC ("Merchants"), a consumer finance company that currently
invests primarily in recreational land development loans, loans secured by time
share interests, and other similar types of consumer loans secured by real
estate, including bridge loans and interim mortgage loans secured by single-
family residential properties. Although Merchants currently does not make the
same types of mortgage loans typically made or intended to be made by the
Company, it is anticipated that some of the borrowers of such loans may desire
access to longer-term residential mortgage loans (including Non-Conforming
Loans) in the future. The Company has agreed to enter into a correspondent
relationship with Merchants to acquire longer-term Non-Conforming Loans made to
qualified borrowers from Merchants and to provide consulting services to
facilitate Merchants' participation in the Company's correspondent program in
exchange for Merchants agreeing to provide a right of first refusal to the
Company with respect to residential mortgage loans (including Non-Conforming
Loans) that Merchants desires to sell. See "Certain Relationships and Related
Transactions."
INTRODUCTION OF NEW LOAN PRODUCTS MAY ADVERSELY AFFECT FUTURE RESULTS OF
OPERATIONS
The Company's ability to expand its loan production will depend in part
upon its ability to introduce and market new loan products to both existing and
new customers and to manage the risks involved in such loan production. The
Company anticipates introducing several new loan products in 1998 and 1999,
including possibly HELOCs, HELs, Conforming Loans and loans secured by
manufactured housing. The failure of the Company to introduce new loan products
successfully, obtain acceptance in markets in which its presence may be more
limited than its competitors, appropriately adapt its underwriting guidelines or
manage operating expenses and losses could adversely affect the Company's future
results of operations.
LOSS OF SERVICING RIGHTS AND SUSPENSION OF FUTURE CASH FLOWS
The Company is entitled to receive servicing income only from receipts on
loans for which it acts as a servicer. The Company's right to act as servicer
for loans pledged to secure its non-recourse CMO issuances can be terminated
upon the occurrence of certain servicer termination events including: (i)
failure of the Company to perform its obligations under the related servicing
contract; (ii) failure of the Company to cure any breaches of its
representations and warranties that materially and adversely affect the
underlying loans; (iii) bankruptcy or the inability of the Company to pay its
debts; and (iv) in some cases, the occurrence of delinquencies or losses on the
serviced loans above certain threshold levels. A loss of servicing rights for
any portion of loans serviced by the Company from time to time may have a
material adverse effect on the Company's results of operations and financial
condition.
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LACK OF GEOGRAPHIC DIVERSIFICATION
Properties underlying the Company's Non-Conforming Loan production and its
other Mortgage Assets may be located in a limited number of geographical
regions. For example, for the year ended December 31, 1997, 29.9% and 14.4% of
the mortgage loans funded by the Company were comprised of loans secured by
properties located in Colorado and Georgia, respectively. To the extent that
properties underlying the Company's Mortgage Assets are located in the same
geographical region, such Mortgage Assets may be subject to a greater risk of
default than other comparable Mortgage Assets in the event of adverse economic,
political or business developments and natural hazard risks that may affect such
region and, ultimately, the ability of property owners to make payments of
principal and interest on the underlying mortgages.
ILLIQUIDITY OF INVESTMENTS
A substantial portion of the Company's portfolio may be invested in
Residual Interests and MBS for which the secondary trading market is not as well
developed as the market for certain other MBS (or which are otherwise considered
less marketable or illiquid due to restrictions on resale or otherwise). In
addition, during turbulent market conditions, the liquidity of all of the
Company's Mortgage Assets may be adversely impacted. There is no limit on the
percentage of the Company's investments that may be invested in illiquid
Mortgage Assets.
TAX, LEGAL AND REGULATORY RISKS
CONSEQUENCES OF FAILURE TO MAINTAIN REIT STATUS
NMC intends to operate in a manner so as to qualify as a REIT for federal
income tax purposes. Although NMC does not intend to request a ruling from the
Service as to its REIT status, it has received an opinion from its counsel,
Hunton & Williams, that, based on certain assumptions and representations, it
will so qualify. Investors should be aware, however, that opinions of counsel
are not binding on the Service or any court. The REIT qualification opinion
only represents the view of counsel to the Company based on counsel's review and
analysis of existing law, which includes no controlling precedent. Furthermore,
both the validity of the opinion and the continued qualification of NMC as a
REIT will depend on the Company's satisfaction of certain asset, income,
organizational, and stockholder ownership requirements on a continuing basis.
If NMC were to fail to qualify as a REIT in any taxable year, it would be
subject to federal income tax (including any applicable alternative minimum tax)
on its taxable income at regular corporate rates, and distributions to
stockholders would not be deductible by the Company in computing its taxable
income. Any such corporate tax liability could be substantial and would reduce
the amount of cash available for distribution to stockholders, which in turn
could have an adverse impact on the value of, and trading prices for, the
Securities. In addition, the Company might be required to liquidate certain
investments or borrow funds to pay the applicable tax. Unless entitled to
relief under certain Code provisions, NMC would be precluded from reinstatement
as a REIT for the four taxable years following loss of REIT status.
FAILURE TO SATISFY DISTRIBUTION REQUIREMENTS WILL RESULT IN THE IMPOSITION OF
CORPORATE INCOME OR EXCISE TAX
NMC must distribute annually at least 95% of its net taxable income
(excluding any net capital gain) in order to maintain REIT status and to avoid
corporate income taxation of the earnings that it distributes. In addition, NMC
will be subject to a 4% nondeductible excise tax on the amount, if any, by which
certain distributions paid by it with respect to any calendar year are less than
the sum of (i) 85% of its ordinary income for that year, (ii) 95% of its capital
gain net income for that year, and (iii) 100% of its undistributed taxable
income from prior REIT taxable years. To the extent that NMC elects to retain
and pay income tax on the net long-term capital gains it receives during a
taxable year, such amounts will be treated as having been distributed for
purposes of the 4% excise tax.
The Company intends to make distributions to its stockholders to comply
with the 95% distribution requirement and to avoid both corporate income tax and
the nondeductible excise tax. However, differences in timing between the
recognition of taxable income and the actual receipt of cash could require the
Company to borrow funds or sell assets on a short-term basis to meet the 95%
distribution requirement and to avoid corporate income tax and the nondeductible
excise tax. The requirement to distribute a substantial portion of the
Company's net taxable income
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could cause the Company (i) to sell assets in adverse market conditions to meet
those distribution requirements, or (ii) to distribute amounts that would
otherwise be spent on future acquisitions, capital expenditures, or repayment of
debt. Gain from the disposition of any asset held primarily for sale to
customers in the ordinary course of business generally will be subject to a 100%
penalty tax.
CERTAIN OF THE COMPANY'S INVESTMENTS MAY GENERATE TAXABLE INCOME IN EXCESS OF
CURRENT CASH RECEIPTS
The Company's investment in certain types of Mortgage Assets may cause it
under certain circumstances to recognize taxable income in excess of its
economic income ("phantom income") and to experience an offsetting excess of
economic income over its taxable income in later years. As a result,
stockholders, from time to time, may be required to treat distributions that
economically represent a return of capital, as a taxable dividend. Such
distributions would be offset in later years by distributions representing
economic income that would be treated as returns of capital for federal income
tax purposes (or by losses). Accordingly, if the Company recognizes phantom
income, its stockholders may be required to pay federal income tax with respect
to such income on an accelerated basis, (i.e., before such income is realized by
the stockholders in an economic sense). Taking into account the time value of
money, such an acceleration of federal income tax liabilities would cause
stockholders to receive an after-tax rate of return on an investment in the
Company that would be less than the after-tax rate of return on an investment
with an identical before-tax rate of return that did not generate phantom
income. In general, as the ratio of the Company's phantom income to its total
income increases, the after-tax rate of return received by a taxable stockholder
of the Company will decrease. See "Federal Income Tax Considerations --
Requirements for Qualification -- Distribution Requirements."
ADVERSE TAX LEGISLATION AND ADMINISTRATIVE AND JUDICIAL DECISIONS
At any time, future legislation or administrative or judicial decisions or
actions could affect the tax treatment of the Company or NMC's qualification as
a REIT. For example, on February 2, 1998, President Clinton released his budget
proposal for fiscal year 1999, two provisions of which potentially could affect
the Company (the "Proposals"). Specifically, one Proposal would prohibit a REIT
from owning, directly or indirectly, more than 10% of the voting power or value
--
of all classes of a C corporation's stock (other than the stock of a qualified
REIT subsidiary) after the effective date of such Proposal. Another Proposal
would prevent the Company from merging with a "large" C corporation after
December 31, 1998. Neither of the two proposals described above were included
in the REIT provisions of the proposed tax legislation that was introduced in
the U.S. House of Representatives and Senate on March 26, 1998 or that was
passed by the Senate. The House of Representatives has not yet acted on the
proposed tax legislation. There can be no assurance regarding whether any
Proposal will be enacted in final form as presently written or whether any
future tax legislation or administrative or judicial decisions will adversely
affect the tax treatment of the Company or NMC's qualification as a REIT. See
"Business -- Taxable Subsidiaries" and "Federal Income Tax Considerations --
Proposed Tax Legislation."
LAWS AND REGULATIONS MAY ADVERSELY AFFECT MORTGAGE LENDING OPERATIONS
The Company's mortgage lending operations are subject to extensive
regulation, supervision and licensing by federal, state and local governmental
authorities and are subject to various laws and judicial and administrative
decisions imposing requirements and restrictions on a substantial portion of its
operations. For example, the Company's mortgage lending activities are subject
to the Federal Truth-in-Lending Act and Regulation Z (including the Home
Ownership and Equity Protection Act of 1994), the Federal Equal Credit
Opportunity Act and Regulation B, as amended, the Fair Credit Reporting Act of
1970, as amended, the Federal Real Estate Settlement Procedures Act of 1974, as
amended ("RESPA"), and the Department of Housing and Urban Development's
Regulation X, the Fair Housing Act, the Home Mortgage Disclosure Act and
Regulation C and the Federal Fair Debt Collection Practices Act. The Company is
also subject to the rules and regulations of, and examinations by, Ginnie Mae,
HUD and state regulatory authorities with respect to originating, processing,
underwriting, selling and servicing mortgage loans. There can be no assurance
that the Company will maintain compliance with these requirements in the future
without additional expense, or that additional or more restrictive local, state
or federal laws, rules and regulations will not be adopted or that existing laws
or regulations will not be interpreted in a more restrictive manner, which would
make compliance more difficult for the Company.
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These rules and regulations, among other things, impose licensing
obligations on the Company, prohibit discrimination, provide for inspections and
appraisals of properties, regulate assessment, collection, foreclosure and
claims handling, investment and interest payments on escrow balances and payment
features, mandate certain disclosures and notices to borrowers and, in some
cases, fix maximum interest rates, fees and mortgage loan amounts. Failure to
comply with these requirements can lead to loss of approved status, termination
or suspension of servicing contracts without compensation to the servicer,
demands for indemnifications or mortgage loan repurchases, certain rights of
rescission for mortgage loans, class action lawsuits and administrative
enforcement actions, any of which could cause a material adverse effect on the
Company's profitability and financial condition.
The laws and regulations described above are subject to legislative,
administrative and judicial interpretation, and certain of these laws and
regulations may be ambiguous with respect to permitted conduct. Any such
ambiguity may lead to regulatory investigations, enforcement actions or private
causes of action, such as class action lawsuits, calling into question the
Company's compliance with the applicable laws and regulations. As a mortgage
lender, the Company may be subject to regulatory enforcement actions and private
causes of action from time to time challenging its compliance with applicable
laws and regulations.
Although the Company believes that it has systems and procedures to
facilitate compliance with these requirements and believes that it is in
compliance in all material respects with applicable local, state and federal
laws, rules and regulations, there can be no assurance that the Company is or
will remain in compliance or that, in the future, more restrictive laws, rules
and regulations or the legislative, administrative and judicial interpretation
of existing laws, rules and regulations would not make compliance more difficult
or expensive.
POTENTIAL LITIGATION; ELIMINATION OF LENDER PAYMENTS TO BROKERS COULD ADVERSELY
AFFECT RESULTS OF OPERATIONS
Specialty finance companies like the Company are often subjected to
lawsuits alleging violations of laws and regulations applicable to consumer
lending, on behalf of purported nationwide classes of borrowers against several
mortgage lenders, including the Company, alleging that such lenders have made
certain payments to independent mortgage brokers in violation of state and
federal laws, including RESPA. Lawsuits have been filed on behalf of purported
nationwide or statewide classes of borrowers against several mortgage lenders,
including the Company, alleging that payments made by a lender to a broker in
addition to payments made by the borrower to a broker are prohibited by RESPA,
and are therefore illegal. Several federal district courts construing RESPA in
these cases have reached conflicting results. On January 9, 1998, in the only
appellate decision addressing the issue to date, the United States Court of
Appeals for the Eleventh Circuit ruled in Culpepper v. Inland Mortgage
Corporation that the payment by the lender to the broker in that case
constituted a prohibited referral fee under RESPA. The case was remanded to the
district court for further proceedings. If the pending cases on lender payments
to brokers are ultimately resolved against the lenders, it may cause an
industry-wide change in the way independent mortgage brokers are compensated.
The Company's broker compensation programs currently utilize such payments.
Future regulatory interpretations or judicial decisions may require the Company
to change its broker compensation programs or subject it to material monetary
judgments or other penalties. Any such changes or penalties may have a material
adverse effect on the Company's results of operations, financial condition and
business prospects.
The Company has settled, for nominal amounts, two putative class action
lawsuits that were filed against it, one grounded chiefly in alleged TILA
violations and the other based on alleged RESPA violations arising out of broker
compensation. While the Company endeavors to comply with all applicable laws
and regulations, there can be no assurance that the Company will not be subject
to litigation based on the same or other grounds in the future. Such lawsuits
could result in liability on the Company's part or rulings requiring the Company
to undertake changes in its manner of doing business, the incurrence of legal
defense expenses, and the diversion of management's time and Company resources
to defending itself in such lawsuits, thereby impairing the Company's ability to
conduct business efficiently.
CONSEQUENCES OF FAILURE TO QUALIFY FOR INVESTMENT COMPANY ACT EXEMPTION
The Company at all times intends to conduct its business so as not to
become regulated as an investment company under the Investment Company Act.
Accordingly, the Company does not expect to be subject to the
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restrictive provisions of the Investment Company Act. The Investment Company Act
exempts entities that are "primarily engaged in the business of purchasing or
otherwise acquiring mortgages and other liens on and interests in real estate."
If the Company fails to qualify for exemption from registration as an investment
company, its ability to use leverage would be substantially reduced and it would
be unable to conduct its business as described herein. Any such failure to
qualify for exemption could have a material adverse effect on the Company.
RISKS OF INVESTMENT IN THE UNITS IN THE OFFERING
IMMEDIATE DILUTION
After giving effect to the estimated underwriting discounts and estimated
offering expenses and assuming no value for or exercise of the Warrants,
purchasers of the Units in the Offering will experience immediate and
substantial dilution in the net tangible book value per share of Common Stock of
approximately $____ per share, assuming an initial offering price of $15 per
share (the midpoint of the estimated range of the initial offering price). In
the event that the Underwriters exercise their over-allotment option in full,
resulting in an additional 1,005,000 Units being sold, purchasers of the Units
will experience immediate and substantial dilution in net tangible book value of
Common Stock of $______ per share. See "Dilution."
OWNERSHIP LIMIT MAY RESTRICT BUSINESS COMBINATION OPPORTUNITIES
In order for NMC to maintain its qualification as a REIT, not more than 50%
in value of its outstanding shares of capital stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of any taxable year (other than its first
REIT taxable year). For the purpose of preserving NMC's REIT status, the
Articles of Incorporation generally prohibit beneficial or constructive
ownership of more than (i) _____% (or, with respect to the Chotin Affiliates,
____%) of the number of outstanding shares of Common Stock, or (ii) 9.9% of the
number of outstanding shares of any class or series of Preferred Stock other
than the Series I Preferred Stock (the "Ownership Limit"). The Articles of
Incorporation also generally prohibit transfers of stock that would (i) violate
the Ownership Limit, (ii) cause NMC's stock to be held by fewer than 100 persons
(determined without reference to any rules of attribution), (iii) cause NMC to
be "closely held" within the meaning of the REIT provisions of the Code or (iv)
cause NMC's stock to be beneficially owned by a "Disqualified Organization" (as
defined in "Federal Income Tax Considerations -- Taxation of NMC"). Every
owner of more than 5% (or such lower percentage as required by the Code or the
regulations promulgated thereunder) of all classes or series of NMC's stock,
within 30 days after the end of each taxable year, is required to give written
notice to the Company stating the name and address of such owner, the number of
shares of each class and series of stock of NMC beneficially or constructively
owned and a description of the manner in which such shares are held. Each such
owner shall provide to the Company such additional information as the Company
may request in order to determine the effect, if any, of such ownership on NMC's
status as a REIT and to ensure compliance with the ownership limitations.
Holders of Warrants will be deemed constructive owners of the shares of Common
Stock for which such Warrants are exercisable.
Subject to certain limitations, the Board of Directors may increase or
decrease the ownership limitations. In addition, the Board of Directors may,
but in no event will be required to, waive the foregoing restrictions with
respect to a particular stockholder if it determines that such stockholder's
ownership will not jeopardize NMC's status as a REIT and the Board of Directors
otherwise decides such action would be in the best interests of the Company.
The foregoing provisions may inhibit market activity and could have the
effect of discouraging a takeover or other transaction in which holders of some,
or a majority, of the Securities might receive a premium for their Securities
over the then prevailing market price or which such holders might believe to be
otherwise in their best interests. See "Description of Securities --
Restrictions on Ownership and Transfer" and "Federal Income Tax Considerations
- -- Requirements for Qualification."
CERTAIN ANTI-TAKEOVER CONSIDERATIONS
As noted above, there are Ownership Limitations on the Securities. In
addition, the Board of Directors is authorized to issue additional shares of
preferred stock (the "Preferred Stock") in addition to the Series I Preferred
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Stock currently outstanding without any further stockholder approval. See "Risk
Factors -- Preferred Stock; Limitations on Dividends." Issuance of Preferred
Stock could also discourage bids for the Securities at a premium as well as
depress the market price of the Securities. Moreover, stockholders are required
to give advance notice with respect to certain proposals they may wish to
present for a stockholder vote, and stockholders may act only at special or
annual meetings (except by unanimous written consent). Taken together, the
circumstances are such that stockholders are unlikely to realize any premiums on
their Securities in a transaction for the acquisition of the Company. See
"Description of Securities."
ABSENCE OF PUBLIC TRADING MARKET
There is currently no trading market for the Securities and there can be no
assurance that an active trading market for the Securities will develop. The
Company will apply to list the Units, the Warrants and the Common Stock on the
. Listing on the does not insure, however, that an
active public trading market for the Securities will develop after this Offering
or that, if developed, it will be sustained. The initial public offering price
of the Units offered hereby will be determined by negotiations among the Company
and representatives of the Underwriters and may not be indicative of the price
at which the Securities will trade after the Offering. See "Underwriting."
Consequently, there can be no assurance that the market price for the Units will
not fall below the initial public offering price or that the Warrants will have
any value at any time in the future.
POSSIBLE VOLATILITY OF PRICE FOR SECURITIES
The market price of the Securities may experience fluctuations unrelated to
the operating performance of the Company. In particular, the price of the
Securities may be affected by general market price movements as well as
developments specifically related to the mortgage and non-conforming mortgage
finance industry or the financial services sector generally, such as interest
rate movements, quarterly variations or changes in financial estimates by
securities analysts, and credit quality trends.
It is likely that the market price of the Securities will be influenced by
any variation between the net yield on the Company's Mortgage Assets and
prevailing market interest rates and by the market perception of the Company's
ability to achieve earnings growth. The Company's earnings will be derived
primarily from any positive spread between the yield on the Company's Mortgage
Assets and the cost of the Company's borrowings. During the period immediately
following the receipt by the Company of new proceeds from an offering or other
source, prior to the time the Company has fully implemented its investment and
acquisition strategies to employ those proceeds, the Company's earnings and
levels of dividend distributions may be lower than if the financing strategy
were fully implemented, which may affect the market value of the Securities. In
addition, the positive spread between the yield on the Company's Mortgage Assets
and the cost of borrowings will not necessarily be larger in high interest rate
environments than in low interest rate environments regardless of the Company's
business strategy to achieve such result. Accordingly, in periods of high
interest rates, the net income of the Company and, therefore, the dividend yield
on the Common Stock may be less attractive compared with alternative
investments, which could negatively impact the price of the Securities. If the
anticipated or actual net yield on the Company's Mortgage Assets declines or if
prevailing market interest rates rise, thereby decreasing the positive spread
between the net yield on the Mortgage Assets and the cost of the Company's
borrowings, the market price of the Securities may be materially adversely
affected. In addition, if the market price of other mortgage REIT or specialty
finance company stocks decline for any reason, or there is a broad-based decline
in real estate values or in the value of the Company's portfolio of Mortgage
Assets, the market price of the Securities may be adversely affected. During
any period when the market price of the Securities has been adversely affected
due to any of the foregoing reasons, the liquidity of the Securities may be
negatively impacted and investors who may desire or be required to sell their
Securities may experience losses.
PREFERRED STOCK; LIMITATIONS ON DIVIDENDS
As of the date hereof, there are 2,100 shares of Series I Preferred Stock
outstanding, all of which are currently held by TCG Investment Corporation, a
company controlled by Steven B. Chotin. The terms of the Series I Preferred
Stock provide that dividends will accrue each quarter at a fixed-rate of 8.00%
per annum on the liquidation preference amount of the Preferred Stock, equal to
$2,100,000. Dividends commenced accruing on July 1, 1997. Accrued
27
<PAGE>
dividends of $_________ will be paid from proceeds of the Offering and dividends
will be paid currently thereafter to the extent the Company otherwise has
sufficient funds legally available to pay such dividends.
The Series I Preferred Stock is callable by the Company in whole or in part
at any time, subject to receipt of required lender consents, for a per share
price of $1,000 plus all accrued and unpaid dividends (the "Redemption Price").
The holders of the Series I Preferred Stock will be entitled to require the
Company to redeem the Series I Preferred Stock for the Redemption Price on or
after June 30, 2002. The Company is prohibited from paying any dividends or
other distributions on its Common Stock unless all accrued dividends and all
other amounts to which the holders of the Series I Preferred Stock are entitled
have been paid. See "Description of Securities -- Preferred Stock."
No dividends will be payable on the Warrants prior to exercise.
EFFECT ON PRICE OF SECURITIES ELIGIBLE FOR FUTURE SALE
The market price of the Securities could be adversely affected by the
availability for sale of additional Common Stock owned by the Company's
principal shareholders. The Company and the Company's principal shareholder,
Steven B. Chotin, who will own or control approximately __________% of the
Company's outstanding Common Stock following the offering (____________% if the
Underwriters' over-allotment option is exercised in full), have agreed not to
offer, sell or otherwise dispose of any shares of Common Stock for a period of
_____ days following the date of this Prospectus without the prior written
consent of Stifel Nicolaus & Company, Incorporated, subject to certain limited
exceptions. After the expiration of such ____-day period, such shares may be
sold subject to the restrictions of Rule 144 promulgated under the Securities
Act. Upon registration under the Securities Act, such shares may be sold without
regard to the volume limitations of Rule 144. ContiFinancial Corporation
("Conti") and Greenwich Capital Markets, Inc. ("Greenwich"), which will own
____% and ____%, respectively, of the Company's Common Stock, have agreed not to
offer, sell or otherwise dispose of any shares of Common Stock for a period of
______ days following the date of this Prospectus without the prior written
consent of the representative of the Underwriters, subject to certain limited
exceptions. Conti and Greenwich together have unlimited piggy-back rights and up
to two demand registration rights of their shares of Common Stock (which demand
rights may only be exercised beginning _____ days after the Offering), in each
case subject to certain restrictions. In addition, Mr. Chotin has unlimited
piggy-back rights and up to two demand registration rights for the shares of
Common Stock he owns or controls, which may be exercised subject to the
______-day lockout period referred to above. Management shareholders to whom Mr.
Chotin transfers shares will also have unlimited piggy-back rights.
Furthermore, the Company intends to register as soon as practicable
following the completion of the Offering approximately ____ shares of Common
Stock reserved for issuance pursuant to the Company's 1998 Incentive Plan,
including options to purchase ____ shares at the initial offering price to be
granted upon completion of the Offering. See "Management -- 1998 Incentive
Plans."
Any future sales of a substantial number of shares of Common Stock, or the
perception that such sales could occur, could adversely affect the market price
of the Securities and could impair the Company's future ability to raise capital
through an offering of its equity securities. See "Principal Stockholders" and
"Shares Eligible for Future Sale."
EFFECT OF POTENTIAL FUTURE OFFERINGS
The Company expects in the future to increase its capital resources by
making offerings of equity and debt securities, including Preferred Stock,
Common Stock, non-recourse CMOs and subordinated debt. All debt securities and
classes of preferred stock will be senior to the Common Stock in the event of a
liquidation of the Company. Additional equity offerings may dilute the equity
of stockholders of the Company or reduce the price of the Securities, or both.
The Company is unable to estimate the amount, timing or nature of additional
offerings as they will depend upon market conditions and other factors. See
"-- Effect on Price of Securities Eligible for Future Sale."
28
<PAGE>
PLANS SHOULD CONSIDER ERISA RISKS OF INVESTING IN SECURITIES
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and section 4975 of the Code prohibit certain transactions that involve (1)
certain pension, profit-sharing, employee benefit, or retirement plans or
individual retirement accounts (each a "Plan") and (2) the assets of a Plan. A
"party in interest" or "disqualified person" with respect to a Plan will be
subject to (a) an initial 15% excise tax on the amount involved in any
prohibited transaction involving the assets of the Plan and (b) an excise tax
equal to 100% of the amount involved if any prohibited transaction is not
corrected. Consequently, the fiduciary of a Plan contemplating an investment in
the Securities should consider whether the Company, any other person associated
with the issuance of the Securities, or any Affiliate of the foregoing is or
might become a "party in interest" or "disqualified person" with respect to the
Plan. In such a case, the acquisition or holding of Securities by or on behalf
of the Plan could be considered to give rise to a prohibited transaction under
ERISA and the Code. See "ERISA Considerations -- Employee Benefit Plans, Tax-
Qualified Retirement Plans, and IRAs."
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of Units
offered hereby, after deduction of underwriting discounts and commissions and
estimated offering expenses payable by the Company, are estimated to be
approximately $_______ million (or $_____ million if the Underwriters' over-
allotment option is exercised in full), assuming an initial public offering
price of $15 per share (the midpoint of the price range set forth on the cover
page of this Prospectus).
The net proceeds of the Offering will be used to repay an estimated (i)
$___ million outstanding or otherwise due or payable under the Company's
existing warehouse, retained interest, working capital and subordinated debt
credit facilities and related agreements with Conti, Greenwich and Residential
Funding Corporation ("RFC"), which facilities currently bear interest rates
ranging from 1.75% above LIBOR to 10% per annum and are due from June 1998 to
July 2001, and (ii) up to $5 million drawn under a bridge line of credit
provided by KeyBank National Association and guaranteed by Steven B. Chotin,
which bears interest at prime rate, currently 8.0% per annum. The remaining net
proceeds are expected to be used for working capital and general corporate
purposes, including funding the Company's expansion and acquisition strategies,
including possible acquisitions of other non-conforming mortgage lending
companies and selective acquisitions of other Mortgage Assets. Pending use of
these remaining net proceeds, they will be deployed to reduce indebtedness or
invested in short term liquid investments consistent with maintaining NMC's
qualification as a REIT that the Company believes have low investment risk, but
that the Company does not anticipate will produce substantial returns. It is
currently anticipated that any proceeds received from exercise of the Warrants
will be utilized for substantially similar purposes.
DIVIDEND POLICY AND DISTRIBUTIONS
NMC generally intends to distribute to stockholders each year substantially
all of its taxable income (which in some years may exceed net income as
determined in accordance with generally accepted accounting principles) to
qualify as a REIT under the Code. Subsequent to the closing of this Offering,
NMC intends to declare quarterly dividends on its Common Stock, to the extent
amounts are available for the payment of Common Stock dividends after payment of
all accrued and unpaid dividends on NMC's Series I Preferred Stock. See "Risk
Factors -- Investment in the Units in the Offering -- Preferred Stock;
Limitations on Dividends." The Company intends to distribute any taxable income
remaining after the distribution of the dividends on the Series I Preferred
Stock and the regular quarterly dividends annually in a special Common Stock
dividend on or prior to the date of the first regular quarterly dividend payment
date of the following taxable year. The dividend policy is subject to revision
at the discretion of the Board of Directors. All distributions will be made by
the Company at the discretion of the Board of Directors and will depend on the
taxable income and financial condition of the Company, maintenance of REIT
status and such other factors as the Board of Directors deems relevant.
29
<PAGE>
DIVIDEND REINVESTMENT PLAN
The Company expects to adopt a dividend reinvestment plan ("DRP") for
eligible stockholders who wish to reinvest all or part their distributions in
additional shares of Common Stock. Generally, under a DRP dividends paid with
respect to shares of Common Stock are automatically invested in additional
shares of Common Stock at a discount to the then current market price.
Eligible stockholders will be able to participate in the DRP following the
effectiveness of the registration of securities issuable thereunder. This
Offering is not related to the proposed DRP, nor has the Company prepared or
filed a registration statement with the Commission registering the shares to be
issued under the DRP. Prior to buying shares through the DRP, participants will
be provided with a DRP prospectus which will constitute a part of such DRP
registration statement. The Company's transfer agent will act as the trustee
and administrator of the DRP (the "Agent").
DILUTION
The pro forma net tangible book value of the Company's Common Stock as of
March 31, 1998, was $____ million, or $____ per share. Pro forma net tangible
book value per share has been determined by dividing the pro forma tangible net
worth of the Company after giving effect to the receipt of the net proceeds of
the Offering (total assets less intangible assets and total liabilities) by the
shares of Common Stock outstanding and to be issued in the Offering and without
taking into account any changes in such pro forma net tangible book value after
March 31, 1998. After (i) giving effect to the sale of 6,700,000 Units offered
hereby by the Company at an assumed initial offering price of $15 per Unit (the
midpoint of the price range set forth on the cover page of this Prospectus)
assuming no value for or exercise of the Warrants and (ii) deducting the
underwriting discounts and commissions and estimated offering expenses payable
by the Company, assuming no value for or exercise of the Warrants, the pro forma
net tangible book value of the Company as of March 31, 1998 would have been
$__________ million or $_____________ per share of Common Stock. This
represents an immediate increase in pro forma net tangible book value to
existing shareholders of $_____________ and an immediate dilution of
$____________ to new public investors purchasing Common Stock in the Offering,
as illustrated in the following table:
<TABLE>
<S> <C>
Assumed initial offering price per Unit............................................................... $15.00
Pro forma net tangible book value per share of Common Stock at March 31, 1998/(1)/.................. $_____
Increase in tangible book value per share of Common Stock attributable to new public investors/(1)/. $_____
Pro forma net tangible book value per share of Common Stock after the Offering/(1)/................... $_____
Dilution of net tangible book value per share of Common Stock to new public investors/(1)/............ $_____
Fully diluted value per Unit/(1)/................................................................... $_____
</TABLE>
______________
/(1)/ Reflects ____ for ____ stock split to be effected immediately prior to
completion of the Offering.
In the event that the Underwriters exercise their over-allotment option in
full, resulting in an additional 1,005,000 Units being sold, purchasers of the
Units will experience immediate dilution in net tangible book value of Common
Stock of $______ per share.
The following table sets forth on an as adjusted basis as of March 31, 1998
the difference between the existing shareholders and the purchasers of Units in
the Offering with respect to the number of Units purchased from the Company, the
total consideration paid and the average price paid per Unit, assuming no value
for or exercise of the Warrants:
30
<PAGE>
<TABLE>
<CAPTION>
AVERAGE
PRICE
SHARES OF COMMON STOCK OWNED TOTAL CONSIDERATION PER SHARE OF
---------------------------- -------------------
NUMBER PERCENTAGE AMOUNT PERCENTAGE COMMON STOCK
------ ---------- ------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Existing shareholders % $ % $
New investors
Total 100.0% $ 100.0%
====== =====
</TABLE>
31
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the
Company as of March 31, 1998 and the capitalization as adjusted to give effect
to the ____ for ____ stock split to be effected immediately prior to the
completion of the Offering, the sale of 6,700,000 Units offered by the Company
hereby (at an assumed initial public offering price of $15.00 per Unit, the
midpoint of the price range set forth on the cover page of this Prospectus), and
the application of the estimated net proceeds therefrom as described under "Use
of Proceeds." This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto included elsewhere
herein.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
-------------------------------------------
ACTUAL AS ADJUSTED/(1)/
------ ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DEBT:
<S> <C> <C>
Warehouse financing facilities............................................ $156,068 $144,756
Residual financing........................................................ 11,029 -
Working capital facilities................................................ 3,900 -
Convertible subordinated debenture facility............................... 9,810 -
Notes payable............................................................. 4,147 4,147
-------- --------
Total debt................................................................ 184,954 148,903
REDEEMABLE PREFERRED STOCK:
$1.00 par value and $1,000 liquidation preference,
2,100 shares issued and outstanding (actual and as adjusted).............. 2,100 2,100
STOCKHOLDERS' EQUITY:
Common Stock, $0.01 par value, 50,000 shares authorized,
1,000 shares issued and outstanding (actual); ________ shares
authorized, _________ shares issued and outstanding (as adjusted)......... -
Additional Paid-in Capital................................................ 9,296
Retained Earnings (Accumulated Deficit)................................... (6,356)
-------- ---------
Total Stockholders' Equity............................................ 2,940
-------- ---------
Total Capitalization.................................................. $189,994 $
======== =========
</TABLE>
______________
/(1)/ After deducting estimated underwriting discount and estimated offering
expenses payable by the Company, assuming no exercise of the Underwriters' over-
allotment option to purchase up to an additional 1,005,000 Units and assuming no
exercise of the Warrants.
32
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
The following table sets forth historical selected financial and operating
data of the Company as of (i) as of and for each of the years in the five-year
period ended December 31, 1997, and as of March 31, 1998 and for each of the
three-month periods ended March 31, 1997 and 1998.
The following selected consolidated financial data of the Company presented
as of December 31, 1996 and 1997 and for the years ended December 31, 1995,
1996, and 1997 are derived from the Company's audited financial statements and
notes thereto included elsewhere herein audited by Deloitte & Touche LLP,
independent public accountants, as set forth in their report also included
elsewhere herein. The selected consolidated financial data of the Company
presented as of December 31, 1993, 1994 and 1995 and for the years ended
December 31, 1993 and 1994 are derived from the Company's audited financial
statements not included herein. The unaudited selected consolidated financial
data of the Company presented as of March 31, 1998 and for the three-month
periods ended March 31, 1997 and 1998 are derived from the unaudited financial
statements of the Company prepared on the same basis as the audited financial
statements and, in the opinion of management, include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
the Company's financial position and results of operations. The results of
operations for any interim period are not necessarily indicative of results to
be expected for the full year.
The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and all of the financial statements and the notes thereto and other
financial information included elsewhere in this Prospectus. References to
"shares" in the following table refer to shares of the Company's Common Stock.
33
<PAGE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------- --------------------------
1993 1994 1995 1996 1997 1997 1998
-------- --------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Revenues:
Interest income $1,445 $ 872 $ 2,160 $ 3,395 $ 9,907 $1,578 $ 3,358
Interest expense 666 383 1,440 2,530 7,293 1,245 2,682
------ ------- ------- ------- ------- ------ -------
Net interest income 779 489 720 865 2,614 333 676
Gain on sale of mortgage loans:
Whole loan sales - - 7,130 4,155 3,268 1,421 1,645
Securitizations 3,060 737 - - 9,203 - -
Unrealized loss on trading securities - - - - (1,035) - 322
Loan servicing fees 1,299 1,690 2,158 2,353 2,966 596 1,081
------ ------- ------- ------- ------- ------ -------
Total Revenues 5,138 2,916 10,008 7,373 17,016 2,350 3,724
Expenses:
Operating expenses 2,990 4,132 6,908 7,472 13,886 2,048 4,098
Provision for credit losses 5 16 142 552 730 173 245
Management fees /(1)/ 1,131 1,660 1,890 - - - -
Amortization of mortgage servicing rights 755 516 758 643 616 136 329
Impairment of mortgage servicing rights - - - 277 - - -
Other interest expense - - 26 109 438 25 295
------ ------- ------- ------- ------- ------ -------
Total Expenses 4,881 6,324 9,724 9,053 15,670 2,382 4,967
Equity in earnings of affiliate/(2)/ - 1,146 - - - - -
Minority interest/(3)/ (206) 183 - - - - -
------ ------- ------- ------- ------- ------ -------
Income (loss) before provision (credit)
for income taxes 51 (2,079) 284 (1,680) 1,346 (32) (1,243)
Provision (credit) for income taxes 26 (340) 438 - - - -
Cumulative effect of change in accounting
for income taxes (114) - - - - - -
------ ------- ------- ------- ------- ------ -------
Net income (loss) 139 (1,739) (154) (1,680) 1,346 (32) (1,243)
Less preferred stock dividends (660) (809) (586) - (94) - (60)
------ ------- ------- ------- ------- ------ -------
Net income (loss) available for common
shareholders $ (521) $(2,548) $ (740) $(1,680) $ 1,252 $ (32) $(1,303)
====== ======= ======= ======= ======= ====== =======
Pro forma per share data/(4)/
Net income (loss) per share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
-------------------------------------------------- ------------------
1993 1994 1995 1996 1997 1998
-------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents $ 1,338 $ 1,156 $ 1,980 $ 613 $ 1,843 $ 871
Mortgage loans/(5)/ $ 8,339 $68,812 $ 5,382 $64,773 $120,413 $157,941/(6)/
Retained securitization interests $ - $ - $ - $ - $ 18,826 $ 19,765
Mortgage servicing rights/(7)/ $ 2,053 $ 1,543 $ 2,421 $ 2,016 $ 3,413 $ 3,573
Total Assets $19,562 $80,591 $14,446 $77,257 $150,894 $ 194,201
Warehouse financing facilities $ 8,309 $65,457 $ 5,029 $64,554 $119,288 $ 156,068
Residual financing facilities $ - $ - $ - $ - $ 11,127 $ 11,029
Working capital facilities $ - $ - $ - $ 1,020 $ 3,900 $ 3,900
Convertible subordinated debt facility $ - $ - $ - $ - $ 6,660 $ 9,810
Total liabilities $10,284 $73,457 $ 8,112 $72,703 $144,551 $ 189,161
Minority interest $ 405 $ 60 $ - $ - $ - $ -
Series I Preferred Stock, redeemable $ - $ - $ - $ - $ 2,100 $ 2,100
Stockholder's equity $ 8,873 $ 7,074 $ 6,334 $ 4,554 $ 4,243 $ 2,940
</TABLE>
34
<PAGE>
Pro forma per share data /(4)/
Book value per share:
Basic
Diluted
Shares outstanding
Basic
Diluted
(1) Before July 1995, the Company paid fees to an unrelated third party for
facilities use, office administration and general administrative services
with respect to what is now the Company's Rhode Island office. Some of
these fees were discontinued in July 1995 and the rest of these fees were
discontinued in December 1995.
(2) In 1994, the Company entered into a partnership agreement with an
investment banker to form CC Mortgage Company, L.P. ("CCMC"), in which the
Company was a 50% general partner. Shown in "Equity in earnings of
affiliate" is the Company's 50% share of CCMC's net income for 1994 of $2.2
million. $1.9 million of CCMC's revenue for 1994 was attributable to gain
recognized by CCMC upon its securitization of loans in July 1994. Taking
into account the Company's $1.0 million share of this gain on sale, the
Company's actual gains on securitization of loans for 1994 equaled $1.7
million.
(3) In December 1992, the Company entered into a partnership agreement with B
First Residential Corporation ("BFRC"), a previously unrelated third party,
to form B First Mortgage Company Limited Partnership ("BFMC"). BFMC was
formed for the purpose of offering and originating non-conforming loans.
BFMC originations were sold exclusively to the Company on a servicing-
released basis. The Company had a two-thirds interest in BFMC as its
limited partner. On December 29, 1995, NMC acquired the outstanding capital
stock of BFRC. The acquisition was accounted for under the purchase method
and the purchase price was allocated among the assets acquired and
liabilities assumed based on relative fair values. Subsequent to the
acquisition, all mortgage banking activities previously conducted by BFMC
have been conducted by the Company. BFMC and BFRC were inactive as of
December 31, 1996 and remained inactive thereafter.
(4) Reflects ____ for _____ stock split to be effected immediately prior to the
completion of the Offering.
(5) Net of reserves for losses established for such loans.
(6) The fair value of the mortgage loans at March 31, 1998 were $5.1 million
higher than their net carrying values on such date. The excess of the fair
value over the net carrying value represents unrealized holding gains on
the Company's assets.
(7) Includes the capitalized cost of mortgage servicing rights net of
amortization of such rights.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the preceding
Selected Financial and Other Data and the Company's Financial Statements and the
Notes thereto, included elsewhere in this Prospectus.
OVERVIEW
The Company is a fully-integrated non-conforming mortgage lender that
operates as a self-managed REIT. The Company originates, purchases, holds for
investment and services primarily first-lien single-family residential Non-
Conforming Loans and intends to finance these mortgage loans through the
issuance of long-term non-recourse CMOs and, to a lesser extent, to sell these
loans in the secondary mortgage market. The Company intends to build and manage
a portfolio of single-family residential mortgage loans (particularly Non-
Conforming Loans) and selectively acquired single-family residential MBS and
other related Mortgage Assets primarily to create attractive risk-adjusted
returns through its tax-advantaged REIT structure.
Since 1993, management has substantially expanded the size and capability
of the Company's wholesale lending and servicing infrastructure by expanding its
network of brokers and correspondents, which has resulted in higher wholesale
loan production volume. Expansion of the type ultimately desired by management
required capital. Initially, management elected to grow the Company in a
measured fashion, in order to gain experience in the non-conforming market
before accessing the public equity markets where it could raise the amount of
capital necessary to implement the more rapid and broad-based growth strategy
that it now has undertaken. Accordingly, management has historically taken
steps principally aimed at long-term accomplishment of the Company's major
objectives, sometimes at the expense of the Company's shorter-term
profitability. For example, until the fourth quarter of 1996, the Company sold
most of its loan production in whole loan form to generate cash proceeds to
provide short-term working capital necessary to implement its expansion
strategies. In addition, in order to reduce costs associated with financing its
short-term expansion goals, the Company entered into a warehouse credit facility
under which it paid to the lender 50% of its gains on the sale of warehoused
loans. Most purchasers of the Company's loans in turn securitized the purchased
loans.
By the last quarter of 1996, the Company's adjustable-rate loan production
had increased to a point at which the Company believed it could (i) use
securitization consistently and efficiently as its primary means of financing
this adjustable-rate loan production and (ii) access the public markets for the
capital needed to take the Company to the next stage of its development. In
June 1997, the Company entered into a group of credit facilities with Conti and
Greenwich. Greenwich is providing premium warehouse financing (i.e., advance
amounts generally in excess of the principal balance of the mortgage loan
pledged as collateral) to the Company under which the Company pays market
interest rates for that type of facility, but no longer shares its gains on
sales of warehoused loans. Conti and Greenwich have provided certain other
credit facilities to the Company to enable it to meet most of its working
capital needs pending completion of the Offering, including a facility under
which the Company has pledged the Retained Interests created by the Company. In
April 1998, the Company arranged a revolving line of credit made available by
KeyBank National Association, with a maximum principal amount of $5.0 million.
This line of credit is guaranteed by Steven B. Chotin, who, together with two of
his affiliates, pledged collateral to secure the loan. This loan is intended to
provide additional working capital to meet the Company's liquidity needs pending
completion of the Offering, and will be repaid using proceeds of the Offering.
The Company began accumulating its adjustable-rate loans in October 1996,
and, in June and September 1997, the Company completed two securitizations of
Non-Conforming Loans. The Company structured these two securitizations to
receive sale treatment for financial accounting purposes ("Gain-on-Sale
Securitizations") in order to generate earnings from those securitizations based
in part on the estimated fair value of the Retained Interests created in the
transactions and held by the Company. Management believes that the earnings
reported in Gain-on-Sale Securitizations are inherently speculative and will
fluctuate in future periods with the changes in the values of the capitalized
Retained Interests, so the Company has decided to finance its future loan
production primarily in transactions structured as non-recourse financings for
accounting and tax purposes. Accordingly, the securitized
36
<PAGE>
mortgage loans will remain on the Company's balance sheet as assets and the debt
obligations (i.e., CMOs) will appear as liabilities. A CMO issuance will result
in refinancing the Company's borrowings, as proceeds from the CMO issuance are
applied against preexisting borrowings (i.e., advances under the Company's
short-term recourse warehouse lines of credit entered into to finance the
acquisition of mortgage loans while they are being aggregated into a pool
sufficiently large to be securitized efficiently). Issuing CMO debt locks in
less expensive, non-recourse long-term financing that better matches the terms
of the loans serving as collateral for the debt (thereby resulting in more
predictable spread income from the assets).
RESULTS OF OPERATIONS
GENERAL
Since 1993, the Company has focused its efforts on expanding its Non-
Conforming Loan origination, acquisition and servicing business. The volume of
loans originated and purchased by the Company has increased from $126.4 million
in 1995, to $207.5 million in 1996 and to $425.9 million in 1997. This
expansion is the primary reason for the increase in net interest income and loan
servicing fees along with operating expenses of the Company during 1995, 1996
and 1997. However, the gains on sale of loans did not follow this trend for
several reasons. In 1995 and the first three quarters of 1996, the Company had
disposed of substantially all of the loans it had funded through whole loan
sales to institutional investors. In the last quarter of 1996, management
determined that the Company's adjustable-rate loan production volume had grown
to the point at which it could begin to avail itself efficiently of the
securitization market. Accordingly, since October 1996, management's strategy
has been focused on aggregating sufficient inventories of its adjustable-rate
loans to utilize securitization to finance adjustable-rate loan products. Gains
on the sales of loans in 1996 decreased from the amount of gains in 1995
primarily because the Company built up its inventory of loans held for sale at
the end of 1996 for a securitization in the following year. In 1997, the gains
on the sale of loans increased significantly from 1996 because the Company
completed two securitizations in 1997; both were structured as Gain-on-Sale
Securitizations rather than as financings. As a result of these developments,
the net loss in 1995 increased from $0.2 million to $1.7 million in 1996. The
Company generated net income of $1.3 million in 1997, a $3.0 million improvement
in earnings from 1996.
In the future, management intends to build and manage its portfolio of Non-
Conforming Loans, and to finance this growth primarily through the issuance of
non-recourse CMO debt. There should be no future gains on sales from
securitizations because management intends to structure future securitizations
as CMO debt financings rather than as sales of the loans. As a result, gains on
sales of mortgage loans should be significantly less in future periods.
Conversely, the net interest income in future periods should be significantly
higher due to the increases in interest income from securitized mortgage loans
that remain on the Company's balance sheet as assets, partially offset by
interest expense on the related CMO debt. The Company plans either to warehouse
its fixed-rate loans or to contribute such loans to a taxable subsidiary for
possible disposition in whole loan sale transactions until the Company's volume
of fixed-rate loans becomes large enough to be financed efficiently in non-
recourse CMO transactions. Additionally, the Company has sold adjustable-rate
loan production in whole-loan sale transactions for liquidity reasons from time
to time in the past. To the extent necessary, the Company could contribute
adjustable-rate loans in the future to a taxable subsidiary for possible
disposition in whole-loan sale transactions.
Going forward, the profitability of the Company will be determined in
significant part by two key factors: (i) the ability of the Company to
originate or otherwise acquire loans and other Mortgage Assets in leveraged
transactions and (ii) the Company's management of the risks inherent in such
assets, including credit and interest rate risks. The Company believes the
structure of a fully integrated, self-administered REIT is the best platform
from which to accomplish these objectives.
QUARTER ENDED MARCH 31, 1998 COMPARED TO QUARTER ENDED MARCH 31, 1997
REVENUES
Interest Income. Interest income primarily consists of the interest earned
on the loans held by the Company, earnings on the Retained Interests in loans
that have been securitized in Gain-on-Sale Securitizations and interest
37
<PAGE>
earned on cash equivalents and certificates of deposits. Interest income
increased by 112.8%, or $1.8 million, to $3.4 million from $1.6 million. The
increase was primarily attributable to (i) a 72.3%, or $54.8 million, increase
in average mortgage inventory balances, from $75.8 million during the first
quarter of 1997 to $130.7 million in the first quarter of 1998 and (ii) the
$19.1 million average value of Retained Interests held by the Company during the
first quarter of 1998 that were originated after March 1997. The increase in the
average balance of mortgage loans in 1998 compared to 1997 was due to (i) a
58.8%, or $36.3 million, increase in loan fundings in the first quarter of 1998
compared to the same period in 1997; and (ii) an 85.9%, or $55.6 million,
increase in the carrying value of the loans at December 31, 1997 compared to
December 31, 1996; offset by (iii) an 89.0%, or $28.0 million, increase in the
principal balance of loans sales during the first quarter of 1998 compared to
the same period in 1997. Additionally, during the first quarter of 1998 the
Company had earnings from the retained interests from the Company's June 1997
securitization (Residential Asset Securities Corporation Series 1997-KS2 ("RASC
1997-KS2") and the Company's September 1997 securitization (Fund America
Investors Trust 1997-NMC1 ("FAIT 1997-NMC1") securitizations of its mortgage
loans completed in June 1997 and September 1997, respectively. Earnings from the
Retained Interests are recorded based upon an expected risk-adjusted yield from
the securities over their expected lives.
Interest Expense. Interest expense primarily consists of the interest
charged on the warehouse lines of credit that were used to finance the loans
held as well as on the financing facilities used by the Company to finance its
Retained Interests and notes payable used to finance its certificates of
deposits. Interest expense increased 115.4%, or $1.4 million, from $1.2 million
to $2.7 million. Interest expense increased proportionately with the increase
in interest income. Interest expense increased in the first quarter of 1998
compared to the same period in 1997 due to, among other things, an increase in
the average balance of mortgage loans in the first quarter of 1998 compared to
the same quarter in 1997 and the $11.1 million of average financing of the
Retained Interests outstanding during the first quarter of 1998 but not
outstanding during the same period of 1997.
Below is a table that analyzes interest income from mortgage loans,
Retained Interests and other sources along with the related interest expense and
the resulting net yields generated from these instruments during the first
quarter on 1998 compared to the same period of 1997 (dollar amounts in
thousands).
<TABLE>
<CAPTION>
NET INTEREST INCOME ANALYSIS
QUARTER ENDING MARCH 1998 COMPARED TO QUARTER ENDING MARCH 1997
1997 1998
------------------------------------------ ----------------------------------------------
INTEREST INTEREST
AVERAGE INCOME/ ANNUAL AVERAGE INCOME/ ANNUAL
BALANCE (EXPENSE) YIELD BALANCE (EXPENSE) YIELD
<S> <C> <C> <C> <C> <C> <C>
Assets:
Mortgage loans $ 75,845 $ 1,531 8.08% $ 130,652 $ 2,615 8.01%/ (1)/
(1)
Retained securitization interests - - 19,070 716 15.01%
Cash equivalents and certificates of
deposit 3,111 47 6.01% 2,191 27 4.86%
-------- ------- ------ --------- -------- -------
Total interest income and related $ 78,956 1,578 7.99% $ 151,913 3,358 8.84%
earning assets ======== ======= ------ ========= ======== =======
Liabilities:
Warehouse financing facility $ 76,173 (1,229) 6.45% $ 130,795 (2,416) 7.39%
Residual financing facility - - - 11,126 (258) 9.28%
Notes payable/(2)/ 3,111 (16) 2.00% 2,191 (8) 1.40%
Total interest expense and -------- -------- ------ --------- -------- -----
related borrowings 79,284 (1,245) 6.28% 114,112 (2,682) 7.44%
======== -------- ------ ========= -------- -----
Net interest income $ 333 $ 676
======= ========
Net interest spread 1.71% 1.40%
Net yield/(3)/ 1.69% 94.87% 1.78%
Ratio of borrowings to earning assets 100.42%
</TABLE>
38
<PAGE>
(1) The interest income and resulting annualized yield is net of a valuation
adjustment to the beginning of the period interest accrual. Exclusive of
this non-recurring adjustment, the interest income is $2,815,000 and the
annualized yield is 8.62%.
(2) The lender under this obligation provides the Company low-cost borrowing
facilities because of the escrow accounts maintained by the Company at the
institution.
(3) Net interest income divided by the average balance of earning assets.
Net interest income is the difference between interest income earned on
portfolio assets and interest expense accrued on the related financing
facilities. Changes in the mix and volume of interest-earning assets and the
related interest-bearing liabilities, and their yields and overall interest
rates have historically had an impact on the Company's earnings, and in the
future are expected to have a larger impact on earnings. Net interest income
increased by $0.3 million, or 103.0%, to $0.7 million in the first quarter of
1998 from the same period in 1997. The increase was primarily due to (i) a
92.4%, or $73.0 million, increase in average earning assets, from $79.0 million
in the first quarter of 1997 to $151.9 million in the same period in 1998; and
(ii) a 9 basis point increase in the net yield on interest earning assets from
1.69% during the first quarter of 1997 to 1.78% during the same period of 1998.
The increase in the average interest-earning assets was due to a 72.3% increase
in the average principal balance of mortgage loans held and the addition of the
Retained Interests during the second and third quarters of 1997. The increase
in net yield was partially due to a 556 basis point decrease in the Company's
leverage ratio from 100.42% during the first quarter of 1997 to 94.87% during
the first quarter of 1998, offset by a 31 basis point decrease in the Company's
net interest spread from 1.71% during the first quarter of 1997 to 1.40% during
the first quarter of 1998.
The Company plans to issue CMO bonds collateralized by its ARM loan
inventory and production in future periods. If the Company is able to
accomplish this, interest income and interest expense should increase from
current levels. However, certain factors will impact the net interest spread
earned by the Company in the future. Those factors include, among other things,
the coupon of the mortgage loans originated and acquired by the Company, the
costs of the credit facilities used to finance the interest-earning assets, the
costs to originate or acquire the mortgage loans, the issuance costs of the
related credit facilities, the prepayment rates of the mortgage loans underlying
the interest-earning assets which will impact the rate of amortization of the
purchase price premium and debt issuance costs and the credit losses incurred on
the mortgage loans owned by the Company. Such factors may be impacted by events
outside of the control of the Company, as changes in interest rates, economic
downturns and natural disasters, which may impact the value of the underlying
collateral.
Gain on Sale of Mortgage Loans. Gains on sales of mortgage loans during
the first quarter of 1998 was relatively consistent with the same period of the
same period of 1997. Gains on sales of mortgage loans during the first quarter
of 1998 were $1.6 million compared to $1.4 million in the same period of 1997.
A large component of the gain in the first quarter 1998 was the $1.6 million
gain on the sale of ARM loans in February 1998. The loans were sold servicing-
retained at a premium of 5.13%. Servicing rights were capitalized at a value of
1.00% of the principal balance of the related loans and included in the gain.
During the first quarter of 1997, the gains on sales of mortgage loans were from
the sale of $15.1 million principal balance of adjustable-rate mortgage loans
and $16.5 million principal balance of fixed-rate mortgage loans, primarily on a
servicing-released basis. The average premium from these sales was 5.48%.
Beginning in 1998 the Company intends to securitize its Non-Conforming
Loans in transactions that qualify as borrowings, rather than as sales, for
financial accounting purposes. It is anticipated that most of the Company's
adjustable-rate loans will be financed through the issuance of non-recourse
CMOs. Fixed-rate loans may be either warehoused or disposed of in whole loan
sales through an affiliate of NMC, until the Company's fixed-rate loan
production volume becomes large enough to be financed efficiently through the
issuance of CMOs. After 1997, there should be no additional gains on sale from
securitizations and significantly reduced amounts of gains on sale from whole
loan sales.
Unrealized Gain on Trading Securities. The Company recorded a $0.3 million
unrealized gain on trading securities during the first quarter of 1998. The
unrealized gain is from the Company's two Retained Interests. The fair value of
the Retained Interests is determined based upon discounted projected cash flows.
Projected cash flows are computed based upon management's estimates of mortgage
loan prepayment rates, default rates and loss severity. The Company did not
change discounted cash flow assumptions from those assumptions used at December
31, 1997. The
39
<PAGE>
increase in value of the Retained Interests was due to actual prepayment rates
being less than projected prepayment rates. The Company utilized a 15% discount
rate, an assumption that credit losses would be incurred at a rate of 0.75% per
annum after a twelve month delay and an assumption that prepayment speeds, as
measured under the constant prepayment rate (CPR) method, would range from 20%
to 35% CPR with the highest CPR being applied to loans that for which 12 to 30
months have elapsed since origination of such loans. Any future unrealized gain
(loss) on trading securities will relate to changes in the fair value of the
Company's Retained Interests obtained through Gain-on-Sale Securitizations.
Loan Servicing Fees. Loan servicing fees increased 81.4%, or $0.5 million,
during the first quarter of 1998 compared to the same period of 1997, to $1.1
million from $0.6 million, respectively. The increase was primarily the result
of an increase in the outstanding principal balance of the mortgage loans in the
servicing portfolio, an increase in the average servicing fee rate and an
increase in ancillary fees from servicing the mortgage loans, primarily
prepayment penalties. The average outstanding principal balance of the
servicing portfolio increased 36.4%, from $521.6 million in the first quarter of
1997 to $711.5 million in the first quarter of 1998. The Company retained the
servicing rights on 94.8% of its mortgage loan production of $98.1 million from
January 1, 1998 to March 31, 1998, which outpaced the "run-off" (or principal
payments) of the mortgage loans in the servicing portfolio of $56.6 million
during the same period.
The average loan servicing fee rate increased from 0.36% per annum to 0.40%
per annum. The increase was due to the increase in the portion of the servicing
portfolio of Non-Conforming Loans as compared to Conforming Loans. The Company
generally earns a servicing fee from Non-Conforming Loans of 0.5% per annum
compared to a servicing fee ranging from 0.20% to 0.375% per annum from
Conforming Loans. The Company's average outstanding principal balance of Non-
Conforming Loans in the servicing portfolio increased 71.7%, from $215.2 million
for the first quarter of 1997 to $369.5 million for the first quarter of 1998.
By comparison, the Company's average outstanding principal balance of Conforming
Loans in the servicing portfolio decreased 10.5%, from $300.0 million for the
first quarter of 1997 to $268.0 million for the first quarter of 1998. The
Company has not added any significant amount of Conforming Loans to its
servicing portfolio for four years.
The Company intends to retain the servicing rights on the loans it uses as
collateral on the CMO bonds it issues in the future. As long as the Company
originates and purchases mortgage loans that it uses as collateral for the CMO
bonds it issues in amounts that exceed the amount of "run-off" of its servicing
portfolio, and the portion of the servicing portfolio represented by Non-
Conforming Loans increases and ancillary servicing fees increase, loan servicing
fees should increase in the future.
EXPENSES
Operating Expenses. Operating expenses consist of, among other things,
payroll costs, occupancy costs and other general and administrative expenses.
Operating expenses increased 100.1%, or $2.1 million, to $4.1 million from $2.0
million in the first quarter of 1998 compared to the same period in 1997. The
increase in operating expenses, in general, was the result of the expansion of
the Company's operations and enhancement of the Company's infrastructure during
1997 and the first quarter of 1998.
More specifically, payroll costs increased 100.6% due to (i) a 76.2%
increase in the number of employees of the Company from 105 at January 1, 1997
to 185 at March 31, 1998, and (ii) the implementation of a new management
incentive program designed to help the Company hire and retain qualified
personnel. (See "Management--1998 Incentive Plans.") Other general and
administrative expenses increased $0.7 million, or 110.4%, primarily due to (i)
advertising and telemarketing expenses related to the direct-to-consumer retail
division that began in the fourth quarter of 1997, and (ii) general increases in
expenses due to the expansion of the Company's operations and infrastructure.
Occupancy costs increased $0.2 million, or 87.5%, because the Company opened new
offices in Newport Beach, California, Fort Lee, New Jersey, and Salt Lake City,
Utah during 1997 and moved to larger office facilities in Warwick, Rhode Island
and Newport Beach, California during the first quarter of 1998. The above
increases are offset by an increase in capitalized loan origination costs.
40
<PAGE>
The Company expects operating expenses to increase in future periods
because of the additional costs of operating as a public company and
implementation of the expansion strategies described herein. The additional
costs currently are not quantifiable.
Provision for Credit Losses. The provision for credit losses on the
Company's mortgage loans increased 41.6% in the first quarter of 1998 compared
to the same period in 1997. The Company estimates future credit losses of
approximately 0.75% per annum. This rate is based on the Company's estimate of
identified and unidentified losses in its mortgage loan portfolio. Management's
periodic evaluation of the adequacy of the allowance is based on the Company's
past loss experience, known and inherent risks in the portfolio, various adverse
situations that may affect the borrowers' ability to repay, the estimated value
of any underlying collateral and current economic conditions. These estimates,
while based upon historical loss experience and other relevant data, are
ultimately subjective and inherently uncertain. The provision for credit losses
increased due to an increase in average mortgage loan balances in the first
quarter of 1998 compared to the first quarter of 1997. As the amount of
mortgage loans that the Company owns increases in the future, the provision for
credit losses is expected to increase in the future. Additionally, the
provision for credit losses will be impacted by actual credit losses incurred by
the Company. Actual credit losses incurred by the Company may be impacted by
events such as significant changes in the regional economies or natural
disasters in areas where the mortgaged properties securing the Company's
mortgage loans are located. The impact of such events on the performance of the
Company's mortgage loans currently is not determinable.
Amortization of Mortgage Servicing Rights. The amortization of mortgage
servicing rights increased 141.9%, or $0.2 million, to $0.3 million in the first
quarter of 1998 from $0.1 million in the same period in 1997. The increase is
due to a 77.0% increase in the average carrying value of mortgage servicing
rights in the first quarter of 1998 compared to the same period of 1997.
Additionally, the Company increased the expected rate of prepayments of the
mortgage loans the Company services, thereby increasing the rate of amortization
of the capitalized servicing rights. The Company will not capitalize the value
of mortgage servicing rights in its non-recourse CMO debt securitizations,
structured as financings. Accordingly, amortization of mortgage servicing
rights should decline in the future as long as there are no significant changes
in expected prepayment rates.
Operating Interest Expense. Operating interest expense consists of
interest expense on working capital loans, the convertible subordinated note
payable to Conti, and capital leases. Operating interest expense increased $0.3
million during the first quarter of 1998 compared to the same period in 1997.
The increase is primarily the result of the increase in working capital
borrowings and convertible subordinated debt financings during the last half of
1997 and the first quarter of 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES
Interest income. Interest income increased $6.5 million or 191.8% to $9.9
million in 1997 from $3.4 million in 1996. This increase was attributable
primarily to the accumulation of an inventory of loans held for sale in 1997 for
disposition through securitizations rather than whole loan sales. Also
contributing to the increase in interest income in 1997 compared to 1996 was
$0.9 million of income from the two Retained Interests issued by the Company in
June and September 1997.
Interest expense. Interest expense increased $4.8 million or 188.3% to
$7.3 million in 1997 from $2.5 million in 1996. The increase in this expense,
similar to the increase in interest income, is attributable primarily to
accumulation of inventory for disposition through securitizations rather than
whole loan sales. Also contributing to the increase is the interest expense
attributable to the financing facilities secured by the Company's Retained
Interests, which resulted in $0.4 million of interest expense in 1997.
Below is a table that analyzes interest income from various sources along
with the related interest expense and the resulting net yields of the related
instruments (dollar amounts in thousands).
41
<PAGE>
<TABLE>
<CAPTION>
1996 1997
------------------------------------- -----------------------------------------------
INTEREST INTEREST
AVERAGE INCOME/ ANNUAL AVERAGE INCOME/ ANNUAL
BALANCE (EXPENSE) YIELD BALANCE (EXPENSE) YIELD
<S> <C> <C> <C> <C> <C> <C>
Assets:
Mortgage loans $37,085 $ 3,089 8.33% $ 96,681 $ 8,859 9.16%
Retained securitization interests - - - 8,234 931 11.30%
Cash equivalents and certificates of
deposit 4,863 306 6.30% 1,685 117 6.97%
------- ------- -------- -------
Total interest income and related
earning assets $41,948 3,395 8.09% $106,600 9,907 9.29%
======= ------- ---- ======== ------- -----
Liabilities:
Warehouse financing facility $37,471 (2,445) 6.53% $ 96,029 (6,871) 7.16%
Residual financing facility - - - 4,192 (387) 9.24%
Notes payable/(1)/ 3,849 (85) 2.22% 1,685 (35) 2.06%
------- ------- -------- -------
Total interest expense and related
borrowings $41,320 (2,530) 6.12% $101,906 (7,293) 7.16%
======= ------- ---- ======== ------- -----
Net interest income $ 865 $ 2,614
======= =======
Net interest spread 1.97% 2.13%
==== =====
Net yield /(2)/ 2.06% 2.45%
==== =====
Ratio of borrowings to earning assets 98.50% 95.60%
======= ========
</TABLE>
(1) The lender under this obligation provides the Company low-cost borrowing
facilities because of the escrow accounts maintained by the Company at the
institution.
(2) Net interest income divided by the average balance of earning assets.
Net interest income increased by $1.7 million to $2.6 million in 1997 from
$0.9 million in 1996. The increase was due in part to a 154.1% increase in
average earning assets partially offset by a 146.6% increase in average
borrowings. The increase in earning assets was due to a 160.7% increase in the
average balance of mortgage loans held by the Company. The average balance of
mortgage loans was higher due to increased production in 1997 compared to 1996
and a longer period of holding mortgage loans in 1997 to accumulate adequately
sized loan pools for securitizations. Also in 1997, the Company began holding
its Retained Interests, which increased its average balance of earning assets.
The Company's net yield increased by 39 basis points in 1997 compared to
1996. This is primarily the result of a 290 basis point decrease in the amount
of leverage and a 16 basis point increase in the Company's net interest spread.
Gains on sales of mortgage loans. Gains on sales of mortgage loans
increased $8.3 million or 200.1% to $12.5 million (comprised of $9.2 million of
gains from securitizations and $3.3 million of gains from whole loan sales) in
1997 from $4.2 million (attributable entirely to whole loan sales) in 1996.
Loans sold either through a whole loan sale or a securitization increased 150.0%
from $145.9 million to $364.7 million during the same respective periods.
Included in the 1997 loan sale activity were Gain-on-Sale Securitizations of
$115.2 million closed in June 1997 and $123.6 million closed in September 1997.
The increase in the gains on sale of mortgage loans from 1996 to 1997 was
greater than the increase in the principal balance of loans sold due to the
Company's warehousing credit facility with Residential Funding Corporation
("RFC") through June 30, 1997, which required the Company to share 50% of the
profits of its loan sales with RFC.
42
<PAGE>
The Company's earnings from each of its Gain-on-Sale Securitizations were
computed based in part on the estimated fair value of the Retained Interests
created in these transactions. The gain on the June securitization was further
reduced by an amount paid to RFC as a final settlement of the agreement to share
gains on sale of adjustable-rate loans warehoused with RFC. In general, the
amount of the gain recorded and the related value of the Retained Interest
recorded approximated the same amount of gain the Company would have recorded
had the loans been sold in a whole loan sale transaction. However, in the Gain-
on-Sale Securitizations the Company will only receive the cash represented by
such gain over the actual life of the securitized loans, subject to the risk
that the actual cash received could be less than anticipated when the estimated
fair values of the Retained Interests were computed due to higher than expected
prepayments and credit losses on such loans. The gains on sale recorded in
connection with the RASC 1997-KS2 securitization of $115.2 million of mortgage
loans and the FAIT 1997-NMC1 securitization of $123.6 million of mortgage loans
were calculated as follows (dollars in thousands):
<TABLE>
<CAPTION>
RASC 1997-KS2 FAIT 1997-NMC1
-------------- ---------------
<S> <C> <C>
Proceeds from issuance of senior securities $ 115,164 $ 121,766
Value of capitalized servicing rights 961 1,048
Value of the Retained Interest 8,977 10,084
Less basis in securitized mortgages (117,676) (127,058)
Less transaction costs (1,151) (1,855)
Less profit sharing obligations (1,057) -
--------- ---------
Gain on securitization $ 5,218 $ 3,985
========= =========
</TABLE>
Unrealized loss on trading securities. The Company recorded an aggregate
unrealized loss on the Retained Interests associated with its two
securitizations in 1997 of $1.0 million. The unrealized loss results from the
decrease in the fair value of the Retained Interests from the date of their
issuance to the end of the year. The decrease in fair value is primarily
attributable to increases in prepayments on the underlying mortgage loans and an
increase in the discount rate used to value the Retained Interests. The fair
values of the Retained Interests are assessed quarterly. The estimated
prepayments used to compute the value of the Retained Interests were increased
from a flat 25% CPR to a vectored CPR ranging from 20% to 35%, applied at its
highest point during months 12 to 30 of the life of the underlying mortgage
loans. The discount rate was increased from 13% at issuance to 15% at year-end
to reflect overall decreases in pricing of these type of instruments during the
last quarter of 1997. Estimates of future credit losses, the remaining
significant variable used in the valuation of these instruments, remained
unchanged at 0.75% per annum.
Loan servicing fees. Loan servicing fees are generated based on a
percentage of the principal balance of loans serviced by the Company. Loan
servicing fees increased $0.6 million or 26.1% to $3.0 million in 1997 from $2.4
million in 1996, due to an increase in the size of the Company's total servicing
portfolio. The Company services a portfolio of Non-Conforming Loans
underwritten by the Company, as well as a portfolio of Conforming Loans
originated and underwritten by other financial institutions for which the
Company acquired the servicing rights in 1992 and 1993. The average principal
balance of the Company's combined servicing portfolios increased by $84.1
million or 16.6% to $589.8 million as of December 31, 1997 from $505.7 million
as of December 31, 1996.
Loan servicing fees are generally higher, as a percentage of the average
principal balance of the portfolio, for the Company's Non-Conforming Loan
portfolio than for the Company's Conforming Loan portfolio. The increase in
servicing income is attributable not only to an increase in the average
principal balance of loans serviced, but also to the fact that the Conforming
Loan portfolio balance decreased and the Non-Conforming Loan portfolio balance
increased.
EXPENSES
Operating expenses. Operating expenses increased $6.4 million or 85.8% to
$13.9 million in 1997 from $7.5 million in 1996. Payroll costs, a component of
operating expenses, increased due to an increase in the number of employees at
the Company and increases in pay rates of certain employees. The rapid
expansion plan of the Company necessitated the hiring of many new employees.
The total number of employees of the Company increased from 105 at December 31,
1996 to 177 at December 31, 1997, a 68.6% increase. Additionally, occupancy
costs and other operating expenses increased in 1997 from 1996, primarily due
to: (i) the opening of four new offices during 1997; (ii) the initial
43
<PAGE>
marketing costs related to the initiation of the direct-to-consumer retail
division in late 1997 and (iii) specific legal and management issues related to
the rapid growth of the Company, which required substantial legal and consulting
services during 1997.
The increases in specific expenses include a $0.5 million increase in rent
and occupancy costs from $0.7 million to $1.2 million; a $0.2 million increase
in mileage/ground transportation from $0.2 million to $0.4 million; $1.4 million
increase in advertising from a negligible amount in 1996 (attributable in 1997
almost entirely to the implementation of the direct-to-consumer retail lending
initiative); and a $1.2 million increase in legal, accounting, and consulting
expenses from approximately $0.6 million to $1.8 million. Additionally, the
Company incurred $0.2 million of consulting fees to TCG for certain services
provided to the Company in 1997.
Provision for credit losses. Provision for credit losses increased $0.2
million or 32.2% to $0.7 million in 1997 from $0.5 million in 1996, due to the
increased volume of loans originated and purchased by the Company. This expense
is chiefly comprised of the amount the Company added to its reserves as
estimates of credit losses.
Amortization of mortgage servicing rights. Amortization of servicing
rights is the charge off of the costs of acquiring a servicing portfolio or the
capitalized costs of creating a servicing portfolio through loan originations
over their expected lives. Amortization of servicing rights was $0.6 million in
1997, consistent with 1996. The amortization of servicing rights increased due
to an increase in servicing retained production in 1997 compared to 1996 and was
offset by a decrease in the amortization due to an impairment in the carrying
value of the servicing rights at the end of 1996. The Company does not expect
to capitalize the value of mortgage servicing rights in its non-recourse CMO
debt financing.
Operating interest expense. Operating interest expense is primarily
interest expense charged on working capital loans. Operating interest expense
increased $0.3 million or 301.8% to $0.4 million in 1997 from $0.1 million in
1996. This increase resulted from the need for working capital caused by the
rapid growth and expansion of the Company, and the increased availability of
working capital financing under the credit facilities entered into in mid-1997
with Conti and Greenwich.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES
Interest income. Interest income increased $1.2 million or 57.2% to $3.4
million in 1996 from $2.2 million in 1995. This increase is consistent with the
64.1% increase in production in 1996 compared to 1995, and a 123.4% increase in
the average mortgage loan balance in 1996 compared to 1995 offset by a 176 basis
point decrease in the average yield on mortgage loans from 1995 to 1996.
Interest expense. Interest expense increased $1.1 million or 75.7% to $2.5
million in 1996 from $1.4 million in 1995. The increase in this expense is
consistent with the 136.0% increase in the average amount of warehouse financing
by the Company during 1996 compared to 1995 offset by a 170 basis point decrease
in the average interest rate on the debt facilities.
Below is a table which analyzes interest income from various sources along
with the related interest expense and the resulting net yields of the related
instruments (dollar amounts in thousands).
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NET INTEREST INCOME ANALYSIS
1996 COMPARED TO 1995
<TABLE>
<CAPTION>
1995 1996
---------------------------------------- -----------------------------------------
INTEREST INTEREST
AVERAGE INCOME/ ANNUAL AVERAGE INCOME/ ANNUAL
BALANCE (EXPENSE) YIELD BALANCE (EXPENSE) YIELD
<S> <C> <C> <C> <C> <C> <C>
Assets
Mortgage loans $16,603 $ 1,674 10.09% $37,085 $ 3,089 8.33%
Cash equivalents and certificates
of deposit 6,117 486 7.94% 4,863 306 6.30%
-------- -------- ------- -------
Total interest income and related
earning assets $22,720 2,160 9.51% $41,948 3,395 8.09%
======= ------- ------- ======= ------- -------
Liabilities:
Warehouse financing facility $15,877 (1,307) 8.23% $37,471 (2,445) 6.53%
Notes payable(1) 6,117 (133) 2.17% 3,849 (85) 2.22%
------- ------- ------- -------
Total interest expense and related
borrowings $21,994 (1,440) 6.55% $41,320 (2,530) 6.12%
======= ------- ----- ======= ------- -----
Net interest income $ 720 $ 865
======= =======
Net interest spread 2.96% 1.97%
===== ====
Net yield (2) 3.17% 2.06%
===== ====
Ratio of borrowings to earning assets 96.81% 98.50%
======= =======
</TABLE>
(1) The lender under this obligation provides the Company low-cost borrowing
facilities because of the escrow accounts deposited at the institution.
(2) Net interest income divided by the average balance of earning assets.
The increase in net interest income was the result of an 84.6% increase in
the average balance of earning assets in 1996 compared to 1995, offset by a 99
basis point decrease in the net interest spread. The 84.6% increase in the
average balance of earning assets is due to a combination of a 64.1% increase in
production in 1996 compared to 1995 and the Company's decision to hold loans in
the fourth quarter of 1996 for a subsequent securitization. The net interest
spread decreased primarily as a result of a 47 basis point decrease in the net
yield on the Company's mortgage loans and an increase in the leverage on the
earning assets.
Gains on sales of mortgage loans. Gains on sales of mortgage loans
decreased $3.0 million or 41.7% to $4.2 million in 1996 from $7.1 million in
1995. This decrease was a result of the Company's decision to build an
inventory of loans during the last quarter of 1996 sufficient to consummate a
securitization. Although the loans originated and purchased increased from
$126.4 million during 1995 to $207.5 million during 1996, the loans sold
decreased by $40.1 million or 21.6% to $145.9 million in 1996 from $186.0
million in 1995. The Company sold loan inventory during 1996 only in an amount
that it determined was necessary to provide adequate working capital to fund the
accumulation of an inventory of loans for the June 1997 securitization. The
decrease is consistent with the decrease in the principal balance of mortgage
loans sold in 1996 compared to 1995. Gains on sales of mortgage loans in 1996
and 1995 was attributable entirely to whole loan sales.
Loan servicing fees. Loan servicing fees increased $0.2 million or 9.0% to
$2.4 million in 1996 from $2.2 million in 1995, due to an increase in the size
of the Company's servicing portfolio. The average principal balance of the
combined Non-Conforming Loan and Conforming Loan portfolios serviced by the
Company increased by $15.8 million or 3.2% to $505.7 million in 1996 from $489.9
million in 1995. The increase in servicing income is also attributable to the
fact that the Conforming Loan portfolio balances decreased and the balance of
the Non-Conforming Loan servicing portfolio (with its higher servicing fees)
increased.
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EXPENSES
Operating expenses. Operating expenses increased $0.6 million or 8.2% to
$7.5 million in 1996 from $6.9 million in 1995. Payroll costs, a component of
operating expenses, increased $1.6 million, or 47.1%, to $4.8 million in 1996
from $3.2 million in 1995. Two factors were primarily responsible for this
increase. The first was a Company decision to expand rapidly its production
department in order to accomplish aggressive growth in loan production. The
other principal reason for the increase was a change in expenses related to what
is now the Company's Northeast regional office (located in Rhode Island) from
management fees to payroll costs. Before August 1995, the Company paid
management fees to an unrelated third party for compensation and employee
benefits, rent and occupancy costs, and other general and administrative
expenses with respect to that office pursuant to a facilities use and office
administration agreement and an administrative services agreement. In August
1995, the facilities use and office administration agreement, pursuant to which
the Company paid fees related to compensation and employee benefits, was
terminated. After this termination, the Company employed persons formerly
employed by the facilities provider. Payroll costs included in the 1995
management fee expense amounted to approximately $1.5 million. Occupancy costs
increased $0.2 million to $0.7 million in 1996 from $0.5 million in 1995. The
increase was due to the Company's opening of its Southeast Regional office in
1995 and expansion of other facilities. Included in the management fee expenses
paid to a third party during 1995 were $0.3 million of other operating expenses.
Legal and professional fees decreased by $0.5 million in 1996 from 1995.
Although the business volume of the Company accounts for a significant portion
of legal and professional fees, isolated lawsuits can have a significant impact
in any one year. During 1996 and 1995 a class action lawsuit involving the
Company was in process; the matter was settled before the end of 1996. The
reduction of legal and professional fees reflected the absence of this activity
during 1996. Additionally, operating expenses were reduced in 1996 by the
offset of loan origination and underwriting fees as the Company's loan inventory
was built up in anticipation of loan securitizations in 1997.
Provision for credit losses. Provision for credit losses increased $0.4
million to $0.5 million in 1996 from $0.1 million in 1995. The Company
increased its reserves against estimated future losses by $0.3 million or 217.6%
from $0.1 million to $0.5 million because the Company funded a greater volume of
loans.
Amortization of mortgage servicing rights. Amortization of mortgage
servicing rights decreased $0.1 million or 15.2% to $0.6 million in 1996. The
decrease was due to a reduction in prepayment estimates in 1996 from 1995 due to
declining interest rates. The reduction in the amortization of servicing rights
was offset by a $0.3 million impairment to the carrying value of the servicing
rights at December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal cash requirements will include the funding of (i)
loan purchases and originations, (ii) the acquisition of Mortgage Assets, (iii)
payment of interest expense and repayment of principal on its various
borrowings, (iv) ongoing operating expenses, including the costs of operating as
a public company and a REIT, (v) the cost of implementing the various aspects of
the Company's expansion plans, including acquisitions of non-conforming mortgage
lending businesses, and (vi) dividend payments.
The Company requires access to short-term warehouse credit facilities in
order to fund the purchase and origination of mortgage loans. The Company
currently has available two warehouse lines of credit and a repurchase agreement
to finance its mortgage loans while they are being aggregated by the Company for
securitization, all of which expire in June 1998. These facilities consist of a
$100 million warehouse line from Greenwich (increased to up to $200 million
through June 26, 1998), which is generally used to finance ARM production, a
$21.1 million warehouse line from RFC, which is generally used to finance fixed-
rate loan production, and a repurchase agreement with an investment bank under
which NMC has financed $138,093,000 of ARM Loans. The Company will pool its
mortgage loans to serve as collateral for its CMO offerings as long-term
financing of the loans. By doing so, the loans will be released as collateral
for the warehouse lines of credit, freeing those arrangements to fund further
loan originations. The warehousing facilities currently used by the Company are
considered premium financing facilities because they advance at rates ranging
from 100% to 103% of the outstanding balance of most of the warehoused mortgage
loans. Although the advance rate on these loans is advantageous, the borrowing
costs are generally higher than similar warehouse facilities that do not advance
above the principal balance of the mortgages. Upon successful
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<PAGE>
completion of the Offering, the Company will seek to obtain lower cost warehouse
credit facilities that advance amounts less than the outstanding balance of the
loans. As the Company securitizes its mortgage loans through CMO offerings, the
Company is required to repay its premium warehouse financing. In most cases, the
CMO offering proceeds would be insufficient to pay off the premium warehouse
indebtedness secured by the securitized loans. The additional funds required to
release the mortgage loans from the premium advance rate of the warehouse credit
facility are provided in part by borrowings under financing facilities
collateralized by the Retained Interests created in the CMO transaction. The
Company currently has a $15 million credit facility that is collateralized by
Retained Interests. In general, any cash received from the Retained Interests is
used to service the related debt until it is repaid. The Company plans to
utilize a portion of the proceeds from the Offering to repay the Retained
Interest credit facility. As a result of the Company's expected use of warehouse
facilities in the future under which it will borrow less than the full principal
balance of the pledged mortgage loans, the Company expects in the future to be
able to use CMO proceeds to pay off the warehouse financing of the related loans
in full. Accordingly, cash received from the Company's Retained Interests will
be available for distributions to stockholders and for satisfaction of other
working capital needs. Additionally, as the Company acquires Mortgage Assets in
the future, it may seek to finance such acquisitions partially using term credit
facilities with specific formulas for collateral valuation from investment
banks. These facilities have not yet been negotiated, and there is no assurance
that they will be available on terms acceptable to the Company.
On April 22, 1998, the Company entered into a one-month repurchase
agreement with an investment banker to finance $138,093,000 of outstanding
principal balance of mortgage loans with a net carrying value of $142,087,000.
The loans were previously financed through the warehouse facility. The
repurchase agreement bears interest at 1.25% over the London Interbank Offered
Rate for one-month U.S. dollar deposits ("One Month LIBOR"), is limited to
$200,000,000 in outstanding borrowings and renews automatically for additional
one-month terms unless the Company is notified otherwise pursuant to notice
provisions contained in the agreement.
The Company plans to replace or substantially modify its existing warehouse
facilities in order to reduce the interest rate applicable to its warehouse
borrowings and prepay its residual financing facilities, working capital
facilities and convertible subordinated note payable with a portion of the
proceeds from the issuance of the Units offered by the Company pursuant to this
Prospectus. The Company currently estimates that approximately $____ of the
proceeds from the Offering will be used to repay corporate indebtedness. In
connection with the repayment of certain indebtedness to Conti and Greenwich,
Conti's waiving the conversion feature of its subordinated note from the Company
and the amendment by Conti and Greenwich of certain of the covenants in their
agreements primarily related to loan sales, the Company has agreed to issue
additional warrants and make cash payments to these lenders. Conti and
Greenwich currently have warrants representing 5.5% and 2.0%, respectively, of
the Common Stock of the Company prior to the Offering. The warrants have a
negligible exercise price and are outstanding through June 2002. Upon
completion of the Offering, the Company has agreed to issue to Conti additional
warrants exercisable for an additional 4.5% of the Common Stock of the Company
prior to the Offering, plus a termination fee of $1,000,000, and to pay to
Greenwich a termination fee of $250,000. If Conti and Greenwich exercise their
warrants, they will own __% and __%, respectively, of the outstanding shares of
Common Stock of the Company after the completion of the Offering. As a result
of the early retirement of the residual financing facilities, working capital
facilities and the convertible subordinated note payable, and the replacement or
substantial modification of the warehouse facilities, the Company will incur a
charge of $_________ due to the early extinguishment of debt, which is comprised
of the value of Warrants issued, the $1,250,000 cash payments made and the
write-off of unamortized debt issuance costs.
While most of the Company's strategies for expansion in the past have been
formulated so as to require minimal cash outlay, the implementation of the
Company's present growth strategies, including the planned establishment of
additional regional and branch offices, continued development of the Company's
direct-to-consumer retail loan origination initiative, and acquisition of
Mortgage Assets and third party loan production and lending operations will
require greater cash commitments in the future. If any of the Company's
strategies are successful, they will result in greater volumes of loan purchases
and originations and Mortgage Asset acquisitions and, therefore, greater
liquidity and capital needs. Funds available from the net proceeds from the
Offering, after reduction of the Company's current warehouse facilities and
repayment of other credit facilities, will be used to fund the Company's
liquidity and capital requirements, including the implementation of its business
strategies, for the period following completion of the Offering. The Company
anticipates that it will need to arrange for additional external cash resources
through additional financing or by accessing the capital markets through
additional stock or debt offerings as the
47
<PAGE>
proceeds from the Offering are fully utilized. The timing of the utilization of
the proceeds of the Offering is dependent upon numerous factors including the
availability of acquisitions of Mortgage Assets and business acquisition
opportunities. The Company has no commitments for additional external financing
and there can be no assurance that the Company will be successful in
consummating any such financing transactions in the future on terms the Company
would consider favorable. The Company's business and growth strategies following
completion of the Offering are dependent on the Company's ability to maintain
its current warehouse and other credit facilities and the Company's growth is
dependent on its ability to acquire additional credit lines or locate other
sources of funding. While the Company anticipates that it will be able to meet
its warehouse and credit needs following completion of the Offering through its
current facilities, there can be no assurance either that the Company's current
creditors will renew their facilities as they expire or that the Company will be
able to acquire additional credit facilities on comparable terms or otherwise.
See "Risk Factors--Operating Risks -- Inability to Access Adequate Funding
Sources on Favorable Terms May Affect Results of Operations."
The Company's warehouse facilities and other credit facilities contain
various affirmative and negative covenants customary for credit arrangements of
their type and which the Company believes will not have a material effect on its
operations, growth and financial flexibility. The warehouse lines and other
financing facilities also contain certain financial covenants requiring the
maintenance of certain levels of consolidated tangible equity or certain debt-
to-equity or debt-to-net worth ratios, as well as establishing limits on the
ability of the Company to incur unsecured indebtedness. The Company does not
believe that the existing financial covenants will restrict its operations or
growth in the immediate future. As of March 31, 1998, the Company was in
compliance with all of the financial covenants in its debt agreements. In 1998,
the Company, effective retroactive to December 31, 1997, amended its agreements
with certain lenders. The amended agreements modified certain of the financial
covenants, including the net worth covenant, which now requires the Company to
have stockholders' equity, including preferred stock, of $10.0 million at
September 30, 1998 and thereafter. Additionally, certain of the Company's
mortgage servicing contracts require that the Company comply with various
financial and operating covenants. The Company was in compliance with all of
these covenants at March 31, 1998, except for a net worth requirement of $6.7
million under an agreement for the servicing of a $119.6 million pool of
securitized mortgage loans. The bond insurer for the related MBS has the right
to remove the Company as servicer of the pool due to this non-compliance. The
Company has discussed this situation with the bond insurer, which has elected
not to exercise its removal remedy at this time, although it has reserved the
right to exercise all of its remedies in the future.
A rapid rise in short-term interest rates could adversely affect the value
of the Company's adjustable-rate loans, because the interest rates on such loans
are reset semi-annually, whereas the interest rates on the Company's warehouse
facilities are reset monthly or more frequently. Any rise in short-term
interest rates will adversely affect the value of the Company's fixed-rate loans
because the increased borrowing costs would not be offset by any increased loan
interest income. Also, in the event of rising short-term interest rates, the
spread between the interest earned on the Company's Mortgage Assets and interest
payable on the Company's borrowings could be reduced or even negative. See
"Risk Factors -- Operating Risks -- Interest Rate Fluctuations May Adversely
Affect Results of Operations."
INFLATION AND INTEREST RATES
Virtually all of the Company's assets and liabilities are and will be
financial in nature. As a result, interest rates and other factors will drive
the Company's performance far more than does inflation. Changes in interest
rates do not necessarily correlate with inflation rates or changes in inflation
rates.
The Company plans to continue adding interest-earning Mortgage Assets,
consisting primarily of its Non-Conforming Loan production and Retained
Interests therein, but also of other Mortgage Assets, including Residual
Interests in other companies' securitized mortgage loans ("Third Party
Residuals"). The Company's Mortgage Asset portfolio will be designed with a
view to generating spread income principally from the earnings on its Mortgage
Assets in excess of its borrowing costs related to those Mortgage Assets and
producing an attractive yield on its net investment in its Mortgage Assets at
appropriate prices (discounts). Income on Retained Interests and Third Party
Residuals will be reported as interest on the underlying loans is received by
the Company in excess of the interest costs of the long-term non-recourse
financing of those assets represented by the related CMOs or other MBS. A
significant portion of the Company's unsecuritized mortgage loans and its other
Mortgage Assets will be financed through
48
<PAGE>
borrowings that bear short-term rates of interest. A substantial portion of the
Company's Mortgage Assets will also bear interest at short-term adjustable
rates. As a result, net interest or spread income will depend on prevailing
market interest rates, as well as the volume of interest-earning assets and
interest-bearing liabilities. Increases in short-term interest rates will
generally increase the yields on Mortgage Assets (except those bearing fixed
rates of interest) and will generally increase the costs of the Company's
borrowings against such Mortgage Assets. However, to the extent that borrowing
costs adjust at different times or in different amounts relative to the yields
on the related Mortgage Assets, the Company will be subject to interest rate
risk. When the costs of borrowings increase more rapidly than the yields on
assets, net interest or spread income may be reduced. Conversely, decreases in
short-term interest rates may decrease the interest costs on the Company's
borrowings more rapidly than it reduces the yields on the Company's adjustable-
rate Mortgage Assets, causing an increase in net interest income. Management
will monitor and attempt to manage interest rate risk. However, the Company's
portfolio cannot be completely hedged against changing interest rates. See
"Business -- Portfolio Management -- Portfolio Risk Management -- Interest Rate
Risk."
YEAR 2000 COMPLIANCE
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a two-
digit year is commonly referred to as the "Year 2000 Compliance" issue. As the
year 2000 approaches, such systems may be unable to process certain date-based
information accurately.
The Company believes it has identified all significant internal
applications that will require modifications to ensure Year 2000 Compliance.
Significant applications acquired or developed over the past three years were
integrated into the Company's systems as Year 2000 compliant. Internal and
external resources are being used to review other significant applications to
make the required modifications and test Year 2000 Compliance. The modification
of all significant applications is substantially complete. The Company plans to
complete its testing of all significant applications over the upcoming year.
In addition, the Company has communicated with third parties with whom it
does significant business to determine their Year 2000 Compliance readiness and
the extent to which the Company is vulnerable to any third party Year 2000
Compliance issues (such as any issues that may exist with respect to the
Company's warehouse lenders, which could affect the Company's loan funding
activities, and any issues that may exist with respect to the Alltel payment
processing system utilized by the Company, which could affect the Company's
servicing capabilities). However, there can be no guarantee that the systems of
other companies on which the Company's systems rely will be timely converted, or
that a failure to convert by another company, or a conversion that is
incompatible with the Company's systems, would not have a material adverse
effect on the Company.
The total cost to the Company of these Year 2000 Compliance activities has
not been and is not anticipated to be material to its financial position or
results of operations in any given year. These costs and the date on which the
Company plans to complete the Year 2000 Compliance modification and testing
processes are based on management's best estimates, which were derived utilizing
numerous assumptions of future events, including the continued availability of
certain resources, third party modification plans and other factors. However,
there can be no guarantee that these estimates will be achieved, and actual
results could differ from those plans.
CERTAIN ACCOUNTING PRONOUNCEMENTS
SFAS 122
Effective January 1, 1995, the Company adopted SFAS 122, "Mortgage
Servicing Rights." Because SFAS 122 prohibits retroactive application to years
prior to adoption thereof, the historical accounting results for the periods
ended prior to 1995 have not been restated and, accordingly, are not directly
comparable to the financial results for 1995 and thereafter. SFAS 122 was
superseded but not materially changed by SFAS 125 as of January 1, 1997, and the
adoption of SFAS 125 had no material impact on the Company with respect to
accounting issues addressed by SFAS 122.
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SFAS 122 required that a mortgage banking entity recognize as a separate
asset the rights to service mortgage loans for others. Mortgage banking
entities that acquire or originate loans and subsequently sell or securitize
those loans and retain the mortgage servicing rights are required to allocate
the total cost of the loans between the mortgage servicing rights and the
mortgage loans based on the fair value of each. The Company determines fair
value of servicing rights based upon the present value of estimated net future
servicing revenues less the estimated cost to service loans, adjusted based on
the same assumptions used in the gain-on-sale calculation. The cost allocated
to these servicing rights is amortized in proportion to and over the period of
estimated net future cash flows from servicing fees collected. As a result of
the adoption of SFAS 122 and SFAS 125, the Company recognizes larger gains at
the time a loan is sold servicing-retained and greater costs during the period
such loan is serviced than it did prior to the adoption of SFAS 122. To this
end, the application of SFAS 122 (and SFAS 125 beginning January 1, 1997)
resulted in additional income recorded as gain-on-sale of approximately $1.6
million, $0.5 million and $2.0 million during 1995, 1996 and 1997, respectively,
which amounts in each case would not have been included in gain-on-sale in years
prior to 1995. In the future, the Company intends to conduct most of its
securitizations as non-recourse financings, and does not intend to sell a
significant portion of its loan production. Accordingly, the Company expects
that SFAS 122 and SFAS 125 as it relates to mortgage servicing will not have any
significant effect on the Company in the future.
SFAS No. 122 also requires impairment evaluations of all amounts
capitalized as servicing rights, including those purchased before the adoption
of SFAS No. 122, based upon the fair value of the underlying servicing rights.
The Company has periodically performed these evaluations on a disaggregated
basis for the predominant risk characteristics of the underlying loans, which
are loan type, term, credit quality and interest rate, and in the future will
perform these evaluations quarterly with respect to loans it has sold for which
it retained the servicing rights.
SFAS 125
Effective January 1, 1997, the Company adopted SFAS 125, as amended by SFAS
No. 127, which provides accounting and reporting standards for transferring and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. This statement distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. Upon implementation, SFAS 125
had no material impact on the financial statements of the Company as it relates
to SFAS 122 and the accounting treatment of retained mortgage servicing rights
discussed above. Pursuant to the provisions of SFAS 125, the Company's two
securitizations completed in 1997 were gain-on-sale transactions. The Company
expects to structure its future securitizations as non-recourse financings. As
a result, the Company does not expect to record gains on securitizations of its
mortgage loans in the future.
SFAS 128
Upon completion of its initial public offering, the Company will report
earnings per share information pursuant to SFAS 128, "Earnings Per Share." SFAS
128 specifies the computation, presentation and disclosure requirements for
"basic" and "diluted" earnings per share ("EPS") for entities with publicly held
common stock or potential common stock.
Basic EPS is computed by dividing income available to common stockholders
by the weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock (such as the Warrants) were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity.
SFAS 131
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 establishes standards for the way
that public companies report selected information about operating segments in
annual financial statements and requires that those companies report selected
information about segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. SFAS 131, which supersedes
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," but
retains the requirement to report information about major
50
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customers, requires that a public company report financial and descriptive
information about its reportable operating segments. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. Generally,
financial information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. SFAS 131 requires that a public company report a measure
of segment profit or loss, certain specific revenue and expense items, and
segment assets. However, SFAS 131 does not require the reporting of information
that is not prepared for internal use if reporting it would be impracticable.
SFAS 131 also requires that a public company report descriptive information
about the way that the operating segments were determined, the products and
services provided by the operating segments, differences between the
measurements used in reporting segment information and those used in the
enterprise's general-purpose financial statements, and changes in the
measurement of segment amounts from period to period. SFAS 131 is effective for
financial statements for periods beginning after December 15, 1997. The Company
has not determined the effects, if any, that SFAS 131 will have on the
disclosures in its consolidated financial statements.
BUSINESS
OVERVIEW
The Company is a fully-integrated, non-conforming mortgage lender that
operates as a self-managed REIT. The Company originates, purchases, holds for
investment and services primarily first-lien single-family residential Non-
Conforming Loans. The Company intends to finance these mortgage loans through
the issuance of long-term non-recourse CMOs. The Company intends to build and
manage a portfolio of single-family residential mortgage loans (particularly
Non-Conforming Loans) and selectively acquired MBS and other related Mortgage
Assets to create attractive risk-adjusted returns through its tax-advantaged
REIT structure.
The Company was formed in 1991 to acquire the assets of its predecessor,
which had been in business since 1948 and primarily originated and serviced
Conforming Loans. In 1993, the Company shifted its business focus and commenced
non-conforming mortgage lending and servicing operations in order to take
advantage of the more attractive risk-adjusted returns the Company believes are
available in the non-conforming mortgage lending market.
The Company's business can be divided into two general categories: (i)
funding and servicing of single-family residential mortgage loans, particularly
Non-Conforming Loans; and (ii) management of a portfolio of Mortgage Assets,
including Non-Conforming Loans and Retained Interests in Non-Conforming Loans
funded by the Company, and other Mortgage Assets that may be selectively
acquired by the Company through secondary market purchases.
The Company's goal generally is to produce and acquire mortgage loans and
other Mortgage Assets that generate interest income in an aggregate amount that
exceeds (i) the interest costs of financing the assets, (ii) the costs of
producing or acquiring the assets, and (iii) the credit losses that will
inevitably be incurred on some portion of the assets. This excess interest
income, or spread, will be available to support the Company's overhead expenses
and, to the extent not so expended, will represent profit that will for the most
part be distributed to stockholders as dividends. The Company's overall
strategy is to maximize profitability by producing and acquiring Mortgage Assets
that are best suited to the Company's goal of maximizing spread income over
time. The Company intends to focus its efforts on locating, producing and
acquiring Mortgage Assets (i) that have risk-adjusted interest rates high enough
to maximize spreads over borrowing and production costs, (ii) for which the
spread income is likely to have a significant duration, so that the spread
income continues to be earned over time and the associated production and
acquisition costs can be amortized over a longer period, (iii) that are priced
at levels commensurate with the levels of credit risk assumed with respect to
the assets, (iv) that can be produced in quantities sufficient to create
economies of scale to justify the related production costs, and (v) that can be
managed efficiently through the Company's servicing and portfolio management
operations.
The Company intends to focus its loan production efforts on loan products
that it identifies as best suited to the Company's overall goals. Through
research, experience and product testing the Company seeks to understand the
consumers who will be most likely to borrow from the Company and identify the
loan products that are in demand.
51
<PAGE>
The Company tests its production channels to determine the best means of
reaching the markets for its loan products (as well as assessing the costs and
efficiency of various production channels in order to ascertain the most viable
production channel for reaching various consumer groups and marketing loan
products). In evaluating a type of Mortgage Asset or prospective targeted
consumer group, the Company will analyze, among other things, the likelihood of
defaults, losses and prepayments on the Mortgage Asset proposed to be produced
or acquired and the internal costs involved in producing and holding the
Mortgage Asset or in reaching that consumer group. The Company intends to use
its experienced servicing operation to manage the credit risks inherent in the
Mortgage Assets it ultimately chooses to produce and acquire.
In the future, the Company intends to:
. build a portfolio of Mortgage Assets and maximize its risk-adjusted
returns on that portfolio by:
. increasing its loan production and broadening its product
mix by (i) expanding existing capacity and the geographic
base of its wholesale Non-Conforming Loan production, (ii)
expanding its retail loan origination capabilities, and
(iii) offering new loan products to targeted groups of
consumers;
. acquiring other non-conforming mortgage lending companies or
certain operations of such companies, including retail
mortgage lending operations and wholesale networks in
geographic areas where the Company wishes to expand, and
acquiring loan production generally meeting the Company's
underwriting guidelines from third parties;
. investing in Retained Interests in securitized loan pools
comprised of its own Non-Conforming Loans and by strategic
acquisitions of other Mortgage Assets meeting investment
guidelines approved by the Board of Directors, including
Third Party Residuals;
. secure long-term non-recourse financing for its loan
production by issuing CMOs backed by its mortgage loans in
transactions that are treated as borrowings for financial
accounting purposes, thereby avoiding the earnings
volatility associated with securitizations that receive
gain-on-sale accounting treatment;
. continue to service its own Non-Conforming Loan production,
and operate as "Special Servicer" with respect to certain
acquired Mortgage Assets, in order to enhance its ability to
manage the risks associated with its Non-Conforming Loans
and such Mortgage Assets.
To implement its objectives as described in this Prospectus, the Company
has assembled an experienced senior management team. The Company recently hired
James A. Weissenborn as Chief Executive Officer and Kevin J. Nystrom as Chief
Financial Officer. This new senior management team has significant experience
operating mortgage lending businesses and managing mortgage-related asset
portfolios. See "Management." The Company believes that the experience of Mr.
Weissenborn and Mr. Nystrom complements the previous experience of the other
members of the Company's management in non-conforming mortgage lending and
accessing the secondary mortgage markets. In addition, the Company will share
certain employees with The Chotin Group Corporation ("TCG"), a company wholly-
owned by Steven B. Chotin. TCG has extensive experience with the mortgage loan
securitization and CMO markets and in acquiring and holding Mortgage Assets. As
a result, the Company believes that it is well positioned to avail itself of
substantial opportunities for growth in the evolving non-conforming mortgage
loan market.
MORTGAGE LENDING OPERATIONS
MARKET OVERVIEW
Over the last three years, the residential mortgage market generated annual
volume in excess of $600 billion per year in mortgage loan principal balance.
Most of these loans (approximately 80% to 85%) consist of Conforming Loans. The
remaining 15% to 20% (approximately $90 to $120 billion) of these loans are Non-
Conforming Loans. Investments
52
<PAGE>
in Non-Conforming Loans involve greater risks than investments in Conforming
Loans; however, investors in Non-Conforming Loans generally can achieve higher
risk-adjusted returns than investors in Conforming Loans, if they manage the
risks associated with non-conforming lending effectively, because non-conforming
mortgage lenders are generally able to charge higher interest rates for their
loan products than those that are usually charged by conforming mortgage
lenders, particularly if the related borrowers do not have good credit.
The Company believes there is strong consumer demand for Non-Conforming
Loans nationwide. Across the country, many consumers have suffered dislocation
and temporary unemployment, resulting in derogatory entries on their credit
reports. Many consumers have high ratios of debts to assets and high levels of
credit card and other installment debt. In addition, more consumers are
choosing to become self-employed and are not as readily capable of documenting
their sources of income. These are some of the circumstances that create the
market for Non-Conforming Loans.
One of the significant differences between the Conforming and Non-
Conforming Loan markets has been their relative levels of sensitivity and
reaction to changes in interest rates. Generally, the Non-Conforming Loan
market's historical performance has been less sensitive and reactive to interest
rate fluctuations than the Conforming Loan market. This is evident by the
growth in Non-Conforming Loan originations from 1993 through 1995. While the
Conforming Loan market experienced a decline in originations of more than 40%
due primarily to an increase in interest rates, loan originations in the Non-
Conforming Loan market continued to grow at an annual rate of 10% to 15% over
the same three-year period. The Company believes that the sub-prime or "non-
conforming" mortgage market will continue to grow and to generate relatively
attractive risk-adjusted returns over the long term due in part to the following
factors: (i) increased numbers of existing homeowners with derogatory entries
on their credit reports; (ii) growth in the number of immigrants with limited
credit histories who are in the prime home buying ages of 25 to 34; (iii) growth
in the number of self-employed individuals who have sources of income that are
inconsistent and difficult to document; (iv) growth in consumer debt levels
which are causing many consumers to have higher debt/income ratios; and (v)
growth in consumer bankruptcy filings that cause consumers to be classified as
non-conforming credits.
Historically, the Non-Conforming Loan market has been a highly fragmented
niche market dominated by local brokers with direct ties to investors who owned
and serviced this relatively higher margin, riskier product. Many new
competitors have entered this market in recent years, and the Company believes
that more competitors may attempt to enter the market in the future. The
Company believes that this market remains fragmented. While the entry of new
competitors may cause profit margins to narrow, the Company believes that the
Non-Conforming Loan mortgage market will be able to sustain attractive profit
margins due to certain barriers to entry, which include (i) the capital
intensive nature of the business as issuers of securities backed by Non-
Conforming Loans are required to retain the associated credit and prepayment
risks; (ii) the higher level of expertise required to underwrite Non-Conforming
Loans compared to Conforming Loans; (iii) the higher cost to service Non-
Conforming Loans compared to Conforming Loans due to the additional emphasis
required on collections and loss mitigation; (iv) the time and expense necessary
to build a wholesale or a retail loan production channel; and (v) the fact that
sub-prime lenders must implement automated and manual processes to originate
Non-Conforming Loans as there are currently no fully automated Non-Conforming
Loan origination systems available. Management believes that the Non-Conforming
Loan market requires more business judgment from underwriters in evaluating
borrowers with previous credit problems. Sub-prime lending is also generally a
lower volume/higher profit margin business than the Conforming Loan business to
which traditional mortgage bankers have become accustomed. Sub-prime mortgage
lending is also more capital intensive than the Conforming Loan market for
lenders who securitize their loan production and for lenders who hold their
mortgage loans due to the fact that the securitization function requires a
higher level of credit enhancement which must be provided by the issuer of MBS
backed by Non-Conforming Loans in the form of over-collateralization or
subordination.
Management believes that the Company is well positioned to avail itself of
substantial opportunities for growth in the evolving non-conforming mortgage
lending market. Many of the participants in this market have relied in
substantial part on the realization of gains upon securitization of mortgage
loans that are treated as sales for financial accounting purposes. Such gains
are calculated on the basis of projected net cash flows from the mortgage loans
and are evidenced by residual or subordinated interests ("Residual Interests")
in securitized mortgage loan pools retained by such companies. In 1997, the
Company and several of its competitors incurred losses due to the devaluation of
their Residual Interests resulting primarily from prepayments with respect to
the underlying mortgage loans that were beyond the estimates of prepayment rates
that had been assumed in initially valuing the Residual Interests, and a
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<PAGE>
general shift in the marketplace toward more conservative methodologies for
valuing Residual Interests than the practices that had been widely in use
previously. The Company and several of its competitors also have adopted more
conservative valuation assumptions for Residual Interests on a prospective
basis, which will ultimately have the effect of reducing earnings that will be
reported by companies with respect to their Residual Interests created in
securitizations structured to generate gains on sale. The trading prices of many
publicly-traded non-conforming mortgage companies have experienced significant
volatility and downward pressure as a result of these events, and certain of the
Company's competitors may be unable to access the capital markets or otherwise
obtain financing adequate to meet their working capital needs in the future. The
Company believes that this situation may create significant opportunities for
the Company to implement strategies for expansion of its loan production
capabilities, as well as to make strategic acquisitions of other non-conforming
mortgage companies or certain operations of such companies that would complement
or supplement the Company's existing operations and loan production and
acquisitions of Mortgage Assets owned by third parties.
SPECIFIC LOAN PRODUCTION AND EXPANSION STRATEGIES
GENERAL
The Company first entered the non-conforming mortgage lending market as a
wholesale mortgage lender, meaning that it acquired its loan production solely
through its network of independent mortgage brokers and correspondent lenders
who acted as intermediaries between the Company and the borrowing public.
Brokers and correspondents conduct their own marketing and employ their own
personnel to solicit loan applications, thereby allowing the Company to enter
the non-conforming mortgage market without as significant a capital investment
as would otherwise have been necessary in establishing a retail-based lending
presence. Accordingly, the Company's non-conforming lending business has
historically been "channel-dependent" in that the types of products offered and
consumers reached by the Company were dictated by the customer base "channeled"
through the Company's network of brokers and correspondents. The brokers and
correspondents who have relationships with the Company have typically derived
most of their borrowing customers from their relationships with real estate
brokers; as a result, the Company's Non-Conforming Loan portfolio has been
comprised largely of loans made to finance initial purchases and non-cash-out
refinancings of residential real estate ("Purchase Money/Refinancing Loans").
During 1997, $252.3 million or 59.2% of the Company's Non-Conforming Loan
production consisted of Purchase Money/Refinancing Loans. Also, most brokers
and correspondents tend to target consumers with relatively higher credit
ratings, because loan applications from these consumers are more likely to
result in funded loans and the compensation of brokers and correspondents is
typically contingent on loan closings. Consequently, the Company's historically
channel-dependent lending has caused the Company's Non-Conforming Loan portfolio
to consist largely of Higher Credit Non-Conforming Loans. Although the
Company's underwriting guidelines include five levels of credit risk
classification, 83.8% of the principal balance of the Non-Conforming Loans
funded by the Company in 1997 were made to borrowers within the Company's "A"
and "A minus" credit grades, its two highest credit classification levels. See
" -- Underwriting and Quality Control Strategy." In the future, the Company may
originate and acquire more Non-Conforming Loans that are not Higher Credit Non-
Conforming Loans.
The Company is now a relatively mature non-conforming mortgage lender,
having been in the business for nearly five years. While the Company intends to
continue to expand its channel-dependent lending business, a major component of
the Company's business plan for the future involves implementation of new
"customer-directed" strategies designed to target groups of consumers that it
has not yet reached through its channel-dependent programs. The Company
believes that more prospective non-conforming borrowers are looking for funds to
consolidate and refinance non-mortgage indebtedness, such as credit cards, and
to finance home improvements, education and other consumer needs than for
Purchase Money/Refinancing Loans. Consumers who own equity in their homes can
obtain funds for these purposes by borrowing loans secured by their residences
("Home Equity Loans") for lower interest rate costs than those charged under
unsecured loans and loans secured by assets other than residential real estate.
The channels through which the Company has historically obtained its loans have
not significantly tapped into this source of Non-Conforming Loan production.
The Company plans to target consumers who seek Home Equity Loans. As the
Company's Home Equity Loan production increases, the Company expects its loan
production volume to be less dependent on general levels of interest rates or
home sales and therefore less cyclical than conventional mortgage lending, which
focuses on Purchase Money/Refinancing Loans. The Company has no current plans
to make Home
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Equity Loans with loan-to-value ratios in excess of 100%. The Company will
continue to apply its underwriting guidelines to ensure that its loan production
remains of satisfactory quality to enable the Company to minimize losses.
The Company also plans to focus on producing loan products that it believes
will add duration to the Company's mortgage loan portfolio. These products are
expected to include loans with prepayment penalties, Home Equity Loans, loans
originated through retail operations, and loans secured by first liens on
properties that are also encumbered by subordinated mortgage liens. See "--
Portfolio Management -- Portfolio Risk Management -- Prepayment Risk."
"CHANNEL-DEPENDENT" LENDING
Description of the Company's Wholesale Lending Infrastructure
The Company is an experienced wholesale non-conforming lender that (i)
originates mortgage loans through independent licensed mortgage brokers and (ii)
purchases mortgage loans from approved mortgage bankers and other financial
institutions acting as correspondent lenders for the Company. Of the $425.9
million in mortgage loans the Company funded in 1997, the Company originated
approximately 68.0% or $289.4 million in mortgage loans through 585 brokers in
39 states and the District of Columbia and purchased approximately 31.6% or
$134.6 million in mortgage loans from 83 correspondents in 30 states and the
District of Columbia. Loan acquisitions from correspondents are comprising an
increasingly large percentage of the Company's wholesale loan production. From
1996 to 1997, the volume of loans originated by the Company through brokers
increased by 63.5%, while the volume of loans funded by the Company through
correspondents increased by 340.6%.
Wholesale Loan Originations and Purchases. The Company has increased its
loan originations and purchases significantly in recent years, from $126.4
million during 1995 to $207.5 million in 1996 and $425.9 million in 1997. The
following table shows certain information regarding the Company's loan
originations and purchases by source for the periods shown. All dollar amounts
are shown in thousands.
55
<PAGE>
SOURCES OF LOANS/(1)/
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ ---------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BROKER:
Principal balance $102,170 $177,000 $289,445 $50,462 $49,020
Percentage of total loans funded 80.8% 85.3% 68.0% 81.6% 49.9%
Average principal balance per loan $ 95 $ 116 $ 114 $ 114 $ 122
Weighted average original
loan-to-value ratio/(2)/ 68.0% 77.6% 79.4% 78.6% 79.5%
Weighted average interest
rate/(3)/ 10.7% 10.3% 10.0% 10.1% 10.0%
CORRESPONDENT:
Principal balance $ 24,277 $ 30,544 $134,580 $11,354 $47,995
Percentage of total loans funded 19.2% 14.7% 31.6% 18.4% 48.9%
Average principal balance per loan $ 109 $ 125 $ 127 $ 137 $ 125
Weighted average original
loan-to-value ratio/(2)/ 69.1% 76.5% 79.0% 77.5% 78.8%
Weighted average interest
rate/(3)/ 10.6% 10.4% 9.7% 9.9% 9.7%
DIRECT TO CONSUMER:
Principal balance $ - $ - $ 1,902 $ - $ 1,123
Percentage of total loans funded -% -% 0.4% -% 1.2%
Average principal balance per loan $ - $ - $ 146 $ - $ 140
Weighted average original
loan-to-value ratio/(2)/ -% -% 72.1% -% 83.6%
Weighted average interest
rate/(3)/ -% -% 9.4% -% 9.9%
TOTAL LOAN ORIGINATIONS
AND ACQUISITIONS:
Principal Balance $126,447 $207,544 $425,927 $61,816 $98,138
Average principal balance per loan $ 98 $ 117 $ 118 $ 118 $ 124
Weighted average original
loan-to-value ratio/(2)/ 68.2% 77.4% 79.2% 78.4% 79.2%
Weighted average interest rate/(3)/ 10.6% 10.3% 10.0% 10.1% 9.8%
</TABLE>
_________________________
(1) Weighted average statistics presented in this table are measured for any
loan as of the date the loan was originated or acquired by the Company.
(2) The original loan-to-value ratio of a mortgage loan is determined by
dividing the amount of the loan by the lesser of the purchase price or the
appraised value of the mortgage property at origination.
(3) With respect to ARMs, reflects the interest rate as of the date of
origination.
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LOAN TYPES/(1)/
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------- --------------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
ADJUSTABLE-RATE LOANS (ARMs)/(2)/
Six-Month LIBOR ARMs
Principal balance $ 88,376 $125,470 $119,151 $28,606 $18,353
Percentage of total loans funded 69.9% 60.5% 28.0% 46.3% 18.7%
Average principal balance per loan $ 102 $ 131 $ 147 $ 143 $ 158
Weighted average original
loan-to-value ratio/(3)/ 68.2% 77.5% 79.4% 78.2% 81.6%
Weighted average interest rate/(4)/ 10.4% 9.9% 9.5% 9.5% 9.4%
Weighted average
margin over LIBOR/(5)/ 5.6% 5.7% 5.8% 5.8% 5.7%
Two-Year Fixed/Six-Month
LIBOR Loans
Principal balance $ 117 $ 42,009 $244,785 $25,221 $64,644
Percentage of total loans funded 0.1% 20.2% 57.5% 40.8% 65.9%
Average principal balance per loan $ 117 $ 111 $ 117 $ 114 $ 126
Weighted average original
loan-to-value ratio/(3)/ 85.0% 80.1% 80.1% 79.0% 79.5%
Weighted average interest rate/(4)/ 9.1% 10.7% 10.1% 10.4% 9.9%
Weighted average
margin over LIBOR/(5)/ 4.1% 5.4% 6.0% 5.9% 5.8%
Three-Year Fixed/Six-Month
LIBOR Loans
Principal balance $ 22,102 $ 9,363 $ 4,534 $ 781 $ 1,333
Percentage of total loans funded 17.5% 4.5% 1.0% 1.2% 1.3%
Average principal balance per loan $ 97 $ 114 $ 133 $ 78 $ 267
Weighted average original
loan-to-value ratio/(3)/ 68.8% 73.4% 73.4% 78.3% 76.5%
Weighted average interest rate/(4)/ 11.1% 11.0% 9.8% 10.8% 10.6%
Weighted average
margin over LIBOR/(5)/ 4.9% 5.7% 5.7% 5.8% 5.9%
Total ARMs
Principal balance $110,595 $176,842 $368,470 $54,608 $84,330
Percentage of total loans funded 87.5% 85.2% 86.5% 88.3% 85.9%
Average principal balance per loan $ 101 $ 131 $ 126 $ 126 $ 132
Weighted average original
loan-to-value ratio/(3)/ 68.3% 77.9% 79.8% 78.6% 79.9%
Weighted average interest rate/(4)/ 10.6% 10.2% 9.9% 9.9% 9.8%
Weighted average
margin over LIBOR/(5)/ 5.5% 5.6% 5.9% 5.8% 5.8%
FIXED-RATE LOANS
Principal balance $ 15,852 $ 30,702 $ 57,457 $ 7,208 $13,808
Percentage of total loans funded 12.5% 14.8% 13.5% 11.7% 14.1%
Average principal balance per loan $ 79 $ 87 $ 86 $ 78 $ 87
Weighted average original
</TABLE>
57
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
loan-to-value ratio/(3)/ 67.7% 74.6% 75.8% 77.1% 74.9%
Weighted average interest rate/(4)/ 11.2% 11.3% 10.5% 10.9% 10.2%
TOTAL LOAN ORIGINATIONS
AND PURCHASES:
Principal balance $126,447 $207,544 $425,927 $61,816 $98,138
Average principal balance per loan $ 98 $ 117 $ 118 $ 118 $ 124
Weighted average original
loan-to-value ratio/(3)/ 68.2% 77.4% 79.2% 78.4% 79.2%
Weighted average interest rate/(4)/ 10.7% 10.3% 10.0% 10.1% 9.8%
</TABLE>
_________________________
(1) Weighted average statistics presented in this table are measured for any
loan as of the date the loan was originated or acquired by the Company.
(2) ARMs include loans bearing fixed interest rates for two or three years
after the date of origination, after which their interest rates are
adjusted semi-annually. These loans are called "Two Year Fixed/Six-Month
LIBOR Loans" and "Three Year Fixed/Six-Month LIBOR Loans" in the table.
(3) The original loan-to-value ratio of a mortgage loan is determined by
dividing the amount of the loan by the lesser of the purchase price or
the appraised value of the related mortgaged property at origination.
(4) With respect to ARMs, reflects the interest rate as of the date of
origination.
(5) The margin for a loan is a fixed amount set for the life of the loan,
which, when added to the index (as described below) determines the
interest rate on the loan (subject to interest rate floors, ceilings and
caps). The index used by the Company is the London Interbank Offered Rate
for six-month U.S. Dollar deposits ("LIBOR"), as published each Monday in
The Wall Street Journal.
Current Geographic Markets. The following table shows for the periods
indicated the geographic distribution of loan purchases and originations:
<TABLE>
<CAPTION>
LOAN ORIGINATIONS
AND PURCHASES
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------------------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATE
1. Colorado 34.8% 46.8% 29.9% 35.7% 26.7%
2. Georgia.............. 9.8 15.8 14.4 18.4 12.2
3. California........... 3.6 2.2 8.0 1.9 6.6
4. Connecticut.......... 10.4 7.5 8.0 9.5 9.6
5. Massachusetts........ 20.9 9.5 7.9 6.0 7.3
6. Maryland............. 2.3 2.9 4.9 4.8 3.1
7. Virginia............. 0.2 1.5 4.6 6.9 4.2
8. Utah................. 1.0 1.1 3.0 1.0 2.5
9. Rhode Island......... 4.6 4.1 2.7 3.8 1.5
10. Illinois............ 2.1 1.5 2.0 1.8 1.4
All Other States......... 10.3 7.1 14.6 10.2 24.9
----- ----- ----- ----- -----
TOTAL.............. 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
Although the Company has expanded its mortgage funding network in many
regions of the United States, the Company's loan origination and purchase
business is likely to remain concentrated for the foreseeable future in certain
states, particularly states in which regional and branch offices of the Company
are located. Consequently, the
58
<PAGE>
Company's results of operations and financial condition are dependent upon
general trends in the local economies and the residential real estate markets in
such states. See "Risk Factors--Operating Risks -- Lack of Geographic
Diversification."
Broker and Correspondent Marketing; Account Executives. The Company has
been successful in establishing and maintaining relationships with brokers and
correspondents interested in offering non-conforming mortgage products to their
clientele, and management believes that this success is primarily attributable
to the quality of service the Company provides to its network of brokers and
correspondents.
The Company typically initiates contact with a broker or correspondent
through the Company's account executives who are supervised by regional sales
officers with sales and marketing experience in the industry. The Company
usually hires account executives who have contacts with brokers and
correspondents that originate Non-Conforming Loans within their geographic
territory. The account executives are responsible for developing and
maintaining the Company's broker and correspondent networks within their
geographic territory chiefly by frequently visiting each broker or
correspondent, communicating the Company's underwriting guidelines,
disseminating new product information and pricing changes, and by a continuing
commitment to understanding the needs of the customer. Account executives
attend industry trade shows and are a source of information to the Company
concerning products and pricing offered by competitors and new market entrants,
all of which assist the Company in refining its programs and product offerings
in order to continue to offer competitive service.
The Company compensates its account executives with base salary plus
commissions based on production volume. All of the Company's account executives
must complete an extensive three- to six-month training program to attain the
level of knowledge and experience integral to the Company's commitment to
providing the highest quality service for brokers and correspondents.
Management believes that by maintaining an efficient, trained and experienced
staff, it has addressed the central factors that determine where a broker or
correspondent sends its business: (1) consistent underwriting, (2)
accessibility, (3) competitive pricing and (4) accurate and timely answers.
Team Approach. The Company seeks to establish, maintain and grow
productive relationships with its brokers and correspondents by assigning to
each broker and correspondent an entire support team headed by an account
executive. The support team consists of a customer support specialist who will
be the broker's or correspondent's "single point of contact" within the Company,
as well as a loan underwriter, a title insurance/closing specialist and an
appraisal specialist. The customer service specialist conveys all team
decisions, including underwriting decisions, to the team's assigned brokers and
correspondents. A "trading desk" also supports each team, providing application
pre-qualification services to brokers and correspondents. Brokers and
correspondents typically submit loan applications to the Company for pre-
qualification through the trading desk before submitting complete application
packages. This enables the brokers and correspondents to obtain a preliminary
indication as to whether the Company will approve a particular application and,
if so, to obtain a preliminary indication of the Company's probable loan terms.
The team's underwriters ultimately make all decisions over loan approval or
denial and on the conditions to closing of a loan, and the customer service
specialist communicates all underwriter decisions to the customer. Teams also
include appraisal review specialists, who conduct a 55-point in-house review of
every appraisal (and a 27-point review of every review appraisal), and a
"closer," who interacts directly with title insurance companies and other
settlement agents to facilitate smooth loan closings. Because the Company
operates in a highly competitive environment where brokers may submit the same
loan application to several prospective lenders simultaneously, the Company
strives to provide brokers with timely responses to broker inquiries, usually
within 2 to 4 hours after a broker's submission of a loan application for pre-
qualification, and usually within 24 to 48 weekday hours after a broker's
submission of a loan application for full review. If the application is
approved by the Company's underwriters, a "conditional approval" will be issued
to the broker with a list of specific conditions to be met and additional
documents to be supplied prior to funding the loan. The account executive and
the support team will then work directly with the submitting broker to collect
the requested information and meet all underwriting conditions. In most cases,
the Company funds loans within 10 to 15 days after preliminary approval of the
loan application. In some cases, the Company will fund a loan within a shorter
period after the loan application is approved. In the case of a denial, the
Company will make all reasonable attempts to ensure that there is no missing
information concerning the borrower or the application that might change the
decision on the loan. If an applicant does not initially meet the Company's
criteria for the type of loan for which he or she applied, the
59
<PAGE>
Company typically will attempt to offer the applicant a mortgage loan bearing a
higher interest rate and requiring a larger down payment before denying the loan
application altogether.
Each of the Company's loan production teams is eligible for incentive
compensation based on loan production, balanced by a loan quality check that
reduces overall team incentive compensation for poor quality loans. A team's
incentive pool is increased by an equal amount for each approval or denial
decision made by the team, and is also increased, but by a smaller amount, for
each loan closed by the team. However, a team's entire commission with respect
to a loan will be eliminated if a loan that is approved is unsalable or
ineligible for securitization. The Company believes that this system encourages
all of its loan production employees to achieve and maintain a complete concept
of the Company's mission of increasing loan production without sacrificing the
Company's quality standards and helps to ensure that the production teams'
incentives mirror the profitability incentives of the Company as a whole.
The Company's Brokers. During 1997, the Company's broker network accounted
for $289.4 million or 68.0% of the Company's loan purchases and originations
compared to $177.0 million or 85.3% of the Company's loan purchases and
originations during 1996. For the quarters ended March 31, 1998 and 1997, the
Company's broker network accounted for $49.0 million, or 49.9%, and $50.5
million, or 81.6%, respectively, of the Company's loan purchases and
originations. No single broker contributed more than 4.3% of the Company's
total purchases and originations in 1997.
Before a broker becomes part of the Company's network, the broker must go
through an approval process in which it must demonstrate that it is properly
licensed and registered in the state in which it seeks to transact business,
submit to business references and an integrity check, demonstrate that it has
adequate net worth, and sign a standard broker agreement with the Company. The
Company regularly reviews the performance of loans originated through its
brokers. The program's legal agreements provide for recourse to brokers in the
event that the Company's quality control program substantiates evidence of
breach of contract representations and warranties, the remedies for which may
include indemnification for losses incurred by the Company.
Typically, the amount the Company must expend to fund loans originated
through brokers exceeds the initial principal amount of the loan which is
disbursed to the borrower, in order to compensate the broker for the loan. The
amounts paid by the Company to fund loan originations through brokers averaged
101.6% of the initial principal amounts of all loans originated by the Company
through brokers in 1997.
The Company originates substantially all of its broker loans on a one-by-
one or "flow" basis, rather than in bulk packages. This is convenient and
efficient for the Company's broker customers, who do not have to incur the costs
of accumulating loans until they have a salable pool. The Company intends to
continue providing top quality and consistent, efficient service to its broker
customers in an effort to originate loans through brokers at prices that are
fair to the Company.
The Company's Correspondents. An approved correspondent is a licensed
mortgage lender, commercial bank or savings and loan who sells loans to the
Company that the correspondent has originated, processed and closed in its own
name. During 1997, the Company's correspondent network accounted for $134.6
million or 31.6% of the Company's loan purchases and originations, compared to
$30.5 million or 14.7% of the Company's loan purchases and originations during
1996. For the quarter ended March 31, 1998, the Company's correspondent network
accounted for $48.0 million, or 48.9%, of the Company's loan purchases and
originations, compared to $11.4 million, or 18.4%, of the Company's loan
purchases and originations in 1997's first quarter. The relative increase in
loan purchases and originations from correspondents primarily reflects the
growth of many of the Company's brokers and their transition to correspondent
status. No single correspondent contributed more than 9.1% of the Company's
total loan purchases and originations in 1997. The amounts paid by the Company
to purchase loans from correspondents averaged 103.6% of the initial principal
amounts of all loans purchased by the Company from correspondents in 1997.
A prospective correspondent becomes eligible to submit loans to the Company
for purchase only after the Company has conducted a review of the prospective
correspondent's business and lending operations, the depth of the prospective
correspondent's involvement in both conforming and non-conforming lending, an
analysis of the prospective correspondent's financial statements for the prior
two years, creditworthiness and other business reference
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checks including Dun & Bradstreet reports, and determination that the
prospective correspondent possesses adequate licensing and approvals from HUD
and appropriate state regulatory authorities. The Company also performs an
annual review of each approved correspondent in order to ensure continued
compliance with legal requirements and that lending operations and financial
information continue to meet the Company's standards. The Company regularly
reviews the performance of loans purchased from its correspondents. The
program's legal agreements provide for recourse to correspondents in the event
that the Company's quality control program substantiates a breach of contract
representations and warranties, the remedies for which may include loan
repurchase and indemnification for losses incurred by the Company.
The Company will purchase a correspondent loan at the loan closing or later
as a pre-closed loan based upon the correspondent's business needs. The Company
purchases individual loans in some instances on a one-by-one or "flow" basis,
and in other cases the Company purchases loans from correspondents as part of
bulk purchases of pre-closed loans. All loans purchased by the Company under
its correspondent program parameters must be underwritten and approved by the
Company prior to purchase. With respect to its correspondents, as with its
brokers, the Company has a commitment to quick and knowledgeable service and
offers both pre-qualification and full review underwriting to its correspondent
customers.
When selling on a flow basis, a correspondent will submit a full loan
application package as a basis for obtaining a preliminary approval from the
Company, subject to final underwriting approval, prior to closing the loan. The
Company's underwriting approval typically will stipulate all items needed to
complete the package for purchase in compliance with the Company's underwriting
guidelines.
In a bulk sale, a correspondent will offer a group of loans to the Company
for sale (not necessarily consisting of loans that have been preapproved), and
the Company will underwrite and purchase those loans in the group that meet the
Company's underwriting criteria or that deviate from the Company's underwriting
guidelines in manners deemed acceptable to the Company.
"Hub and Spoke" Structure. The Company is organized in a geographically
evolving "hub and spoke" structure. The Company currently has four regional
office hubs, each of which oversees and serves the account executives located in
the regional office, in the branch offices, if any, within the related region,
and in smaller markets within the region where no branch office has yet been
established. As of March 31, 1998, the Company maintained a staff of
approximately 41 account executives who operate (i) from the Company's four
regional offices located in Englewood, Colorado (Central Region), Warwick, Rhode
Island (Northeast Region), Roswell, Georgia (Southeast Region) and Newport
Beach, California (Western Region), (ii) from the Company's five branch offices
located in Phoenix, Arizona (in the Western Region), Landover, Maryland (in the
Northeast Region), Fort Lee, New Jersey (in the Northeast Region), Pittsburgh,
Pennsylvania (in the Northeast Region), and Salt Lake City, Utah (in the Central
Region), and (iii) in certain other geographic markets in which the Company is
evaluating the desirability of opening a branch office. The regional offices
are full-service operations in which all loan processing and underwriting
functions take place. Branch offices are designed to facilitate loan production
in a local area served by a regional office. The Company believes that by
having a local sales presence in a market, it can maximize its ability to
penetrate that market. While sales efforts can be conducted effectively through
the branch offices or through brokers on-site in other markets, loan processing
and approval remain concentrated at the appropriate regional office until the
branch office can support the overhead associated with the increased work of
processing and underwriting. The Company believes this allows its sales
personnel in branch offices to concentrate their efforts on expansion of
business during the branch office's formative stages, while enabling the Company
to maintain consistency in application of its loan processing operations and its
underwriting decision-making.
EXPANSION STRATEGIES
The Company places great emphasis on its mortgage lending operation
primarily as a source of Non-Conforming Loans for the Company's portfolio. The
Company plans to improve profitability by, in general, increasing the net
interest spread from its loan production. This can be accomplished by (i)
lowering the production costs of its mortgage loans, (ii) effectively managing
the risks (including credit and prepayment risks) inherent in its mortgage
loans, and (iii) increasing the volume of its loan production in order to create
economies of scale that better leverage the
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Company's overhead and produce more interest income overall. The Company
currently seeks to generate a broader product mix to help manage risks through
creating a more balanced portfolio, to increase the volume of its loan
production generally, and to identify and produce the types of loan products
that best serve the Company's overall strategies for maximizing profitability.
Strategies for Expansion of Wholesale Loan Production
Expansion of Existing Wholesale Lending Platform. The Company intends to
take advantage of its existing wholesale lending platform and strengths inherent
in its existing mortgage lending infrastructure to expand its wholesale loan
production volume to utilize excess capacity at its existing offices. Also, the
Company believes that providing prompt, consistent service is the primary reason
for its historic success with independent brokers and correspondents.
Management has accordingly created a service-oriented culture at the Company
designed to provide consistently efficient and effective service to the mortgage
broker and correspondent community. In particular, the Company believes that
its team approach to broker and correspondent customer relations, especially the
provision of a dedicated team member as a "single point of contact" for each
wholesale customer, has enhanced its relationships with its broker and
correspondent customers by personalizing the Company's customer relationships,
while the provision of an entire team of specialists supporting the customer
service representative ensures the customer's needs will be met promptly and
effectively. The Company expects to continue to emphasize customer service and
utilize its decentralized structure to retain existing broker and correspondent
customers and capitalize on its reputation for quality service to expand its
wholesale lending network further.
Continued Geographic Expansion of Wholesale Platform. In recent years, the
Company has successfully expanded the geographic scope of its wholesale lending
operations to penetrate new markets and further penetrate existing markets. The
Company had $424.0 million in wholesale loan production from 39 states and the
District of Columbia in 1997, compared to $207.5 million of wholesale loan
production from 34 states in 1996 and $126.4 million in loan production from 35
states during 1995. The Company intends to continue its geographic expansion
and to continue to build its network of brokers and correspondents both in the
Company's existing markets and in new markets. The Company recently expanded
its Newport Beach, California Western Regional office to enable it to handle
more production volume and, in November 1997, the Company opened a branch office
in Salt Lake City, Utah (associated with the Central Region) and in December
1997, the Company opened a branch office in Fort Lee, New Jersey (associated
with the Northeast Region) to fund loans in New Jersey and New York, and in
March 1998, the Company opened its newest branch office in Pittsburgh,
Pennsylvania (also associated with the Northeast Region). The Company plans to
open new branch office "spokes" around its current regional office "hubs" in the
future, as well as to open new regional offices. The Company is considering
opening a new regional office in the Midwest and, possibly, new branch offices
in Texas and/or Florida, in 1998. The Company targets markets where it believes
homeowners have significant equity in their residences and the value of
residential real estate is appreciating, so that the equity against which
homeowners in the area can borrow is increasing. The Company also looks at
other factors that may indicate a heightened level of consumer demand for Non-
Conforming Loans, such as changes in law that permit or facilitate home equity
or non-conforming lending. The Company applies a 13-point market analysis to a
prospective market, reviewing the growth of equity in residential real estate as
well as other factors such as demographic information, consumer credit profiles
(including the incidence of personal bankruptcies, foreclosures and other
similar events), and the overall regional economy. If the Company determines
that a new geographic area presents an appropriate opportunity, it may hire an
account executive located in the vicinity to conduct a sales effort out of his
or her home to test the market. If the Company believes that this test has been
successful, the Company will strongly consider opening a branch office.
Bulk Acquisition of Mortgage Loans
Another manner in which the Company may expand its loan production is by
opportunistically acquiring bulk packages of mortgage loans from other
relatively large-scale lenders in the non-conforming mortgage lending market
from time to time. The Company believes that the prices it would have to pay
for bulk pools of mortgage loans will be higher than the prices it pays for its
wholesale loan production funded through brokers and correspondents, but under
certain circumstances management may elect to make such purchases in order to
increase loan production generally or to improve the execution of its CMO
financing transactions. The Company will underwrite the loans in any pool
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considered for acquisition in accordance with the Company's underwriting
guidelines to confirm general compliance with those guidelines, subject to
exceptions approved by management. See "--Underwriting and Quality Control
Strategy" below.
"CUSTOMER-DIRECTED" LENDING INITIATIVES
The Company has gained substantial experience in originating Non-Conforming
Loans by operating as a wholesale lender in the non-conforming mortgage market
for the last five years. Management believes that the Company is now ready to
make the transition from being a totally channel-dependent wholesale mortgage
lender into directing its business at specific groups of consumers who have not
been reached adequately through its existing wholesale lending operations. The
Company plans initially to conduct this customer-directed expansion principally
through its wholesale channels, by directing greater efforts to brokers and
correspondents who serve the types of consumers the Company wants to reach.
Marketing to Home Equity Loan Borrowers
The Company intends to increase its lending under Home Equity Loans made to
consumers seeking funds to consolidate and refinance non-mortgage debt and to
finance home improvements, education and other consumer needs. Primarily
because of its historical dependence on certain brokers and correspondents whose
production channels are derived principally through real estate brokers, the
Company's loan production to date has been disproportionately concentrated in
Purchase Money/Refinancing Loans. Management believes that more potential non-
conforming borrowers are seeking Home Equity Loans than Purchase
Money/Refinancing Loans. Consequently, targeting of the Home Equity Loan
consumers will be a key component of the Company's strategies to expand its
overall Non-Conforming Loan production volume. Because borrowers under Home
Equity Loans use the proceeds of their loans for a broad array of purposes, Home
Equity Loan volume is expected to be less dependent on general levels of
interest rates or home sales and therefore less cyclical than lending under
Purchase Money/Refinancing Loans.
New Loan Products
The Company recognizes that the non-conforming lending marketplace is
constantly evolving. Consequently, the Company actively and frequently
evaluates its continuing competitiveness in the marketplace, and will continue
to attempt to discern when it needs to broaden its product offerings to enhance
its competitiveness while maintaining its ability to manage its risks
effectively.
The Company is presently considering expanding its product lines during
1998 and 1999 to include (i) non-conforming home equity lines of credit
("HELOCs") secured by second liens on residential properties, (ii) second-lien
home equity mortgage loans ("HELs"), (iii) loans secured by manufactured housing
units, and (iv) Conforming Loans. Management believes that the types of
borrowers who would be likely to use HELOCs and HELs, and, to some extent,
borrowers under loans secured by manufactured housing, are similar to the types
of consumers who currently utilize the Company's existing Non-Conforming Loan
products and, consequently, that development of these products would be a
natural expansion of the Company's business. A conforming lending presence
would enable the Company to offer a full range of loan products to its
customers, and would position the Company to refinance Non-Conforming Loans for
borrowers who improve their credit sufficiently to qualify for Conforming Loans.
Retail Lending
The Company believes that development of a strong retail origination
capability will be important to the success of its movement into customer-
directed segments of the non-conforming mortgage market. Management intends to
develop the Company's ability by building on its recently implemented direct-to-
consumer retail lending initiative and by acquiring retail operations of other
non-conforming mortgage lenders as appropriate strategic opportunities arise.
Direct-to-Consumer Retail Lending Initiative. In September 1997, the
Company initiated its direct-to-consumer retail lending effort, pursuant to
which the Company directly originates Non-Conforming Loans to
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borrowers. The Company has initially targeted five metropolitan areas for
aggressive marketing of the direct-to-consumer program: San Diego, Los Angeles,
Sacramento, Phoenix, and Las Vegas. These cities were selected because, based on
demographic and general market research, the Company concluded that they are
populated by a high preponderance of consumers who would be likely to desire
Non-Conforming Loans. The Company has launched telemarketing and radio and news
print advertising campaigns in these cities. The Company has also established an
Internet website (at www.getapproved.com) advertising its retail lending
operations and offering loan applications, and plans to follow up on its initial
advertising with direct mail advertising in the second quarter of 1998 in the
Sacramento metropolitan market. The Company utilizes a toll-free telephone
number through which initial consumer inquires are fielded by a third-party
specialized telemarketing consultant, who will route consumer inquiries directly
to an appropriate loan specialist at the Company's direct lending production
office in Englewood, Colorado.
To date, the Company has not derived a significant amount of loan
production from its direct-to-consumer program. For the three and one-half
months in 1997 in which the program was in operation, the Company funded $1.9
million in mortgage loans through the program. Full implementation of an
effective retail operation segment will take time and dedication of capital and
human resources, and a commitment on the part of the Company's management to
growing the segment into a self-sufficient operation. The Company is committed
to building this portion of its business over the long term, because management
believes it can become a viable, self-sustaining profit center and can attract
new types of Non-Conforming Loan borrowers to the Company's loan products. Over
time, after developing a successful enterprise in its initial five metropolitan
areas, the Company plans to expand its direct-to-consumer lending efforts to
other geographic markets. The concentration of the Company's loan origination
and processing activities in a single location (or through the Company's
regional offices) will allow the Company to supervise regulatory compliance
efficiently and consistently and to offer consistent underwriting and processing
to its customers. The Company will refer any prospective borrower who indicates
a preference for face-to-face dealings with a lending professional in his area,
rather than dealing by telephone with the Company's centralized processing and
underwriting teams, to one of the Company's top five independent brokers in that
marketplace.
The Company will process each application from a consumer and grant or deny
preliminary approval for the application generally within one business day from
receipt of the application. In addition, the Company will ensure direct contact
with a customer specialist and support team in the Company's direct lending
production office who will follow each loan from the application to the closing
process. The Company believes that consistent underwriting decisions, quick
response times and personal service are critical to enabling the Company to
succeed in originating loans directly to potential borrowers, just as these
factors are critical to succeed in satisfying its broker and correspondent
customers. No assurance can be made that the Company's direct-to-consumer
lending effort will be successful.
Acquisition of Retail Operations. To augment its efforts to develop a
retail lending presence through its internal growth strategy, the Company's
management intends selectively to acquire retail lending operations from other
companies where such acquisitions would complement or supplement the Company's
then-existing operations. These efforts can be combined with the direct-to-
consumer initiative to accelerate the growth of the Company's retail lending
capabilities. See " -- Acquisition of Third-Party Lending Operations and Loan
Production" below.
ACQUISITION OF THIRD-PARTY LENDING OPERATIONS AND LOAN PRODUCTION
In the fragmented non-conforming mortgage market, the Company expects to
encounter opportunities to purchase some or all of the operations or loan
production of other non-conforming mortgage companies, including some who, due
to recent upheaval in the market, may not have access to sufficient capital to
continue funding their operations effectively. The Company intends to acquire
other non-conforming mortgage lending companies or certain operations of such
companies, on a selective basis in cases where such acquisitions would
complement or supplement the Company's existing business.
In addition, the Company plans to enter into strategic alliances with
smaller non-conforming mortgage companies. Under these alliances, the Company
would acquire exclusive or preferential rights to purchase these companies' loan
production. Such arrangements may involve flow purchase agreements or the
extension by the
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Company of warehouse credit facilities linked to loan production delivery
requirements, as well as other types of arrangements.
UNDERWRITING AND QUALITY CONTROL STRATEGY
UNDERWRITING PROCESS
As of March 31, 1998, the Company had a staff of 16 underwriters with an
average of more than five years of mortgage loan underwriting experience. At
present, all underwriting functions are handled from the Company's corporate
headquarters, regional offices and from the Landover, Maryland branch office.
The Company does not delegate underwriting authority to any broker or
correspondent. The Company's underwriters work in concert with its sales and
loan production support personnel as part of the Company's teams. However, they
do not report to any individual directly involved in the origination process.
Underwriters at the Company are compensated as part of a loan production/quality
control team under a program that penalizes the entire team for poor
underwriting decisions. See "--Specific Loan Production and Expansion
Strategies--'Channel-Dependent' Lending--Description of the Company's Wholesale
Lending Infrastructure--Team Approach."
The Company's loan application and approval process generally is conducted
via facsimile or direct submission of credit applications to the Company's
underwriters. An underwriter reviews the applicant's credit history based on
the information contained in the application and reports available from credit
reporting bureaus in order to determine whether the applicant's credit history
is acceptable under the Company's underwriting guidelines. Based on this
review, the underwriter assigns a preliminary Company credit classification to
the application. The proposed terms of the loan are then communicated by the
team's customer service specialist to the correspondent or broker responsible
for the application who in turn discusses the proposal with the loan applicant.
When a potential borrower applies for a loan through the Company's direct
lending program, the Company underwriter will discuss the proposal directly with
the applicant.
All loan applicants must have an appraisal of their collateral property
performed by a licensed appraiser prior to closing their loans. Appraisals are
performed by third party, fee-based appraisers and generally are required to
conform to current Fannie Mae/Freddie Mac secondary market requirements for
residential property appraisals. Each such appraisal includes, among other
things, an inspection of the exterior of the subject property and, where
available, data from sales within the preceding six months of similar properties
within the general vicinity of the subject property. The Company requires that
each appraisal be reviewed, or that a drive-by "field" review of the property
must be performed, by a licensed appraiser that is listed on or qualifies for
listing on the Company's approved appraiser list.
A decision by the Company to fund a loan to an applicant is based upon the
value of the underlying collateral, the applicant's creditworthiness and the
Company's evaluation of the applicant's ability to repay the loan. A number of
factors determine a loan applicant's creditworthiness, including debt/income
ratios (the borrower's average monthly expenses for debts, including fixed
monthly expenses for housing, taxes and installment debt, as a percentage of his
gross monthly income), payment history on existing mortgages and the combined
loan-to-value ratio for all existing mortgages on a property.
The nature of the Company's assessment of an applicant's ability and
willingness to pay is one of the principal elements in distinguishing the
Company's lending specialty from methods employed by traditional lenders, such
as savings and loans and commercial banks. Virtually all lenders utilize
debt/income ratios and loan-to-value ratios in their loan approval processes.
Many lenders simply use software packages to score an applicant for loan
approval and fund the applicant's loan after auditing the data provided by the
applicant. In contrast, while the Company does utilize a scoring system to
screen applicants through analysis of purely objective data, it also employs
experienced Non-Conforming Loan credit underwriters to scrutinize each
applicant's credit profile and to evaluate the reasons for objectively
derogatory information. In particular, the Company's underwriters strive to
ascertain whether an impaired credit history is a result of adverse
circumstances, often beyond the applicant's control, or a continuing inability
or unwillingness to meet credit obligations in a timely manner. Personal
circumstances including divorce, family illnesses or deaths and temporary job
loss due to layoffs and corporate downsizing will often impair an otherwise
high-quality applicant's credit record.
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Upon completion of underwriting and processing of a wholesale or retail
loan, the closing of the loan is scheduled with a closing attorney or agent
approved by the Company. The closing attorney or agent is responsible for
completing the loan closing transaction in accordance with applicable law and
the Company's operating procedures. Title insurance that insures the Company's
interest as mortgagee and evidence of adequate homeowner's insurance naming the
Company as an additional insured party are required on all loans.
UNDERWRITING GUIDELINES
All of the Company's brokers and correspondents are provided with the
Company's written underwriting guidelines. Management believes that on average
no more than 5% of the Company's loan production deviates from the underwriting
guidelines. Any significant deviations must be approved by the Company's chief
underwriter, who will only approve such a deviation if the applicant has
adequate compensating factors in his credit profile to offset deficiencies that
do not meet the guideline standards.
Loan applications received from brokers and correspondents are classified
according to certain characteristics, including but not limited to: condition
of the underlying real property, credit history of the applicant, ability to
pay, loan-to-value ratio and general stability of the applicant in terms of
employment history and time in residence. The Company has established
classifications in an effort to define the credit profiles of its loan
applicants, and each loan is placed into one of five rating categories, each
denominated by a letter: "A," "A-," "B," "C" or "D." The classification grades
denote the relative status of an applicant as a non-conforming borrowing
candidate in accordance with the Company's criteria; accordingly an "A"
classification does not mean that the applicant is a candidate for a Conforming
Loan. Terms of loans made by the Company, as well as maximum loan-to-value
ratios and debt-to-income ratios, vary depending on the applicant's credit
classification. Loan applicants with less favorable Company credit
classifications are generally offered loans bearing higher interest rates and
requiring lower loan-to-value ratios than applicants with more favorable Company
credit classifications. The general criteria currently used by the Company's
underwriting staff in classifying loan applicants are set forth below. Such
criteria may change in the future to the extent the Company modifies its
underwriting guidelines to respond to changes in the marketplace, the
introduction of new loan products, or otherwise.
<TABLE>
<CAPTION>
"A" "A-" "B" "C" "D"
Classification Classification Classification Classification Classification
-------------- -------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
EXISTING Current at Current at Current at Maximum of 12 Maximum of 12
MORTGAGE application application application 30-day late 30-day,
HISTORY time and a time and a time and a payments and a 60-day and
(12-MONTH maximum of maximum of maximum of four maximum of three 90-day late
HISTORY)(1) one 30-day two 30-day 30-day late 60-day late payments in
late payment late payments payments and payment and one the last 12
in the last in the last one 60-day late 90-day late months.
12 months. 12 months. payment in the payment in the
Rolling Rolling last 12 months. last 12 months.
30-day late 30-day late Rolling 30-day Rolling 30-day
payments late payments late payments and 60-day late
allowed. allowed. allowed. payments allowed.
BANKRUPTCY Chapter 7: Chapter 7: Chapter 7: Chapter 7: None Chapter 7:
None in the None in the None in the in the last year Discharged by
last 2 years last 2 years last 18 months (based on loan closing.
(based on (based on (based on discharge date).
discharge discharge discharge date).
date). date).
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Chapter 13: Chapter 13: Chapter 13: Chapter 13: Chapter 13:
None in the None in the None in the None in the last Discharged by
last 3 years last 2 years last 18 months year (based on loan closing.
(based on (based on (based on filing date). On
filing date). filing date). filing date). case-by-case
basis will
take out of
bankruptcy if
improves
applicant's
situation.
FORECLOSURE None in the None in the None in the None in the last On
last 3 years last 3 years last 18 months year based on case-by-case
based on based on based on filing filing date. basis will
filing date, filing date, date. take out of
or 2 years or 2 years foreclosure
based on sale based on sale if improves
date. date. applicant's
situation.
INSTALLMENT Maximum of Maximum of Maximum of six Unlimited 30-day Overall poor
CREDIT three 30-day four 30-day 30-day late late payments credit.
(TOTAL late payments late payments payments, four and a maximum of
ACCOUNTS)(1) in the last and two 60-day late six 60-day late
12 months. 60-day late payments and payments and two
Rolling payment in one 90-day late 90-day late
30-day late the last 12 payment in the payments in the
payments months. last 12 months. last 12 months.
allowed. Rolling Rolling 30-day Rolling 30-day
30-day and and 60-day late and 60-day late
60-day late payments payments
payments allowed. allowed.
allowed. Rolling 90-day Rolling 90-day
late payments late payments
allowed on a allowed on a
case-by-case case-by-case
basis. basis.
REVOLVING CREDIT Maximum of Maximum of Maximum of six Unlimited 30-day Overall poor
(TOTAL three 30-day four 30-day 30-day late late payments credit.
ACCOUNTS)(1) late payments late payments payments, four and a maximum of
in the last and two 60-day late six 60-day late
12 months. 60-day late payments and payments and two
Rolling payment in one 90-day late 90-day late
30-day late the last 12 payment in the payments in the
payments months. last 12 months. last 12 months.
allowed. Rolling Rolling 30-day Rolling 30-day
30-day and and 60-day late and 60-day late
60-day late payments payments
payments allowed. allowed.
allowed. Rolling 90-day Rolling 90-day
late payments late payments
allowed on a allowed on a
case-by-case case-by-case
basis. basis.
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C>
OPEN Maximum of Maximum of Maximum of Maximum of May be
COLLECTIONS, $200 per $500 per $1,000 per $2,500 per disregarded
CHARGE-OFFS, account. If account. If account. If account. If on a
AND JUDGMENTS over $200, over $500, over $1,000, over $2,500, case-by-case
each account each account each account each account basis and
must be paid must be paid must be paid must be paid generally not
in full. If in full. If down to $1,000. down to $2,500. considered in
older than 3 older than 3 If older than 2 If older than 2 classification of loan.
years, not years, not years, not years, not
required to required to required to be required to be
be paid. be paid. paid. Medical paid. Medical
Medical Medical collections collections
collections collections excluded. excluded.
excluded. excluded.
DEBT SERVICE TO Generally 45% Generally 50% Generally 50% Generally 55% or Generally 60%
INCOME RATIO or less. or less. or less. less. or less.
TAX LIENS All tax liens All tax liens All tax liens All tax liens All tax liens
must be paid must be paid must be paid in must be paid in must be paid
in full.(2) in full.(2) full.(2) full. in full.
MAXIMUM
LOAN-TO-VALUE
RATIO(3)
MAXIMUM COMBINED 95% (5) 95% (5) 95% (5) 95% 95%
LOAN-TO-VALUE
RATIO(4)
EMPLOYMENT Minimum 2 Minimum 2 Minimum 2 years Minimum 2 years Minimum 2
REQUIRED years years employment in employment in years
employment in employment in the same field. the same field. employment in
the same the same the same field
field. field.
</TABLE>
___________________
(1) "Rolling late payments" refers to consecutive rolling 30-day, 60-day and 90-
day delinquencies, as the case may be, up to 12 months reported on a credit
report, which consecutive payments may be counted as one late payment in
those classifications identified above in which such "rolling late payments"
are allowed.
(2) Tax liens may be subordinated to a first mortgage loan made by the Company
in the A, A- and B categories on a case-by-case basis.
(3) See LTV table below.
(4) The Company will permit the existence of liens junior to its first lien
mortgage loan, provided the combined loan-to-value ratio of the Company's
mortgage loan and all subordinate mortgage loans does not exceed the maximum
permitted "combined loan-to-value ratio."
(5) Combined loan-to-value ratio may be increased to 100% for purchase money
transactions involving owner-occupied properties only if the requested first
mortgage loan has an LTV of 80% or less.
The Company uses the foregoing categories and characteristics as guidelines
only. On a case-by-case basis, the Company may determine in the course of its
underwriting process that a prospective borrower warrants a loan-to-value ratio
upgrade based on compensating factors. For example, a borrower may be able to
get a loan in a particular credit classification with a loan-to-value ratio 5%
higher than the loan-to-value ratio that would otherwise be permitted for loans
with that credit classification if certain compensating factors exist. In
addition, NMC has in place a "Blended Credit Program" for certain borrowers who
have a different quality of credit history for their mortgage borrowings than
for their consumer credit borrowings. Such borrowers applying for loans against
owner-occupied properties, who have experienced no bankruptcies or foreclosures
during the previous 24 months, and who have a mortgage history and no rental
history for the preceding 12 months may receive a final loan classification
between the classification levels that
68
<PAGE>
would have resulted from the applicant's mortgage history and the applicant's
consumer credit history. An applicant cannot receive an LTV upgrade in addition
to utilizing the Blended Credit Program. The following chart shows the effect of
the Company's Blended Credit Program on the ultimate classification of qualified
applicants:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
12-MONTH MORTGAGE HISTORY 12-MONTH CONSUMER CREDIT FINAL LOAN CLASSIFICATION
HISTORY
<S> <C> <C>
- ---------------------------------------------------------------------------------------------
A A A
- ---------------------------------------------------------------------------------------------
A or A- A- or B A-
- ---------------------------------------------------------------------------------------------
A or A- C B
- ---------------------------------------------------------------------------------------------
B A, A-, B, C B
- ---------------------------------------------------------------------------------------------
A, A- or B D C
- ---------------------------------------------------------------------------------------------
C A, A-, B, C, D C
- ---------------------------------------------------------------------------------------------
D A, A-, B, C, D D
- ---------------------------------------------------------------------------------------------
</TABLE>
The maximum loan-to-value ratio on a mortgage loan is based on the adequacy
of the property and is made up of a variety of factors including the size of the
loan, whether it is an owner-occupied or a non-owner-occupied property, and
under which type of program the prospective mortgagor submitted his or her
application. Prospective mortgagors may submit loan applications under one of
three programs, which differ from each other with respect to the requirements
for the verification of the income of the mortgagor and the source of funds
required to be deposited by the applicant in order to close the loan. Certain
of the Company's mortgage loans will be originated under "limited documentation"
programs, which require less documentation and verification than those required
for traditional "full documentation" programs. Generally, under such a program,
minimal investigation into a mortgagor's income profile would have been
undertaken by the originator and the underwriting for such mortgage loans will
place a greater emphasis on the value of the mortgaged property. Under the
"Full App" program, mortgagors are generally required to submit documentation
verifying at least two years of income history. Under the "Fast App" program,
applicants must have proven six months of income history verified by appropriate
documentation. Under the "Stated Income Application" program, no verification
of the applicant's income is required; rather, the applicant may be qualified
based on monthly income as stated in the mortgage loan application, if that
income is supported by the general information included in the loan application
package and if the income is reasonable for the line of work. Verification of
the source of funds (if any) to be deposited by the applicant in order to close
the loan is required under both the Full App and Fast App programs and may be
requested pursuant to the Stated Income Application program.
The following table shows the Company's current loan-to-value ratio
requirements for Non-Conforming Loans in different credit classification levels,
with different ranges of initial principal balance, and originated under
different documentation programs. These requirements may change in the future
to the extent the Company modifies its underwriting guidelines to respond to
changes in the marketplace, the introduction of new loan products, or otherwise.
69
<PAGE>
================================================================================
MAXIMUM LOAN-TO-VALUE, LOAN AMOUNT AND CASH-OUT AMOUNT MATRIX
<TABLE>
<CAPTION>
-------------------------------------------------
OWNER OCCUPIED LOAN CLASS A LOAN CLASS A-
MAX MAX MAX MAX
- -----------------------------------------------------------------------
PROPERTY APP LTV LOAN LTV LOAN
PURPOSE TYPE TYPE % AMOUNT % AMOUNT
=======================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Full 90 400,000 90 400,000
85 450,000 85 450,000
1-2 Family, 80 500,000 80 500,000
Condo* 75 600,000 75 600,000
Purchase 65 750,000 65 750,000
------------------------------------------------
Money/ Second Home Fast 85 400,000 80 400,000
Refinancing 80 450,000 75 450,000
Loans and Home (Lower LTV by 5% 75 500,000 70 500,000
Equity Loans (Cash- for Mid rise condos* 70 600,000 65 600,000
out Refinancings) and Second Homes) 60 750,000 55 750,000
------------------------------------------------
Stated 80 400,000 75 400,000
75 450,000 70 450,000
70 500,000 65 500,000
65 600,000 NA NA
-----------------------------------------------------------------------------------------------
Single Family Only Full 1,000,000
On a case-by-case basis
- -----------------------------------------------------------------------------------------------------------------------
Cash-out Refinances Maximum Cash-out: 200,000 250,000
=======================================================================================================================
Full 85 400,000 80 400,000
80 450,000 75 450,000
75 500,000 70 500,000
------------------------------------------------
Fast 80 400,000 75 400,000
3-4 Family 75 450,000 70 450,000
70 500,000 65 500,000
------------------------------------------------
Stated 75 400,000 70 400,000
70 450,000 65 450,000
65 500,000 60 500,000
- -----------------------------------------------------------------------------------------------------------------------
Cash-out Refinances Maximum Cash-out: 150,000 250,000
=======================================================================================================================
<CAPTION>
--------------------------------------------------------
OWNER OCCUPIED LOAN CLASS B LOAN CLASS C
MAX MAX MAX MAX
- -----------------------------------------------------------------------
PROPERTY APP LTV LOAN LTV LOAN
PURPOSE TYPE TYPE % AMOUNT % AMOUNT
============================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Full 85** 400,000 75 400,000
80 450,000 70 450,000
1-2 Family, 75 500,000 65 500,000
Condo* 70 600,000 NA NA
Purchase 60 750,000 NA NA
-----------------------------------------------------
Money/ Second Home Fast 75 400,000 70 400,000
Refinancing 70 450,000 65 450,000
Loans and Home (Lower LTV by 5% 65 500,000 60 500,000
Equity Loans (Cash- for Mid rise condos* 60 600,000 NA NA
out Refinancings) and Second Homes) 50 750,000 NA NA
-----------------------------------------------------
Stated 75 400,000 70 400,000
70 450,000 65 450,000
65 500,000 NA NA
NA NA NA NA
----------------------------------------------------------------------------------------------------
Single Family Only Full
On a case-by-case basis
- ----------------------------------------------------------------------------------------------------------------------------
Cash-out Refinances Maximum Cash-out: 200,000 100,000
============================================================================================================================
Full 80 400,000 70 400,000
75 450,000 65 450,000
70 500,000 60 500,000
-----------------------------------------------------
Fast 75 400,000 65 400,000
3-4 Family 65 450,000 60 450,000
NA NA NA NA
-----------------------------------------------------
Stated 70 400,000 65 400,000
65 450,000 60 450,000
NA NA NA NA
- ----------------------------------------------------------------------------------------------------------------------------
Cash-out Refinances Maximum Cash-out: 200,000 100,000
============================================================================================================================
<CAPTION>
------------------------
OWNER OCCUPIED LOAN CLASS D
MAX MAX
- -----------------------------------------------------------------------
PROPERTY APP LTV LOAN
PURPOSE TYPE TYPE % AMOUNT
===============================================================================================
<S> <C> <C> <C> <C> <C>
Full 65 350,000
60 400,000
1-2 Family, 55 450,000
Condo* NA NA
Purchase NA NA
------------------------
Money/ Second Home Fast 65 350,000
Refinancing 60 400,000
Loans and Home (Lower LTV by 5% NA NA
Equity Loans (Cash- for Mid rise condos* NA NA
out Refinancings) and Second Homes) NA NA
------------------------
Stated 60 150,000
NA NA
NA NA
NA NA
-----------------------------------------------------------------------
Single Family Only Full
On a case-by-case basis
- -----------------------------------------------------------------------------------------------
Cash-out Refinances Maximum Cash-out: 50,000
===============================================================================================
Full 65 350,000
60 400,000
NA NA
------------------------
Fast 65 350,000
3-4 Family 60 400,000
NA NA
------------------------
Stated 60 150,000
NA NA
NA NA
- -----------------------------------------------------------------------------------------------
Cash-out Refinances Maximum Cash-out: 50,000
===============================================================================================
*High rise condos considered on a case-by-case basis at lower
LTVs and higher rates.
Minimum Loan Amount $40,000 **If LTV is greater than 80%, no 60-day lates on mortgage history
allowed.
- -----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
===============================================================================
MAXIMUM LOAN-TO-VALUE, LOAN AMOUNT AND CASH-OUT AMOUNT MATRIX
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
NON-OWNER OCCUPIED LOAN CLASS A LOAN CLASS A- LOAN CLASS B LOAN CLASS C
MAX MAX MAX MAX MAX MAX MAX MAX
- -----------------------------------------------------------
PROPERTY APP LTV LOAN LTV LOAN LTV LOAN LTV LOAN
PURPOSE TYPE TYPE % AMOUNT % AMOUNT % AMOUNT % AMOUNT
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Full 80 350,000 75 350,000 75 350,000 70 350,000
75 400,000 70 400,000 70 400,000 65 400,000
------------------------------------------------------------------------
1-2 Family, Fast 75 350,000 70 350,000 70 350,000 65 350,000
Purchase Condo (Low rise*) 70 400,000 65 400,000 65 400,000 60 400,000
------------------------------------------------------------------------
Money/ Stated 70 350,000 70 350,000 65 350,000 60 300,000
Refinancing
---------------------------------------------------------------------------------------------------------------
Loans and Home
Equity Loans (Cash-
Out Refinancings)
3-4 Family Full 70 350,00 70 350,000 70 300,000 65 300,000
65 400,000 65 400,000 65 350,000 60 350,000
------------------------------------------------------------------------
Fast 65 350,000 65 350,000 65 300,000 60 300,000
60 400,000 60 400,000 60 350,000 55 350,000
------------------------------------------------------------------------
Stated 60 300,000 60 300,000 60 300,000 55 300,000
------------------------------------------------------------------------
100,000 100,000 100,000 100,000
<CAPTION>
------------------
LOAN CLASS D
MAX MAX
- --------------------------------------------------------
PROPERTY APP LTV LOAN
PURPOSE TYPE TYPE % AMOUNT
==============================================================================
<S> <C> <C> <C> <C>
Full 60 300,000
55 350,000
------------------
1-2 Family, Fast 55 250,000
Purchase Condo (Low rise*) 50 300,000
------------------
Money/ Stated 50** 150,000
Refinancing
---------------------------------------------------------
Loans and Home
Equity Loans (Cash-
Out Refinancings)
3-4 Family Full 60 250,000
55 300,000
------------------
Fast 55 250,000
50 300,000
------------------
Stated 50** 150,000
- ------------------------------------------------------------------------------------------------------------------------------------
50,000
Cash-out Refinances Maximum Cash-out:
====================================================================================================================================
** Cash-out not allowed on Stated Income loans.
* Mid-rise condos lower LTV by 5%,
High rise condos considered on a case-by-case basis at lower
LTVs and higher rates.
Minimum Loan Amount $40,000
====================================================================================================================================
</TABLE>
71
<PAGE>
EXISTING NON-CONFORMING LOANS
The following table sets forth certain information with respect to the
Company's purchases and originations of mortgage loans by borrower
classification, along with weighted average coupons, for the periods shown
(dollar amounts in thousands).
<TABLE>
<CAPTION>
1995
--------------------------------------------------------
PRODUCT/ WEIGHTED
COMPANY AVERAGE WEIGHTED WEIGHTED
LOAN % OF INTEREST AVERAGE AVERAGE
CLASSIFICATIONS VOLUME TOTAL RATE/(1)/ MARGIN/(2)/ LTV/(3)/
--------------- -------- ----- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
FIXED RATE:
A..................... $ 2,452 1.9% 10.6% - 67.5%
A-.................... 9,409 7.4 11.0 - 69.8
B..................... 2,743 2.2 11.5 - 66.6
C..................... 517 0.4 12.6 - 60.7
D..................... 731 0.6 13.7 - 50.5
Totals................ $ 15,852 12.5% 11.2% - 67.7%
ADJUSTABLE-RATE/(4)/:
A..................... $ 25,099 19.9% 10.0% 5.1% 69.5%
A-.................... 44,610 35.3 10.2 5.0 72.6
B..................... 19,147 15.1 10.6 5.6 66.1
C..................... 11,798 9.3 11.5 6.4 62.6
D..................... 9,941 7.9 12.7 7.2 56.9
Totals................ $110,595 87.5% 10.6% 5.5% 68.3%
ALL PRODUCTS/(5)/:
A..................... $ 27,551 21.8% 10.0% - 69.3%
A-.................... 54,019 42.7 10.3 - 72.1
B..................... 21,890 17.3 10.7 - 66.2
C..................... 12,315 9.7 11.6 - 62.6
D..................... 10,672 8.5 12.8 - 56.5
Totals................ $126,447 100.0% 10.6% - 68.2%
<CAPTION>
1996
--------------------------------------------------------
PRODUCT/ WEIGHTED
COMPANY AVERAGE WEIGHTED WEIGHTED
LOAN % OF INTEREST AVERAGE AVERAGE
CLASSIFICATIONS VOLUME TOTAL RATE/(1)/ MARGIN/(2)/ LTV/(3)/
--------------- -------- ----- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
FIXED RATE:
A..................... $ 16,561 8.0% 11.0% - 77.9%
A-.................... 8,282 4.0 11.3 - 72.6
B..................... 3,473 1.7 11.8 - 69.3
C..................... 1,454 0.7 12.9 - 67.5
D..................... 932 0.5 13.5 - 62.1
Totals................ $ 30,702 14.9% 11.3% - 74.6%
ADJUSTABLE-RATE/(4)/:
A..................... $104,631 50.4% 9.9% 5.4% 80.6%
A-.................... 37,232 17.9 10.1 5.6 78.1
B..................... 16,807 8.1 10.3 5.8 73.1
C..................... 12,714 6.1 11.1 6.6 68.3
D..................... 5,458 2.6 12.0 7.4 61.2
Totals................ $176,842 85.1% 10.2% 5.6% 77.9%
ALL PRODUCTS/(5)/:
A..................... $121,192 58.4% 10.1% - 80.2%
A-.................... 45,514 21.9 10.3 - 77.1
B..................... 20,280 9.8 10.6 - 72.4
C..................... 14,168 6.8 11.2 - 68.2
D..................... 6,390 3.1 12.2 - 61.3
Totals................ $207,544 100.0% 10.3% - 77.4%
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
1997
-----------------------------------------------------
PRODUCT/ WEIGHTED
COMPANY AVERAGE WEIGHTED WEIGHTED
LOAN % OF INTEREST AVERAGE AVERAGE
CLASSIFICATIONS VOLUME TOTAL RATE/(1)/ MARGIN/(2)/ LTV/(3)/
- --------------- -------- ------ ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
FIXED-RATE:
A..................... $ 39,323 9.2% 10.4% - 78.2%
A-.................... 9,451 2.2 10.5 - 73.6
B..................... 5,461 1.3 10.9 - 70.2
C..................... 2,164 0.5 11.4 - 65.9
D..................... 1,058 0.3 12.6 - 54.9
Totals................ $ 57,457 13.5% 10.5% - 75.8%
ADJUSTABLE-RATE/(4)/:
A..................... $246,416 57.9% 9.8% 5.8% 82.3%
A-.................... 61,553 14.4 9.8 5.8 77.3
B..................... 37,917 8.9 10.0 6.1 74.6
C..................... 15,897 3.7 10.5 6.6 71.3
D..................... 6,687 1.6 11.7 7.6 60.3
Totals................ $368,470 86.5% 9.9% 5.9% 79.8%
ALL PRODUCTS/(5)/:
A..................... $285,739 67.1% 9.9% - 81.7%
A-.................... 71,004 16.6 9.9 - 76.8
B..................... 43,378 10.2 10.1 - 74.1
C..................... 18,061 4.2 10.6 - 70.7
D..................... 7,745 1.9 11.8 - 59.6
Totals................ $425,927 100.0% 10.0% - 79.2%
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1997
-----------------------------------------------------
PRODUCT/ WEIGHTED
COMPANY AVERAGE WEIGHTED WEIGHTED
LOAN % OF INTEREST AVERAGE AVERAGE
CLASSIFICATIONS VOLUME TOTAL RATE/(1)/ MARGIN/(2)/ LTV/(3)/
- --------------------------- ------- --------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
FIXED-RATE:
A......................... $ 4,910 7.9% 10.7% - 80.7%
A-........................ 1,477 2.4% 11.2% - 71.3%
B......................... 440 0.7% 11.6% - 69.5%
C......................... 269 0.5% 12.2% - 61.6%
D......................... 112 0.2% 13.2% - 58.5%
Totals.................... $ 7,208 11.6% 10.9% - 77.1%
ADJUSTABLE-RATE/(4)/:
A......................... $33,496 54.2% 9.8% 5.7% 82.0%
A-........................ 10,256 16.6% 9.9% 5.8% 75.7%
B......................... 6,259 10.1% 10.1% 6.2% 72.2%
C......................... 3,178 5.1% 10.7% 6.6% 71.2%
D......................... 1,419 2.3% 11.7% 7.5% 62.9%
Totals.................... $54,608 88.3% 9.9% 5.8% 78.6%
ALL PRODUCTS/(5)/:
A......................... $38,406 62.1% 9.9% - 81.9%
A-........................ 11,733 19.0% 10.1% - 75.1%
B......................... 6,699 10.8% 10.2% - 72.0%
C......................... 3,447 5.6% 10.8% - 70.5%
D......................... 1,531 2.5% 11.8% - 62.6%
Totals.................... $61,816 100.0% 10.1% - 78.4%
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1998
---------------------------------------------------
PRODUCT/ WEIGHTED
COMPANY AVERAGE WEIGHTED WEIGHTED
LOAN % OF INTEREST AVERAGE AVERAGE
CLASSIFICATIONS VOLUME TOTAL RATE/(1)/ MARGIN/(2)/ LTV/(3)/
- --------------------------- -------- ------ ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
FIXED-RATE:
A......................... $ 8,878 9.1% 9.9% - 76.2%
A-........................ 2,020 2.1% 10.2% - 73.6%
B......................... 1,606 1.6% 10.4% - 76.7%
C......................... 1,003 1.0% 11.2% - 67.1%
D......................... 301 0.3% 12.9% - 61.4%
Totals.................... $13,808 14.1% 10.2% - 74.9%
ADJUSTABLE-RATE/(4)/:
A......................... $55,383 56.4% 9.6% 5.6% 82.1%
A-........................ 14,138 14.4% 9.8% 5.8% 78.0%
B......................... 8,974 9.1% 10.0% 5.9% 76.0%
C......................... 4,179 4.3% 10.5% 6.5% 73.8%
D......................... 1,656 1.7% 11.9% 7.9% 61.3%
Totals.................... $84,330 85.9% 9.8% 5.8% 79.9%
ALL PRODUCTS/(5)/:
A......................... $64,261 65.5% 9.7% - 81.3%
A-........................ 16,158 16.5% 9.8% - 77.5%
B......................... 10,580 10.7% 10.1% - 76.1%
C......................... 5,182 5.3% 10.7% - 72.5%
D......................... 1,957 2.0% 12.0% - 61.3%
Totals.................... $98,138 100.0% 9.8% - 79.2%
</TABLE>
_______________________
(1) Each fixed-rate loan bears interest at a fixed interest rate set on its date
of funding and lasting through the term of the loan. Adjustable interest
rates reset every six months to a new rate through the term of the loan,
except that certain adjustable-rate loans have fixed interest rates for the
first two to three years after their origination. The weighted average
interest rate shown above for loans bearing interest at adjustable-rates is
the weighted average of the rates of such loans at origination.
(2) The margin for a loan is a fixed amount set for the life of the loan, which,
when added to the index (as described below) determines the interest rate on
the loan (subject to interest rate floors, ceilings and caps). The index
used by the Company is the London Interbank Offered Rate for six-month U.S.
dollar deposits, as published each Monday in The Wall Street Journal. Fixed-
rate loans have no margin because such loans are not tied to an index,
therefore, no weighted average margin can be shown for "Fixed-Rate" or "All
Products."
(3) The original loan-to-value ratio of a mortgage loan is determined by
dividing the amount of the loan by the lesser of the purchase price or the
appraised value of the related mortgaged property at origination.
(4) Adjustable-rate loans include loans bearing fixed interest rates for two or
three years after the date of origination, after which their interest rates
are adjusted semi-annually.
(5) In the future, the Company may originate and acquire a larger percentage of
lower credit quality Non-Conforming Loans.
Quality Control
The Company performs a pre-funding and post-funding quality control review
to monitor and evaluate the Company's loan origination policies and procedures.
The quality control department is separate from the underwriting department, and
reports directly to a member of senior management. On a monthly basis, at least
10% through 1997, and at least 5% thereafter, of all pending loan files are
subjected to a pre-funding quality control review. Loans are selected for
review each day on a random basis from specified risk categories, weighted more
heavily towards loans in certain high risk categories. In addition, the
percentage sampled may be increased with respect to loan files from particular
wholesale customers or geographic areas where, in management's discretion
74
<PAGE>
(based on actual experience with loans submitted by those customers or secured
by properties in those areas) greater risk may be involved in the underwriting
and appraisal process than for loans secured by properties in other geographic
areas. The pre-funding quality control review typically involves (i) verbal
verification of employment for all wage earners and the existence of a business
for self-employed borrowers, (ii) review of the underwriting decisions for
compliance with corporate guidelines and for explanations on any items that are
not consistent with the loan file and (iii) review of the appraisal for
compliance with Company guidelines, for accuracy and consistency and for the
determination of the value of the property. Problems found during the quality
control review process are reported to senior management, the Chief Underwriter,
the credit risk department and to regional managers and operations managers.
In addition to the pre-funding quality control review process, at least 10%
of all funded loans (including 100% of all such loans that underwent pre-funding
quality control review) will be subjected to a full post-funding quality control
re-underwriting and review. The sample selected will be skewed toward including
loans identified by Company personnel during the pre-closing phase as involving
higher than usual elements of risk. Discrepancies noted by the audit are
analyzed and corrective actions are instituted, and the results are reported to
senior management. A typical post-funding quality control review currently
includes: (i) obtaining a new field review appraisal for each property; (ii)
obtaining a new credit report from a different credit reporting agency; (iii)
reviewing loan applications for completeness, signatures, and for consistency
with other processing documents; (iv) obtaining new written verification of
income and employment; (v) obtaining new written verification of mortgage to re-
verify any outstanding mortgages; (vi) analyzing the underwriting and program
selection decisions; and (vii) verifying other demographic information from CD-
ROM and Internet databases. The quality control process is updated from time to
time as the Company's policies and procedures change. To date, the pre-funding
and post-funding quality control process has not revealed material deficiencies
in the Company's loan underwriting procedures.
LOAN SERVICING STRATEGY
Collectively, the Company and its predecessor have nearly 50 years of
experience in servicing mortgage loans. The Company has placed particular
emphasis on servicing Non-Conforming Loans since the inception of its non-
conforming lending operations in 1993. As of December 31, 1997, the Company
held a Non-Conforming Loan servicing portfolio of 4,023 loans with a principal
balance of $458.5 million and a Conforming Loan servicing portfolio of 4,150
loans with a principal balance of $254.2 million. The Conforming Loan portfolio
consists primarily of loans for which the Company acquired the servicing rights
in 1991 and 1992, although the Company does anticipate originating and servicing
new Conforming Loans as part of its business plan commencing in 1998. See "--
Specific Loan Production and Expansion Strategies -- 'Customer Directed' Lending
Initiatives--New Loan Products." The Company believes that it has the
personnel, systems and expertise necessary to service Non-Conforming Loans and
Conforming Loans effectively. The Company historically retained the servicing
rights on the Non-Conforming Loans it sold until early 1996, when it began
selling most of its loans on a servicing-released basis as a means of raising
additional capital during a period of intense capital needs when the Company was
making the effort to put in place the operating structure necessary to increase
its production volume to a level at which it could begin to finance loans
consistently and efficiently through securitization. In 1997 the Company
conducted two Gain-on-Sale Securitizations of pools of Non-Conforming Loans for
which it retained the servicing.
The Company now intends to retain the servicing of most of its future
mortgage loan production. Through servicing, the Company believes that it can
enhance its ability to manage the risks associated with Non-Conforming Loans and
other Mortgage Assets (including Retained Interests in securitized Non-
Conforming Loans), rather than merely being a passive investor in those assets.
Also, the Company plans to increase the size of its servicing portfolio in order
to capitalize on its servicing expertise and the economics of scale associated
with servicing to enhance the Company's overall profitability and financial
strength. The Company's rights to service securitized loans will typically be
subject to termination in the event certain pool performance targets, such as
levels of delinquencies and losses, are not met.
Servicing involves, among other things, collecting payments from borrowers
when due, remitting payments of principal and interest and furnishing reports to
the current owners of the loans and enforcing such
75
<PAGE>
owners' rights with respect to the loans, including recovering delinquent
payments, instituting foreclosure proceedings and liquidating the underlying
collateral as necessary. The standard servicing fees charged by the Company on
its Non-Conforming and Conforming Loan servicing portfolios are approximately
0.50% and 0.375% per annum, respectively, on the declining principal balance of
such loans, which servicing fees are collected out of the monthly mortgage
payments. In addition to servicing fees, the Company also charges ancillary fees
such as late charges, prepayment fees and fees for services rendered to
borrowers (e.g., fees for provision of amortization schedules and copying and
telecopy charges). Ancillary servicing fees received for the combined servicing
portfolio during 1997 were $0.8 million.
The Company services most of its Conforming Loan portfolio for Ginnie Mae,
Fannie Mae and Freddie Mac. With respect to these loans, the Company, as
servicer, is required to pay guarantee fees to Ginnie Mae, Fannie Mae or Freddie
Mac, as the case may be. Also, the Company is obligated to pay guarantee fees
to private credit enhancement providers with respect to some of the securitized
loans it services. During 1997, the Company's guarantee fee obligations totaled
$0.1 million.
The Company services all loans out of its offices in Englewood, Colorado,
utilizing the Alltel (formerly Computer Power, Inc. or CPI) servicing software
system.
The Company has established centralized controls and standards for the
servicing and collection of mortgage loans in its portfolio. The Company
revises such policies and procedures from time to time in connection with
changing economic and market conditions and changing legal and regulatory
requirements.
The Company's collections policy is designed to identify payment problems
sufficiently early to permit the Company to address delinquency problems quickly
and, when necessary, to act to preserve equity in a preforeclosure property.
The Company believes that these policies help to reduce the incidence of charge-
offs. Servicing Non-Conforming Loans generally requires earlier intervention
and more vigilant attention to portfolio performance than does servicing of
Conforming Loans.
The following table illustrates the time line of the Company's collection
practices with respect to its non-conforming mortgage loan portfolio, assuming
that a 10-day grace period applies by contract or applicable law. The
collection procedures outlined below may change in the future and may vary as a
result of state law requirements.
<TABLE>
<CAPTION>
TIME EVENT
---- -----
<S> <C>
Due date of loan payment.......................... Borrower loan payment due
7th day after due date............................ Reminder notice mailed to borrower
11th day after due date........................... Notice of past due payment with late charge
assessment
13th day after due date........................... Demand or breach notice mailed to borrower
25th day after due date........................... A letter is sent by Western Union outlining
acceptable methods of payment
31st day after due date........................... Final notice mailed to borrower
45th day after due date........................... Property inspection is ordered (and
automatically ordered every 30 days until the
loan is reinstated or foreclosure sale is
held)
50th day after due date........................... File forwarded to foreclosure department with
recommendation of collector
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
After foreclosure approval....................... Borrower informed of status and the Company's
reinstatement dates and legal package
forwarded to approved legal counsel to
commence foreclosure process
End of Company's reinstatement period............. Notice of sale recorded and
trustee's sale date scheduled; property sold to third party or
acquired on behalf of the Company
</TABLE>
During a period of delinquency with respect to a Non-Conforming Loan
serviced by the Company, the Company's collector assigned to the loan will
contact the borrower frequently. All collection activity, including the date
collection letters were sent and detailed notes on the substance of each
collection telephone call, is entered into a permanent collection history for
each account. Company collectors have computer access to telephone numbers,
payment histories, loan information and all past collection notes. Collectors
obtain additional guidance with respect to the collection process through
frequent communication with the Company's senior management.
During the foreclosure process, frequent borrower contact is maintained by
the foreclosure specialists. Their goal is to reinstate defaulted loans to a
current status and reduce the inherent potential for loss. Formal forbearance,
seller assistance, pre-foreclosure sales for losses lower than those that would
be incurred after foreclosure, and deeds-in-lieu of foreclosure are some of the
methodologies employed in these loss mitigation efforts.
At the time a borrower contacts the Company's collection department
regarding their inability to remit a payment in a timely manner, the Company
commences a review of the mortgagor's file to determine whether there is
potential for loss mitigation. If the problem is of a temporary, short-term
nature, the Company's collection staff will make every effort to enter into a
repayment plan with the borrower. However, if the problem is recurrent or
involves a long-term collectability issue, a collector will counsel the customer
to consider all available options to avoid foreclosure proceedings. Such
options include refinancing, short sale, deed-in-lieu of foreclosure and other
methods. In determining what type of loss mitigation method it will recommend
to a delinquent borrower, the Company considers several factors. The Company
considers the value of the mortgaged property to be most significant, but will
also review the borrower's financial situation and any detailed hardship letter
and income tax returns submitted by the borrower.
If the collector is unable to resolve the delinquency problem with the
borrower, the loan file is referred to the Company's foreclosure area. Company
specialists in this area will make additional contact with the borrower in an
effort to mitigate any potential loss. The borrower is again counseled to
consider selling the mortgaged property to prevent a foreclosure and a possible
deficiency judgment. The borrower is also reminded that, if he has sufficient
equity in the mortgaged property, a refinancing of his loan could stop
foreclosure proceedings. The Company will refer the borrower to a broker
participating in the Company's network or to the Company's direct-to-consumer
group for potential pre-approval of a new mortgage loan if the borrower is
interested in refinancing and that approach appears to be a viable solution.
Also, at the time a loan is approved for foreclosure, the foreclosure
specialists will review the file to see if any other type of loss mitigation
might be advisable, such as a deed-in lieu of foreclosure.
The Company's servicing software also maintains and tracks homeowners'
insurance information. Expiration reports are generated bi-weekly listing all
policies scheduled to expire within 30 days. When policies lapse, a letter is
issued advising the borrower of the lapse and that the Company will obtain
forced-placed insurance at the borrower's expense.
Regulations and practices regarding the liquidation of properties (e.g.,
foreclosure) and the rights of a borrower in default vary greatly from state to
state. As such, each foreclosure is assigned to outside legal counsel, located
in the same state as the property. Bankruptcies filed by borrowers are
similarly assigned to appropriate local
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<PAGE>
counsel. All aspects of foreclosures and bankruptcies are closely monitored by
the Company through monthly status reports from attorneys.
If the Company acquires title to a property at a foreclosure sale or
otherwise, the Company's REO department immediately obtains an estimate of the
sale price of the property by sending a local real estate broker to inspect the
premises and begin marketing the property. If the property is not vacant when
acquired, local eviction attorneys are hired to commence eviction proceedings
and/or negotiations are held with occupants in an attempt to get them to vacate
without incurring the additional time and cost of eviction. Repairs are
performed if it is determined that they will increase the net liquidation
proceeds, taking into consideration the cost of repairs, the carrying costs
during the repair period and the marketability of the property both before and
after the repairs.
The following tables set forth information relating to the delinquency and
loss experience of the Company for its servicing portfolio of Non-Conforming
Loans and Conforming Loans for the periods indicated. All dollar amounts shown
are in thousands.
NON-CONFORMING LOAN SERVICING PORTFOLIO
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------- ---------------------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total principal balance (at period end)........... $178,743 $230,458 $458,497 $ 235,989 $ 462,966
Average portfolio principal balance/(1)/.......... $177,084 $203,276 $310,734 $ 215,197 $ 369,484
DELINQUENCIES (at period end)
30-59 Days:
Principal balance.............................. $ 9,161 $ 8,185 $ 15,328 $ 5,082 $ 14,647
Percent/(2)/................................... 5.13% 3.55% 3.34% 2.15% 3.16%
60-89 Days:
Principal balance.............................. $ 821 $ 285 $ 1,103 $ 636 $ 1,188
Percent/(2)/................................... 0.46% 0.12% 0.24% 0.27% 0.26%
90 Days or More:
Principal balance.............................. $ 1,473 $ 4,369 $ 4,646 $ 4,511 $ 4,728
Percent/(2)/................................... 0.82% 1.90% 1.01% 1.91% 1.02%
Total Delinquencies:
Principal balance.............................. $ 11,455 $ 12,840 $ 21,077 $ 10,229 $ 20,562
Percent/(2)/................................... 6.41% 5.57% 4.60% 4.33% 4.44%
FORECLOSURES
Principal balance.............................. $ 8,112 $ 10,176 $ 16,312 $ 8,459 $ 18,913
Percent/(2)/................................... 4.54% 4.42% 3.56% 3.58% 4.09%
REO (at period end)............................... $ 929 $ 3,414 $ 4,665 $ 3,746 $ 5,528
Net gains/(losses) on liquidated loans............ $ (168) $ (1,576) $ (1,626) $ (1,796)/(3)/ $ (1,605)/(3)/
Percentage of net gains/(losses) on
liquidated loans (based on average
portfolio principal balance)................... (0.10)% (0.78)% (0.52)% (0.83)%/(3)/ (0.43)%/(3)/
</TABLE>
___________________
(1) Calculated by summing the actual outstanding principal balances at the end
of each month and dividing the total by the number of months in the
applicable period.
(2) Percentages are expressed based upon the total outstanding principal
balance at the end of the indicated period.
(3) Annualized.
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<PAGE>
CONFORMING LOAN SERVICING PORTFOLIO/(1)/
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- -----------------------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total principal balance (at period end)....... $312,736 $294,257 $254,192 $ 287,169 $ 240,480
Average portfolio principal balance/(2)/...... $312,809 $302,419 $279,060 $ 299,515 $ 267,964
DELINQUENCIES (at period end)
30-59 Days:
Principal balance.......................... $ 4,784 $ 4,547 $ 5,036 $ 2,007 $ 3,024
Percent/(3)/............................... 1.53% 1.55% 1.98% 0.70% 1.26%
60-89 Days:
Principal balance.......................... $ 932 $ 485 $ 808 $ 616 $ 865
Percent/(3)/............................... 0.30% 0.16% 0.32% 0.21% 0.36%
90 Days or More:
Principal balance.......................... $ 1,633 $ 1,250 $ 1,039 $ 944 $ 1,100
Percent/(3)/............................... 0.52% 0.42% 0.41% 0.33% 0.46%
Total Delinquencies:
Principal balance.......................... $ 7,349 $ 6,281 $ 6,883 $ 3,567 $ 4,990
Percent/(3)/............................... 2.35% 2.13% 2.71% 1.24% 2.07%
FORECLOSURES
Principal balance.......................... $ 1,833 $ 4,712 $ 3,684 $ 4,255 $ 4,310
Percent/(3)/............................... 0.59% 1.60% 1.45% 1.48% 1.79%
REO (at period end)........................... $ 1,058 $ 627 $ 219 $ 452 $ 200
Net gains/(losses) on liquidated loans........ $ (7) $ (151) $ (125) $ (151)/(4)/ $ (171)/(4)/
Percentage of net gains/(losses) on
liquidated loans (based on average
portfolio principal balance)............... - % (0.05)% (0.04)% (0.05)%/(4)/ (0.06)%/(4)/
</TABLE>
_________________
(1) The Company's Conforming Loan servicing portfolio consists primarily of
loans for which the Company acquired the servicing rights in 1991 and 1992.
This portfolio is not growing, and servicing of Conforming Loans is not a
major part of the Company's future business plan, although the Company does
anticipate originating and servicing new Conforming Loans commencing in
1998.
(2) Calculated by summing the actual outstanding principal balances at the end
of each month and dividing the total by the number of months in the
applicable period.
(3) Percentages are expressed based upon the total outstanding principal
balance at the end of the indicated period.
(4) Annualized.
PORTFOLIO MANAGEMENT
GENERAL
The Company plans to invest in and manage a portfolio of Mortgage Assets,
including primarily Non-Conforming Loans and Retained Interests in Non-
Conforming Loans funded by the Company through its mortgage lending operations,
but also other Mortgage Assets, including Residual Interests, which the Company
may acquire from time to time through purchases in the secondary market. The
Company will make its investments in a manner designed to maximize its aggregate
spread income over time, focusing on Mortgage Assets that (i) generate
sufficient interest income to support a spread over borrowing costs acceptable
to management, (ii) are likely to continue generating interest income for a
significant duration, (iii) are subject to levels of risk of credit losses
commensurate with the yields thereon, and (iv) can be acquired and managed
efficiently. Among other things, the Company intends to:
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<PAGE>
. obtain long-term non-recourse financing for its Non-Conforming
Loans through the issuance of CMO debt secured by such mortgage
loans;
. hold Retained Interests created in connection with CMO debt
transactions involving its own Non-Conforming Loan production;
. make selective acquisitions from third parties of suitable
Mortgage Assets, including Residual Interests, that are
consistent with the investment guidelines to be adopted by the
Company's management, where such acquisitions are strategically
important to the Company's overall objectives as a mortgage
company; and
. borrow funds under various credit facilities, including warehouse
facilities, secured term debt facilities, and reverse repurchase
arrangements, to finance the funding and warehousing of Non-
Conforming Loans pending the arrangement of long-term financing
and to finance the acquisition and holding of other Mortgage
Assets.
ISSUANCE OF COLLATERALIZED MORTGAGE OBLIGATIONS
The Company intends to finance the Non-Conforming Loans produced by its
mortgage lending operation primarily through long-term, non-recourse CMO debt
issuances as a major component of its overall asset/liability strategy. Under
this approach, the Company will issue long-term non-recourse CMOs secured by
pledges of specific pools of mortgage loans. These CMO issuance transactions
will be structured to be accounted for as financings. Accordingly, the
securitized mortgage loans will remain on the Company's balance sheet as assets
and the debt obligations (i.e., the CMOs) will appear as liabilities. A CMO
issuance will result only in rearranging the Company's borrowings, as proceeds
from the CMO issuance are applied against preexisting borrowings (i.e., advances
under the Company's short-term recourse warehouse lines of credit entered into
to finance the holding of mortgage loans while they are being aggregated into a
sufficient quantity to be financed efficiently). Issuing CMO debt in this
manner locks in less expensive, non-recourse long-term financing that better
matches the terms of the loans serving as collateral for the debt (thereby
resulting in more predictable spread income from the assets over time).
The Company expects to contribute its fixed-rate loan production to a
taxable subsidiary, which may sell such loans in secondary market whole loan
sale transactions from time to time, until the Company's fixed-rate loan
production volume is large enough to be securitized efficiently. Fixed-rate
loans accounted for only 13.5% of he Company's aggregate loan production for
1997.
RETAINED INTERESTS IN SECURITIZED LOANS
The Company plans to retain Residual Interests representing the right to
receive future cash flow from the Non-Conforming Loans it finances in CMO
transactions ("Retained Interests") in excess of amounts required to be paid to
investors and other fees in the related CMOs. Generally, the Company no longer
intends to use the "gain-on-sale" accounting method as it had in connection with
its two 1997 securitizations, because management believes the earnings reported
in connection with the application of that accounting method are inherently
speculative. Instead, the Company plans to finance its mortgage loans through
the issuance of non-recourse CMOs secured by its mortgage loans, as described
above. In this way, the Company will earn net interest or spread income over
time as it is actually earned, in the tax-advantaged REIT structure, rather than
realizing gains based on estimated present values of Retained Interests at the
time they are created in a securitization structured to generate gain on sale.
Securitization of loans includes an additional potential benefit over
selling loans in whole loan form. By financing its mortgage loans in CMO
transactions, the Company will retain ownership of its securitized loans. While
the CMOs remain outstanding, the value of the Company's interest in the mortgage
loans will be represented only by the related Retained Interest, which generally
represents the right to receive only the portion of interest payable on the
loans in any month in excess of amounts required to pay interest on the CMOs.
When the CMOs are paid off, the Company will own any remaining loans free and
clear of the lien of the CMOs, and will receive all principal and interest
payments on those loans, not just the interest strip allocable to its Retained
Interest. Had the
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<PAGE>
Company sold the loans instead of securitizing them, the Company would have
received its payment in respect of the loans all at the time of sale, with no
participation in any residual value.
The Company expects that its Retained Interests will be subordinated to the
classes of securities issued to investors in the related CMOs with respect to
losses of principal and interest on the underlying mortgage loans. Accordingly,
any such losses incurred on the underlying mortgage loans will be applied first
to reduce the value of the Company's Retained Interest, until reduced to zero.
Thereafter, any further losses would be borne by the investors or by any
monoline insurers hired to provide credit enhancement for the CMOs, rather than
the Company.
The Company will structure its CMO financings so as to avoid the
attribution of any excess inclusion income to the Company's stockholders. See
"Federal Income Tax Considerations -- Taxation of Taxable U.S. Stockholders."
The Company's management is experienced in the securitization of Non-Conforming
Loans and other single-family residential mortgage loans.
ACQUISITION OF MORTGAGE ASSETS FROM THIRD PARTIES
In addition to securitizing its own mortgage loan production and holding
the Retained Interests in such securitized mortgage loans, the Company may from
time to time selectively acquire Mortgage Assets from third parties, including
Residual Interests in securitized loans originated by other lenders ("Third
Party Residuals"), when such acquisitions serve the Company's primary goal of
growing its mortgage lending operations.
The Company intends to acquire Mortgage Assets from third parties on a
selective basis. These acquisitions will typically be made systematically
pursuant to arrangements with other non-conforming mortgage companies with whose
Residual Interests the Company is familiar, where the Company is satisfied that
the quality of the underlying mortgage loans comports with the Company's own
risk and reward guidelines. From time to time the Company may make isolated
opportunistic acquisitions of Mortgage Assets that complement the Company's
portfolio.
Management will adopt investment guidelines (the "Investment Guidelines")
for acquired Mortgage Assets, which will be approved by the Company's Board of
Directors and which the Company will use in evaluating potential Mortgage Asset
investments. The Company's management will use the Investment Guidelines as a
framework for managing the structure of the Company's balance sheet with a view
to achieving the maximum level of net interest income consistent with
maintaining levels of interest rate risk, credit risk, prepayment risk, and
liquidity commensurate with the yield on its assets. See "-- Portfolio Risk
Management." The Company's management will form and monitor policies governing
investments, funding sources, off-balance sheet commitments, overall interest
rate risk, credit risk, prepayment risk, and liquidity based on the Investment
Guidelines. The Company's interest rate and prepayment sensitivity position
will be managed as a function of balance sheet trends, asset opportunities and
interest rate expectations. In most circumstances, the Company expects to
remain well within the risk limits that will be established in the Investment
Guidelines.
FINANCING FOR MORTGAGE LENDING OPERATIONS AND MORTGAGE ASSET ACQUISITIONS
General. The Company will finance its originations and acquisitions of
mortgage loans pending the issuance of CMOs against such loans primarily through
warehouse credit facilities. The Company will obtain long-term financing for
such mortgage loans generally by issuing long-term non-recourse CMOs secured by
those loans. Initially, following the Offering, the Company expects to have
sufficient capital on hand to fund selected acquisitions of Mortgage Assets from
third parties. After the Company's capital has been fully deployed, management
will explore other financing options for continuing the growth of the Company's
portfolio. See "Risk Factors -- Operating Risks -- Inability to Access Adequate
Funding Sources on Favorable Terms May Affect Results of Operations."
Leveraging of MBS Investments. The Company intends to employ a leveraging
strategy to increase its return on its Mortgage Assets other than mortgage
loans, which are expected to consist chiefly of various types of MBS. The
Company will endeavor to set a level of borrowing to provide it with a
reasonable capital base as a hedge against interest rate environments in which
the Company's net borrowing costs, including associated hedging
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<PAGE>
costs and credit losses, might exceed its interest income from MBS. See "Risk
Factors -- Operating Risks -- Substantial Leverage and Potential Net Losses in
Connection with Borrowings." The Company intends to enter into the
collateralized borrowings described herein only with institutions that meet the
credit standards approved by the Company's management.
The Company's MBS will be financed primarily at short-term borrowing rates
through reverse repurchase agreements and, to a lesser extent, bank warehouse
financing and borrowings under lines of credit and other collateralized
financing arrangements that the Company may establish with approved
institutional lenders. It is expected that reverse repurchase agreements will
be the principal financing device utilized by the Company to leverage its
portfolio of MBS. The Company anticipates that upon repayment of each reverse
repurchase agreement, the underlying collateral normally will be pledged
immediately to secure a new reverse repurchase agreement.
A reverse repurchase agreement, although structured as a sale and
repurchase obligation, is treated as a financing transaction for tax and GAAP
purposes, pursuant to which the Company will pledge the financed MBS as
collateral to secure a short-term loan. Generally, the other party to the
agreement will make the loan in an amount equal to a percentage of the market
value of the pledged collateral. At the maturity of a reverse repurchase
agreement, the Company will be required to repay the loan and, at the time of
repayment, will receive back its collateral. The Company generally will
continue to receive the principal and interest paid on the MBS while pledged.
The Company intends to enter into reverse repurchase agreements primarily with
national broker/dealers, commercial banks and other lenders that typically offer
such financing arrangements. The Company believes that the firms selected to
provide this financing will be financially sound institutions meeting the
Company's approved credit standards.
The Company's Investment Guidelines will generally set limits on the levels
of borrowing the Company may incur with respect to Mortgage Assets of certain
types and credit quality. If the returns on the Mortgage Assets purchased with
borrowed funds fail to cover the cost of the borrowings, the Company will
experience net interest losses. In addition, through increases in
collateralization requirements, decreases in the market value of the Company's
Mortgage Assets, increases in interest rate volatility, availability of
financing in the market, circumstances then applicable in the lending market and
other factors, the Company may not be able to achieve the degree of leverage
necessary to optimize the returns on its portfolio, which may adversely affect
the Company's operating results.
PORTFOLIO RISK MANAGEMENT
UNDERWRITING AND INVESTMENT GUIDELINES
The Company will utilize its underwriting guidelines and quality control
procedures to maintain the quality of the mortgage loans it originates and
acquires through its mortgage lending operations. See "-- Mortgage Lending
Operations -- Underwriting and Quality Control Strategy." In addition, the
Company will implement Investment Guidelines, approved by the Company's Board of
Directors, to be followed generally in connection with the Company's
acquisitions of Mortgage Assets from third parties. These guidelines will be
designed to ensure the Company's acquired Mortgage Assets will be of adequate
credit quality and that the Company's portfolio contains the mix of products
desired by the Company. See "-- Acquisition of Mortgage Assets from Third
Parties."
CREDIT RISK
With respect to its Mortgage Asset portfolio, the Company will attempt to
control and mitigate credit risk through:
(i) ensuring that established credit and collateral property
underwriting guidelines are followed in connection with the
origination of its mortgage loans and that Board-approved Investment
Guidelines are followed in connection with its acquisitions of other
Mortgage Assets;
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<PAGE>
(ii) the use of early intervention, aggressive collection and loss
mitigation techniques in servicing its mortgage loans and
acquisition of "special servicing" rights with respect to MBS
acquired from others (especially Third Party Residuals) wherever
available on a cost-effective basis; and
(iii) maintenance of appropriate capital reserve levels.
The Company is an experienced servicer of Non-Conforming Loans. See "--
Mortgage Lending Operations -- Loan Servicing Strategy." The Company plans to
continue to use aggressive and effective collection techniques in servicing its
portfolio of Non-Conforming Loans, and believes this will be a critical factor
in its ability to maintain the value of its loan portfolio. The Company intends
to attempt to acquire "special servicing" rights whenever possible with respect
to mortgage loans underlying any Third Party Residuals that the Company may
acquire. "Special servicing" involves the ability to supervise the activities
of the primary loan servicer, and the right to take control of the collection
process when loss mitigation techniques become necessary with respect to
particular loans.
Management will monitor the credit quality composition of the Company's
Mortgage Asset portfolio, and will attempt to maintain some balance in the
portfolio by directing fundings and purchases of Mortgage Assets with a view to
creating and maintaining diversity with regard to these factors and, in some
cases, selling certain portions of the Company's portfolio in order to achieve a
better balance.
INTEREST RATE RISK
The Company's Mortgage Asset portfolio will be designed with a view to
generating spread income principally from the earnings on its Mortgage Assets in
excess of its borrowing costs related to those Mortgage Assets. Income on
Retained Interests and Third Party Residuals will be reported as interest on the
underlying loans is received by the Company in excess of the interest costs of
the long-term non-recourse financing of those assets represented by the related
CMOs or other MBS. A significant portion of the Company's unsecuritized
mortgage loans and its other Mortgage Assets will be financed through borrowings
that bear short-term rates of interest. A substantial portion of the Company's
Mortgage Assets will also bear interest at short-term adjustable interest rates.
As a result, net interest or spread income will depend on prevailing market
interest rates, as well as the volume of the Company's interest-earning assets
and interest-bearing liabilities. Increases in short-term interest rates will
generally increase the yields on Mortgage Assets (except those bearing fixed
rates of interest) and will generally increase the costs of the Company's
borrowings against such Mortgage Assets. However, to the extent that borrowing
costs adjust at different times or in different amounts relative to the yields
on the related Mortgage Assets, the Company will be subject to interest rate
risk. When the costs of borrowings increase more rapidly than the yields on
assets, net interest or spread income may be reduced. Conversely, decreases in
short-term interest rates may decrease the interest cost on the Company's
borrowings more rapidly than it reduces the yields on the Company's adjustable-
rate Mortgage Assets, causing an increase in net interest income.
The Company will hedge the interest rate risk to which its portfolio of
Mortgage Assets is subject in large part through its CMO issuance strategy,
which is designed to provide long-term financing for its mortgage loan
production while maintaining a consistent spread in a variety of interest rate
environments. The Company plans to contribute most of its fixed-rate loan
production to a taxable subsidiary, which will sell such mortgage loans to third
parties in whole loan form, until its fixed-rate loan production becomes large
enough to be financed efficiently through CMO transactions. This short-term
strategy is also an important part of the Company's current hedging strategy
with respect to its fixed-rate portfolio. Specifically, the Company's interest
rate risk management program will be formulated with the intent to offset the
potential adverse effects resulting from rate adjustment limitations on its
Mortgage Assets, the differences between interest rate adjustment indices and
interest rate adjustment periods of its adjustable-rate mortgage loans and
related borrowings, and the effect of changes in interest rates on variable-rate
borrowings that are matched against fixed-rate Mortgage Assets.
The Company may use interest rate caps and interest rate swaps and may,
from time to time, use options, future contracts, and forward contracts and
purchase interest-only REMIC regular interests and similar instruments to
attempt to mitigate the risk of the cost of its variable-rate liabilities
increasing at a faster rate than the earnings on its assets during a period of
rising interest rates ("Spread Risks"). In particular, when the Company begins
accumulating
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<PAGE>
its fixed-rate loans in anticipation of financing them through CMO transactions,
the Company may utilize such hedging vehicles because Spread Risks are more
pronounced when fixed-rate assets are financed through variable-rate borrowings.
The Company intends generally to hedge as much of the interest rate risk as
management determines is in the best interests of the stockholders of the
Company, given the cost of such hedging transactions and the need to maintain
the Company's status as a REIT. See "Federal Income Tax Considerations--
Requirements for Qualification" and "--Income Tests." This determination may
result in management electing to have the Company bear a level of interest rate
risk that could otherwise be hedged when management believes, based on all
relevant facts, that bearing such risk is advisable. The Company may also, to
the extent consistent with its compliance with the REIT gross income tests and
applicable law, utilize financial futures contracts, options and forward
contracts as a hedge against future interest rate changes.
Interest rate cap agreements are legal contracts between the Company and a
third party firm (the "counter-party"). The counter-party agrees to make
payments to the Company in the future should the one- or three-month LIBOR
interest rate rise above the "strike" rate specified in the contract. The
Company would make monthly premium payments to the counter-party under the
contract. Each contract would have a fixed "notional face" amount, on which the
interest is computed, and a set term to maturity. Should the reference LIBOR
interest rate rise above the contractual strike rate, the Company would earn
"cap income." Payments on an annualized basis equal the contractual notional
face amount times the difference between actual LIBOR and the strike rate.
Interest rate swap agreements typically will stipulate that the Company will pay
a fixed rate of interest to its counter-party. In return, the counter-party
would pay the Company a variable rate of interest based on the notional amount.
The agreements would have fixed notional amounts, on which the interest is
computed, and set terms to maturity. In all of these interest rate risk
management transactions, the Company will follow certain procedures designed to
limit credit exposure to counter-parties, including dealing only with counter-
parties whose financial strength meets the Company's requirements. See "Risk
Factors -- Operating Risks -- Failure to Hedge Effectively Against Interest Rate
Changes May Adversely Affect Results of Operations" and "-- Potential Adverse
Effect of the Use of Financial Instruments in Hedging."
PREPAYMENT RISK
Among other things, the Company seeks to maximize the duration of the net
interest income it will receive from its Mortgage Assets, so that it will
continue to be earned over time and so that the associated production and
acquisition costs can be amortized over a longer period. Prepayments have the
effect of shortening the lives of Mortgage Assets and the duration of the net
interest income that can be earned with respect to those assets. The Company
will seek to minimize the effects of faster than anticipated prepayment rates on
the mortgage loans underlying its Mortgage Asset portfolio by (i) requiring as
many as possible of the loans and other Mortgage Assets that it funds and
acquires to subject the related borrowers to prepayment penalties in the event
they prepay their loans in full within a certain period of time after loan
origination, (ii) seeking to achieve a balanced mix of loan products in its
portfolio, stressing the funding and acquisition of loan types that have been
empirically proven to be less likely to be prepaid early, (iii) using its
servicing operation to solicit borrowers to refinance their mortgage loans with
the Company rather than with another lender, to the extent the Company is
permitted to do so, and (iv) engaging in a strategy of hedging its exposure to
prepayment risk by acquiring certain types of Mortgage Assets that increase in
value in times of higher mortgage loan prepayment rates.
The Company will originate and acquire mortgage loans with prepayment
penalties in most instances. During 1997, 75.4% of the Company's mortgage loans
were subject to prepayment penalties. Prepayment penalties are designed to
deter prepayments by borrowers during an initial period following loan closing
(typically one to five years), by imposing penalty charges on the borrowers for
prepaying their loans during that period. The duration of the prepayment
penalties at origination to which the Company's mortgage loans are subject
averaged 24 months. Prepayment charges on the Company's Non-Conforming Loans
averaged 1.0% of the outstanding loan balance to a maximum of six months'
interest on 80% of the balance of the mortgage loan. Under certain state laws,
prepayment charges may not be imposed or may be limited as to amount or period
of time during which they can be imposed.
In addition, the Company plans to introduce new loan products through its
mortgage lending operation that add duration to its loan portfolio. For
instance, the Company believes that retail loan production is less likely to be
prepaid than wholesale loan production, especially wholesale loans funded
through brokers, because many brokers
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tend to solicit their borrower customers to refinance their mortgage loans.
Brokers typically will not attempt to apply to a lender to refinance its own
loan, for fear that the lender would stop doing business with the broker. Also,
Home Equity Loans are generally more difficult to refinance than Purchase
Money/Refinancing Loans because most or all of the borrower's equity in his
mortgaged property will have been eliminated when the Home Equity Loan was made.
The effort to manage prepayment risk by adding products that have duration is
one of the reasons the Company plans to increase its retail lending presence and
to increase its focus on Home Equity Loans as opposed to Purchase Money/
Refinancing Loans. See "-- Mortgage Lending Operations -- Specific Loan
Production and Expansion Strategies -- 'Customer-Directed' Lending Initiatives
- -- Retail Lending" and "-- New Product Lines." Similarly, the Company intends to
increase the number of Purchase Money/Refinancing Loans it makes to borrowers
who will simultaneously take a subordinated mortgage loan on the same real
property, because in these instances the borrower's equity in his mortgaged
property will be eliminated, making it more difficult for that borrower to
obtain a new loan to refinance his existing first-lien mortgage loan for some
period of time.
Because the Company intends to service most of the mortgage loans it funds,
the Company will be in a position to maintain contact with the borrowers under
those loans after the loan closings. To the extent it is permitted to do so,
the Company will use its servicing contact to solicit borrowers who are likely
to refinance their mortgage loans to do so using a new loan funded by the
Company rather than another lender. Such borrowers will include borrowers whose
prepayment penalties have recently expired or are scheduled to expire within the
near future and borrowers who have requested pay-off statements from the Company
as servicer of their loans. By refinancing its own loans to the maximum extent
possible, the Company will maintain its borrowing customers and add duration to
its portfolio.
Finally, the Company may engage in transactions designed to hedge its
exposure to prepayment risks. These transactions will chiefly involve
acquisition of Mortgage Assets the values of which tend to increase during times
of increased mortgage loan prepayments, when other assets in the Company's
portfolio may be losing value as a result of the same prepayments. "Principal-
only strips" ("POs") are such a type of Mortgage Asset. POs represent the right
to receive a fixed amount of principal distributions from an underlying pool of
mortgage loans. POs are bought at discounts from their face amount, as they
accrue no interest on their face amounts. To the extent the underlying mortgage
loans prepay at rates that are faster than the rates that were anticipated in
pricing the PO, the holder of the PO will receive the entire face amount of the
PO faster than anticipated, thereby earning a higher yield than anticipated at
the time of purchase. "Planned amortization class" MBS ("PACs") are another
type of Mortgage Asset whose value may increase during times of high mortgage
loan prepayment rates if purchased at discounts from their face amounts. These
classes are designed and priced to amortize at a set rate. As long as
prepayment speeds on the underlying mortgage loans do not exceed a certain
range, the PAC will continue to pay down in accordance with its amortization
schedule. If, however, prepayment rates on the underlying mortgage loans exceed
the assumed range of speeds, the PAC will be amortized more rapidly than the
planned rate of amortization. Again, if the PAC was purchased at a discount
from its face amount, the faster amortization will cause the holder to receive
his full return sooner, thereby increasing the holder's yield.
Prepayment risk will be monitored by management and through periodic review
of the impact of a variety of prepayment scenarios on the Company's revenues,
net earnings, dividends, cash flow and net balance sheet market value. No
strategy will be able to insulate the Company completely from the effects of
interest rate changes and prepayments. Further, certain of the federal income
tax requirements that the Company must satisfy to qualify as a REIT may limit
the Company's ability to fully hedge its interest rate and prepayment risks.
See "Federal Income Tax Considerations -- Requirements for Qualification" and "
- -- Income Tests."
DISPOSITION OF CERTAIN ASSETS
The Company generally intends to hold Mortgage Assets to maturity. In
addition, the REIT provisions of the Code limit in certain respects the ability
of the Company to sell Mortgage Assets. See "Federal Income Tax
Considerations." Management may decide to sell assets from time to time,
however, for a number of reasons, including, without limitation, to dispose of
an asset as to which credit risk concerns have arisen, to reduce interest rate
risk, to substitute one type of Mortgage Asset for another to improve yield, to
enhance credit risk or geographic diversification in the portfolio, or to
maintain compliance with the requirement for exemption under Section
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3(c)(5)(C) of the Investment Company Act that at least 55% of its assets consist
of mortgages and other liens on and interests in real estate, and generally to
restructure the Company's balance sheet when management deems such action
advisable. Management will select any Mortgage Assets to be sold according to
the particular purpose such sale will serve. The Board of Directors has not
adopted a policy that would restrict management's authority to determine the
timing of sales or the selection of Mortgage Assets to be sold.
TAXABLE SUBSIDIARIES
The Company has implemented, and will continue to implement, portions of
its business strategy from time to time through one or more taxable
subsidiaries. For a REIT, a taxable subsidiary refers to a corporation up to
99% of the common stock of which is owned by the REIT. The voting common stock
of such corporation (which may represent a small percentage (e.g. one to five
percent) of the corporation's outstanding common stock), however, is owned by
persons other than the REIT due to the provisions of the Code limiting ownership
by REITs of the voting stock of Subchapter C corporations (other than Qualified
REIT Subsidiaries). See "Federal Income Tax Considerations--Requirements for
Qualification" and "-- Asset Tests." NMC currently has two taxable
subsidiaries, National Mortgage Sales Corporation ("NMSC") and National Mortgage
Administration Corporation ("NMAC"), each of which is a Colorado corporation.
NMC owns 100% of the non-voting stock of NMSC and NMAC, representing 95% of the
value of the outstanding stock of NMSC and NMAC, respectively. Steven B. Chotin
owns all of the voting stock of NMSC and NMAC, representing 5% of the value of
the outstanding stock of NMSC and NMAC, respectively. NMC contributed certain
of its Non-Conforming Loans to NMSC in January 1998, and NMSC sold these loans
in whole loan form for cash in February 1998. NMC may contribute fixed-rate
loans to NMSC from time to time, and NMSC may sell such loans to third parties
in whole loan form, until the Company's fixed-rate loan production volume is
large enough to be securitized efficiently. NMAC will provide loan processing
and closing services to, and collect the related fees from, borrowers.
Taxable subsidiaries are not Qualified REIT Subsidiaries and will be
subject to federal and state corporate income taxes. In order to comply with
the asset tests applicable to NMC as a REIT, as of the last day of each calendar
quarter, the securities of each such subsidiary held by the Company must not
represent either (i) more than five percent of the value of the Company's total
assets or (ii) more than ten percent of the voting securities of any such
subsidiary. See "Federal Income Tax Considerations -- Requirements for
Qualification," "-- Asset Tests" and "-- Proposed Tax Legislation." Taxable
subsidiaries generally will distribute any net profit after taxes to the Company
and their other stockholders. Before NMC forms any additional taxable
subsidiaries, the Company will obtain advice of counsel regarding whether the
formation and contemplated method of operation of such corporation will cause
NMC to fail to satisfy the income and asset tests applicable to it as a REIT.
NMC will not have voting control over the activities of its taxable
subsidiaries.
President Clinton recently proposed certain tax legislation that could
severely limit the Company's ability to use taxable subsidiaries in the future.
See "Federal Income Tax Considerations -- Proposed Tax Legislation."
EMPLOYEES
As of March 31, 1998, the Company had a total of 185 employees. The
Company has 104 employees working at its corporate headquarters and regional
loan production office in Englewood, Colorado. None of the Company's employees
is covered by a collective bargaining agreement. The Company considers its
relations with its employees to be good.
PROPERTIES
The Company's executive and administrative offices, including its servicing
operation and national production and direct lending offices, are located at
7600 East Orchard Road, Englewood, Colorado 80111, where the Company presently
leases approximately 27,532 square feet of office space, consisting of three
separate suites, at an aggregate annual rent of approximately $0.5 million. The
Company's lease provides that one of the suites, consisting of 4,668 square
feet, will be replaced by a new suite that is presently under construction,
consisting of 15,596 square feet. It is presently anticipated that this new
space will be ready in July, 1998. After the Company
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occupies the new suite, its total leased space in its Englewood office will be
approximately 38,640 square feet, and annual rent will total approximately $0.65
million. After May, 1999 and through May, 2002, the Company's aggregate annual
rent for these suites will increase to approximately $0.81 million. The lease
expires in May, 2002.
The Company also leases office space for its other three regional offices
(average size of approximately 6,116 square feet) and five branch offices
(average size of approximately 1,720 square feet). The total annual base rent
of the regional offices and branch offices is $0.4 million.
The Company believes its facilities are both suitable and adequate for the
current business activities conducted at its regional centers and at its
existing sales offices. As part of the Company's geographic expansion, the
Company anticipates leasing additional office space in the future.
POTENTIAL LITIGATION
Specialty finance companies like the Company are often subjected to
lawsuits alleging violations of laws and regulations applicable to consumer
lending. Several such lawsuits have been filed in recent years on behalf of
purported nationwide classes of borrowers against several mortgage lenders,
including the Company, alleging that such lenders have made certain payments to
independent mortgage brokers in violation of state and federal laws, including
RESPA. Several federal district courts construing RESPA in these cases have
reached conflicting results. On January 9, 1998, in the only appellate decision
addressing the issue to date, the United States Court of Appeals for the
Eleventh Circuit ruled in Culpepper v. Inland Mortgage Corporation that the
payment by the lender to the broker in that case constituted a prohibited
referral fee under RESPA. The case was remanded to the district court for
further proceedings. If the pending cases on lender payments to brokers are
ultimately resolved against the lenders, it may cause an industry-wide change in
the way independent mortgage brokers are compensated. The Company's broker
compensation programs currently utilize such payments. Future regulatory
interpretations or judicial decisions may require the Company to change its
broker compensation programs or subject it to material monetary judgments or
other penalties. Any such changes or penalties may have a material adverse
effect on the Company's results of operations, financial condition and business
prospects.
The Company has settled, for nominal amounts, two putative class action
lawsuits that were filed against it, one grounded chiefly in alleged TILA
violations (settled in 1995) and the other based primarily on alleged RESPA
violations arising out of broker compensation (settled in 1997). There can be
no assurance that the Company will not be subject to litigation based on the
same or other grounds in the future.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position with the Company
of each person who serves or will serve as a Director and/or executive officer
of the Company. All officers are appointed by and serve at the discretion of
the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Steven B. Chotin(1) 50 Chairman of the Board(2)
James A. Weissenborn 41 President, Chief Executive Officer and Director
William J. Rogers, Jr. 43 Executive Vice President
Kevin J. Nystrom 38 Executive Vice President and Chief Financial Officer
Howard J. Glicksman(1)(3) 52 Executive Vice President, General Counsel and Director
Helen M. Dickens(1)(3) 44 Executive Vice President, Secretary, Treasurer and
Director
</TABLE>
_______________
(1) Mr. Chotin, Mr. Glicksman and Ms. Dickens currently are employed and
compensated by The Chotin Group Corporation ("TCG") and are not directly
compensated by the Company, but following the completion of the Offering
shall be employed and compensated by TCG and the Company as shared
employees pursuant to the TCG Agreement (as defined herein). See "Certain
Relationships and Related Transactions -- The TCG Agreement."
(2) Mr. Chotin also holds the office of Chairman of the Company.
(3) Upon completion of the Offering, Mr. Glicksman and Ms. Dickens shall resign
from the Board of Directors and shall be replaced by three Independent
Directors as described below.
The Articles of Incorporation of the Company require that within 90 days of
the closing of the Offering a majority of the Board of Directors shall consist
of individuals, who within two years of becoming a Director, have not been a
director, officer or employee of the Company or any of the Company's Affiliates
("Independent Directors"). The Company anticipates that three Independent
Directors will be elected to the Board and that the Board will consist of five
members upon the completion of the Offering.
Steven B. Chotin has served as a Director (and effectively as Chairman of
the Board) of the Company since its inception in 1991 and served as President
and Chief Executive Officer of the Company from January 1996 to January 1998.
Effective April 1998, Mr. Chotin was named to the office of Chairman of the
Company. Mr. Chotin also is the Chief Executive Officer and Chairman of the
Board of The Chotin Group Corporation ("TCG"), which has facilitated over $50
billion in structured financings. Before establishing the Company, Mr. Chotin
founded Fund America Investors Corporation in 1987 and Fund America Investors
Corporation II in 1992, which together have issued approximately $3.6 billion in
mortgage-backed securities in 24 separate issuance transactions.
James A. Weissenborn has served as President and Chief Executive Officer of
the Company since January 1998 and as a Director of the Company since April
1998. Prior to joining the Company, Mr. Weissenborn had been
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employed since 1987 in various capacities with the Pulte Corporation, an
international homebuilder, mortgage bank and home services provider. He served
as Vice President and Treasurer since 1993 and as Vice President of Business
Development and Strategic Planning from 1995, until joining the Company. Mr.
Weissenborn also served as President of Pulte Financial Companies, Inc. from
1993 until joining the Company in January 1998. From 1988 to 1993, Mr.
Weissenborn served as Executive Vice President, Chief Financial Officer and
Director of First Heights Bank, fsb, a 32-branch savings and loan wholly owned
by the Pulte Corporation.
William J. Rogers, Jr. has served as Executive Vice President responsible
for loan production and marketing since June 1995. From 1989 until immediately
before he joined the Company, Mr. Rogers worked in the home equity division of
Prudential Bank in Atlanta, Georgia, most recently as Senior Vice President.
Mr. Rogers served as Vice President of Shearson Lehman Mortgage Company in
Newport Beach, California from 1987 to 1989 and as Second Vice President for the
Dallas, Texas firm of Lomas & Nettleton from 1982 to 1987. Mr. Rogers has over
14 years of experience in the mortgage lending industry.
Kevin J. Nystrom has served as Senior Vice President (and since April 1998
as Executive Vice President) and Chief Financial Officer of the Company since
November 1997. Prior to joining the Company, Mr. Nystrom was employed by
Financial Asset Management LLC, the manager of two publicly held REITs, Asset
Investors Corporation and Commercial Assets, Inc. He served as Senior Vice
President and Chief Financial Officer of the two REITs from October 1996 until
joining the Company and, prior to that, as Vice President and Chief Accounting
Officer of Asset Investors Corporation from January 1993 and of Commercial
Assets, Inc. from August 1993. Prior to joining Financial Asset Management LLC
in September 1992, Mr. Nystrom had been employed from January 1985 in various
positions culminating as Senior Manager - Audit of Deloitte & Touche LLP, which
serves as the independent auditors of the Company. At Deloitte, Mr. Nystrom was
involved in the audit of the Company's financial statements for 1991.
Howard J. Glicksman has served as General Counsel of the Company since its
inception, as Vice President of the Company since 1993 (and Executive Vice
President since April 1998) and as a Director of the Company since January 1996.
Mr. Glicksman also is General Counsel, Vice President and a member of the Board
of Directors of TCG. Prior to joining TCG in 1989, Mr. Glicksman was in the
private practice of law for twelve years.
Helen M. Dickens has served as Secretary of the Company since 1991 and as a
Director of the Company since January 1996 and was elected as an Executive Vice
President and Treasurer in April 1998. Ms. Dickens also is the Secretary,
Treasurer, Vice President and a member of the Board of Directors of TCG, where
she has been employed since 1989.
OTHER SENIOR OFFICERS
Scott W. Colclough, age 34, has served as the Company's Senior Vice
President of Secondary Marketing since 1996 and Vice President of Secondary
Marketing from 1994 to 1996. Prior to joining the Company, Mr. Colclough had
been employed from 1989 to 1994 as Vice President of Secondary Marketing for
Plaza Home Mortgage Bank, FSB and from 1988 to 1989 as Secondary Marketing
Manager for First Northern Mortgage Corporation. Mr. Colclough has extensive
experience in the secondary marketing of residential mortgage loans, including
pricing and trading, investors relations, and designing and implementing hedging
strategies.
J. Lawrence Jeppson, age 46, has served as Vice President of Loan
Administration for the Company since 1995 and is responsible for managing the
mortgage loan servicing operations of the Company. For the ten years prior to
joining the Company, Mr. Jeppson has held senior level positions as a loan
administrator for other mortgage banking companies including First California
Mortgage Company, CUNA Mortgage Corporation, Secor Bank, FSB, and First
Guarantee Mortgage Corporation. Mr. Jeppson has over 22 years experience in the
mortgage loan servicing industry.
Wanda W. Michel, age 41, has served as Quality Assurance Manager and Senior
Vice President since 1997. From 1985 until joining the Company, Ms. Michel was
a Quality Assurance Director and Senior Vice
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President with United Companies Lending Corporation. Ms. Michel is a Certified
Quality Auditor and has extensive education and experience in the banking and
real estate lending industry.
Elena Carraway-Hill, age 38, joined the Company as Senior Vice President
and Chief Underwriter in March 1998. From 1996 through February 1998, Ms.
Carraway-Hill was employed as a Vice President-Chief Credit Officer of AMRESCO
Residential Capital Markets, Inc. From 1992 until 1996, Ms. Carraway-Hill was
employed by Home Savings of America (H. F. Ahmanson & Company) of Irwindale,
California, as Vice President-Assistant Director of Wholesale Lending and as
Vice President - Assistant Director of Residential Underwriting. From 1981
through 1992, Ms. Carraway-Hill worked in the mortgage lending area, as a
mortgage lending consultant and in connection with positions with Sumitomo Bank
of California and Family Savings Bank.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established, or will establish prior to the
completion of the Offering, four standing committees.
Executive Committee. Steven B. Chotin and James A. Weissenborn will serve
on the Executive Committee, which is authorized to exercise the powers of the
Board of Directors between meetings. However, the Executive Committee may not
(i) amend the Articles of Incorporation or the Bylaws of the Company, (ii) adopt
an agreement of merger or consolidation, (iii) recommend to the stockholders the
sale, lease or exchange of all or substantially all of the Company's property
and assets, (iv) recommend to the stockholders a dissolution of the Company or
revoke a dissolution, (v) elect a director, or (vi) declare a dividend or
authorize the issuance of stock.
Compensation Committee. Mr. Chotin and two Independent Directors will
serve on the Compensation Committee. The Compensation Committee will review
salaries, benefits and other compensation, excluding stock-based compensation
grants under the 1998 Employee Incentive Plan, to senior officers and other
employees of the Company and make recommendations to the Board.
Stock Incentive Committee. Two Independent Directors will serve on the
Stock Incentive Committee, which is authorized to make stock based compensation
grants under the Company's 1998 Plan. See "-- 1998 Incentive Plans."
Audit Committee. Two Independent Directors will serve on the Audit
Committee, which will make recommendations concerning the engagement of
independent public accountants, review with the independent public accountants
the plans and results of the audit engagement, approve professional services
provided by the independent public accountants, review the independence of the
independent public accountants, consider the range of audit and non-audit fees
and review the adequacy of the Company's internal accounting controls.
NON-EMPLOYEE DIRECTORS COMPENSATION
The Company shall pay each non-employee Director of the Company an annual
fee of $10,000, plus $500 for attendance at each meeting of the Company's Board
of Directors and $500 for attendance at each meeting of a committee of the
Company's Board of which such director is a member (if held on a day on which
the Board does not also meet). In addition, each non-employee Director will be
granted options to purchase Common Stock pursuant to the Directors' Stock
Incentive Plan (the "Directors' Plan"). The Directors' Plan also authorizes
payment of up to 100% of each non-employee Director's annual fee and meeting
fees in shares of Common Stock, if provided for in a resolution approved by the
Board of Directors. See "-- 1998 Incentive Plans -- The Directors' Plan." The
Company will also reimburse Directors for expenses incurred to attend meetings
of the Board of Directors or committees thereof.
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EXECUTIVE COMPENSATION
The Summary Compensation Table below provides certain summary information
concerning compensation paid or accrued during the years ended December 31 of
1995, 1996 and 1997 by the Company to or on behalf of the four highest paid
executive officers or employees of the Company employed as of December 31, 1997.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------------------
NAME AND FISCAL OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION/(1)/
- -------------------------------- ------ ------ ----- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Craig A. Stulz.................. 1997 $ 175,000 $ 150,000 -- $10,948
Executive Vice President - 1996 150,000 75,000 -- $20,362
Chief Operating Officer/(2)/ 1995 145,833 15,000 -- --
William J. Rogers, Jr........... 1997 $ 150,000 $ 152,500 -- $10,948
Executive Vice President 1996 150,000 58,340 -- 20,362
1995 78,365 15,000 -- --
Kevin J. Nystrom/(3)/........... 1997 $ 112,500/(3)/ $ 7,500/(4)/ -- --
Executive Vice President and 1996 -- -- -- --
Chief Financial Officer 1995 -- -- --
Christine Maron................. 1997 $ 90,000 $ 20,000 -- $ 4,928
Executive Vice President/(5)/ 1996 72,916 20,000 -- 11,253
1995 70,000 6,000 -- --
Patricia A. Lowe................ 1997 $ 85,000 -- $ 132,243/(6)/ $10,948
Senior Vice President and 1996 85,000 -- 71,687/(6)/ 20,362
Central Region 1995 106,881 -- 29,594/(6)/ --
Production Manager
David A. Barchi................. 1997 $ 90,000 $ 3,000 $ 75,458/(6)/ $10,948
Senior Vice President and 1996 101,667 -- 20,449/(6)/ --
Northeast Region 1995 41,667 -- -- --
Production Manager
</TABLE>
______________
(1) The contribution made by the Company on behalf of the individual
participant pursuant to a 401(k) profit sharing plan.
(2) Mr. Stulz resigned as Chief Operating Officer in April 1998 and has entered
into an agreement with the Company pursuant to which he will remain
employed by the Company until September 30, 1998. See "--Management
Compensation and Employment Agreements."
(3) Mr. Nystrom joined the Company in November 1997. His salary is shown on an
annualized basis.
(4) Partial year bonus.
(5) Ms. Maron resigned from the Company in March 1998.
(6) Loan production commissions.
In the past, a significant portion of the management of the Company has been
conducted by TCG, which is wholly owned by Steven B. Chotin, the sole beneficial
owner of the Company prior to the Offering. Mr. Chotin was not directly
compensated by the Company for acting as Chief Executive Officer and President
of the Company prior to Mr. Weissenborn assuming those positions, although under
an agreement that became effective on July 1, 1997, the Company paid TCG $20,000
per month for providing services associated with a Chief Executive Officer
through December 1997 and $20,000 per month for providing services associated
with a Chief Financial Officer until Kevin Nystrom was employed by the Company
in November 1997.
MANAGEMENT COMPENSATION AND EMPLOYMENT AGREEMENTS
The Company expects to enter into employment agreements with Messrs.
Weissenborn, Nystrom, and Rogers for terms expiring two years from the
completion of the Offering, but renewing automatically for successive one-year
periods thereafter unless and until terminated in accordance with the
agreements. Under the terms of the
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respective employment agreements, the Company will pay a base salary of $225,000
to Mr. Weissenborn, $200,000 to Mr. Rogers and $118,500 to Mr. Nystrom. The
employment agreements will provide that, beginning in 1999, base salary may be
increased or decreased from the above-stated amounts in the sole discretion of
the Compensation Committee of the Board of Directors. Each of the officers
entering into an employment agreement is entitled to participate in the
Company's employee benefits plans, including the 1998 Employee Incentive Plan
and the Incentive Bonus Pool described below.
The employment agreements will require each officer to devote his entire
time, attention and energy during working hours to the business of the Company
and at all times to use his best efforts to promote the interests of the
Company. Under the employment agreements, the Company may terminate the officer
with cause or, by providing 30 days' written notice, without cause. Each
officer will be entitled to severance payments as set forth in his agreement
following termination of his employment without cause prior to the date two
years following the completion of the Offering (and thereafter if the agreement
is renewed for one or more successive periods). The Company or the employee may
terminate the agreement by providing 90 days' notice to the other party prior to
the end of the initial (or successive) term of the agreement. If an employee is
terminated with cause or resigns, any severance pay will be solely within the
discretion of the Compensation Committee.
Each employment agreement prohibits the officer from divulging confidential
information regarding the Company's business to any other person or from
otherwise misusing such information during his employment and for a period of
one year following such employee's resignation (other than for "good reason" as
defined in the agreement) or the termination of his employment agreement for
cause, or for a period of six months following the termination of such
employment agreement without cause (or a resignation for "good reason"). Also,
during the term of each employment agreement and for the same period specified
in the preceding sentence, each of the officers shall be prohibited from (i)
hiring or soliciting employees of the Company or encouraging employees to leave
their employment with the Company, (ii) soliciting business from, or doing
business with, customers of the Company if such business would compete with the
primary business of the Company, or (iii) engaging in any other activities that
are competitive with the Company's primary business.
The Company intends to establish an incentive bonus pool (the "Incentive
Bonus Pool"), which will be allocated among two groups of employees: senior
executives, including initially Messrs. Weissenborn, Rogers and Nystrom; and
non-production employees who are not senior executives. The size of the
Incentive Bonus Pool will be determined by the Compensation Committee for 1998
and 1999 and is expected to range from $825,000 to $1,525,000 for each year.
Beginning in 2000, the size of the Incentive Bonus Pool will be determined by a
formula set by the Compensation Committee tied to the amount by which GAAP net
income exceeds a threshold return percentage times book equity of the Company.
The Incentive Bonus Pool will be allocated among employees in amounts determined
by the Compensation Committee, based upon achievement of specified targets and
goals for the Company and the individual employee, but Mr. Weissenborn is
guaranteed a minimum bonus of $175,000 for 1998. Amounts received by an
employee under the Incentive Bonus Pool will be capped at an amount equal to the
employee's salary for the applicable year times a multiple, which will vary
depending on the employee's level, and initially is expected to range from one
to three times salary.
In addition to the Incentive Bonus Pool, the Company will pay production
bonuses (i) to senior production employees (other than Mr. Rogers) based on a
formula tied to the initial principal balance of the monthly wholesale loan
production for an individual employee, and (ii) to Mr. Rogers based on a formula
tied to annual increases in certain loan production. Production bonuses will be
paid independently of the Company's profitability.
Incentive bonuses paid from the Incentive Bonus Pool, as well as production
bonuses, may be paid part in cash and part in shares of Common Stock. To the
extent a bonus is paid in shares of Common Stock, those shares will be issued
under the 1998 Employee Incentive Plan.
The Company also intends to establish a Stock Bonus Plan under which a
maximum of _________ shares of Common Stock will be delivered to participating
executives no later than June 30, 2003 in recognition of past contributions to
the Company. It is currently anticipated that Mr. Rogers will be the only
participant in the Company's Stock Bonus Plan. A similar plan will be
established for certain employees of TCG, including
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Mr. Glicksman and Ms. Dickens. Such plan will be funded with shares of Common
Stock currently owned by Mr. Chotin.
The Company has entered into an agreement with Mr. Stulz under which he has
agreed to resign his employment with the Company on September 30, 1998. Until
his resignation is effective, Mr. Stulz will be responsible for overseeing
various operations of the Company consistent with his past duties and under the
direction of the Chief Executive Officer. Such responsibilities may change at
the discretion of the Chief Executive Officer or the Board of Directors. Mr.
Stulz will not be permitted to begin employment with any other employer until
his resignation is effective. During the remainder of his employment with the
Company and for the period of one year thereafter, Mr. Stulz and any future
employer shall be prohibited from hiring or soliciting employees of the Company
or inducing employees to seek employment other than at the Company without the
permission of the Chief Executive Officer or the Board of Directors. Under the
terms of such agreement, the Company will pay Mr. Stulz a salary and separation
benefits in an amount approximating his annual compensation in 1997.
SHARED EMPLOYEES AND OVERHEAD WITH TCG
Under the TCG Agreement, TCG and the Company will share certain senior
officers and other personnel and related overhead expenses, including their
respective allocable portion of the compensation and benefits of such shared
employees. It is anticipated that the shared employees will be involved, among
other things, in the acquisition of Mortgage Assets by the Company in the
secondary market, the management of the Company's portfolio of Mortgage Assets,
the acquisition by the Company of other non-conforming lending companies or
operations, structuring and pricing the Company's non-recourse CMO transactions,
and providing internal legal counsel and employee benefits. The initial term of
the shared employee arrangement between the Company and TCG shall expire two
years from the completion of the Offering (unless terminated earlier by mutual
agreement of the parties), but shall be renewed automatically for successive
one-year periods thereafter unless and until terminated in accordance with the
TCG Agreement. The shared employees are expected to consist initially of
approximately 11 individuals, including Steven B. Chotin, Howard J. Glicksman
and Helen M. Dickens. The Company will be required to pay a percentage of such
employees' annual compensation, which percentage will vary by individual and
from year to year based on the estimated amount of time spent by such individual
on matters relating to the Company for such year. The percentage of
compensation of such shared employees and related overhead expenses allocated to
the Company each year shall be approved by a majority of the Independent
Directors of the Company. For 1998, the Company estimates that the portion of
the annual compensation, benefits and related overhead expenses of the shared
employees that will be allocable to the Company will equal on an aggregate basis
approximately $__________ per month (or $_____ million on an annualized basis).
In the event there are competing demands for the time of the shared employees,
the TCG Agreement provides the Company with a right of first access to such
employees; provided, however, that TCG shall be permitted to direct shared
employees to perform functions on behalf of TCG prior to functions requested by
Company to the extent such Company functions may still be performed by the
appropriate shared employees in a timely and reasonably acceptable manner. See
"Certain Relationships and Related Transactions -- The TCG Agreement."
1998 INCENTIVE PLANS
In connection with the Offering, the Company has adopted the 1998 Employee
Incentive Plan (the "1998 Plan") and the Directors' Plan (collectively, the
"1998 Incentive Plans") for the purpose of (i) attracting and retaining
employees and Independent Directors with ability and initiative; (ii) providing
incentives, including cash incentive awards, to those deemed important to the
success of the Company and related entities; and (iii) associating the interests
of these individuals with the interests of the Company and its shareholders
through opportunities for increased stock ownership. The summaries of the 1998
Plan and the Directors' Plan set forth below are qualified in their entirety by
reference to the text of the 1998 Plan and the Directors' Plan, which will be
filed as exhibits to the Registration Statement of which this Prospectus is a
part.
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THE 1998 PLAN
Administration. The 1998 Plan will be administered by the Board of
Directors prior to the Offering and by the Stock Incentive Committee of the
Board of Directors following the Offering. The Board of Directors and its Stock
Incentive Committee may delegate authority to administer the 1998 Plan to one or
more officers of the Company. Neither the Board of Directors nor the Stock
Incentive Committee may delegate authority with respect to grants and awards to
individuals who are subject to Section 16 of the Exchange Act, however. As used
in this summary, the term "Administrator" means the Board of Directors or its
Stock Incentive Committee, and any delegate, as appropriate.
Eligibility. Each employee of the Company or of any corporation that
becomes a parent or a subsidiary of the Company, including an employee who is a
member of the Board of Directors or an employee who is shared with TCG, is
eligible to participate in the 1998 Plan. The Administrator in its sole
discretion will select the individuals who will participate in the 1998 Plan
("Participants"). The Administrator may, from time to time, grant stock
options, stock appreciation rights ("SARs"), stock awards, performance share
awards or cash based awards to Participants.
Stock Options. Options granted under the 1998 Plan may be incentive stock
options ("ISOs") or nonqualified stock options (collectively, "Options"). An
Option entitles a Participant to purchase shares of Common Stock from the
Company at the Option price. The Option price may be paid in cash, cash
equivalents acceptable to the Stock Incentive Committee, shares of Common Stock,
or a combination thereof. The Option price will be fixed by the Administrator
at the time the Option is granted, but the price cannot be less than the shares'
fair market value on the date of grant. The exercise price of an ISO granted to
any Participant who is a Ten Percent Shareholder (as defined below) may not be
less than 110% of the fair market value of the shares of Common Stock on the
date of grant. A Participant is a "Ten Percent Shareholder" if he owns, or is
deemed to own, more than ten percent of the total combined voting power of all
classes of stock of the Company or of any corporation that becomes a parent or a
subsidiary of the Company. An individual is deemed to own any voting stock
owned (directly or indirectly) by the individual's spouse, brothers, sisters,
ancestors and lineal descendants. A Participant and such persons are also
considered to own proportionately any voting stock owned (directly or
indirectly) by or for a corporation, partnership, estate or trust of which the
Participant or any such person is a shareholder, partner or beneficiary. An ISO
must expire within ten years from the date of grant, except that the term of an
ISO that is granted to a Ten Percent Shareholder may not be longer than five
years. Moreover, no Participant may be granted ISOs or related SARs (under all
incentive stock option plans of the Company) which are first exercisable in any
calendar year for stock having an aggregate fair market value (determined as of
the date that the ISO was granted) that exceeds the amount prescribed under the
Code (currently $100,000). No Participant may be granted, in any calendar year,
Options for more than _______ shares of Common Stock or SARs for more than
_______ shares of Common Stock. For purposes of the preceding sentence, an
Option and Corresponding SAR (defined below) shall be treated as a single award.
SARs. SARs entitle the Participant to receive, with respect to each share
of Common Stock encompassed by such SAR, a payment based on a formula determined
by the Administrator and set forth in the agreement with the Participant. In
the absence of such a determination, the Participant will be entitled to receive
the excess of the fair market value of a share of Common Stock on the date of
exercise over the initial value of the SAR. The initial value of the SAR is the
fair market value of a share of Common Stock on the date of grant or, in the
case of a corresponding SAR, the Option price of the related Option (which
cannot be less than the fair market value of a share of Common Stock on the date
of grant). The amount payable upon the exercise of an SAR may be paid in cash,
Common Stock, or a combination of the two.
SARs may be granted in relation to Option grants ("Corresponding SARs") or
independently of Option grants. The difference between these two types of SARs
is that to exercise a Corresponding SAR, the Participant must surrender
unexercised that portion of the Option to which the Corresponding SAR relates.
Stock Awards. Participants may also be awarded shares of Common Stock
pursuant to a stock award. The Administrator, in its discretion, may prescribe
that a Participant's rights in a stock award will be nontransferable or
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forfeitable or both unless certain conditions are satisfied. These conditions
may include, for example, a requirement that the Participant continue employment
with the Company or a subsidiary for a specified period or that the Company or
the Participant achieve objectives established by the Administrator, which may
be stated with respect to any one or a combination of Cash Flow Per Share,
Earnings Per Share, Return on Equity, Share Value, Loan Production Volume, Loan
Quality and Asset Acquisition Volume (each as defined in the 1998 Plan) or other
criteria specified by the Administrator. No Participant may be granted, in any
calendar year, a stock award for more than _______ shares of Common Stock.
Performance Based Awards. The 1998 Plan also provides for the award of
performance shares and for awards that are not denominated nor payable in and do
not have a value derived from the value of or a price related to shares of
Common Stock and are payable only in cash ("Cash Based Awards"). Such awards
and certain stock awards (described above) that are subject to performance based
restrictions on transferability or vesting ("Performance Based Awards") are
intended to qualify as "performance-based compensation" under Section 162(m) of
the Code.
A performance share award entitles the Participant to receive a payment
equal to the fair market value of a specified number of shares of Common Stock
if certain performance standards are met. To the extent that performance shares
are earned, the obligation may be settled in cash, in Common Stock, or a
combination of the two.
No Participant may be granted performance shares for more than __________
shares of Common Stock in any calendar year, and the annual aggregate amount of
compensation that may be paid to any Participant in respect of Cash Based Awards
may not exceed $____________.
The Administrator will prescribe the performance requirements that must be
satisfied before a performance share award or a Cash Based Award is earned. The
performance goals of Performance Based Awards will be stated with respect to any
one or a combination of Cash Flow Per Share, Earnings Per Share, Return on
Equity, Share Value, Loan Production Volume and Loan Quality, and Asset
Acquisition Volume (each as defined in the 1998 Plan) or other criteria
specified by the Administrator. These goals will be applied over performance
cycles as determined by the Administrator, which cycle shall be at least one
year in the case of performance shares. Specific cycles and target levels of
performance, as well as the award levels, will be determined by the
Administrator not later than the applicable deadline under Section 162(m) of the
Code and in any event at a time when achievement of such targets is
substantially uncertain. Appropriate adjustments to goals and targets may be
made by the Administrator based upon objective criteria in the case of certain
events that were not anticipated at the time goals were established. The
Company believes that specific performance targets (when established) are likely
to constitute confidential business information, the disclosure of which may
adversely affect the Company or mislead the public.
The Administrator must certify the achievement of the applicable
performance goals and the actual amount payable to each participant under
Performance Based Awards prior to payment. The Administrator may retain
discretion to reduce, but not increase, the amount payable under a Performance
Based Award, notwithstanding the achievement of targeted performance goals.
Performance Based Awards may be fully accelerated or the Administrator may
provide for partial credit in the event of certain events or circumstances that
the Administrator may determine.
Share Authorization. All awards made under the 1998 Plan will be evidenced
by written agreements between the Company and the Participant. A maximum of
_______ shares of Common Stock may be issued under the 1998 Plan pursuant to the
exercise of Options or SARs. An additional _____ shares of Common Stock may be
issued under the 1998 Plan as Stock Awards and in settlement of Performance
Shares. The foregoing limit on the number of shares that may be issued pursuant
to Options and SARs under the 1998 Plan shall be reduced and offset by the
number of shares issued under the Directors' Plan pursuant to the exercise of
Options; and the foregoing limit on the number of shares that may be issued as
Stock Awards and in settlement of Performance Shares under the 1998 Plan shall
be reduced and offset by the number of shares awarded under the Directors' Plan
in lieu of director fees. The share limitations, the terms of outstanding
awards, and per individual annual limitations on awards will be
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adjusted, as the Administrator deems appropriate, in the event of a stock
dividend, stock split, combination, reclassification, recapitalization, or other
event that, in the judgment of the Administrator requires such action.
Nontransferability. In general, any Option or SAR granted under the 1998
Plan is nontransferable except by will or by the laws of descent and
distribution. During the lifetime of a Participant, Options or SARs may only be
exercised by such Participant. Notwithstanding the foregoing, a Participant may
transfer an Option or SAR (other than an ISO and a Corresponding SAR that
relates to an ISO) with respect to all or part of the shares of Common Stock
subject to such Option or SAR to the Participant's spouse, children or
grandchildren; to a trust for the benefit of such family members; or to a
partnership in which such family members are the only partners if the agreement
with the Participant evidencing the Option or SAR expressly provides for
transfers described in this sentence and the Option or SAR will continue to be
subject to the same terms and conditions after any such transfer.
Termination and Amendment. No Option, SAR, stock award, performance shares
or Cash Based Award may be granted under the 1998 Plan more than ten years after
the earlier of (i) the date that the 1998 Plan is adopted by the Board of
Directors or (ii) the date that is approved by the Company's shareholders. The
Board of Directors may amend or terminate the 1998 Plan at any time, but an
amendment will not become effective without shareholder approval if the
amendment materially increases the aggregate number of shares that may be issued
under the 1998 Plan or changes the eligibility requirements under the 1998 Plan.
Initial Awards. The Board of Directors will approve prior to the
completion of the Offering the grant of Options (the "Initial Grants") under the
1998 Plan with respect to ______ shares of Common Stock, to certain executive
officers and employees of the Company, as shown in the table below:
Number of Shares
Name and Position Underlying Options
James A. Weissenborn
President and Chief Executive Officer.....................
William J. Rogers
Executive Vice President..................................
Kevin J. Nystrom
Executive Vice President and Chief Financial Officer......
Howard J. Glicksman
Executive Vice President and General Counsel..............
Helen M. Dickens
Executive Vice President, Secretary and Treasurer.........
All executive officers, as a group.........................
All employees, including officers
who are not executive officers, as
a group....................................................
The Initial Grants will be exercisable at the initial public offering price
of the Common Stock over a four-year period at the rate of 20% per year,
beginning on the date of the grant and thereafter for the next four
anniversaries thereof. Except in limited circumstances described in an
agreement with a Participant, the Initial Grants will become exercisable on a
given date only if the Participant is employed by the Company or a subsidiary on
that date.
Shareholder Rights. A Participant will have no rights as a shareholder
with respect to the shares subject to his or her Option until the Option is
exercised.
Federal Income Taxes. A Participant's employer (the Company or an
affiliate) is generally entitled to claim a federal income tax deduction as a
result of the exercise of a nonqualified stock option in an amount equal to the
difference between the shares' fair market value and the Option price. A
Participant's employer is not entitled
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to a similar deduction upon either the grant or exercise of an ISO. The employer
may claim a federal income tax deduction on account of certain dispositions of
Common Stock acquired upon the exercise of an ISO. With respect to other awards
under the 1998 Plan, a Participant's employer generally is entitled to a
deduction equal to the ordinary income recognized by a Participant, as described
in the following paragraph. The employer's deduction is subject to Section
162(m) of the Code, which limits the deductibility of remuneration paid to
certain officers and other highly compensated employees.
The exercise of an SAR generally is a taxable event, resulting in income to
the Participant equal to the cash paid and the fair market value of Common Stock
received in settlement of an SAR. A Participant will recognize income on
account of a stock award on the first date that the shares of Common Stock are
transferable or not subject to a substantial risk of forfeiture, in an amount
equal to the fair market value of the shares on that date (unless the
Participant elects to recognize income as of the date of grant of the stock
award, based on the shares' fair market value on that date). A Participant will
recognize income upon the settlement of a performance share award or Cash Based
Award equal to any cash that is paid and, with respect to a performance share
award, the fair market value of any Common Stock received.
THE DIRECTORS' PLAN
Eligibility. The Directors' Plan provides for the grant of Options to
purchase Common Stock to each eligible Director of the Company. No Director who
receives compensation from the Company for services performed as an employee of
the Company is eligible to participate in the Directors' Plan.
Options. The Directors' Plan provides that each eligible Director who is a
member of the Board as of the closing of the Offering (an "Initial Director")
will be awarded, on such date, a nonqualified Option covering 15,000 shares of
Common Stock. All other eligible Directors will receive a nonqualified Option
covering 15,000 shares of Common Stock on the earlier of (a) the date of the
annual meeting of the Company's shareholders at which the Director is first
elected or (b) the date of the Board meeting at which the Director is elected or
appointed to the Board. The price per share of Common Stock purchased on the
exercise of an Option granted to Initial Directors upon the closing of the
Offering is equal to the Offering price, and the Option price of future grants
will be the fair market value of a share of Common Stock on the date the Option
is granted. The exercise price may be paid in cash, cash equivalent acceptable
to the individual committee appointed to administer the Directors' Plan (the
"Directors' Plan Administrator"), Common Stock, or a combination thereof.
Options granted under the Directors' Plan are exercisable for ten years from the
date of grant, subject to certain restrictions described below.
Exercise of Options. Each Option granted under the Directors' Plan will
become exercisable with respect to one-third of the shares of Common Stock
covered by the Option on each of the first through third anniversaries of the
date of grant if the Director is a member of the Board on the applicable
anniversary. On the date that a Director ceases to be a member of the Board for
any reason, he or she shall forfeit the right to exercise his or her Option to
the extent is it not then exercisable in accordance with the preceding sentence.
To the extent that an Option has become exercisable, it may be exercised
while a Director is a member of the Board and for 90 days after the Director
ceases to be a member of the Board for any reason. An Option may be exercised
with respect to any number of whole shares less than the full number for which
the Option could be exercised.
Nontransferability. In general, any Option granted under the Directors'
Plan is nontransferable except by will or the law of descent and distribution.
If requested by a Participant and agreed to by the Directors' Plan
Administrator, all or part of the shares of Common Stock subject to such Option
may be transferred to the Director's spouse, children or grandchildren; to a
trust for the benefit of such family members; or to a partnership in which such
family members are the only partners. An Option will continue to be subject to
the same terms and conditions after any such transfer.
Stock Awards. The Plan also authorizes the payment of up to 100% of an
eligible Director's annual fee and meeting fees in shares of Common Stock if
provided for in a resolution approved by the Board of Directors. Any
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such shares awarded will have a fair market value on the date the shares are
issued equal to the annual fee or portion thereof with respect to which the
shares are being issued. Except as otherwise provided in the applicable
resolution, the shares will be immediately transferable and nonforfeitable and
will be issued at the same time or times as the annual or meeting fee would have
been paid if paid in cash.
Shareholder Rights. A Director will have no rights as a shareholder with
respect to the shares subject to his or her Option until the Option is
exercised.
Amendment and Termination. The Directors' Plan provides that the Board may
amend or terminate the Plan at any time. An amendment will not become effective
without shareholder approval, however, if the amendment materially changes the
eligibility requirements. No Option may be granted and no Common Stock may be
issued under the Directors' Plan more than ten years after the earlier of (i)
the date that the Directors' Plan is adopted by the Board of Directors or (ii)
the date that it is approved by the Company's shareholders.
401(K) PLAN
The Company currently participates in TCG's Profit Sharing Plan (the
"Plan"), which is intended to comply with Sections 401(a) and 401(k) of the
Code, and the applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended. Amounts contributed to the Plan are held under a trust
intended to be exempt from income tax pursuant to Section 501(a) of the Code.
All employees of the Company that have completed at least one year of service
(as defined in the Plan) and who are at least 21 years old are eligible to
participate in the Plan. Participating employees are entitled to make pre-tax
contributions to their accounts, subject to certain maximum annual limits
imposed by law ($10,000 for 1998), and certain other limitations. The Company
may elect to make a discretionary contribution to the Plan each year. Employees
are always fully vested in their own contributions, while the Company's
contributions vest in participating employees over a six-year period.
Distributions generally are payable after retirement, disability or death and,
in certain circumstances, upon termination of employment with the Company for
other reasons. Following the Offering, employees of the Company will continue
to be eligible to participate in the Plan or, alternatively, the Plan may be
split into two plans, one of which will cover only eligible employees of the
Company. The Company's Common Stock may be offered as an investment option
under the Plan or, if implemented, the separate plan for employees of the
Company, or both. If the Company's Common Stock is selected as an investment
option by a participant, it will be purchased by the trustee of the applicable
plan on the open market or, to the extent permitted by applicable law, from the
Company at prevailing market prices. Under the TCG Agreement, the Company will
reimburse TCG for its proportionate allocation of contributions made to the Plan
on behalf of Company employees, including shared employees with TCG, and for
overhead and out-of-pocket costs incurred by TCG in connection with
administering the Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the Offering, the Company has not had a compensation committee or
any other committee of the Board of Directors performing similar functions.
Prior to the Offering, decisions concerning executive compensation were made by
the Board of Directors, including Steven B. Chotin, Howard J. Glicksman and
Helen M. Dickens, who as directors of TCG also make the decisions regarding
executive compensation for TCG. Mr. Chotin, Mr. Glicksman and Ms. Dickens serve
or have served as executive officers and directors of both TCG and the Company.
See "Certain Relationships and Related Transactions." The Board of Directors of
the Company will establish a Compensation Committee consisting of Mr. Chotin and
two Independent Directors on or prior to the completion of the Offering to
review and make recommendations to the Board regarding the compensation and
certain benefits of senior officers and other employees of the Company. See "--
Committees of the Board of Directors." Other than as described above with
respect to Mr. Chotin, the Company intends that none of the members of the
Compensation Committee of the Company will serve on the compensation committee
of another entity or on any other committee of the board of directors of another
entity performing similar functions.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE TCG AGREEMENT
The Company intends to enter into a Business Opportunity and Shared
Employee Agreement (the "TCG Agreement") with Steven B. Chotin, the Chairman of
the Board and principal shareholder of the Company, and TCG, a corporation
wholly owned by Mr. Chotin, under which Mr. Chotin and TCG, on behalf of
themselves and the Chotin Affiliates, will grant to the Company a right of first
refusal with respect to acquisitions of one- to four-family residential mortgage
loans and related Mortgage Assets and other business opportunities relating to
such loans and Mortgage Assets that are considered for purchase by TCG
(collectively, "Residential Mortgage Asset Opportunities"), Mr. Chotin or the
other Chotin Affiliates. This right of first refusal will terminate upon the
later to occur of the following: (a) Steven B. Chotin and entities controlled
by Mr. Chotin own in the aggregate 5% or less of the outstanding shares of
Common Stock of the Company, (b) Mr. Chotin no longer serves as Chairman of the
Board of Directors of the Company and (c) three years from the completion of the
Offering (the "Three Year Test"); provided, however, that in the event that a
party unaffiliated with TCG or Mr. Chotin acquires a majority of the outstanding
shares of Common Stock of the Company or substantially all of the assets of the
Company, the Three Year Test shall not apply.
Under the TCG Agreement, TCG and the Company will share certain senior
officers (including Mr. Chotin) and other personnel and related overhead
expenses, including their respective allocable portion of the compensation and
benefits of those persons serving as employees of both companies. The initial
term of the shared employee arrangement between the Company and TCG shall expire
two years from the completion of the Offering (unless terminated earlier by
mutual agreement of the parties), but shall be renewed automatically for
successive one-year periods thereafter unless and until terminated in accordance
with the TCG Agreement. In the event the shared employee arrangement is
terminated pursuant to the TCG Agreement, the Company has agreed to compensate
TCG in connection with any Residential Mortgage Asset Opportunities acquired by
the Company for the fair value of the time and expense incurred by TCG in
identifying and analyzing such Residential Mortgage Asset Opportunities and
presenting such opportunities to the Company. The agreement is terminable by
NMC under certain circumstances upon payment of a termination fee. See "Risk
Factors--Operating Risks--Certain Relationships; Potential Conflicts of
Interest" and "Management--Shared Employees and Overhead with TCG."
FINANCING AND INVESTMENT BANKING RELATIONSHIPS WITH CONTI AND GREENWICH
On June 30, 1997, the Company entered into various agreements establishing
a financing and investment banking relationship with Conti and Greenwich. In
conjunction therewith, Conti and Greenwich received warrants to acquire shares
of the Company's Common Stock for a nominal exercise price, and Conti received
the right to convert the amounts drawn by the Company under a subordinated debt
facility into additional shares of the Company's Common Stock. This
relationship included the establishment of warehouse, retained interest, working
capital and subordinated debt credit facilities with Conti and Greenwich, which
facilities currently bear interest rates ranging from 1.75% above One-Month
LIBOR to 10% per annum and mature or terminate from June 1998 to July 2001. In
connection with this Offering, approximately $_____ and $_____ of the net
proceeds will be used to repay Conti and Greenwich, respectively, for amounts
outstanding or otherwise due under the various borrowing facilities with these
entities. See "Use of Proceeds." These facilities will be terminated upon the
completion of the Offering and payment of outstanding amounts thereunder,
provided, however, that the Company intends to maintain a warehouse line of
credit with Greenwich. As part of the consideration for making available the
various borrowing facilities and for subsequently agreeing to modify and
terminate certain of these arrangements, the Company has issued warrants to
Conti and Greenwich to acquire for $1.00 10.0% and 2.0%, respectively, of the
shares of the Company's Common Stock, which warrants will be exercised at the
time of the Offering.
As part of the consideration to Conti and Greenwich for making available
the borrowing facilities referred to above, the Company agreed to offer Conti
and Greenwich the lead managing underwriting of the securitization of the first
$750 million of mortgage loans securitized by the Company after June 1997,
$123.6 million of which has since been securitized. The Company has further
agreed to offer to Greenwich the lead managing underwriting of
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the securitization of at least 50% of the next $1.25 billion of mortgage loans
securitized by the Company, all for market-based compensation, and to use its
best efforts to afford Greenwich the opportunity to serve as co-underwriter on
the other 50% of these securitizations, to the extent this can be accomplished
at market rates and Greenwich continues to serve as a warehouse lender to the
Company.
OTHER TRANSACTIONS
On April 1, 1998, the Company entered into a $5 million revolving line of
credit (the "KeyBank Bridge Line") with KeyBank National Association to provide
additional working capital financing to meet the Company's liquidity needs
pending completion of the Offering. The KeyBank Bridge Line is guaranteed by
Mr. Chotin, and Mr. Chotin and two of his affiliates pledged collateral to
secure the KeyBank Bridge Line. Amounts outstanding under the KeyBank Bridge
Line will bear interest at the "Prime Rate" for KeyBank National Association.
The Company intends to terminate the KeyBank Bridge Line upon repayment of all
outstanding amounts thereunder from proceeds of the Offering.
During 1996 and the first six months of 1997, the Company borrowed money
from Mr. Chotin and two corporations wholly owned by Mr. Chotin on several
occasions. During that time period, the Company was implementing its business
plan, and did not have available to it external sources of working capital
financing that were sufficient to meet its liquidity needs. In each of July and
August 1996, the Company borrowed $200,000 from TCG, evidenced by separate
promissory notes payable on demand, bearing interest at a rate equal to the rate
set from time to time by Norwest Bank Colorado, National Association as its
"Prime Rate" ("Norwest Prime"). The Company repaid each of these notes in
September 1996. In September 1996, the Company borrowed $250,000 from Mr.
Chotin directly, evidenced by a promissory note payable on demand, bearing
interest at Norwest Prime. The Company repaid this note in October 1996.
During the first six months of 1997, the Company borrowed a total of $1.7
million from RDC III, Inc., a corporation wholly owned by Mr. Chotin, under four
separate promissory notes payable on demand, bearing interest at Norwest Prime.
The Company repaid all amounts owed to RDC III, Inc. in June 1997.
The Company has executed a Shelf Issuance Agreement with Fund America
Investors Corporation II ("FAIC II"), a corporation wholly owned by Mr. Chotin,
under which FAIC II has agreed to make its shelf registration statement
available to the Company for the registration of offerings of mortgage-backed
securities to be sponsored by the Company during the term of the agreement. The
Company is required to pay FAIC II a $75,000 issuance fee for each
securitization transaction with respect to which the Company uses FAIC II's
registration statement, as well as to reimburse FAIC II for all of its
reasonable expenses incurred in connection with each such securitization
transaction, including the registration fees paid by FAIC II to the Commission
to register the securities issued at the Company's request. The initial term of
this agreement ends two years following completion of the Offering, and is
renewable for successive one-year terms after its expiration at the Company's
and FAIC II's options. The Company utilized FAIC II's registration statement on
its most recent securitization in September 1997.
The Company entered into a Business Administration and Reimbursement
Agreement with TCG effective as of July 1, 1997, under which TCG agreed to
provide certain administrative services to the Company, including (i) the
temporary provision of the services of certain executive officers and the
general counsel for the Company, who are employed by TCG, and (ii) employee
benefits administration. Until the effectiveness of the TCG Agreement, the
Company is required to reimburse TCG for the actual allocated cost of certain
administrative services provided by TCG and related overhead costs not to exceed
$4,166 per month. Under the Business Administration and Reimbursement
Agreement, TCG also provided the Company with management services of TCG
employees pending the Company's hiring of a permanent Chief Executive Officer
("CEO") and a permanent Chief Financial Officer ("CFO"). The Company paid TCG
$20,000 per month for TCG's provision of CEO services through December 1997 and
$20,000 per month for TCG's provision of CFO services until Kevin Nystrom was
employed by the Company in November 1997. The Business Administration and
Reimbursement Agreement will be superseded in relevant part by the TCG
Agreement.
Mr. Chotin indirectly owns 43% of Merchants Mortgage & Trust Corporation
LLC ("Merchants"), a consumer finance company that currently invests primarily
in recreational land development loans, loans secured by
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time share interests, and other similar types of consumer loans secured by real
estate, including certain short-term residential mortgage loans with terms
ordinarily of three years or less ("Short-Term Loans"). The Company has agreed
to enter into a correspondent relationship with Merchants to acquire Non-
Conforming Loans made to qualified borrowers from Merchants and to provide
consulting services and other assistance as reasonably necessary to facilitate
Merchants' participation in the Company's correspondent program in exchange for
Merchants agreeing to provide a right of first refusal to the Company with
respect to residential mortgage loans (including Non-Conforming Loans but not
including Short-Term Loans) that Merchants desires to sell. This right of first
refusal will remain in force until the earlier to occur of the following: (a)
Mr. Chotin and entities controlled by Mr. Chotin own less than 5% of the
outstanding shares of Common Stock of the Company or Merchants, and (b) five
years following the completion of the Offering, but in any event will remain in
effect until two years following the completion of the Offering.
OTHER RELATIONSHIPS
Steven B. Chotin, Howard J. Glicksman and Helen M. Dickens, each of whom is
currently a Director and officer of the Company, are also Directors and officers
of TCG and other business entities controlled by Mr. Chotin, who is the
principal stockholder of the Company. Mr. Glicksman and Ms. Dickens will resign
as Directors of the Company following the completion of the Offering. Mr.
Chotin, Mr. Glicksman, Ms. Dickens and certain other individuals will be shared
employees of TCG and the Company and will be compensated by both companies
pursuant to the TCG Agreement. See "Management--Shared Employees and Overhead
with TCG."
INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES
The Company's Articles of Incorporation require it to indemnify its
Directors, officers and employees in certain circumstances, in the manner and to
the fullest extent permitted by the Colorado Business Corporation Act.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock following the sale of the Units by the
Company offered hereby by (i) each director of the Company, (ii) each of the
executive officers named in the Summary Compensation Table, (iii) each person
known to the Company to be the beneficial owner of more than 5% of the Common
Stock and (iv) all Directors and executive officers of the Company as a group.
Except as indicated in the footnotes to this table and subject to applicable
community property laws, all shares are owned directly and the indicated person
has the sole voting and investment power.
<TABLE>
<CAPTION>
Common Stock Common Stock to be
Beneficially Owned Beneficially Owned
Prior to Offering/(1)/ After the Offering/(1)/
---------------------- -----------------------
Number Number
of of
Beneficial Owners Shares Percent Shares Percent
----------------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Steven B. Chotin/(2)/
James A. Weissenborn/(3)/ * * * *
William J. Rogers/(3)/ * * * *
Kevin J. Nystrom/(3)/ * * * *
Howard J. Glicksman/(3)/ * * * *
Helen M. Dickens/(3)/ * * * *
ContiTrade Services L.L.C./(4)/
All Directors and Executive Officers
as a Group (10 persons)
</TABLE>
* Less than 1%
(1) Based on ______________ shares of Common Stock outstanding prior to the
Offering and, assuming no exercise of the Underwriters' over-allotment
option and no exercise of the Warrants, ____________ shares of Common Stock
outstanding immediately after the Offering.
(2) Includes (a) ______________ shares held by TCG Investment Corporation,
which is wholly owned by Mr. Chotin, (b) ____ shares held as part of a
compensation arrangement for certain employees of TCG and of the Company
under which Mr. Chotin currently retains voting control of the shares and
(c) ____ shares held in trusts for Mr. Chotin's children. Mr. Chotin may be
reached at Plaza Tower One, Suite 1200, 6400 South Fiddler's Green Circle,
Englewood, Colorado 80111.
(3) Includes options held by Mr. Weissenborn, Mr. Rogers, Mr. Nystrom, Mr.
Glicksman and Ms. Dickens to purchase ______, ______, ______, ______ and
______ shares of Common Stock, respectively, which will become immediately
exercisable upon the date of grant and excludes options held by such
persons to purchase ______, ______, ______, ______ and ______ shares of
Common Stock, respectively, which are not exercisable within 60 days from
the date of this Prospectus. Messrs. Weissenborn, Rogers and Nystrom may be
reached at 7600 East Orchard Road, Suite 330 S, Englewood, Colorado 80111;
Mr. Glicksman and Ms. Dickens may be reached at Plaza Tower One, Suite
1200, 6400 South Fiddler's Green Circle, Englewood, Colorado 80111. Also,
Mr. Glicksman, Ms. Dickens and Mr. Rogers beneficially own certain of the
shares held as part of a compensation arrangement established by Mr. Chotin
for certain employees of TCG and the Company, which is referenced in clause
(b) of footnote (2) above.
(4) Consists solely of Warrants issued to Conti that are to be exercised upon
completion of the Offering for ____ shares. ContiTrade Services L.L.C. may
be reached at 277 Park Avenue, New York, New York 10172.
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DESCRIPTION OF SECURITIES
GENERAL
The authorized capital stock of the Company consists of (i) _________
shares of preferred stock, with par values (or no par values) as determined at
the time of issuance (the "Preferred Stock"), including 2,100 shares of Series I
Preferred Stock, $1.00 par value per share, which are the only issued and
outstanding shares of Preferred Stock, and (ii) ___________ shares of common
stock, $0.01 par value per share (the "Common Stock").
The following description of the capital stock of NMC is qualified in its
entirety by reference to NMC's Articles of Incorporation and Bylaws, which are
filed as exhibits to the Registration Statement of which this Prospectus is a
part.
COMMON STOCK
After giving effect to the ________ for _________ stock split to be
effected immediately prior to the closing of the Offering, there will be
currently _________ shares of Common Stock issued and outstanding, all of which
are currently owned either directly or through controlled entities by Steven B.
Chotin. Following completion of the Offering, _____________ shares of Common
Stock will be issued and outstanding (or ____________ shares if the
Underwriters' over-allotment option is exercised in full), _______ shares will
be reserved for issuance upon the exercise of Warrants, and __________ shares
will be reserved for issuance upon the exercise of options.
Subject to preferences that may be granted to holders of Preferred Stock,
holders of Common Stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available therefor. No
dividends will be payable on the Common Stock until all accrued dividends and
all other amounts to which holders of Preferred Stock are entitled have been
paid. See " -- Preferred Stock." In the event of liquidation, dissolution or
winding up of the Company, holders of Common Stock are entitled to share ratably
in all assets remaining after payment of, or adequate provision for, all known
debts and liabilities of the Company and the liquidation preference, if any,
that may be payable to the holders of Preferred Stock. NMC intends to pay four
regular quarterly dividends. To the extent necessary to maintain its REIT
qualification or to avoid a corporate level tax in any particular year, NMC may
declare a fifth, special dividend.
Each holder of Common Stock is entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders, including the
election of Directors. Cumulative voting in the election of Directors is not
permitted, which means that in all elections of Directors, each holder of Common
Stock has the right to cast one vote for each share of stock for each candidate.
For a discussion of the voting rights of shareholders of the Common Stock,
including the provisions specifying the vote required by shareholders to take
action, see "Certain Provisions of Colorado Law and NMC's Articles of
Incorporation and Bylaws."
Holders of Common Stock have no conversion, preemptive or other rights to
subscribe for additional shares or other securities, and there are no redemption
or sinking fund provisions with respect to such shares. The issued and
outstanding shares of Common Stock are, and the shares of Common Stock offered
hereby will be upon payment therefor, validly issued, fully paid and
nonassessable.
PREFERRED STOCK
As of the date hereof, there are 2,100 shares of Series I Preferred Stock
outstanding, all of which are currently held by TCG Investment Corporation, a
company controlled by Steven B. Chotin. The terms of the Series I Preferred
Stock provide that dividends will accrue each quarter at a fixed-rate of 8.00%
per annum on the liquidation preference amount of the Preferred Stock, equal to
$2,100,000. Dividends commenced accruing on July 1, 1997. Accrued dividends of
$200,000 will be paid from proceeds of the Offering and dividends will be paid
currently thereafter to the extent the Company has available earnings and
otherwise has sufficient funds legally
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available to pay such dividends. Accrued dividends that are undeclared or
otherwise unpaid will accumulate and continue to be owed, but will not bear
interest.
The Series I Preferred Stock is callable by the Company in whole or in part
at any time, subject to receipt of required lender consents, for a per share
price of $1,000 plus all accrued and unpaid dividends (the "Redemption Price").
The holders of the Series I Preferred Stock will be entitled to require the
Company to redeem the Series I Preferred Stock for the Redemption Price on or
after July 1, 2002. NMC is prohibited from paying any dividends or other
distributions on its Common Stock unless all accrued dividends and all other
amounts to which the holders of the Series I Preferred Stock are entitled have
been paid.
The holders of the Series I Preferred Stock will not have any voting rights
(other than those required by state law), except that no amendments to NMC's
Articles of Incorporation that would adversely affect the rights of the holders
of the Series I Preferred Stock may be adopted without the consent of the
holders of the Series I Preferred Stock.
Pursuant to NMC's Articles of Incorporation, the Board of Directors has the
authority to issue additional series of Preferred Stock with such designations,
powers, preferences and rights, including voting rights, as may be determined
from time to time by the Board of Directors. Accordingly, the Board of
Directors is empowered, without stockholder approval, to issue Preferred Stock
with dividend, liquidation, conversion, voting or other rights that adversely
affect the voting power or other rights of the holders of NMC's Common Stock.
The issuance of Preferred Stock could be utilized, under certain circumstances,
as a way of discouraging, delaying or preventing an acquisition or change in
control of the Company. NMC currently has no plans to issue any additional
shares of Preferred Stock.
WARRANTS
The Warrants will be issued pursuant to a warrant agreement (the "Warrant
Agreement") dated as of the closing of the Offering between the Company and the
warrant agent (the "Warrant Agent"). ______________ will initially act as
Warrant Agent. The following is a brief summary of certain provisions of the
Warrant Agreement and does not purport to be complete and is qualified in its
entirety by reference to the Warrant Agreement including the definitions therein
of certain terms used below. A copy of the proposed form of Warrant Agreement
will be filed as an exhibit to the Registration Statement of which this
Prospectus is a part. See "Available Information."
Each Unit consists of one share of Common Stock and one Warrant. The
Warrants will not become detachable from shares of Common Stock until six months
after the closing of the Offering. The Warrants will become exercisable six
months following the closing of the Offering and will remain exercisable until
5:00 p.m. Eastern Time on the third anniversary of the date such Warrants first
become exercisable (the "Expiration Date") at the initial public offering price
and will be subject to certain anti-dilution protection. Each Warrant, when
exercised, will entitle the holder thereof to receive one share of Common Stock.
The Warrants may be exercised by surrendering to the Warrant Agent the
definitive certificates evidencing such Warrants (the "Warrant Certificates"),
with the accompanying form of election to purchase properly completed and
executed, together with payment of the exercise price. Payment of the exercise
price may be made (a) in the form of cash or by certified or official bank check
payable to the order of the Company, or (b) by surrendering additional Warrants
or shares of Common Stock for cancellation to the extent the Company may
lawfully accept shares of Common Stock, with the value of such shares of Common
Stock for such purpose to equal the average trading price of the Common Stock
during the 10 trading days preceding the date of surrender and the value of the
Warrants to be equal to the difference between the value of a share of Common
Stock determined as described above and the exercise price. Upon surrender of
the Warrant Certificate and payment of the exercise price and any other
applicable amounts, the Warrant Agent will deliver or cause to be delivered, to
or upon the written order of such holder, stock certificates representing the
number of whole shares of Common Stock or other securities or property to which
such holder is entitled. If less than all of the Warrants evidenced by a
Warrant Certificate are to be exercised, a new Warrant Certificate will be
issued for the remaining number of Warrants.
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The Warrants are in registered form and may be presented to the Warrant
Agent for transfer, exchange or exercise at any time on or prior to 5:00 p.m.
Eastern Time on the Expiration Date, at which time the Warrants become wholly
void and of no value. The Company intends to apply to have the Warrants approved
for quotation on the at the time they become detached from the Common
Stock. If a market for the Warrants develops, the holder may sell the Warrants
instead of exercising them. There can be no assurance, however, that a market
for the Warrants will develop or continue.
The Registration Statement of which this Prospectus forms a part covers the
Warrant Shares and has been declared effective. However, for a holder to
exercise the Warrants, there must be a current prospectus covering the Warrant
Shares. Although the Company will use its best efforts to maintain a current
prospectus relating to the Warrant Shares until the Expiration Date, there can
be no assurance that it will be able to do so.
No fractional shares of Common Stock will be issued upon exercise of the
Warrants. The holders of the Warrants will have no right to vote on matters
submitted to the stockholders of the Company and will have no right to receive
dividends. The holders of the Warrants not yet exercised will not be entitled
to share in the assets of the Company in the event of liquidation, dissolution
or the winding up of the affairs of the Company.
The exercise price of the Warrants will be appropriately adjusted if the
Company (i) pays a dividend or makes a distribution on its Common Stock in
shares of its Common Stock or makes certain other dividends or distributions on
its Common Stock (other than cash dividends out of funds legally available
therefor), (ii) subdivides its outstanding shares of Common Stock into a greater
number of shares, (iii) combines its outstanding shares of Common Stock into a
smaller number of shares, or (iv) issues by reclassification of its Common Stock
any shares of its capital stock.
In case of certain consolidations or mergers of the Company, or the
liquidation of the Company or the sale of all or substantially all of the assets
of the Company to another corporation, each Warrant will thereafter be deemed
exercised for the right to receive the kind and amount of shares of stock or
other securities or property to which such holder would have been entitled as a
result of such consolidation, merger or sale had the Warrants been exercised
immediately prior thereto, less the exercise price.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
In order for NMC to qualify as a REIT under the Code, it must meet certain
requirements concerning the ownership of its outstanding shares of capital
stock. Specifically, not more than 50% in value of the Company's outstanding
capital stock may be owned, directly or indirectly, by five or fewer individuals
(as defined in the Code to include certain entities) during the last half of a
taxable year (other than its first REIT taxable year), and the Company must be
beneficially owned by 100 or more persons during at least 335 days of a taxable
year of 12 months or during a proportionate part of a shorter taxable year
(other than its first REIT taxable year). See "Federal Income Tax
Considerations -- Requirements for Qualification."
In order to ensure that NMC qualifies as a REIT, the Articles of
Incorporation provide that, subject to certain specified exceptions, no person
or entity may own, or be deemed to own by virtue of the applicable constructive
ownership provisions of the Code, more than (i) ____% (or, with respect to the
Chotin Affiliates, _____%) of the number of outstanding shares of Common Stock
or (ii) 9.9% of the number of outstanding shares of Preferred Stock of any class
or series (other than the Series I Preferred Stock) (the "Ownership Limit").
The Board of Directors may, but in no event will be required to, waive the
Ownership Limit with respect to a particular shareholder if it determines that
such ownership will not jeopardize the Company's status as a REIT and the Board
of Directors otherwise decides such action would be in the Company's best
interest. As a condition of such waiver, the Board of Directors may require a
ruling from the Service or an opinion of counsel satisfactory to it and/or
undertakings or representations from the applicant with respect to preserving
the REIT status of NMC.
The constructive ownership provisions applicable under Section 544 of the
Code attribute ownership of securities owned by a corporation, partnership,
estate or trust proportionately to its stockholders, partners or beneficiaries,
attribute ownership of securities owned by family members to other members of
the same family and
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by partners to other partners of the same partnership, treat securities with
respect to which a person has an option to purchase as actually owned by that
person, and set forth rules as to when securities constructively owned by a
person are considered to be actually owned for the application of such
attribution provisions (i.e., "reattribution"). For purposes of determining
whether a person holds shares of Common Stock in violation of the Ownership
Limitation set forth in the Company's charter, a person or group will thus be
treated as owning not only shares of Common Stock actually or beneficially
owned, but also any shares of Common Stock attributed to such person or group
under the attribution rules described above such as Warrant Shares or any other
shares issuable upon exercise of any warrant or option. Ownership of shares of
the Common Stock through such attribution is generally referred to as
constructive ownership.
In order to prevent NMC from incurring an entity-level tax when it accrues
Excess Inclusion from REMIC Residual Interests, the Articles of Incorporation,
subject to certain waivers, also contain provisions designed to prevent a
"Disqualified Organization" (as defined in "Federal Income Tax Considerations--
Taxation of NMC") from owning stock of NMC. The Board of Directors may, but in
no event will be required to, waive the restriction on stock ownership by a
Disqualified Organization under certain circumstances. As a condition of such
waiver, the Board of Directors may require a ruling from the Service or an
opinion of counsel satisfactory to it and/or undertakings or representations
from the Disqualified Organization.
Subject to certain exceptions described below, the Articles of
Incorporation further provide that any purported transfer of Common Stock,
Warrants or Preferred Stock that would (i) result in any person owning, directly
or indirectly, shares of Common Stock, Warrants or Preferred Stock in excess of
the Ownership Limit, (ii) result in Common Stock, Warrants and Preferred Stock,
collectively, being owned by fewer than 100 persons (determined without
reference to any rules of attribution), (iii) result in NMC being "closely held"
within the meaning of section 856(h) of the Code, or (iv) cause shares of Common
Stock or Preferred Stock to be owned by a "Disqualified Organization" (as
defined in "Federal Income Tax Considerations--Taxation of the Company") will be
void ab initio and the intended transferee will acquire no rights in such shares
-- ------
of Common or Preferred Stock. Any person who acquires or attempts or intends to
acquire actual or constructive ownership of shares of Common Stock of the
Company that will or may violate any of the foregoing restrictions on
transferability of ownership is required to give notice immediately to the
Company and provide the Company with such other information as the Company may
request in order to determine the effect of such transfer on NMC's status as a
REIT.
Pursuant to the Articles of Incorporation, if any purported transfer of
Common Stock or Preferred Stock of NMC or any other event would otherwise
violate any of the restrictions set forth in the preceding paragraph, then any
such purported transfer will be void and of no force or effect with respect to
the purported transferee (the "Prohibited Transferee") as to that number of
shares that would cause such violation, and the Prohibited Transferee shall
acquire no right or interest (or, in the case of any event other than a
purported transfer, the person or entity holding record title to such shares
that would cause such violation (the "Prohibited Owner") shall cease to own any
right or interest) in such excess shares. Any such excess shares described
above will be converted automatically into an equal number of shares of shares-
in-trust (the "Shares-in-Trust") and transferred automatically, by operation of
law, to a trust (the "Share Trust"), the beneficiary of which will be a
qualified charitable organization selected by the Company (the "Beneficiary").
Such automatic transfer shall be deemed to be effective as of the close of
business on the business day prior to the date of such violative transfer. The
trustee of the Share Trust (who shall be designated by the Company and be
unaffiliated with the Company or any Prohibited Transferee or Prohibited Owner)
may sell such Shares-in-Trust to a person or entity who could own such shares
without violating the transfer restrictions set forth in the Articles of
Incorporation, and distribute to the Prohibited Transferee an amount equal to
the lesser of the price paid by the Prohibited Transferee for such Shares-in-
Trust or the sales proceeds received by the Share Trust for such Shares-in-
Trust. In the case of any Shares-in-Trust issued as a result of any event other
than a transfer, or from a transfer for no consideration (such as a gift), the
trustee will be required to sell such Shares-in-Trust to a qualified person or
entity and distribute to the Prohibited Owner an amount equal to the lesser of
the Market Price (as defined below) of such Shares-in-Trust as of the date of
such event or the sales proceeds received by the trust for such Shares-in-Trust.
In either case, any proceeds in excess of the amount distributable to the
Prohibited Transferee or Prohibited Owner, as applicable, will be distributed to
the Beneficiary. Prior to a sale of any such Shares-in-Trust by the Share
Trust, the trustee will be entitled to receive, in trust for the Beneficiary,
all dividends and other distributions paid by the Company with respect to such
Shares-in-Trust, and also will be
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entitled to exercise all voting rights with respect to such Shares-in-Trust.
Subject to Colorado law, effective as of the date that such Shares-in-Trust have
been transferred to the Share Trust, the trustee shall have the authority (at
the trustee's sole discretion) (i) to rescind as void any vote cast by a
Prohibited Transferee or Prohibited Owner, as applicable, prior to the discovery
by the Company that such Shares-in-Trust have been transferred to the Share
Trust and (ii) to recast such vote in accordance with the desires of the trustee
acting for the benefit of the Beneficiary. However, if the Company has already
taken irreversible trust action, then the trustee shall not have the authority
to rescind and recast such vote. Any dividend or other distribution paid to the
Prohibited Transferee or Prohibited Owner (prior to the discovery by the Company
that such Shares-in-Trust have been automatically transferred to the Share Trust
as described above) will be required to be repaid to the trustee upon demand for
distribution to the Beneficiary, and any dividend declared but unpaid shall be
rescinded.
In addition, Shares-in-Trust held in the Share Trust shall be deemed to
have been offered for sale to the Company, or its designee, at a price per share
equal to the lesser of (i) the price per share in the transaction that resulted
in such transfer to the Share Trust (or in the case of a devise or gift, the
Market Price at the time of such devise or gift) and (ii) the Market Price on
the date the Company, or its designee, accepts such offer. The Company shall
have the right to accept such offer until the trustee has sold the Shares-in-
Trust. Upon such a sale to the Company, the interest of the Beneficiary in the
Shares-in-Trust sold shall terminate and the trustee shall distribute the net
proceeds of the sale to the Prohibited Transferee or Prohibited Owner.
"Market Price" for any Security on any date shall mean the average of the
Closing Price for the five consecutive Trading Days ending on such date. The
"Closing Price" on any date shall mean the last sale price for such Securities,
regular way, or, in case no such sale takes place on such a day, the average of
the closing bid and asked prices, regular way, for such shares, in either case
as reported in the principal consolidated transaction reporting system with
respect to securities listed or admitted to trading on any stock exchange or, if
such shares are not listed or admitted to trading on the
, as reported on the principal consolidated transaction reporting system with
respect to securities listed on the principal national securities exchange on
which such shares are listed or admitted to trading or, if such shares are not
listed or admitted to trading on any national securities exchange, the last
quoted price, or, if transaction prices are not reported, the average of the
high bid and low asked prices in the over-the-counter market, as reported by The
Nasdaq Stock Market, or, if such system is no longer in use, the principal other
automated quotations system that may then be in use or, if such shares are not
quoted by any such organization, the average of the closing bid and asked prices
as furnished by a professional market maker making a market in such shares
selected by the Board of Directors, or, in the event that no trading price is
available for such shares, the fair market value of the shares, as determined in
good faith by NMC's Board of Directors. "Trading Day" shall mean any day other
than a Saturday, a Sunday or a day on which banking institutions in the State of
New York are authorized or obligated by law or executive order to close.
Any person who acquires or attempts to acquire Common Stock, Warrants or
Preferred Stock in violation of the foregoing restrictions, or any person who
owned Common Stock, Warrants or Preferred Stock transferred to a Trust, will be
required (i) to give immediate written notice to the Company of such event and
(ii) to provide to the Company such other information as it may request in order
to determine the effect, if any, of such transfer on NMC's status as a REIT.
The foregoing restrictions on transferability and ownership will not apply
if the Board of Directors determines that it is no longer in the best interest
of the Company to attempt to qualify, or to continue to qualify, as a REIT and
such determination is approved either by 80% of the members of the Board of
Directors or by an affirmative vote of two-thirds of the votes entitled to be
cast on such matter at a regular or special meeting of the shareholders of the
Company. Except as otherwise described above, any change in the Ownership Limit
would require an amendment to the Articles of Incorporation.
All certificates representing shares of Common Stock of NMC or Warrants
exercisable therefor will bear a legend referring to the restrictions described
above.
If the foregoing transfer restrictions are determined to be void or invalid
by virtue of any legal decision, statute, rule or regulation, then the intended
transferee of any excess shares may be deemed, at the option of the
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Company to have acted as agent on behalf of the Company in acquiring such excess
shares and to hold such excess shares on behalf of the Company.
Under the Articles of Incorporation, every actual and constructive owner of
more than 5% (or such lower percentage as required by the Code or Treasury
Regulations) of the outstanding Common Stock or Preferred Stock must file a
written notice with the Company containing information regarding their ownership
of such shares, as set forth in the Treasury Regulations. Under current
Treasury Regulations, the percentage will be set between one-half of 1% and 5%,
depending upon the number of record holders of the Company's Securities.
Further, each shareholder shall upon demand be required to disclose to the
Company in writing such information as the Company may request in order to
determine the effect, if any, of such shareholder's actual and constructive
ownership of Common Stock or Preferred Stock on NMC's status as a REIT.
The foregoing ownership limitations may have the effect of precluding
acquisition of control of the Company without the consent of the Board of
Directors and, consequently, shareholders may be unable to realize a premium for
their shares over the then-prevailing market price that is customarily
associated with such acquisitions and to ensure compliance with the Ownership
Limit, or such other limit as provided in the Articles of Incorporation.
These restrictions will not preclude settlement for transactions through
the _____________________.
REPORTS TO STOCKHOLDERS
The Company will furnish its stockholders with annual reports containing
audited financial statements certified by independent public accountants and
distribute quarterly reports containing unaudited financial information for each
of the first three quarters of the year.
TRANSFER AGENT
The transfer agent and registrar for the Units is Norwest Shareowner
Services.
LISTING OF THE SECURITIES
The Company intends to apply for listing of the Units, the Warrants and the
Common Stock on the _________________________ under the symbols "________.U,"
"_______.WS" and "___________," respectively.
CERTAIN PROVISIONS OF COLORADO LAW AND NMC'S
ARTICLES OF INCORPORATION AND BYLAWS
The following summary of certain provisions of Colorado law and of the
Articles of Incorporation and Bylaws of NMC does not purport to be complete and
is subject to and qualified in its entirety by reference to Colorado law and the
Articles of Incorporation and Bylaws of NMC. Certain provisions of Colorado law
and the Articles of Incorporation and Bylaws are described elsewhere in this
Prospectus.
NUMBER OF DIRECTORS, REMOVAL, FILING VACANCIES
The Articles of Incorporation and Bylaws of the Company provide that the
number of Directors may not be fewer than three nor more than nine, a majority
of whom will at all times be Independent Directors, and may be changed by a
majority of the entire Board of Directors. The term "Independent Director"
means any person who is not an employee or officer of NMC or its subsidiaries or
Affiliates. On the Closing Date, the Board will consist of five Directors, of
whom three will be Independent Directors. NMC's Bylaws provide that a Director
may be removed with or without cause by the affirmative vote of at least two-
thirds of the votes entitled to be cast in the election of Directors. The
Bylaws also provide that, unless the Board of Directors otherwise determines,
any vacancies may be filled by a majority of the remaining Directors, though
less than a quorum, except vacancies created by the increase in the number of
Directors, which may be filled only by a vote of the stockholders or a
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majority of the entire Board of Directors. Accordingly, the Board of Directors
could temporarily prevent any stockholder from enlarging the Board of Directors
and filling the new Directorship with such stockholder's own nominees and, as a
practical matter, can preclude NMC's stockholders from removing incumbent
Directors and filling the vacancies created by such removal with their own
nominees.
AMENDMENT
NMC reserves the right from time to time to make any amendment to its
Articles of Incorporation now or hereafter authorized by law, including any
amendments which alter the contract rights as expressly set forth in the
Articles of Incorporation of any shares of outstanding stock, provided that no
such amendment which changes the terms or contract rights of any of its
outstanding stock shall be valid unless such amendment shall have been
authorized by not less than a majority of the outstanding shares entitled to
vote thereon. The Articles of Incorporation provides that the provision
relating to NMC's election to be taxed as a REIT and those relating to removal
of Directors shall not be amended, altered, changed or repealed without the
affirmative vote of at least 80% of the members of the Board of Directors and
the affirmative vote of holders of two-thirds of the outstanding shares of
Common Stock and any other shares of capital stock entitled to vote generally in
the election of Directors voting as a class.
NMC's Bylaws may be amended by the Board of Directors or by vote of the
holders of a majority of the outstanding shares of Common Stock, provided that
provisions with respect to removal of Directors, quorum requirements and
approval of certain matters by a majority of the Directors, cannot be amended
without the affirmative vote of 80% of the members of the entire Board of
Directors, including a majority of the Independent Directors, or the holders of
two-thirds of the outstanding shares of Common Stock and any other class of
shares of capital stock entitled to vote generally in the election of Directors.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws of NMC provide (a) with respect to an annual meeting of
stockholders, nominations of persons for election to the Board of Directors and
the proposal of business to be considered by such stockholders may be made only
(i) pursuant to NMC's notice of the meeting, (ii) by the Board of Directors or
(iii) by a stockholder who is entitled to vote at the meeting and has complied
with the advance notice procedures set forth in the Bylaws and (b) with respect
to special meetings of stockholders, nominations of persons for election to the
Board of Directors may be made only (i) pursuant to NMC's notice of meeting,
(ii) by the Board of Directors or (iii) provided that the Board of Directors has
determined that Directors shall be elected at such meeting, by a stockholder who
is entitled to vote at the meeting and has complied with the advance notice
provisions set forth in the Bylaws.
LIMITATIONS ON LIABILITY
The Articles of Incorporation of NMC contain certain provisions permitted
under the Colorado Business Corporation Act (the "CBCA") relating to the
liability of Directors. These provisions disclaim the Directors' personal
liability for monetary damages for a breach of fiduciary duty by a director,
except that, pursuant to Colorado law, these provisions will not exempt
Directors from liability in certain circumstances involving any breach of a
director's duty of loyalty to the Company or to its shareholders, or acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, acts specified in Section 7-108-403 of the CBCA or any
transaction from which the director derived an improper personal benefit.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation provide for indemnification of the Directors
and officers of the Company to the fullest extent permitted by Colorado law.
Colorado law generally permits indemnification of Directors against liabilities
(including the obligation to pay a judgment, settlement, penalty, fine or
reasonable expense) incurred in a proceeding and have expenses advanced for such
a proceeding (including any civil, criminal, administrative or investigative
proceeding whether threatened, pending or completed and whether formal or
informal) to which the director was made a party because he is or was a
director. If the proceeding is brought by or in the right of the
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Company, however, indemnification is permitted only with respect to reasonable
expenses incurred in connection with the proceeding, and, if the director is
adjudged liable in a proceeding brought by or in the right of the Company, no
indemnification is permitted. The CBCA prohibits indemnification of a director
in connection with any proceeding charging improper personal benefit to the
director in which the director is adjudged liable for receipt of an improper
personal benefit.
Indemnity may be provided only if the director's actions resulting in the
liability: (i) were taken in good faith; (ii) were reasonably believed to have
been in the Company's best interest with respect to actions taken in the
director's official capacity; (iii) were reasonably believed not to be opposed
to the Company's best interest with respect to actions other than those taken in
the director's official capacity; and (iv) with respect to any criminal action,
the director had no reasonable cause to believe his or her conduct was unlawful.
The CBCA further provides that unless limited by a company's articles of
incorporation, a director or officer who is wholly successful, on the merits or
otherwise, in defense of any proceeding to which he was a party, is entitled to
receive indemnification against reasonable expenses, including attorneys' fees,
incurred in connection with the proceeding. The Company's Articles of
Incorporation do not limit the foregoing provisions.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have _________ shares
(assuming that the Underwriters' over-allotment option is not exercised) of
Common Stock outstanding, 6,700,000 shares of Common Stock reserved for
issuances upon exercise of the Warrants, and 201,000 shares of Common Stock
(231,150 shares if the over-allotment option is exercised) reserved for issuance
upon exercise of the Representative's Warrants. The Units sold in this Offering
will be freely tradable as Units without restriction under the Securities Act
immediately after the Offering, except for any such Units held at any time by an
"affiliate" of the Company, as such term is defined in Rule 144 promulgated
under the Securities Act ("Rule 144"), and subject to the limitations on actual
or constructive ownership of the Common Stock set forth in NMC's Articles of
Incorporation. The Warrants, Warrant Shares and Common Stock issued in the
Offering will be separately tradable six months after the Offering, in each case
by persons other than "affiliates" of the Company, without restriction under the
Securities Act, subject to the limitations on actual or constructive ownership
of Common Stock set forth in NMC's Articles of Incorporation. See "Description
of Securities."
The remaining ____________ shares of Common Stock (assuming that the
Underwriters' over-allotment option is not exercised) held by the existing
shareholders will be "restricted securities," as that term is defined in Rule
144, and may not be sold in the absence of registration under the Securities Act
unless an exemption from registration is available, including exemptions
contained in Rule 144. As described below, the Company has granted the existing
shareholders registration rights with respect to their shares of Common Stock.
The Company and Steven B. Chotin, its principal shareholder, have agreed with
the Underwriters, subject to certain limited exceptions, not to offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock, for a
period of _________ days following the date of this Prospectus without the prior
written consent of Stifel, Nicolaus & Company, Incorporated. See
"Underwriting."
In general, under Rule 144, a person (or persons whose shares are
aggregated) who has beneficially owned restricted securities for at least one
year, will be entitled to sell in any three-month period a number of shares that
does not exceed the greater of: (i) 1% of the number of shares of Common Stock
then outstanding or (ii) the average weekly trading volume of the Company's
Common Stock during the four calendar weeks immediately preceding the date on
which the notice of sale is filed with the Commission. Sales pursuant to Rule
144 are subject to certain requirements relating to manner of sale, notice and
availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not deemed to have been an affiliate
of the Company at any time during the 90 days immediately preceding the sale and
who has beneficially owned restricted securities for at least two years is
entitled to sell such shares pursuant to Rule 144(k) without regard to the
limitations and requirements described above.
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Conti and Greenwich, which will own ____% and ____%, respectively, of NMC's
Common Stock after the Offering, have agreed not to offer, sell or otherwise
dispose of any shares of Common Stock for a period of _____ days following the
date of this Prospectus without the prior written consent of Stifel, Nicolaus &
Company, Incorporated, subject to certain limited exceptions. Conti and
Greenwich together have rights to demand two registrations of any shares of
Common Stock (which demand rights may only be exercised beginning _____ days
after the Offering), in each case subject to certain restrictions. Conti and
Greenwich also have unlimited "piggyback" registration rights for their shares,
subject to customary underwriter cutback provisions, entitling them to sell some
of their shares publicly in conjunction with the offering by the Company of
other shares of Common Stock. In addition, Mr. Chotin has unlimited piggyback
rights and up to two demand registration rights for the shares of Common Stock
he owns or controls, which may be exercised subject to a _____-day lockout
period. Management shareholders to whom Mr. Chotin transfers shares will also
have unlimited piggy-back rights.
In addition, the Company intends to file a registration statement under the
Securities Act shortly after the completion of this Offering (to become
effective as soon thereafter as practicable) to register _________ shares of
Common Stock reserved for issuance pursuant to the 1998 Incentive Plans. Shares
of Common Stock issued upon exercise of outstanding options under the 1998
Incentive Plans after the effective date of such registration statement
generally may be sold on the open market.
Prior to this Offering there has been no public market for the Common
Stock, the Warrants or the Units. No prediction can be made as to the effect,
if any, that future sales of shares of Common Stock pursuant to a future
registration statement or Rule 144 or the availability of shares of Common Stock
for future sale will have on the market price of the Securities prevailing from
time to time. Sales of substantial amounts of the Common Stock including shares
issued upon the exercise of stock options, or the perception that such sales
could occur, could adversely affect prevailing market prices of the Securities.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material federal income tax
considerations that may be relevant to a prospective holder of Units who
purchases Units in the Offering. Hunton & Williams has acted as counsel to the
Company in connection with the Offering and the preparation of this Prospectus.
This summary should not be construed as tax advice. The discussion contained
herein does not address all aspects of federal income taxation that may be
relevant to particular holders in light of their personal investment or tax
circumstances, or to certain types of holders (including, without limitation,
insurance companies, financial institutions, broker-dealers, persons whose
functional currency is other than the United States dollar, persons who hold the
Units as part of a straddle, hedging, or conversion transaction or, except as
specifically described herein, tax-exempt entities and non-U.S. persons) who are
subject to special treatment under the federal income tax laws. In addition,
this summary is generally limited to investors who will hold the Units as
"capital assets" (generally, property held for investment) within the meaning of
section 1221 of the Internal Revenue Code of 1986, as amended (the "Code").
The statements in this summary are based on current provisions of the Code,
Treasury Regulations promulgated thereunder, and administrative and judicial
interpretations thereof, as of the date hereof, all of which are subject to
change, possibly with retroactive effect. The provisions of the Code, the
Treasury Regulations promulgated thereunder and the administrative and judicial
interpretations thereof that concern REITs are highly technical and complex and
this summary is qualified in its entirety by such Code provisions, Treasury
Regulations, and administrative and judicial interpretations. No assurance can
be given that future legislative, judicial, or administrative actions or
decisions will not affect the accuracy of any statements in this summary. In
addition, no ruling will be sought from the Service with respect to any matter
discussed herein, and there can be no assurance that the Service or a court will
agree with the statements made herein.
EACH PROSPECTIVE PURCHASER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE,
OWNERSHIP, AND SALE OF UNITS AND OF THE COMPANY'S ELECTION TO BE TAXED AS A
REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES
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OF SUCH PURCHASE, OWNERSHIP, SALE, AND ELECTION AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
GENERAL
NMC intends to elect to be taxed as a REIT under sections 856 through 860
of the Code beginning with its taxable year ending on December 31, 1998. NMC
believes that it is organized and will operate in such a manner to qualify for
taxation as a REIT under the Code. No assurance can be given, however, that NMC
will so qualify as a REIT.
Hunton & Williams has acted as counsel to NMC in connection with the
Offering and NMC's election to be taxed as a REIT. In the opinion of Hunton &
Williams, provided that the elections and other procedural steps described in
this discussion of "Federal Income Tax Considerations" are completed by NMC in a
timely fashion, commencing with NMC's taxable year ending December 31, 1998, NMC
will qualify to be taxed as a REIT pursuant to sections 856 through 860 of the
Code, and NMC's organization and proposed method of operation will enable it to
continue to meet the requirements for qualification and taxation as a REIT under
the Code. Investors should be aware, however, that opinions of counsel are not
binding upon the Service or any court. It must be emphasized that Hunton &
Williams' opinion is based on various assumptions and is conditioned upon
certain representations made by NMC as to factual matters, including
representations regarding the nature of NMC's assets and the future conduct of
its business. Such factual assumptions and representations are described below
in this discussion of "Federal Income Tax Considerations" and are set out in the
federal income tax opinion of Hunton & Williams filed as an exhibit to the
Registration Statement. Moreover, such qualification and taxation as a REIT
depend upon NMC's ability to meet on a continuing basis, through actual annual
operating results, distribution levels, and stock ownership, the various
qualification tests imposed under the Code discussed below. Hunton & Williams
will not review NMC's compliance with those tests on a continuing basis.
Accordingly, no assurance can be given that the actual results of NMC's
operations for any particular taxable year will satisfy such requirements or
that the Service will not challenge successfully that status of NMC as a REIT.
For a discussion of the tax consequences of failure to qualify as a REIT, see "-
- -Failure to Qualify."
TAXATION OF NMC
For any taxable year in which NMC qualifies for taxation as a REIT, it
generally will not be subject to federal corporate income tax on that portion of
its ordinary income or capital gain that is currently distributed to its
stockholders. The REIT provisions of the Code generally allow a REIT to deduct
dividends paid to its stockholders. This deduction for dividends paid to
stockholders substantially eliminates the federal "double taxation" on earnings
(once at the corporate level and once again at the stockholder level) that
generally results from an investment in a corporation.
Even if NMC qualifies for taxation as a REIT, it may be subject to federal
income tax in certain circumstances. First, NMC will be taxed at regular
corporate rates on any undistributed "REIT taxable income" and undistributed net
capital gains. Second, under certain circumstances, NMC may be subject to the
corporate "alternative minimum tax" on its undistributed items of tax
preference, if any. Third, if NMC has (i) net income from the sale or other
disposition of "foreclosure property" which is held primarily for sale to
customers in the ordinary course of business or (ii) other nonqualifying income
from foreclosure property, NMC will be subject to tax on such income at the
highest regular corporate rate (currently, 35%). Fourth, if NMC has net income
from prohibited transactions (which are, in general, certain sales or other
dispositions of property held primarily for sale to customers in the ordinary
course of business, other than foreclosure property or property that is
involuntarily converted), such income will be subject to a 100% tax. Fifth, if
NMC fails to satisfy the 75% gross income test or the 95% gross income test (as
discussed below), but nonetheless maintains its qualification as a REIT because
certain other requirements are met, NMC will be subject to a 100% tax on the
gross income attributable to the greater of the amount by which NMC fails the
75% or the 95% test, multiplied by a fraction intended to reflect NMC's
profitability. Sixth, if NMC should fail to distribute for each calendar year
at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95%
of its REIT capital gain net income for such year, and (iii) any undistributed
taxable income from prior periods, NMC will be subject to a 4% excise tax on the
excess of such
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required distribution over the amounts actually distributed. To the extent that
NMC elects to retain and pay income tax on the net long-term capital gains it
receives during a taxable year, such amounts will be treated as having been
distributed for purposes of the 4% excise tax. Seventh, if NMC acquires any
asset from a C corporation (i.e., generally a corporation subject to full
corporate level tax) in a transaction in which the basis of the asset in NMC's
hands is determined by reference to the basis of the asset (or any other
property) in the hands of the C corporation, and NMC subsequently recognizes
gain on the disposition of such asset during the 10-year period (the
"Recognition Period") beginning on the date on which the asset was acquired by
NMC, then NMC will be subject to tax at the highest regular corporate rate on
the excess of (i) the fair market value of the asset as of the beginning of the
applicable Recognition Period, over (ii) NMC's adjusted basis in such asset as
of the beginning of such Recognition Period (i.e., "built-in gain"). NMC also
will be subject to such tax to the extent of the "built-in gain" associated with
any assets that it held on January 1, 1998 and subsequently disposed of in a
taxable transaction during the ten-year period beginning on January 1, 1998. The
results described above with respect to the tax on "built-in-gain" assume that
NMC will elect pursuant to the Service's Notice 88-19 to be subject to the rules
described in the preceding sentence if it were to make any such acquisition. See
"--Proposed Tax Legislation." Upon the acquisition of the stock of a corporation
which is a "qualified REIT subsidiary," NMC also would be taxed on any built-in
gain associated with the qualified REIT subsidiary's assets. See "--Requirements
for Qualification."
NMC also will be subject to tax at the highest marginal corporate rate on
the portion of any excess inclusion derived by NMC from REMIC Residual Interests
("Excess Inclusion") equal to the percentage of the stock of NMC held by the
United States, any state or political subdivision thereof, any foreign
government, any international organization, any agency or instrumentality of any
of the foregoing, any other tax-exempt organization (other than a farmer's
cooperative described in section 521 of the Code) that is exempt from taxation
under the unrelated business taxable income provisions of the Code, or any rural
electrical or telephone cooperative (each, a "Disqualified Organization"). The
Articles of Incorporation prohibit Disqualified Organizations from owning stock
of NMC. In addition, if any REIT in which NMC owns an equity interest derives
Excess Inclusion from REMIC Residual Interests, NMC will be subject to tax at
the highest corporate rate on the portion of its proportionate share of the
Excess Inclusion derived by such REIT equal to the percentage of the stock of
NMC held by Disqualified Organizations. Any such tax on the portion of any
Excess Inclusion allocable to stock of NMC held by a Disqualified Organization
will reduce the cash available for distribution from NMC to all stockholders.
If NMC invests in properties in foreign countries, NMC's profits from such
investments will generally be subject to tax in the countries where such
properties are located. The precise nature and amount of any such taxation will
depend on the laws of the countries where the properties are located. If NMC
satisfies the annual distribution requirements for qualification as a REIT and
is therefore not subject to federal corporate income tax on that portion of its
ordinary income and capital gain that is currently distributed to its
stockholders, NMC will generally not be able to recover the cost of any foreign
tax imposed on profits from its foreign investments by claiming foreign tax
credits against its U.S. tax liability on such profits. Moreover, a REIT is not
able to pass foreign tax credits through to its stockholders.
NMC will use the calendar year for both federal income tax purposes and
financial reporting purposes.
REQUIREMENTS FOR QUALIFICATION
To qualify as a REIT, NMC must meet and continue to meet the requirements,
discussed below, relating to NMC's organization, the sources of its gross
income, the nature of its assets, and the level of distributions of taxable
income to its stockholders. The Code defines a REIT as a corporation, trust, or
association: (i) which is managed by one or more trustees or Directors; (ii)
the beneficial ownership of which is evidenced by transferable shares or by
transferable certificates of beneficial interest; (iii) which would be taxable
as a domestic corporation but for sections 856 through 860 of the Code; (iv)
which is neither a financial institution nor an insurance company subject to
certain special provisions of the Code; (v) the beneficial ownership of which is
held by 100 or more persons; (vi) no more than 50% in value of the outstanding
stock of which is owned, directly or indirectly, by or for five or fewer
individuals at any time during the last half of each taxable year (the "5/50
Rule"); (vii) that makes an election to be a REIT (or has made such election for
a previous taxable year) and satisfies all relevant filing and other
administrative requirements established by the Service that must be met in order
to elect and maintain REIT status;
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(viii) that uses a calendar year for federal income tax purposes and complies
with the recordkeeping requirements of the Code and Treasury Regulations
promulgated thereunder; and (ix) which meets certain other tests, described
below, regarding the nature of its income and assets. The Code provides that
conditions (i) through (iv), inclusive, must be met during the entire taxable
year and that condition (v) must be met during at least 335 days of a taxable
year of 12 months, or during a proportionate part of a taxable year of less than
12 months. Conditions (v) and (vi) do not apply until after the first taxable
year for which a REIT election is made. For purposes of determining stock
ownership under the 5/50 Rule, a supplemental unemployment compensation benefits
plan, a private foundation, or a portion of a trust permanently set aside or
used exclusively for charitable purposes generally is considered an individual.
A trust that is a qualified trust under Code section 401(a), however, generally
is not considered an individual and beneficiaries of such trust are treated as
holding shares of a REIT in proportion to their actuarial interests in such
trust for purposes of the 5/50 Rule.
NMC anticipates issuing sufficient Common Stock with sufficient diversity
of ownership pursuant to the Offering to allow it to satisfy requirements (v)
and (vi). See "--Proposed Tax Legislation." In addition, NMC's Articles of
Incorporation provide for restrictions regarding the ownership and transfer of
the Common and Preferred Stock that are intended to assist NMC in continuing to
satisfy the share ownership requirements described in clauses (v) and (vi)
above. Such transfer restrictions are described in "Description of Common
Stock--Restrictions on Ownership and Transfer." For purposes of determining
ongoing compliance with the share ownership requirements, Treasury Regulations
require NMC to issue letters to certain shareholders demanding information
regarding the number of shares each such shareholder actually or constructively
owns. If NMC fails to comply with those regulatory rules, it will be subject to
a $25,000 penalty ($50,000 for intentional violations).
Any "qualified REIT subsidiary" of a REIT will be disregarded for federal
income tax purposes, and all assets, liabilities, and items of income,
deduction, and credit of the qualified REIT subsidiary will be treated as
assets, liabilities and items of income deduction, and credit of NMC. A
"qualified REIT subsidiary" is any corporation all of the stock of which is
owned by a REIT. NMC currently does not have any qualified REIT subsidiaries.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT is deemed to own its proportionate share of
the assets of the partnership corresponding to the REIT's capital interest in
such partnership and, for REIT qualification purposes, is deemed to be entitled
to the income of the partnership attributable to such proportionate share. In
addition, the character of the assets and gross income of the partnership retain
the same character in the hands of the REIT for purposes of the REIT
requirements, including satisfying the gross income tests and the asset tests.
INCOME TESTS
To qualify and maintain its qualification as a REIT, NMC must satisfy two
gross income requirements annually. First, at least 75% of NMC's gross income
(excluding gross income from prohibited transactions) for each taxable year must
be derived directly or indirectly from investments relating to real property or
mortgages on real property (including "rents from real property," interest on
obligations secured by mortgages on real property or on interests in real
property, and dividends or other distributions on and gain from the sale of
shares in other REITs) or from certain types of temporary investments. Second,
at least 95% of NMC's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived from such real property
investments and from dividends, interest, and gain from the sale or disposition
of stock or securities or from any combination of the foregoing.
The term "interest," as defined for purposes of the 75% and 95% gross
income tests, generally does not include any amount received or accrued
(directly or indirectly) if the determination of such amount depends in whole or
in part on the income or profits of any person. However, an amount received or
accrued generally will not be excluded from the term "interest" solely by reason
of being based on a fixed percentage or percentages of receipts or sales. In
addition, an amount received or accrued generally will not be excluded from the
term "interest" solely by reason of being based on the income or profits of a
debtor if the debtor derives substantially all of its gross
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income from the related property through the leasing of substantially all of its
interests in the property, to the extent the amounts received by the debtor
would be characterized as rents from real property if received by a REIT.
Interest on obligations secured by mortgages on real property or on
interests in real property generally is qualifying income for purposes of the
75% gross income test. For purposes of the 75% gross income test, mobile homes
and manufactured housing units generally are treated as "interests in real
property." Any amount includible in gross income with respect to a regular or
residual interest in a REMIC generally is treated as interest on an obligation
secured by a mortgage on real property. If, however, less than 95% of the
assets of a REMIC consists of real estate assets (determined as if NMC held such
assets), NMC will be treated as receiving directly its proportionate share of
the income of the REMIC. In addition, if NMC receives interest income with
respect to a loan that is secured by both real property and other property and
the highest principal amount of the loan outstanding during a taxable year
exceeds the fair market value of the real property on the date NMC originated or
acquired the loan, the interest income will be apportioned between the real
property and the other property, which apportionment may cause NMC to recognize
income that is not qualifying income for purposes of the 75% gross income test.
NMC believes that the interest, OID, and any market discount income it
derives from its investments in Mortgage Assets generally will be qualifying
interest income for purposes of both the 75% and the 95% gross income tests,
except to the extent that less than 95% of the assets of a REMIC in which NMC
holds an interest consists of real estate assets (determined as if NMC held such
assets), and NMC's proportionate share of the income of the REMIC includes
income that is not qualifying income for purposes of the 75% and 95% gross
income tests. In addition, the principal amount of a loan may exceed the value
of the real property securing the loan, which will result in a portion of the
interest income from the loan being classified as qualifying income for purposes
of the 95% gross income test, but not for purposes of the 75% gross income test.
NMC plans to originate or acquire Non-Conforming and Conforming Loans and
securitize such loans through the issuance of non-REMIC CMOs. As a result of
such transactions, NMC will retain an equity ownership interest in the loans
that has economic characteristics similar to those of a subordinated MBS. Such
transactions will not cause NMC to fail to satisfy the gross income tests or the
asset tests described below. Because the assets securitized in a REMIC or
financial asset securitization investment trust ("FASIT") securitization are
treated as sold for federal income tax purposes, engaging in REMIC or FASIT
securitizations with respect to whole Non-Conforming Loans and Conforming Loans
could subject NMC to the prohibited transactions tax. Accordingly, NMC will
securitize its Non-Conforming Loans and Conforming Loans primarily through non-
REMIC, non-FASIT transactions.
To the extent that NMC acquires real property, any rents received by NMC
from such real property, will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent received or accrued with
respect to any property must not be based in whole or in part on the income or
profits derived by any person from such property, although an amount received or
accrued generally will not be excluded from the term "rents from real property"
solely by reason of being based on a fixed percentage or percentages of gross
receipts or gross sales. Rents received from a tenant that are based on the
tenant's income from the property will not be treated as rents based on income
or profits and thus excluded from the term "rents from real property" if the
tenant derives substantially all of its income with respect to such property
from the leasing or subleasing of substantially all of such property, provided
that the tenant receives from subtenants only amounts that would be treated as
rents from real property if received directly by NMC. Second, rents received
from a tenant will not qualify as "rents from real property" in satisfying the
gross income tests if NMC, or an owner of 10% or more of NMC, directly or
constructively owns 10% or more of the ownership interests in such tenant (a
"Related Party Tenant"). Third, if rent attributable to personal property,
leased in connection with a lease of real property, is greater than 15% of the
total rent received under the lease, then the portion of rent attributable to
such personal property will not qualify as "rents from real property." Finally,
NMC generally must not operate or manage the property or furnish or render
services to the tenants of such property, other than through an "independent
contractor" from whom NMC derives no income. The independent contractor
requirement, however, does not apply to the extent the services rendered by NMC
are "usually or customarily rendered" in connection with the rental of space for
occupancy only and are not otherwise considered "rendered to
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the occupant." In addition, pursuant to a de minimis exception, NMC may provide
non-customary services to its tenants other than through an independent
contractor without disqualifying the income from the property as long as the
amount NMC receives for the impermissible services does not exceed 1% of NMC's
gross income from the property. The amount NMC receives that is attributable to
impermissible services cannot be valued at less than 150% of the direct cost to
NMC of providing the services.
NMC has represented that it will not charge rent for any portion of any
property that is based, in whole or in part, on the income or profits of any
person (except by reason of being based on a fixed percentage or percentages of
receipts of sales, as described above) to the extent that the receipt of such
rent would jeopardize NMC's status as a REIT. In addition, NMC has represented
that, to the extent that it receives rent from a Related Party Tenant, such rent
will not cause NMC to fail to satisfy either the 75% or 95% gross income test.
NMC also has represented that it will not allow the rent attributable to
personal property leased in connection with any lease of real property to exceed
15% of the total Rent received under the lease, if the receipt of such rent
would cause NMC to fail to satisfy either the 75% or 95% gross income test.
Finally, NMC has represented that it will not operate or manage its real
property or furnish or render noncustomary services to the tenants of its real
property other than through an "independent contractor," to the extent that such
operation or the provision of such services would jeopardize NMC's status as a
REIT.
NMC may receive income not described above that is not qualifying income
for purposes of either or both of the 75% and 95% gross income tests. For
example, NMC will receive dividends from NMSC, NMAC, and any other taxable
corporation in which NMC owns stock, which dividends will be qualifying income
for purposes of the 95% gross income test, but not the 75% gross income test.
In addition, any origination fees or third-party servicing fees received by NMC
(other than indirectly through NMAC or another taxable corporation) will not be
qualifying income for purposes of either the 75% or the 95% gross income test.
NMC will monitor the amount of nonqualifying income produced by its assets and
has represented that it will manage its portfolio in order to comply at all
times with both the 75% and the 95% gross income tests.
The net income derived from a prohibited transaction is subject to a 100%
tax. The term "prohibited transaction" generally includes a sale or other
disposition of property (other than foreclosure property) that is held primarily
for sale to customers in the ordinary course of a trade or business. NMC
believes that, in general, no asset owned by NMC will be held for sale to
customers and that a sale of any such asset will not be in the ordinary course
of NMC's business. However, to the extent that NMC engages in REMIC or FASIT
securitizations of its whole mortgage loans, it could be subject to the
prohibited transactions tax. Whether an asset is held "primarily for sale to
customers in the ordinary course of a trade or business" depends, however, on
the facts and circumstances in effect from time to time, including those related
to a particular asset. Nevertheless, NMC will attempt to comply with the terms
of safe-harbor provisions in the Code prescribing when asset sales will not be
characterized as prohibited transactions. Complete assurance cannot be given,
however, that NMC can comply with the safe-harbor provisions of the Code or
avoid owning property that may be characterized as property held "primarily for
sale to customers in the ordinary course of a trade or business."
From time to time, NMC may enter into hedging transactions with respect to
one or more of its assets or liabilities. Any such hedging transactions could
take a variety of forms, including interest rate swap contracts, interest rate
cap or floor contracts, futures or forward contracts, and options. To the
extent that NMC enters into an interest rate swap or cap agreement, option,
futures contract, forward rate agreement, or any similar financial instrument to
reduce its interest rate risk with respect to debt incurred or to be incurred to
acquire or carry real estate assets, any periodic income or gain from the
disposition of such instrument should be qualifying income for purposes of the
95% gross income test, but not the 75% gross income test. To the extent that
NMC hedges with other types of financial instruments that are not similar to the
above or in other situations, it may not be entirely clear how the income from
those transactions will be treated for purposes of the various income tests that
apply to REITs under the Code. NMC intends to structure any hedging
transactions in a manner that does not jeopardize its status as a REIT. If
necessary to preserve its REIT status, NMC may conduct some or all of its
hedging activities through a corporate subsidiary that is fully subject to
federal corporate income tax. See "--Proposed Tax Legislation."
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If NMC fails to satisfy one or both of the 75% or the 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions generally will be available if (i) NMC's failure to meet such test(s)
was due to reasonable cause and not due to willful neglect, (ii) NMC reported
the nature and amount of each item of its income included in the test(s) for
such taxable year on a schedule attached to its return, and (iii) any incorrect
information on the schedule was not due to fraud with intent to evade tax. It
is not possible, however, to state whether, in all circumstances, NMC would be
entitled to the benefit of these relief provisions. As discussed above in
"Federal Income Tax Considerations--Taxation of NMC" even if those relief
provisions apply, NMC will be subject to a 100% tax on the gross income
attributable to the greater of the amount of by which NMC failed the 75% or the
95% test, multiplied by a fraction intended to reflect NMC's profitability.
ASSET TESTS
NMC, at the close of each quarter of each taxable year, also must satisfy
two tests relating to the nature of its assets. First, at least 75% of the
value of NMC's total assets must be represented by cash or cash items (including
certain receivables), government securities, "real estate assets," or, in cases
where NMC raises new capital through stock or long-term (at least five-year)
debt offerings, temporary investments in stock or debt instruments during the
one-year period following NMC's receipt of such capital. The term "real estate
assets" includes interests in real property, interests in mortgages on real
property to the extent the principal balance of a mortgage does not exceed the
fair market value of the associated real property, regular or residual interests
in a REMIC (except that, if less than 95% of the assets of a REMIC consists of
"real estate assets" (determined as if NMC held such assets), NMC will be
treated as holding directly its proportionate share of the assets of such
REMIC), and shares of other REITs. For purposes of the 75% asset test, the term
"interest in real property" includes an interest in mortgage loans or land and
improvements thereon, such as buildings or other inherently permanent structures
(including items that are structural components of such buildings or
structures), a leasehold of real property, and an option to acquire real
property (or a leasehold of real property). Second, of the investments not
included in the 75% asset class, the value of any one C corporation's securities
owned by NMC may not exceed 5% of the value of NMC's total assets, and NMC may
not own more than 10% of any one C corporation's outstanding voting securities
(except for its interests in any qualified REIT subsidiary and any other REIT).
See "--Proposed Tax Legislation."
NMC expects that any Mortgage Assets and temporary investments that it
acquires generally will be qualifying assets for purposes of the 75% asset test,
except to the extent that less than 95% of the assets of a REMIC in which NMC
owns an interest consists of "real estate assets" and NMC's proportionate share
of those assets includes assets that are non-qualifying assets for purposes of
the 75% asset test. Although the conclusion is not entirely clear under current
law, NMC intends to take the position for purposes of the asset tests that if,
the principal amount of a loan exceeds the fair market value of the real
property securing such loan, to the extent of such excess, such loan will not be
a qualifying asset for purposes of the 75% asset test. NMC owns 100% of the
non-voting common stock of each of NMSC and NMAC, representing 95% of the value
of the outstanding stock of NMSC and NMAC, respectively. Steven B. Chotin owns
all of the voting common stock of each of NMSC and NMAC, representing 5% of the
value of the outstanding stock of NMSC and NMAC, respectively. NMC will not
own, directly or indirectly, any of the voting stock of NMSC or NMAC, and NMC
believes that the value of its ownership interest in each of NMSC and NMAC will
not exceed 5% of the value of its total assets. NMC's investment in any other C
corporation (other than a qualified REIT subsidiary) in which NMC acquires an
ownership interest, such as a non-conforming mortgage lending company that is
organized as a C corporation, may not represent (i) more than 5% of the value of
NMC's total assets or (ii) more than 10% of the C corporation's outstanding
voting securities. See "--Proposed Tax Legislation." NMC will monitor the
status of the assets that it acquires for purposes of the various asset tests
and has represented that it will manage its portfolio in order to comply at all
times with such tests.
If NMC should fail to satisfy the asset tests at the end of a calendar
quarter, such a failure would not cause it to lose its REIT status if (i) it
satisfied the asset tests at the close of the preceding calendar quarter and
(ii) the discrepancy between the value of NMC's assets and the asset test
requirements arose from changes in the values of its assets and was not wholly
or partly caused by the acquisition of one or more non-qualifying assets. If
the
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condition described in clause (ii) of the preceding sentence were not satisfied,
NMC still could avoid disqualification by eliminating any discrepancy within 30
days after the close of the calendar quarter in which it arose.
DISTRIBUTION REQUIREMENTS
To qualify as a REIT under the Code, NMC is required to distribute
dividends (other than capital gain dividends and retained capital gains) to its
stockholders each year in an amount at least equal to (i) the sum of (A) 95% of
NMC's "REIT taxable income" (computed without regard to the dividends paid
deduction and NMC's net capital gain) plus (B) 95% of the net income (after
tax), if any, from foreclosure property, minus (ii) the sum of certain items of
non-cash income. Such distributions must be paid in the taxable year to which
they relate, or in the following taxable year if declared before NMC timely
files its tax return for such year and if paid on or before the first regular
dividend payment after such declaration. To the extent that NMC does not
distribute all of its net capital gain or distributes at least 95%, but less
than 100%, of its "REIT taxable income," as adjusted, it will be subject to tax
on the undistributed amount at regular capital gains or ordinary corporate tax
rates, as the case may be. Furthermore, if NMC should fail to distribute for
each calendar year at least the sum of (i) 85% of its REIT ordinary income for
such year, (ii) 95% of its REIT capital gain net income for such year, plus
(iii) any undistributed taxable income from prior periods, NMC will be subject
to a 4% excise tax on the excess of such required distribution over the amounts
actually distributed. To the extent NMC elects to retain and pay income tax on
the net long-term capital gains it receives during a taxable year, such amounts
will be treated as having been distributed for purposes of the 4% excise tax.
See "--Taxation of Taxable U.S. Stockholders."
It is possible that, from time to time, NMC may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of such
expenses in arriving at its REIT taxable income. For example, NMC will
recognize taxable income in excess of the related cash flow if any Mortgage
Assets that it owns are deemed to have OID. OID generally will be accrued using
a constant yield methodology that does not allow credit losses to be reflected
until they are actually incurred. In addition, NMC may recognize taxable market
discount income upon the receipt of proceeds from the disposition of, or
principal payments on, Mortgage Assets that are "market discount bonds" (i.e.,
obligations with an adjusted issue price that is greater than NMC's tax basis in
such obligations), although such proceeds often will be used to make non-
deductible principal payments on related borrowings. NMC also may recognize
Excess Inclusion or other "phantom" taxable income from REMIC Residual Interests
and Non-REMIC Residual Interests. Also, because NMC is an accrual-basis
taxpayer, it may have to recognize interest income on Mortgage Loans even though
the borrower is unable to pay the full amount due. Finally, NMC may recognize
taxable income without receiving a corresponding cash distribution if it
forecloses on or makes a "significant modification" (as defined in Regulations
section 1.1001-3(e)) to a Mortgage Loan, to the extent that the fair market
value of the underlying property or the principal amount of the modified loan,
as applicable, exceeds NMC's basis in the original loan. As a result, NMC may
have less cash than is necessary to distribute all of its taxable income and
thereby avoid corporate income tax or the excise tax imposed on certain
undistributed income. In such a situation, NMC may find it necessary to sell
assets or to arrange for short-term (or possibly long-term) borrowings or to
raise funds through the issuance of additional Preferred Stock or Common Stock.
If NMC fails to meet the 95% distribution requirement as a result of an
adjustment to NMC's tax return by the Service upon audit, NMC may retroactively
cure the failure by paying "deficiency dividends" to its stockholders in a later
year, which may then be included in NMC's deduction for dividends paid for the
earlier year. NMC may thus be able to avoid being taxed on amounts distributed
as deficiency dividends; however, NMC will be required to pay interest to the
Service based upon the amount of any deduction taken for deficiency dividends.
To qualify as a REIT, NMC also must distribute its accumulated earnings and
profits (as determined for federal income tax purposes) as of December 31, 1997
by the end of its 1998 taxable year. If NMC fails to distribute such amount by
December 31, 1998 (or January 31, 1999, if certain declaration and record date
requirements are met), it will fail to qualify as a REIT.
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FAILURE TO QUALIFY
If NMC fails to qualify for taxation as a REIT in any taxable year and the
relief provisions do not apply, NMC will be subject to tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates. Distributions to stockholders in any year in which NMC fails to qualify
as a REIT will not be required and, if made, will not be deductible by NMC. As
a result, NMC's failure to qualify as a REIT will reduce the cash available for
distribution by NMC to its stockholders. In addition, if NMC fails to qualify
as a REIT, all distributions to NMC's stockholders will be taxable as ordinary
dividend income to the extent of NMC's then current and accumulated earnings and
profits, and, subject to certain limitations in the Code, corporate distributes
may be eligible for the dividends-received deduction. Unless entitled to relief
under specific statutory provisions, NMC also will be ineligible for
qualification as a REIT for the four taxable years following the year during
which qualification was lost. It is not possible to determine whether NMC would
be entitled to such statutory relief in all circumstances.
TAXATION OF TAXABLE U.S. STOCKHOLDERS
The Units. The purchase of a Unit will be treated as the purchase of an
investment unit for federal income tax purposes. In order to determine the
issue prices of the share of Common Stock and the Warrant included in a Unit,
the aggregate purchase price for the Unit must be allocated between the share of
Common Stock and the Warrant in proportion to their relative fair market values
on the date of issuance. The allocation of the purchase price of a Unit between
the share of Common Stock and the Warrant included therein will be determined
based on discussions between the Company and the Representatives. Although the
Company expects that such allocation will be reasonable, there can be no
assurance that the Service will respect such allocation.
The Common Stock. As used herein, the term "U.S. Stockholder" means a
holder of shares of Common Stock who for United States federal income tax
purposes is (i) a citizen or resident of the United States, (ii) a corporation,
partnership, or other entity created or organized in or under the laws of the
United States or of any political subdivision thereof, (iii) an estate whose
income is subject to taxation in the United States regardless of its connection
with the conduct of a U.S. trade or business or (iv) a trust with respect to
which (A) a court within the United States is able to exercise primary
supervision over the administration of the trust and (B) one or more United
States fiduciaries have the authority to control all substantial decisions of
the trust.
As long as NMC qualifies as a REIT, distributions made by NMC out of its
current or accumulated earnings and profits (and not designated as capital gain
dividends or retained capital gains) will constitute dividends taxable to its
U.S. Stockholders as ordinary income. Such distributions will not be eligible
for the dividends-received deduction in the case of U.S. Stockholders that are
corporations. Dividends paid to U.S. Stockholders will be treated as portfolio
income. Such income, therefore, will not be subject to reduction by losses from
passive activities (i.e., any interest in a rental activity or in a trade or
business in which the holder does not materially participate, such as certain
interests held as a limited partner) of any holder who is subject to the passive
activity loss rules. Such distributions will, however, be considered investment
income which may be offset by certain investment expense deductions.
Distributions made by NMC that are properly designated by NMC as capital
gain dividends will be taxable to U.S. Stockholders as long-term capital gains
(to the extent that they do not exceed NMC's actual net capital gain for the
taxable year) without regard to the period for which a U.S. Stockholder has held
his shares of Common Stock. U.S. Stockholders that are corporations may,
however, be required to treat up to 20% of certain capital gain dividends as
ordinary income. NMC may elect to retain and pay income tax on its net long-
term capital gain. In that case, each stockholder will be taxed on his
proportionate share of the total long-term capital gains retained by NMC and
will receive a credit or refund for his proportionate share of the tax paid by
NMC. Each stockholder will increase the adjusted basis in his shares by the
difference between his allocable amount of NMC's long-term capital gain and the
tax deemed paid by the stockholder.
Distributions in excess of NMC's current and accumulated earnings and
profits will be treated first as a tax-free return of capital to each U.S.
Stockholder to the extent of the stockholder's adjusted basis in his shares of
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Common Stock. Distributions in excess of NMC's current and accumulated earnings
and profits that exceed a U.S. Stockholder's adjusted basis in his shares will
be taxable as capital gains (provided that the shares have been held as a
capital asset). Dividends declared by NMC in October, November, or December of
any year and payable to a stockholder of record on a specified date in any such
month shall be treated as both paid by NMC and received by the stockholder on
December 31 of such year, provided that the dividend is actually paid by NMC on
or before January 31 of the following calendar year. Stockholders may not
include in their own income tax returns any net operating losses or capital
losses of NMC.
NMC's investments may cause it under certain circumstances to recognize
taxable income in excess of its economic income ("phantom income") and to
experience an offsetting excess of economic income over its taxable income in
later years. As a result, stockholders may from time to time be required to pay
federal income tax on distributions that economically represent a return of
capital, rather than a dividend. Such distributions would be offset in later
years by distributions representing economic income that would be treated as
returns of capital for federal income tax purposes. Accordingly, if NMC
receives phantom income, its stockholders may be required to pay federal income
tax with respect to such income on an accelerated basis, i.e., before such
income is realized by the stockholders in an economic sense. Taking into
account the time value of money, such an acceleration of federal income tax
liabilities would cause stockholders to receive an after-tax rate of return on
an investment in NMC that would be less than the after-tax rate of return on an
investment with an identical before-tax rate of return that did not generate
phantom income. For example, if an investor subject to an effective income tax
rate of 30% purchased a bond (other than a tax-exempt bond) with an annual
interest rate of 10% for its face value, his before-tax return on his investment
would be 10%, and his after-tax return would be 7%. However, if the same
investor purchased stock of NMC at a time when the before-tax rate of return was
10%, his after-tax rate of return on his stock might be somewhat less than 7% as
a result of any phantom income received by NMC. In general, as the ratio of
NMC's phantom income to its total income increases, the after-tax rate of return
received by a taxable stockholder of NMC will decrease. NMC will consider the
potential effects of phantom income on its taxable stockholders in managing its
investments.
To the extent that NMC owns REMIC Residual Interests, it is likely that
stockholders will not be permitted to offset certain portions of the dividend
income they derive from NMC with their current deductions or net operating loss
carryovers or carrybacks. The portion of a stockholder's dividends that will be
subject to this limitation will equal his allocable share of any Excess
Inclusion income derived by NMC with respect to the REMIC Residual Interests.
NMC's Excess Inclusion income for any calendar quarter will equal the excess of
its income from REMIC Residual Interests over its "daily accruals" with respect
to such REMIC Residual Interests for the calendar quarter. Daily accruals for a
calendar quarter are computed by allocating to each day on which a REMIC
Residual Interest is owned a ratable portion of the product of (i) the "adjusted
issue price" of the REMIC Residual Interest at the beginning of the quarter and
(ii) 120% of the long-term federal interest rate (adjusted for quarterly
compounding) on the date of issuance of the REMIC Residual Interest. The
adjusted issue price of a REMIC Residual Interest at the beginning of a calendar
quarter equals the original issue price of the REMIC Residual Interest,
increased by the amount of daily accruals for prior quarters and decreased by
all prior distributions to NMC with respect to the REMIC Residual Interest. To
the extent provided in future Treasury regulations, the Excess Inclusion income
with respect to any REMIC Residual Interests owned by NMC that do not have
significant value will equal the entire amount of the income derived from such
REMIC Residual Interests.
To the extent that NMC (or a qualified REIT subsidiary) acquires or
originates Mortgage Loans and uses those loans to collateralize one or more
multiple-class offerings of CMOs for which no REMIC election is made ("Non-REMIC
Transactions"), it is possible that, to the extent provided in future Treasury
regulations, stockholders will not be permitted to offset certain portions of
the dividend income that they derive from NMC that are attributable to Non-REMIC
Transactions with current deductions or net operating loss carryovers or
carrybacks. Although no applicable Treasury regulations have yet been issued,
no assurance can be provided that such regulations will not be issued in the
future or that, if issued, such regulations will not prevent NMC's stockholders
from offsetting some portion of their dividend income with deductions or losses
from other sources.
Taxation of Stockholders on the Disposition of the Common Stock. In
general, any gain or loss realized upon a taxable disposition of the Common
Stock by a stockholder who is not a dealer in securities will be treated as
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long-term capital gain or loss if the shares of Common Stock have been held for
more than one year and otherwise as short-term capital gain or loss. However,
any loss upon a sale or exchange of Common Stock by a stockholder who has held
such stock for six months or less (after applying certain holding period rules)
will be treated as a long-term capital loss to the extent of distributions from
NMC required to be treated by such stockholder as long-term capital gain. All
or a portion of any loss realized upon a taxable disposition of the Common Stock
may be disallowed if other shares of Common Stock are purchased within 30 days
before or after the disposition.
The Warrants. Upon the exercise of a Warrant, a holder will not recognize
gain or loss and will have a tax basis in the Common Stock received equal to the
holder's tax basis in the Warrant plus the exercise price of the Warrant. The
holding period for the Common Stock purchased pursuant to the exercise of a
Warrant will begin on the day following the date of exercise and will not
include the period during which the holder held the Warrant.
Upon the sale or other disposition of a Warrant, a holder will recognize
capital gain or loss in an amount equal to the difference between the amount
realized and the holder's tax basis in the Warrant. Such gain or loss will be
long-term gain or loss if the holder's holding period for the Warrant is more
than one year. In the event that a Warrant lapses unexercised, a holder will
recognize a capital loss in an amount equal to his tax basis in the Warrant.
Such loss will be long-term if the Warrant has been held for more than one year.
Adjustments to the exercise price of the Warrants (or the failure to make
such adjustments) pursuant to the anti-dilution provisions of the Warrants or
otherwise may result in constructive distributions to the holders of Warrants
that could, under certain circumstances, be taxable to them as dividends
pursuant to section 305 of the Code. If such a constructive distribution were
to occur, a holder of Warrants could be required to recognize ordinary income
for tax purposes without receiving a corresponding distribution of cash.
CAPITAL GAINS AND LOSSES
A capital asset generally must be held for more than one year in order for
gain or loss derived from its sale or exchange to be treated as long-term
capital gain or loss. The highest marginal individual income tax rate is 39.6%.
The maximum tax rate on long-term capital gains applicable to non-corporate
taxpayers is 28% for sales and exchanges of assets held for more than one year,
but not more than 18 months, and 20% for sales and exchanges of assets held for
more than 18 months. The maximum tax rate on gain from the sale or exchange of
"section 1250 property" (i.e., depreciable real estate) is 25%, to the extent
that such gain would have been recaptured and treated as ordinary income if the
section 1250 property were personal property. If NMC designates a dividend as a
capital gain dividend or is deemed to distribute the capital gains it elects to
retain, it may designate the dividend or deemed distribution (subject to certain
limitations) as a 20% rate gain distribution, an unrecaptured section 1250 gain
distribution, or a 28% rate gain distribution. If NMC fails to designate the
rate, the distribution will be a 28% rate gain distribution. Thus, the tax rate
differential between capital gain and ordinary income for non-corporate
taxpayers may be significant. In addition, the characterization of income as
capital gain or ordinary income may affect the deductibility of capital losses.
Capital losses not offset by capital gains may be deducted against a non-
corporate taxpayer's ordinary income only up to a maximum annual amount of
$3,000. Unused capital losses may be carried forward indefinitely by non-
corporate taxpayers. All net capital gain of a corporate taxpayer is subject to
tax at ordinary corporate rates. A corporate taxpayer can deduct capital losses
only to the extent of capital gains, with unused losses being carried back three
years and forward five years.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
NMC will report to its U.S. Stockholders and to the Service the amount of
distributions paid during each calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, a stockholder may be subject to backup
withholding at the rate of 31% with respect to distributions paid unless such
holder (i) is a corporation or comes within certain other exempt categories and,
when required, demonstrates this fact or (ii) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding, and
otherwise complies with the applicable requirements of the backup withholding
rules. A stockholder who does not provide NMC with its correct taxpayer
identification number also may be subject to penalties imposed by the Service.
Any amount paid as backup withholding will be creditable against the
stockholder's income tax liability.
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In addition, NMC may be required to withhold a portion of capital gain
distributions to any stockholders who fail to certify their non-foreign status
to NMC. The Treasury Department has issued final regulations regarding the
backup withholding rules as applied to Non-U.S. Stockholders. Those regulations
alter the current system of backup withholding compliance and will be effective
for distributions made after December 31, 1999. See "--Taxation of Non-U.S.
Stockholders."
TAXATION OF TAX-EXEMPT STOCKHOLDERS
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject to
taxation on their unrelated business taxable income ("UBTI"). While many
investments in real estate generate UBTI, the Service has issued a published
ruling that dividend distributions from a REIT to an exempt employee pension
trust do not constitute UBTI, provided that the shares of NMC are not otherwise
used in an unrelated trade or business of the exempt employee pension trust.
Based on that ruling, amounts distributed by NMC to Exempt Organizations
generally should not constitute UBTI. However, if an Exempt Organization
finances its acquisition of Units with debt, a portion of its income from NMC
will constitute UBTI pursuant to the "debt-financed property" rules.
Furthermore, social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts, and qualified group legal services plans that are
exempt from taxation under paragraphs (7), (9), (17), and (20), respectively, of
Code section 501(c) are subject to different UBTI rules, which generally will
require them to characterize distributions from NMC as UBTI.
Special rules apply to certain tax-exempt pension funds (including 401(k)
plans but excluding IRAs or government pension plans) that own more than 10%
(measured by value) of the stock of a "pension held REIT" at any time during a
taxable year. Such a pension fund must treat a certain percentage of all
dividends received from the "pension-held REIT" during the year as UBTI. The
percentage is equal to the ratio of NMC's gross income (less direct expenses
related thereto) derived from the conduct of unrelated trades or businesses,
determined as if NMC were a tax-exempt pension fund, to NMC's gross income (less
direct expenses related thereto) from all sources. The special rules will not
apply to require a pension fund to recharacterize a portion of its dividends as
UBTI unless the percentage computed is at least 5%. NMC will be treated as a
"pension held REIT" if (i) NMC would fail to satisfy the 5/50 Rule if the stock
of NMC held by such tax-exempt pension funds were not treated as held directly
by their respective beneficiaries, and (ii) either (A) at least one tax-exempt
pension fund holds more than 25% (measured by value) of NMC's stock, or (B) one
or more tax-exempt pension funds (each of which owns more than 10% (measured by
value) of NMC's stock) own in the aggregate more than 50% (measured by value) of
NMC's stock.
NMC will be subject to tax at the highest marginal corporate rate on the
portion of any Excess Inclusion income derived by NMC from REMIC Residual
Interests that is allocable to stock of NMC held by Disqualified Organizations.
Any such tax would be deductible by NMC against its income that is not Excess
Inclusion income. The Articles of Incorporation prohibit Disqualified
Organizations from owning stock of NMC. If NMC derives Excess Inclusion income
from REMIC Residual Interests, a tax similar to the tax on NMC described in the
preceding paragraph may be imposed on stockholders who are (i) pass-through
entities (i.e., partnerships, estates, trusts, regulated investment companies,
REITs, common trust funds, and certain types of cooperatives (including farmers'
cooperatives described in section 521 of the Code)) in which a Disqualified
Organization is a record holder of shares or interests and (ii) nominees who
hold Common Stock on behalf of Disqualified Organizations. Consequently, a
brokerage firm that holds shares of Common Stock in a "street name" account for
a Disqualified Organization may be subject to federal income tax on the Excess
Inclusion income derived from those shares. In addition, NMC may be subject to
tax at the highest corporate rate on the portion of its allocable share of any
Excess Inclusion derived by a REIT in which NMC owns an equity interest, equal
to the percentage of NMC's stock held by Disqualified Organizations.
Any dividends received by an Exempt Organization that are allocable to
Excess Inclusion may be treated as UBTI. In addition, the Treasury Department
has been authorized to issue regulations regarding issuances by a REIT of CMOs
in Non-REMIC transactions. If such Treasury regulations are issued in the
future preventing taxable stockholders from offsetting some percentage of the
dividends paid by NMC with deductions or losses from
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other sources, that same percentage of NMC's dividends most likely would be
treated as UBTI for stockholders that are Exempt Organizations. See "--Taxation
of Taxable U.S. Stockholders."
TAXATION OF NON-U.S. STOCKHOLDERS
The rules governing United States federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships, foreign trusts
and estates and other foreign stockholders (collectively, "Non-U.S.
Stockholders") are highly complex, and the following discussion is intended only
as a summary of such rules. PROSPECTIVE NON-U.S. STOCKHOLDERS SHOULD CONSULT
WITH THEIR OWN TAX ADVISORS TO DETERMINE THE IMPACT OF UNITED STATES FEDERAL,
STATE, AND LOCAL INCOME TAX LAWS ON AN INVESTMENT IN UNITS, INCLUDING ANY
REPORTING REQUIREMENTS.
In general, Non-U.S. Stockholders will be subject to regular United States
income tax with respect to their investment in Units in the same manner as a
U.S. Stockholder if such investment is "effectively connected" with the Non-U.S.
Stockholder's conduct of a trade or business in the United States. A corporate
Non-U.S. Stockholder that receives income with respect to its investment in
Units that is (or is treated as) effectively connected with the conduct of a
trade or business in the United States also may be subject to the 30% branch
profits tax imposed by the Code, which is payable in addition to regular United
States corporate income tax.
Distributions made by NMC that are not attributable to gain from the sale
or exchange by NMC of United States real property interests and that are not
designated by NMC as capital gain dividends or retained capital gains will be
treated as dividends of ordinary income to the extent made out of current or
accumulated earnings and profits of NMC. Generally, such distributions will be
subject to United States withholding tax at the rate of 30% on the gross amount
of the distributions unless the withholding tax is reduced or eliminated by an
applicable United States income tax treaty. NMC expects to withhold United
States income tax at the rate of 30% on the gross amount of any such dividends
paid to a Non-U.S. Stockholder unless a lower treaty rate applies and the Non-
U.S. Stockholder has filed the Service's Form 1001 with NMC certifying the Non-
U.S. Stockholder's entitlement to treaty benefits or (ii) the Non-U.S.
Stockholder files the Service's Form 4224 with NMC claiming that the
distribution is effectively connected income. The U.S. Treasury Department has
issued final regulations that modify the manner in which NMC complies with the
withholding requirements. Those regulations are effective for distributions
made after December 31, 1999.
Distributions made by NMC in excess of its current and accumulated earnings
and profits will be treated first as a tax-free return of capital to each Non-
U.S. Stockholder, reducing the adjusted basis which such Non-U.S. Stockholder
has in his shares of Common Stock for U.S. tax purposes by the amount of such
distribution (but not below zero). Distributions in excess of NMC's current and
accumulated earnings and profits that exceed a Non-U.S. Stockholder's adjusted
basis in his shares will be treated as gain from the sale or exchange of such
shares, which will give rise to tax liability if the Non-U.S. Stockholder would
otherwise be subject to tax on any gain from the sale or disposition of its
Common Stock, as described below. Because it generally cannot be determined at
the time a distribution is made whether or not a distribution will be in excess
of NMC's current and accumulated earnings and profits, the entire amount of a
distribution normally will be subject to withholding at the rate applicable to a
dividend distribution. However, the Non-U.S. Stockholder may seek a refund from
the Service of any amount withheld if it is subsequently determined that such
distribution was, in fact, in excess of NMC's then current and accumulated
earnings and profits.
NMC is required to withhold 10% of any distribution in excess of NMC's
current and accumulated earnings and profits. Consequently, although NMC
intends to withhold at a rate of 30% on the entire amount of any distribution,
to the extent that NMC does not do so, any portion of a distribution not subject
to withholding at a rate of 30% will be subject to withholding at a rate of 10%.
If NMC derives Excess Inclusion income from REMIC Residual Interests, the
portion of the dividends paid to Non-U.S. Stockholders that is allocable to the
Excess Inclusion income may not be eligible for any applicable exemption from
the 30% withholding tax or a reduced treaty rate. In addition, the U.S.
Treasury Department has been authorized to issue regulations regarding issuances
by a REIT of CMOs in Non-REMIC Transactions. If
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Treasury Regulations are issued in the future preventing taxable stockholders
from offsetting some percentage of the dividends paid by NMC with deductions or
losses from other sources, that same percentage of NMC's dividends most likely
would not be eligible for exemption from the 30% withholding tax or a reduced
treaty rate. See " --Taxation of Taxable U.S. Stockholders."
As long as NMC qualifies as a REIT, distributions made by NMC that are
attributable to gain from the sale or exchange by NMC of U.S. real property
interests (i.e., interests in U.S. property and corporations more than 50% of
whose assets are U.S. real property interests, but not Mortgage Loans or MBS)
will be taxed to a Non-U.S. Stockholder under the Foreign Investment in Real
Property Tax Act of 1980 ("FIRPTA"). Under FIRPTA, such distributions are taxed
to a Non-U.S. Stockholder as if such distributions were gains "effectively
connected" with the conduct of a trade or business in the United States.
Accordingly, a Non-U.S. Stockholder will be taxed on such distributions at the
same capital gain rates applicable to U.S. Stockholders (subject to any
applicable alternative minimum tax and a special alternative minimum tax in the
case of nonresident alien individuals). Distributions subject to FIRPTA also
may be subject to the 30% branch profits tax in the case of a corporate Non-U.S.
Stockholder that is not entitled to treaty relief or exemption. NMC will be
required to withhold tax from any distribution to a Non-U.S. Stockholder that
could be designated by NMC as a capital gain dividend in an amount equal to 35%
of the gross distribution. The amount of tax withheld is fully creditable
against the Non-U.S. Stockholder's FIRPTA tax liability, and if such amount
exceeds the Non-U.S. Stockholder's federal income tax liability for the
applicable taxable year, the Non-U.S. Stockholder may seek a refund of the
excess from the Service.
Gain recognized by a Non-U.S. Stockholder upon the sale or exchange of
shares of Common Stock generally will not be subject to United States taxation
if NMC is a "domestically controlled REIT." A "domestically controlled REIT" is
a REIT in which at all times during a specified testing period less than 50% in
value of its stock is held directly or indirectly by Non-U.S. Stockholders.
Because the shares of Common Stock will be publicly traded, no assurance can be
given that NMC is or will continue to be a "domestically-controlled REIT."
Nevertheless, a Non-U.S. Stockholder that owned, actually or constructively, 5%
or less of NMC's outstanding Common Stock at all times during a specified
testing period will not be subject to tax under FIRPTA if NMC's Common Stock is
regularly traded on an established securities market. Notwithstanding the
foregoing, gain from the sale or exchange of shares of Common Stock not
otherwise subject to FIRPTA will be taxable to a Non-U.S. Stockholder if the
Non-U.S. Stockholder is a nonresident alien individual who is present in the
United States for 183 days or more during the taxable year and has a "tax home"
in the United States. In such case, the nonresident alien individual will be
subject to a 30% United States withholding tax on the amount of such
individual's gain. If gain on the sale or exchange of shares of the Common
Stock were subject to taxation under FIRPTA, the Non-U.S. Stockholder would be
subject to regular United States income tax with respect to such gain in the
same manner as a U.S. Stockholder (subject to any applicable alternative minimum
tax, a special alternative minimum tax in the case of nonresident alien
individuals and the possible application of the 30% branch profits tax in the
case of Non-U.S. corporations).
OTHER TAX CONSIDERATIONS
NMC or NMC's stockholders may be subject to state and local tax in various
states and localities, including those states and localities in which it or they
transact business, own property, or reside. The state and local tax treatment
of NMC and its stockholders in such jurisdictions may differ from the federal
income tax treatment described above. Consequently, prospective stockholders
should consult their own tax advisors regarding the effect of state and local
tax laws upon an investment in the Common Stock.
PROPOSED TAX LEGISLATION
On February 2, 1998, President Clinton released his budget proposal for
fiscal year 1999 (the "Proposal"). Three provisions contained in the Proposal
potentially could affect NMC if enacted in their currently proposed form.
First, the Proposal would prohibit a REIT from owning, directly or indirectly,
more than 10% of the voting power or value of all classes of a C corporation's
stock (other than the stock of a qualified REIT subsidiary). Currently, a REIT
may own no more than 10% of the voting stock of a C corporation, but its
ownership of the nonvoting stock of a C corporation is not limited (other than
by the rule that the value of a REIT's combined equity
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and debt interest in a C corporation may not exceed 5% of the value of a REIT's
total assets). That provision is proposed to be effective with respect to stock
in a C corporation acquired by a REIT on or after the date of "first committee
action" (i.e., first action by the House Ways and Means Committee with respect
to the provision) ("First Committee Action"). A REIT that owns stock in a C
corporation in excess of the new ownership limit prior to First Committee Action
would be "grandfathered," but only to the extent that the corporation does not
engage in a new trade or business or acquire substantial new assets on or after
the date of First Committee Action. NMC owns 100% of the non-voting common stock
of each of NMSC and NMAC, representing 95% of the value of the outstanding stock
of each of NMSC and NMAC. If enacted as presently written, that provision would
severely limit the ability of NMSC and NMAC to expand their business or acquire
new assets, and would limit NMC's ability to use by a REIT of other taxable
subsidiaries to conduct businesses the income from which would be nonqualifying
income if received directly by NMC.
Second, the Proposal would require recognition of any "built-in gain"
associated with the assets of a "large" C corporation (i.e., a C corporation
whose stock has a fair market value of more than $5 million) upon its conversion
to REIT status or merger into a REIT. That provision is proposed to be
effective for conversions to REIT status effective for taxable years beginning
after January 1, 1999 and mergers of C corporations into REITs that occur after
December 31, 1998. Although this provision would not affect NMC's conversion
from a C corporation to a REIT, it would require immediate recognition of any
"built-in gain" of an acquired C corporation that is determined to be "large"
if, at any time after December 31, 1998, the C corporation merges into NMC.
Third, the Proposal would impose an additional stock ownership requirement upon
entities that first elect REIT status for taxable years beginning on or after
the date of First Committee Action. With respect to such a REIT, no person
would be permitted to own, directly or indirectly, more than 50% of the total
voting power or value of the REIT's stock. Such provision should not affect
NMC, even if enacted in final form as currently proposed, because NMC will elect
REIT status for its taxable year beginning January 1, 1998.
Neither of the two provisions described in this section is included in
Representative Archer's or Senator Roth's proposed tax legislation, introduced
on March 26, 1998, involving REITS. However, it is possible that legislation
containing either or both of the provision described in this section will be
introduced in Congress and, although it is not likely, that the effective date
of any such legislation could be March 26, 1998. In addition, other
legislation, as well as administrative interpretations or court decisions,
could change the tax laws with respect to NMC's qualifications as a REIT and the
federal income tax consequences of such qualification.
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the
prohibited transaction provisions of section 4975 of the Code that may be
relevant to a prospective purchaser (including, with respect to the discussion
contained in "--Status of the Company under ERISA," to a prospective purchaser
that is not an employee benefit plan, another tax-qualified retirement plan, or
an individual retirement account ("IRA")). The discussion does not purport to
deal with all aspects of ERISA or section 4975 of the Code that may be relevant
to particular stockholders (including plans subject to Title I of ERISA, other
retirement plans and IRAs subject to the prohibited transaction provisions of
section 4975 of the Code, and governmental plans or church plans that are exempt
from ERISA and section 4975 of the Code but that may be subject to state law
requirements) in light of their particular circumstances.
The discussion is based on current provisions of ERISA and the Code,
existing and currently proposed regulations under ERISA and the Code, the
legislative history of ERISA and the Code, existing administrative rulings of
the Department of Labor ("DOL") and reported judicial decisions. No assurance
can be given that legislative, judicial, or administrative changes will not
affect the accuracy of any statements herein with respect to transactions
entered into or contemplated prior to the effective date of such changes.
A FIDUCIARY MAKING THE DECISION TO INVEST IN THE SECURITIES ON BEHALF OF A
PROSPECTIVE PURCHASER THAT IS AN EMPLOYEE BENEFIT PLAN, A TAX QUALIFIED
RETIREMENT PLAN, OR AN IRA SHOULD CONSULT ITS OWN LEGAL ADVISOR REGARDING THE
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SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE CODE, AND STATE
LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP, OR SALE OF THE SECURITIES BY SUCH
PLAN OR IRA.
EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS, AND IRAS
Each fiduciary of a pension, profit-sharing, or other employee benefit plan
(a "Plan") subject to Title I of ERISA should consider carefully whether an
investment in the Securities is consistent with his fiduciary responsibilities
under ERISA. In particular, the fiduciary requirements of Part 4 of Title I of
ERISA require a Plan's investment to be (i) prudent and in the best interests of
the Plan, its participants, and its beneficiaries, (ii) diversified in order to
minimize the risk of large losses, unless it is clearly prudent not to do so,
and (iii) authorized under the terms of the Plan's governing documents (provided
the documents are consistent with ERISA). In determining whether an investment
in the Securities is prudent for purposes of ERISA, the appropriate fiduciary of
a Plan should consider all of the facts and circumstances, including whether the
investment is reasonably designed, as a part of the Plan's portfolio for which
the fiduciary has investment responsibility, to meet the objectives of the Plan,
taking into consideration the risk of loss and opportunity for gain (or other
return) from the investment, the diversification, cash flow, and funding
requirements of the Plan's portfolio. A fiduciary also should take into account
the nature of NMC's business, the management of NMC, the length of NMC's
operating history, the fact that certain investment assets may not have been
identified yet, and the possibility of the recognition of UBTI.
The fiduciary of an IRA or of a qualified retirement plan not subject to
Title I of ERISA because it is a governmental or church plan or because it does
not cover common law employees (a "Non-ERISA Plan") should consider that such an
IRA or Non-ERISA Plan may only make investments that are authorized by the
appropriate governing documents and under applicable state law.
Fiduciaries of Plans and persons making the investment decision for an IRA
or other Non-ERISA Plan should consider the application of the prohibited
transaction provisions of ERISA and the Code in making their investment
decision. A "party in interest" or "disqualified person" with respect to a Plan
or with respect to a Plan or IRA subject to Code section 4975 is subject to (i)
an initial 15% excise tax on the amount involved in any prohibited transaction
involving the assets of the plan or IRA and (ii) an excise tax equal to 100% of
the amount involved if any prohibited transaction is not corrected. If the
disqualified person who engages in the transaction is the individual on behalf
of whom an IRA is maintained (or his beneficiary), the IRA will lose its tax-
exempt status and its assets will be deemed to have been distributed to such
individual in a taxable distribution (and no excise tax will be imposed) on
account of the prohibited transaction. In addition, a fiduciary who permits a
Plan to engage in a transaction that the fiduciary knows or should know is a
prohibited transaction may be liable to the Plan for any loss the Plan incurs as
a result of the transaction or for any profits earned by the fiduciary in the
transaction.
STATUS OF THE COMPANY UNDER ERISA
The following section discusses certain principles that apply in
determining whether the fiduciary requirements of ERISA and the prohibited
transaction provisions of ERISA and the Code apply to an entity because one or
more investors in the equity interests in the entity is a Plan or is a Non-ERISA
Plan or IRA subject to section 4975 of the Code. A Plan fiduciary also should
consider the relevance of those principles to ERISA's prohibition on improper
delegation of control over or responsibility for "plan assets" and ERISA's
imposition of co-fiduciary liability on a fiduciary who participates in, permits
(by action or inaction) the occurrence of, or fails to remedy a known breach by
another fiduciary.
If the assets of NMC are deemed to be "plan assets" under ERISA, (i) the
prudence standards and other provisions of Part 4 of Title I of ERISA would be
applicable to any transactions involving NMC's assets, (ii) persons who exercise
any authority over NMC's assets, or who provide investment advice to NMC, would
(for purposes of the fiduciary responsibility provisions of ERISA) be
fiduciaries of each Plan that acquires Securities, and transactions involving
NMC's assets undertaken at their direction or pursuant to their advice might
violate their fiduciary responsibilities under ERISA, especially with regard to
conflicts of interest, (iii) a fiduciary exercising his investment discretion
over the assets of a Plan to cause it to acquire or hold the Securities could be
liable under Part
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4 of Title I of ERISA for transactions entered into by NMC that do not conform
to ERISA standards of prudence and fiduciary responsibility, and (iv) certain
transactions that NMC might enter into in the ordinary course of its business
and operations might constitute "prohibited transactions" under ERISA and the
Code.
Regulations of the DOL defining "plan assets" (the "Plan Asset
Regulations") generally provide that when a Plan or Non-ERISA Plan or IRA
acquires a security that is an equity interest in an entity and the security is
neither a "publicly-offered security" nor a security issued by an investment
company registered under the Investment Company Act of 1940, the Plan's or Non-
ERISA Plan's or IRA's assets include both the equity interest and an undivided
interest in each of the underlying assets of the issuer of such equity interest,
unless one or more exceptions specified in the Plan Asset Regulations are
satisfied.
The Plan Asset Regulations define a publicly-offered security as a security
that is "widely-held," "freely transferable," and either part of a class of
securities registered under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or sold pursuant to an effective registration statement under
the Securities Act (provided the securities are registered under the Exchange
Act within 120 days after the end of the fiscal year of the issuer during which
the offering occurred). The Units are being sold in an offering registered
under the Securities Act and will be registered under the Exchange Act. The
Plan Asset Regulations provide that a security is "widely held" only if it is
part of a class of securities that is owned by 100 or more investors independent
of the issuer and of one another. A security will not fail to be widely held
because the number of independent investors falls below 100 subsequent to the
initial public offering as a result of events beyond the issuer's control. NMC
anticipates that upon completion of this offering, the Securities will be
"widely held."
The Plan Asset Regulations provide that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The Plan Asset Regulations further provide
that where a security is part of an offering in which the minimum investment is
$10,000 or less (as is the case with this offering), certain restrictions
ordinarily will not, alone or in combination, affect a finding that such
securities are freely transferable. The restrictions on transfer enumerated in
the Plan Asset Regulations as not affecting that finding include: (i) any
restriction on or prohibition against any transfer or assignment that would
result in the termination or reclassification of an entity for federal or state
tax purposes, or that otherwise would violate any federal or state law or court
order, (ii) any requirement that advance notice of a transfer or assignment be
given to the issuer, (iii) any administrative procedure that establishes an
effective date, or an event (such as completion of an offering), prior to which
a transfer or assignment will not be effective, and (iv) any limitation or
restriction on transfer or assignment that is not imposed by the issuer or a
person acting on behalf of the issuer. NMC believes that the restrictions
imposed under the Articles of Incorporation on the transfer of the Securities
will not result in the failure of the Securities to be "freely transferable."
NMC also is not aware of any other facts or circumstances limiting the
transferability of the Securities that are not enumerated in the Plan Asset
Regulations as those not affecting free transferability, and no assurance can be
given that the DOL or the Treasury Department will not reach a contrary
conclusion.
Assuming that the Securities will be "widely held" and that no other facts
and circumstances other than those referred to in the preceding paragraph exist
that restrict transferability of the Securities, the Securities should be
publicly offered securities and the assets of NMC should not be deemed to be
"plan assets" of any Plan, IRA, or Non-ERISA Plan that invests in the
Securities.
UNDERWRITING
The Company has entered into an underwriting agreement (the "Underwriting
Agreement") with the underwriters listed in the table below (the
"Underwriters"), for whom Stifel, Nicolaus & Company, Incorporated and Piper
Jaffray Inc. are acting as representatives (the "Representatives"). Subject to
the terms and conditions of the Underwriting Agreement, the Company has agreed
to sell to the Underwriters, and each of the Underwriters have severally agreed
to purchase, the number of Units set forth opposite such Underwriter's name in
the table below:
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<TABLE>
<CAPTION>
NAME NUMBER OF UNITS
---- ---------------
<S> <C>
Stifel, Nicolaus & Company, Incorporated..............
Piper Jaffray Inc.....................................
Total.................................................
-----------------------
6,700,000
=======================
</TABLE>
In the Underwriting Agreement, the Underwriters have severally agreed,
subject to the terms and conditions set forth therein, to purchase all of the
Units being sold pursuant to the Underwriting Agreement, if any are purchased
(other than those covered by the over-allotment option described below). In the
event of a default by any Underwriter, the Underwriting Agreement provides that,
in certain circumstances, purchase commitments of the nondefaulting Underwriters
may be increased or the Underwriting Agreement may be terminated.
The Company has been advised by the Representatives that the Underwriters
propose to offer the Units in part to the public at the initial public offering
price set forth on the coverage page of this Prospectus, and in part to certain
securities dealers (who may include the Underwriters), at such price less a
concession not in excess of $_____ per Unit, and that the Underwriters and such
dealers may reallow to certain dealers a discount not in excess of $____ per
Unit. After commencement of the Offering, the initial public offering price,
concessions to selected dealers and the discount to other dealers may be changed
by the Representatives.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 1,005,000
additional Units, at the initial public offering price less the underwriting
discount set forth on the cover page of this Prospectus. To the extent the
Underwriters exercise such option, each of the Underwriters will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of such option Units as it was obligated to purchase pursuant to the
Underwriting Agreement.
The Company has agreed to indemnify the Underwriters and their controlling
persons against certain liabilities, including liabilities under the Securities
Act, or to contribute to payments, which the Underwriters may be required to
make in respect thereof. The Company has been advised that, in the view of the
Commission, indemnification of the Underwriters and their controlling persons
under the Securities Act is against public policy and, therefore, is
unenforceable.
The Company and Steven B. Chotin, its principal shareholder, and Conti and
Greenwich have agreed that, without the prior written consent of Stifel,
Nicolaus & Company, Incorporated, they will not sell or otherwise dispose of any
shares of Common Stock for a period of ____ days after the date of this
Prospectus, other than as gifts to family members and transfers to wholly owned
affiliates, except that (i) the Company may issue shares upon the exercise of
options granted or which may be granted under the 1998 Incentive Plans, and (ii)
the transfer of stock by the Company or Mr. Chotin to restricted stock plans for
the benefit of certain employees of TCG and the Company. See "Principal
Shareholders."
The Company has agreed to grant to Stifel, Nicolaus & Company, Incorporated
warrants to purchase 201,000 (231,150 if the over-allotment option is exercised)
shares of Common Stock at an exercise price equal to the initial public offering
price of the Units (the "Representative's Warrants"). The Representative's
Warrants are exercisable for a period of three years beginning six months after
the closing of the Offering. The Representative's Warrants and, if exercised,
the underlying securities, may not be sold, transferred, assigned, pledged or
hypothecated for a period of one year following the date of this Prospectus
except to any officer or partner of Stifel, Nicolaus & Company, Incorporated or
by operation of law. The Representative's Warrants contain anti-dilution
provisions providing for appropriate adjustment upon the occurrence of certain
events. See "Description of Securities."
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The Representatives have informed the Company that they do not expect the
Underwriters to confirm sales of Units offered by this Prospectus to any
accounts over which they exercise discretionary authority.
The Company intends to apply for listing of the Units, the Warrants and the
Common Stock on the ________________. See "The Offering."
The Company has been advised by the Representatives that the
Representatives presently intend to make a market in the Units and, when
detached, the Warrants and Common Stock offered hereby; however, the
Representatives are not obligated to do so, and any market making activity may
be discontinued at any time. Until the Representatives' participation in the
distribution of the Units is completed, any such passive market making will be
conducted in accordance with Rule 103 of Regulation M under the Securities
Exchange Act of 1934. There can be no assurance that an active public market
for the Units, Warrants or Common Stock will develop or continue after the
closing of the Offering.
Prior to the closing of the Offering, there has been no public market for
the Units. Accordingly, the initial public offering price for the Units has
been determined through negotiations between the Company and the
Representatives. Among the factors which were considered in determining the
initial public offering price were the Company's future prospects, the
experience of its management, the economic condition of the financial services
industry in general, the general condition of the equity securities market, the
demand for similar securities of companies considered comparable to the Company
and other relevant factors.
The initial public offering price set forth on the cover page of this
Prospectus should not be considered an indication of the actual value of the
Units. Such price is subject to change as a result of market conditions and
other factors and no assurance can be given that the Units can be resold at the
initial public offering price of the Units after the closing of the Offering.
Certain of the Underwriters, including the Representatives, may from time
to time in the future enter into reverse repurchase agreements or other
financing arrangements with the Company to finance the purchase of Mortgage
Assets.
Until the distribution of the Units is completed, rules of the Commission
may limit the ability of the Underwriters and certain selling group members to
bid for and purchase the Units. As an exception to these rules, the
Representatives are permitted to engage in certain transactions that stabilize
the prices of the Units. Such transactions consist of bids or purchases for the
purpose of pegging, fixing or maintaining the price of such securities. If the
Underwriters create a short position in the Units in connection with the
Offering, i.e., if they sell a greater number of Units than is set forth on the
cover page of this Prospectus, then the Representatives may reduce that short
position by purchasing Units in the open market. The Representatives may also
elect to reduce any short position by exercising all or part of the over-
allotment option described herein. The Representatives may also impose a
penalty bid on certain Underwriters and selling group members. This means that
if the Representatives purchase Units in the open market to reduce the
Underwriters' short position or to stabilize the price of the Units, it may
reclaim the amount of the selling concession from the Underwriters and selling
group members who sold those securities as part of the Offering. In general,
purchases of a security for the purpose of stabilization or to reduce a short
position could cause the price of the security to be higher than it might be in
the absence of such purchases. The imposition of a penalty bid might also have
an effect on the price of a security to the extent that it were to discourage
resales of the security. These transactions may be effected on the
or otherwise. Neither the Company nor any of the Underwriters makes any
representation or prediction as to the direction or magnitude of any effect that
the transactions described above may have on the prices of the Units. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions, or
that such transactions, once commenced, will not be discontinued without notice.
At the request of the Company, the Underwriters have reserved up to _______
Units (and _____ Units if the Underwriters' over-allotment option is exercised)
for sale to employees, officers and Directors of the Company and its affiliates
and their families and to certain other persons at the price to public set forth
on the cover page of this Prospectus. The number of Units available for sale to
the general public will be reduced to the extent such
130
<PAGE>
persons purchase such reserved Units. Any such reserved shares that are not so
purchased will be offered by the Underwriters to the general public on the same
basis as other Units offered thereby.
Piper Jaffray has provided financial advisory services to the Company in
the past.
LEGAL MATTERS
The validity of the Common Stock offered in the Offering will be passed
upon for the Company by Hunton & Williams, Richmond, Virginia. Andrews & Kurth
L.L.P., Washington, D.C., will act as counsel to the Underwriters. Hunton &
Williams will be relying as to matters of Colorado law on the opinion of Howard
J. Glicksman, General Counsel to the Company. Mr. Glicksman also serves as an
Executive Vice President of the Company and will resign as a Director of the
Company upon the closing of the Offering.
EXPERTS
The financial statements of the Company as of December 31, 1996 and 1997,
and for each of the three years in the period ended December 31, 1997 included
in this Prospectus, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and are included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-11 (File No. 333-_____) under the Securities Act with respect to the Units
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and the Units, reference is
hereby made to such Registration Statement and the exhibits and schedules
thereto. Statements contained in this Prospectus as to the contents of any
contract or other document are not necessarily complete and, in each instance,
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference. Copies of the Registration Statement, including all
exhibits thereto, can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the regional offices of the Commission located at 500 West Madison
Street, Room 1400, Chicago, Illinois 60606 and at 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of such material can be obtained from
the Public Reference Section of the Commission at 450 Fifth Street, Washington,
D.C. 20549, at prescribed rates. The Commission also maintains a web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission, including
the Company. The address of the Commission's website is http://www.sec.gov.
The Company intends to furnish to its stockholders annual reports
containing audited consolidated financial statements and an opinion thereon
expressed by the Company's independent auditors as well as quarterly reports for
the first three fiscal quarters of each fiscal year containing unaudited
consolidated condensed financial statements.
131
<PAGE>
GLOSSARY
Except as otherwise specified or as the context may otherwise require, the
following terms used herein shall have the meanings assigned to them below. All
terms in the singular shall have the same meanings when used in the plural and
vice-versa.
"1996 Lender Liability Act" shall mean the Asset Conservation, Lender
Liability and Deposit Insurance Act of 1996, as amended.
"1998 Plan" shall mean the 1998 Employee Incentive Plan.
"1998 Incentive Plans" shall mean the 1998 Plan and the Directors' Plan.
"5/50 Rule" shall mean the tax rule that no more than 50% in value of the
Company's outstanding shares may be owned, directly or indirectly, by five or
fewer individuals during the last half of each taxable year.
"Act" shall mean the Securities Act of 1933.
"Administrator" shall mean the Board of Directors or its Stock Incentive
Committee, and any delegate, as appropriate.
"Agency Certificates" shall mean MBS guaranteed by Fannie Mae, Freddie Mac
or Ginnie Mae.
"Agent" shall mean NMC's transfer agent.
"Affiliate" shall mean (i) any person directly or indirectly owning,
controlling, or holding, with power to vote ten percent or more of the
outstanding voting securities of such other person, (ii) any person ten percent
or more of whose outstanding voting securities are directly or indirectly owned,
controlled, or held, with power to vote, by such other person, (iii) any person
directly or indirectly controlling, controlled by, or under common control with
such other person, (iv) any executive officer, director, trustee or general
partner of such other person, and (v) any legal entity for which such person
acts as an executive officer, director, trustee or general partner. The term
"person" means and includes any natural person, corporation, partnership,
association, limited liability company or any other legal entity. An indirect
relationship shall include circumstances in which a person's spouse, children,
parents, siblings or mothers-, fathers-, sisters- or brothers-in-law is or has
been associated with a person.
"ARM" or "adjustable-rate mortgage" shall mean a mortgage loan (including
any mortgage loan underlying an MBS that features adjustments of the underlying
interest rate at predetermined times based on an agreed margin to an established
index, and includes loans bearing interest rates that remain fixed for two or
three years after the date of origination and are adjustable semi-annually
thereafter. An ARM is usually subject to periodic interest rate and/or payment
caps and a lifetime interest rate cap.
"Articles of Incorporation" shall mean the Articles of Incorporation of
NMC, as amended.
"Bankruptcy Code" shall mean Title 11 of the United States Code, as
amended.
"Beneficiary" shall mean the beneficiary of a Share Trust.
"BFRC" shall mean B First Residential Corporation.
"BFMC" shall mean B First Mortgage Company Limited Partnership.
"Board of Directors" shall mean the Board of Directors of NMC.
"Bylaws" shall mean the bylaws of NMC, as amended.
A-1
<PAGE>
"Cash Based Awards" shall mean, under the 1998 Plan, the awarding of
performance shares and awards that are not denominated nor payable in and do not
have a value derived from the value of or a price related to shares of Common
Stock and are payable only in cash
"CBCA" shall mean the Colorado Business Corporation Act.
"CCMC" shall mean CC Mortgage Company, L.P.
"CERCLA" shall mean the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended.
"Chotin Affiliates" shall mean Steven B. Chotin and TCG and any entity that
is wholly-owned or controlled, directly or indirectly, by Mr. Chotin and TCG.
"Closing" shall mean the completion of the Offering.
"Closing Date" shall mean the date of the Closing.
"CMOs" shall mean non-recourse collateralized mortgage obligations.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Commission" shall mean the Securities and Exchange Commission.
"Common Stock" shall mean the Common Stock, par value $0.01 per share, of
NMC.
"Company" shall mean National Mortgage Corporation, a Colorado corporation,
together with its subsidiaries.
"Conforming Loans" shall mean mortgage loans that comply with requirements
for inclusion in credit support programs sponsored by either Fannie Mae or
Freddie Mac.
"Conti" shall mean ContiTrade Services L.L.C., a subsidiary of
ContiFinancial Corporation.
"Corresponding SARs" shall mean SARs granted in relation to Option grants.
"CPR" shall mean the specified constant rate of prepayment of prepayment of
a specified pool of mortgage loans.
"Directors" shall mean the members of NMC's Board of Directors.
"Directors' Plan" shall mean the Directors' Stock Incentive Plan.
"Directors' Plan Administrator" shall mean the individual committee
appointed to administer the Directors' Plan.
"Disqualified Organization" shall mean the United States, any state or
political subdivision thereof, any foreign government, any international
organization, any agency or instrumentality of any of the foregoing, any other
tax-exempt organization (other than a farmer's cooperative described in section
521 of the Code) that is exempt from taxation under the unrelated business
taxable income provisions of the Code, or any rural electrical or telephone
cooperative.
"DOL" shall mean the Department of Labor.
A-2
<PAGE>
"DRP" shall mean the dividend reinvestment plan to be established by NMC.
"EPS" shall mean earnings per share.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Excess Inclusion" shall have the meaning specified in section 860E(c) of
the Code.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Exempt Organizations" shall mean tax-exempt entities, including, but not
limited to, charitable organizations, qualified employee pension and profit
sharing trusts and individual retirement accounts.
"FAIC II" shall mean Fund America Investors Corporation II.
"Fannie Mae," formerly known as the Federal National Mortgage Association,
is a federally chartered and privately owned corporation organized and existing
under the Federal National Mortgage Association Charter Act, or any successor
thereto.
"FASIT" shall mean financial asset securitization investment trust.
"FIRPTA" shall mean the Foreign Investment in Real Property Tax Act of
1980, as amended.
"Freddie Mac" shall mean the Federal Loan Home Mortgage Corporation, a
corporate instrumentality of the United States created and existing under Title
III of the Emergency Home Finance Act of 1970, as amended, or any successor
thereto.
"GAAP" shall mean generally accepted accounting principles applied on a
consistent basis.
"Gain-on-Sale Securitizations" shall mean securitizations accounted for
pursuant to gain-on-sale accounting methods
"Ginnie Mae" shall mean the Government National Mortgage Association.
"Greenwich" shall mean Greenwich Capital Markets, Inc.
"HELOCs" shall mean non-conforming home equity lines of credit secured by
second liens on residential properties.
"HELs" shall mean Home Equity Loans.
"Higher Credit Non-Conforming Loans" shall mean loans made by the Company
to borrowers within the Company's "A" and "A minus" credit grades, its two
highest credit grades.
"Home Equity Loans" shall mean loans to consolidate and refinance non-
mortgage debt and to finance home improvements, education and other consumer
needs, which loans are secured by first or subordinate liens on residential
properties.
"HUD" shall mean the Department of Housing and Urban Development.
"Independent Director" shall mean a director who, within two years of
becoming Director, has not (a) directly or indirectly been employed by NMC or
any of its Affiliates or (b) been an officer or director of NMC or any of its
Affiliates.
A-3
<PAGE>
"Initial Director" shall mean each Director who is a member of the Board as
of the Closing.
"Initial Grants" shall mean, under the 1998 Plan, the grant of Options
prior to the Offering to the executive officers and certain employees of NMC.
"Investment Company Act" shall mean the Investment Company Act of 1940, as
amended.
"IO" shall mean a class of MBS that is entitled to no (or only nominal)
distributions of principal.
"IRA" shall mean an individual retirement account.
"ISOs" shall mean incentive stock options under the 1998 Plan.
"LIBOR" shall mean the London Interbank Offered Rate for six-month U.S.
Dollar deposits, as published each Monday in The Wall Street Journal.
"LTV" or "loan-to-value ratio" is the percentage obtained by dividing the
amount of the loan by the lesser of the purchase price or the appraised value of
the mortgaged property at origination.
"Management Bonus Plan" shall mean a bonus plan under which certain key
management employees who are directly involved in the growth and success of NMC
are eligible to receive bonuses based upon achievement of specified targets and
goals for NMC and the individual employee.
"Management Shareholders Registration Rights Agreement" shall mean a
registration rights agreement between Steven B. Chotin and TCG Investment
Corporation granting the Management Shareholders certain registration rights
with respect to the Common Stock.
"Management Shareholders" shall mean Steven B. Chotin and TCG Investment
Corporation.
"MBS" shall mean mortgage-backed securities backed by one- to four-family
residential mortgage loans.
"Merchants" shall mean Merchants Mortgage & Trust Corporation LLC.
"Mortgage Assets" shall mean (i) one- to four-family residential mortgage
loans and (ii) MBS and other related mortgage assets.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"NMAC" shall mean National Mortgage Administration Corporation, a Colorado
corporation, to be formed in connection with the Offering.
"NMC" shall mean National Mortgage Corporation, a Colorado corporation.
"NMSC" shall mean National Mortgage Sales Corporation, a Colorado
corporation.
"Non-Conforming Loans" shall mean mortgage loans made to borrowers who are
unable (or, in some cases, unwilling) to obtain mortgage financing from
conventional mortgage loan sources, typically because their credit profiles do
not meet Fannie Mae or Freddie Mac credit underwriting standards, generally for
reasons of credit impairment, income qualification or credit history.
"Non-ERISA Plan" shall mean a plan that does not cover common law
employees.
"Non-REMIC Residual Interests" shall mean residual ownership interest in
mortgage loans that are subject to CMO debt.
A-4
<PAGE>
"Non-REMIC Transactions" shall mean one or more multiple-class offerings of
CMOs for which no REMIC election is made.
"Non-U.S. Stockholders" shall mean nonresident alien individuals, foreign
corporations, foreign partnerships, foreign trusts and estates and other foreign
stockholders.
"Offering" shall mean the offering of Units hereby.
"OID" shall mean original issue discount.
"Options" shall mean, under the 1998 Plan, ISOs or nonqualified stock
options.
"Ownership Limit" shall mean the restriction on ownership (or deemed
ownership by virtue of the attribution provisions of the Code) of (i) _____%
(or, with respect to the Chotin Affiliates) _____% of the number of outstanding
shares of Common Stock, or (ii) 9.9% of the number of outstanding shares of any
class or series of Preferred Stock other than the Series I Preferred Stock.
"Participants" shall mean the individuals who will participate in the 1998
Plan.
"Performance Based Awards" shall mean, under the 1998 Plan, certain awards
and certain stock awards that are subject to performance based restrictions on
transferability or vesting and that are intended to qualify as "performance-
based compensation" under Section 162(m) of the Code.
"Plan" shall mean certain pension, profit-sharing, employee benefit, or
retirement plans subject to Title I of ERISA or individual retirement accounts.
"Plan Asset Regulations" shall mean regulations of the DOL that define
"plan assets."
"Preferred Stock" shall mean the preferred stock of NMC.
"Prohibited Owner" shall mean the record holder of the Common Stock,
Warrants or Preferred Stock that are designated as Shares-in-Trust.
"Prohibited Transferee" shall mean the purported transferee to whom such
transfer of NMC's Common Stock or Preferred Stock would result in (i) share
ownership in excess of the Ownership Limit, (ii) the shares of Common Stock or
Preferred Stock, collectively, being owned by fewer than 100 persons, (iii)
result in NMC's being "closely held" within the meaning of Section 856(h) of the
Code, or (iv) cause shares of Common Stock or Preferred Stock to be owned by a
Disqualified Organization.
"Proposal" shall mean President Clinton's budget proposal for fiscal year
1999.
"Purchase Agreement" shall mean the agreement pursuant to which the
Underwriters will purchase and distribute the Common Stock offered hereby.
"Purchase Money/Refinancing Loans" shall mean loans made to finance
purchases and refinancings of residential real estate.
"Qualified REIT Assets" shall mean Mortgage Assets that are qualifying
assets for purposes of the 75% asset test.
"Recognition Period" shall mean the 10-year period beginning on the date on
which an asset was acquired by NMC and ending upon disposition of such asset.
"REIT" shall mean real estate investment trust, as defined in section 856
of the Code.
A-5
<PAGE>
"Related Party Tenant" shall mean a tenant in which the Company, or an
owner of 10% or more of the Company, directly or constructively owns 10% or more
of the ownership interests in such tenant.
"REMIC" shall mean real estate mortgage investment conduit, as defined in
section 860D of the Code.
"REMIC Residual Interest" shall mean a class of MBS that is designated as
the residual interest in one or more REMICs.
"Rent" shall mean rent received by the Company from tenants of real
property owned by NMC.
"Representatives" shall mean Stifel, Nicolaus & Company, Incorporated and
Piper Jaffray Inc. in their capacity as representatives of the other
Underwriters.
"Representative's Warrants" mean the warrants issued by the Company to
Stifel, Nicolaus & Company, Incorporated to purchase 201,000 (231,150 if the
Underwriters' over-allotment option is exercised) shares of Common Stock at an
exercise price equal to the initial public offering price of the Units.
"Residual Interests" shall mean residual and subordinated interests in
securitized mortgage loan pools.
"RESPA" shall mean the Federal Real Estate Settlement Procedures Act of
1974, as amended.
"Retained Interests" shall mean a residual interest in Non-Conforming Loans
retained by the Company in connection with a CMO issuance secured by such loans.
"RFC" shall mean Residential Funding Corporation.
"RICO" shall mean the Racketeer Influenced and Corrupt Organizations
statute, 18 U.S.C.A. (S) 1961, et seq., as amended.
"Rule 144" shall mean the rule promulgated under the Securities Act that
permits holders of restricted securities as well as Affiliates of an issuer of
the securities, pursuant to certain conditions and subject to certain
restrictions, to sell their securities publicly without registration under the
Securities Act.
"SARs" shall mean stock appreciation rights.
"Securities" means, collectively, the Units, the Common Stock, the Warrants
and the Warrant Shares.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Service" shall mean the Internal Revenue Service.
"Shares-in-Trust" shall mean Common Stock, Warrants or Preferred Stock the
purported transfer of which would result in a violation of certain restrictions
on transfer set forth in the Articles of Incorporation, including the Ownership
Limit.
"Share Trust" shall mean a trust created in the event of an impermissible
transfer of shares of Common Stock.
"Spread Risks" shall mean the risk of the cost of variable-rate liabilities
increasing at a faster rate than the earnings on assets during a period of
rising interest rates.
"TCG" shall mean The Chotin Group Corporation.
A-6
<PAGE>
"TCG Agreement" shall mean the Business Opportunity and Shared Employee
Agreement among Steven B. Chotin, TCG and NMC to be effective upon completion of
the Offering.
"Title V" shall mean Title V of the Depository Institutions Deregulation
and Monetary Control Act of 1980.
"Third Party Residuals" shall mean Residual Interests in securitized loans
originated by third-party lenders.
"Trading Day" shall mean any day other than a Saturday, a Sunday or a day
on which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
"Treasury Regulations" shall mean the income tax regulations promulgated
under the Code.
"UBTI" shall mean unrelated business taxable income.
"UCC" shall mean the Uniform Commercial Code.
"Underwriters" shall mean Stifel, Nicolaus & Company, Incorporated and
Piper Jaffray Inc., as well as others in the future and each of the Underwriters
for whom they are acting as Representatives.
"Unit" means a unit offered by the Company in the Offering, consisting of
one share of Common Stock and one Warrant.
"Warrant" means a Stock Purchase Warrant entitling the holder thereof to
purchase one share of Common Stock during the period beginning six months after
the initial closing of the Offering and ending on the third anniversary of the
date such Warrant first becomes exercisable, at an exercise price equal to the
initial public offering price for the Units. The Warrants include the Common
Stock Purchase Warrants included in the Units and the Representative's Warrants.
"Warrant Certificate" means a certificate evidencing a Warrant.
"Warrant Share" means a share of Common Stock for which a Warrant is
exercisable.
A-7
<PAGE>
INDEX TO FINANCIAL STATEMENTS
[Copy to Come]
F-1
<PAGE>
The accompanying consolidated financial statements give effect to the completion
of the ______ for 1 split of the Company's outstanding common stock which will
take place prior to the effective date of the offering. The following report is
in the form which will be furnished by Deloitte & Touche LLP upon completion of
the stock split of the Company's outstanding common stock described in Note 13
to the consolidated financial statements and assuming that from March 6, 1998 to
the date of such completion no other material events have occurred that would
affect the accompanying consolidated financial statements or required disclosure
therein.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholder of
National Mortgage Corporation
Englewood, Colorado
We have audited the accompanying consolidated balance sheets of National
Mortgage Corporation (Company) as of December 31, 1996 and 1997, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company at
December 31, 1996 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
March 6, 1998 (_____, 1998 as to the effects of the stock split described in
Note 13)
Denver, Colorado
F-1
<PAGE>
NATIONAL MORTGAGE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, March 31,
------------------------------- ----------------
1996 1997 1998
ASSETS (unaudited)
<S> <C> <C> <C>
Cash and cash equivalents $ 613 $ 1,843 $ 871
Certificate of deposits 5,000 - 4,147
Retained securitization interests - trading, at fair value
(unamortized cost of $18,930 and $18,832 (unaudited),
respectively) - 18,826 19,765
Mortgage loans, net 64,773 120,413 157,941
Mortgage servicing rights, net of accumulated amortization
of $3,154, $3,525 and $4,098 (unaudited), respectively 2,016 3,413 3,573
Other assets 4,855 6,399 7,904
-------- --------- ---------
TOTAL $ 77,257 $ 150,894 $ 194,201
======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $ 2,129 $ 3,576 $ 4,179
Warehouse facilities 64,554 119,288 156,068
Residual financing - 11,127 11,029
Working capital facilities 1,020 3,900 3,900
Convertible subordinated note payable - 6,660 9,810
Notes payable 5,000 - 4,147
-------- --------- ---------
72,703 144,551 189,133
-------- --------- ---------
Commitments and contingencies (Note 6)
Series I Preferred stock, $1.00 par value, 12,000 shares
authorized, 2,100 shares issued and outstanding,
subject to holder redemption right at $1,000 per share -
December 31, 1997 and March 31, 1998 (unaudited) - 2,100 2,100
Stockholders' equity:
Series A Preferred stock, $1.00 par value, 12,000 shares
authorized, 10,750 shares issued and outstanding 10,750 - -
Common stock, $.01 par value; 50,000 shares authorized,
900 shares issued and outstanding - 1996 and 1,000 shares
issued and outstanding - December 31, 1997 and
March 31, 1998 (unaudited) - - -
Additional paid-in capital 109 9,296 9,296
Accumulated deficit (6,305) (5,053) (6,328)
-------- --------- ---------
Stockholders' equity 4,554 4,243 2,968
-------- --------- ---------
TOTAL $ 77,257 $ 150,894 $ 194,201
======== ========= =========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
NATIONAL MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------- ---------------------------
1995 1996 1997 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET INTEREST INCOME:
Interest income $ 2,160 $ 3,395 $ 9,907 $ 1,578 $ 3,358
Interest expense 1,440 2,530 7,293 1,245 2,682
-------- --------- -------- -------- ---------
Net interest income 720 865 2,614 333 676
OTHER REVENUES, GAINS, (LOSSES):
Gain on sale of mortgage loans:
Whole loan sales 7,130 4,155 3,268 1,421 1,645
Securitizations - - 9,203 - -
Unrealized gain (loss) on trading securities - - (1,035) - 322
Loan servicing fees 2,158 2,353 2,966 596 1,081
-------- --------- -------- -------- ---------
Total revenues, gains, (losses) 10,008 7,373 17,016 2,350 3,724
EXPENSES:
Operating expenses 6,908 7,472 13,886 2,048 4,098
Management fees 1,890 - - - -
Provision for credit losses 142 552 730 173 245
Amortization of mortgage servicing rights 758 643 616 136 329
Impairment of mortgage servicing rights - 277 - - -
Other interest expense 26 109 438 25 295
-------- --------- -------- -------- ---------
Total expenses 9,724 9,053 15,670 2,382 4,967
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES 284 (1,680) 1,346 (32) (1,243)
PROVISION FOR INCOME TAXES 438 - - - -
-------- --------- -------- -------- ---------
NET INCOME (LOSS) (154) (1,680) 1,346 (32) (1,243)
LESS PREFERRED STOCK DIVIDENDS (586) - (94) - (32)
-------- --------- -------- -------- ---------
INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $ (740) $ (1,680) $ 1,252 $ (32) $ (1,275)
======== ========= ======== ======== =========
EARNINGS (LOSS) PER COMMON SHARE:
Basic $ $ $ $ $
======== ========= ======== ======== =========
Diluted $ $ $ $ $
======== ========= ======== ======== =========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
NATIONAL MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREFERRED COMMON ADDITIONAL
STOCK STOCK PAID-IN ACCUMULATED
SERIES A SHARES AMOUNT CAPITAL DEFICIT NET
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1995 $ 10,750 1,000 $ - $ 209 $ (3,885) $ 7,074
Net loss - - - - (154) (154)
Series A preferred
stock dividends - - - - (586) (586)
-------- ------ ------- -------- -------- -------
BALANCE,
DECEMBER 31, 1995 10,750 1,000 - 209 (4,625) 6,334
Net loss - - - - (1,680) (1,680)
Common stock
repurchase - (100) - (100) - (100)
-------- ------ ------- -------- -------- -------
BALANCE,
DECEMBER 31, 1996 10,750 900 - 109 (6,305) 4,554
Preferred stock
exchange (10,750) 100 - 8,650 - (2,100)
Series I preferred
stock dividends - - - - (94) (94)
Issuance of warrants - - - 537 - 537
Net income - - - - 1,346 1,346
-------- ------ ------- -------- -------- -------
BALANCE,
DECEMBER 31, 1997 - 1,000 - 9,296 (5,053) 4,243
Series I preferred
stock dividends
(unaudited) - - - - (32) (32)
Net loss
(unaudited) - - - - (1,243) (1,243)
-------- ------ ------- -------- -------- -------
BALANCE,
MARCH 31, 1998
(unaudited) $ - 1,000 $ - $ 9,296 $ (6,328) $ 2,968
======== ====== ======= ======== ======== =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
NATIONAL MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------ ------------------------
1995 1996 1997 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (154) $ (1,680) $ 1,346 $ (32) $ (1,243)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Amortization of mortgage servicing rights 758 643 616 136 329
Impairment of mortgage servicing rights - 277 - - -
Provision for credit losses 142 552 730 173 245
Gain on sale of mortgage loans - whole
loan sales (7,130) (4,155) (3,268) (1,421) (1,645)
Gain on sale of mortgage loans - securitizations - - (9,203) - -
Unrealized (gain) loss on trading securities - - 1,035 - (322)
Deferred tax provision 435 - - - -
Acquisition of mortgage loans (126,447) (207,544) (425,927) (61,816) (98,138)
Proceeds from sale of mortgage loans
and other real estate owned 195,022 150,642 360,378 34,195 60,872
Changes in operating assets and liabilities:
Other assets 322 (1,493) (1,326) (43) (1,505)
Accounts payable and accrued liabilities (441) 946 1,447 14 603
--------- --------- --------- -------- --------
Net cash provided by (used in)
operating activities 62,507 (61,812) (74,172) (28,794) (40,804)
--------- --------- --------- -------- --------
INVESTING ACTIVITIES:
Net change in certificate of deposits 3,994 (3,000) 5,000 2,000 (4,147)
Net cash paid for acquisition of business (227) - - - -
--------- --------- --------- -------- --------
Net cash provided by (used in)
investing activities 3,767 (3,000) 5,000 2,000 (4,147)
--------- --------- --------- -------- --------
FINANCING ACTIVITIES:
Proceeds from line of credit - related parties 8,934 - - - -
Payments on line of credit - related parties (12,687) - - - -
Proceeds from credit facilities 216,033 283,532 505,696 70,630 117,207
Payments on credit facilities (276,702) (219,987) (435,294) (43,828) (73,228)
Preferred stock dividends (1,028) - - - -
Repurchase of common stock - (100) - (100) -
--------- --------- --------- -------- --------
Net cash provided by (used in)
financing activities (65,450) 63,445 70,402 26,702 43,979
--------- --------- --------- -------- --------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 824 (1,367) 1,230 (92) (972)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 1,156 1,980 613 613 1,843
--------- --------- --------- -------- --------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 1,980 $ 613 $ 1,843 $ 521 $ 871
========= ========= ========= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
NATIONAL MORTGAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED
DECEMBER 31, 1997 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 (UNAUDITED) AND MARCH 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
THE financial information as of March 31, 1998 and for the three months ended
March 31, 1997 and 1998 is unaudited. This financial information reflects all
adjustments (including all normal recurring accruals), which, in the opinion of
management, are necessary to present fairly the financial position, results of
operations and cash flows of the Company (as hereinafter defined) as of March
31, 1998 and for the three months ended March 31, 1997 and 1998. The
consolidated financial position at March 31, 1998 and consolidated results of
operations for the three months then ended are not necessarily indicative of the
consolidated financial position that may be expected at December 31, 1998 or
consolidated results of operations that may be expected for the year ending
December 31, 1998.
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY - National Mortgage Corporation and subsidiaries (the Company)
originates, purchases and services primarily first-lien residential sub-prime
mortgage loans. The Company originates and purchases loans in approximately
39 states plus the District of Columbia; Colorado and Georgia accounted for
approximately 30% and 14% of such activity, respectively for the year ended
December 31, 1997 and 27% and 12%, respectively for the three months ended
March 31, 1998.
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of National Mortgage Corporation (NMC), its wholly owned
subsidiaries, National Mortgage Finance Corporation (NMFC), B First
Residential Corporation (BFRC) and B First Mortgage Company Limited
Partnership (BFMC) and its taxable affiliate National Mortgage Sales
Corporation (NMSC). All intercompany balances and transactions have been
eliminated.
The accounting and reporting practices of the Company conform with generally
accepted accounting principles and practices within the mortgage banking
industry. In preparing the financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the consolidated balance sheet and revenues and
expenses during the reporting period. If events occur in a future period
which affect the underlying assumptions and estimates, actual results could
differ from those estimates. A summary of the more significant accounting and
reporting practices follows.
F-6
<PAGE>
STATEMENT OF CASH FLOWS - Cash and cash equivalents consists of highly liquid
investments and securities with maturities of three months or less at time of
purchase and amounts held in demand deposit accounts. Supplemental cash flow
information is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1998
(UNAUDITED)
Interest paid $ 1,605 $ 2,413 $ 7,363 $ 1,098 $ 2,849
Income taxes paid 154 2 - - -
Income tax refund received 42 150 - - -
Issuance of warrants (non-cash) - - 537 - -
Preferred stock exchange (non-cash) - - 10,750 - -
</TABLE>
RETAINED SECURITIZATION INTERESTS - Securitization is the process of pooling
mortgage loans and issuing debt or equity securities which are collateralized by
the pooled mortgage loans. During 1997, the Company completed two
securitizations of its mortgage loans that were structured as sale transactions.
The Company retained the equity interest in the securitization or the retained
securitization interest. Retained securitization interests are recorded as an
asset as a result of the securitization of mortgage loans. Retained
securitization interests represent the Company's right to receive certain cash
flows from the mortgage loans that are not required to pay the principal and
interest requirements of senior securities issued in the securitization. In
accounting for securitizations that qualify as a sale, the excess of the cash
received and assets retained by the Company, including retained securitization
interests and capitalized servicing rights, over the carrying value of the loans
sold, less transaction costs, is recorded as a gain on the securitization of
loans.
The Company classifies retained securitization interests as "held-for-trading"
securities. Accordingly, the retained securitization interests are recorded at
estimated fair value and the Company includes in earnings any unrealized gains
or losses attributable to the change in the fair value. The Company is not aware
of an active market for the purchase or sale of residual interests; accordingly,
the Company estimates fair value of the retained securitization interests by
calculating the present value of the estimated expected future cash flows, using
estimates for mortgage loan prepayment and credit loss rates, and the applicable
discount rate. Such estimates are subjective and/or are based on potentially
volatile market conditions. Accordingly, the Company's estimates of fair value
are subject to change, and the change could be material to the financial
statements. The valuation includes consideration of characteristics of the loans
including loan type and size, interest rate, origination date, term, geographic
location and market prices received from whole loan sales. The Company also uses
other available information such as externally prepared reports on prepayment
rates, collateral value, economic forecasts and historical default and
prepayment rates of the portfolio under review.
At origination in 1997, the Company utilized prepayment assumptions ranging from
25% to 30%, estimated loss factor assumptions of 0.75% per annum and a discount
rate of 13% (see Note 12).
MORTGAGE LOANS - Mortgage loans are carried at the lower of aggregate cost or
market value, net of amortization of premium and discounts and less a reserve
for loan losses. Loan origination fees and related direct loan origination costs
are deferred and recognized over the period the related loan is held by the
Company. The allowance for estimated credit losses represents the Company's
estimate of identified and unidentified losses in the mortgage loan portfolios.
Management's periodic evaluation of the adequacy of the allowance is based on
the Company's past loss experience, known and inherent
F-7
<PAGE>
risks in the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral and
current economic conditions. These estimates, while based upon historical
loss experience and other relevant data, are ultimately subjective and
inherently uncertain. Adjustments to the allowance are recorded as a
provision for credit losses and established through a charge to operations.
OTHER REAL ESTATE OWNED - Other real estate owned (which was acquired by
foreclosure or by deed in lieu of foreclosure) is carried at fair value less
estimated costs to sell. Costs relating to the improvement of the property
are capitalized; holding costs are charged to expense. Other real estate
owned of $886,000, $1,104,000 and $1,041,000, at December 31, 1996, 1997 and
March 31, 1998, respectively, are included in other assets.
MORTGAGE SERVICING RIGHTS - The Company records an asset for mortgage
servicing rights acquired through loan origination activities if the
servicing rights are contractually separated from the related mortgage loans
by sale or securitization. The allocated cost of servicing rights is
initially recorded based on relative fair value of the servicing rights to
the total fair value of mortgage loans sold or securitized. The servicing
rights are amortized in proportion to, and over the period of, estimated net
servicing income. Mortgage servicing rights are periodically evaluated for
possible impairment. Impairment evaluations are based on stratifying the
mortgage servicing rights portfolio by coupon rates and conforming vs. non-
conforming classifications.
ESCROW FUNDS - Mortgage escrow funds related to loan servicing are held in
separate bank accounts that cannot be used as general operating funds. The
asset and related liability are not included in the accompanying consolidated
balance sheets. At December 31, 1996 and 1997 and March 31, 1998 the Company
held $7,475,000, $15,891,000 and $17,547,000 respectively, in mortgage escrow
funds.
DEBT ISSUANCE COSTS - Debt issuance costs are deferred and amortized over the
term of the related borrowings. Unamortized debt issuance costs of $701,000
and $647,000 at December 31, 1997 and March 31, 1998 are included in other
assets. There were no debt issuance costs at December 31, 1996.
INCOME TAXES - Through December 31, 1997, the Company's tax provision
included the effects of current and deferred income taxes, using currently
enacted tax rates. Deferred income taxes result from temporary differences
between financial reporting and income tax accounting treatment of certain
transactions. Deferred tax assets are reduced by valuation allowances, to the
extent their recovery is not more likely than not. Beginning January 1, 1998
the Company intends to operate and qualify as a Real Estate Investment Trust
("REIT") under the requirements of the Internal Revenue Code. As a result,
the Company, and its qualified REIT subsidiaries will generally not be
subject to federal income taxes at the corporate level on taxable income
distributed to shareholders. Requirements for qualification as a REIT include
various restrictions on common stock ownership and the nature of assets and
sources of income. In addition, a REIT must distribute at least 95% of its
annual taxable income to its stockholders. If the Company fails to qualify as
a REIT, it will be taxed as a Subchapter C corporation and distributions to
shareholders will not be deductible for income tax purposes. In addition, if
the Company fails to qualify as a REIT in any tax year, it will not be
permitted to requalify for the succeeding four years. The Company's non-REIT
affiliate will file separate tax returns.
RECLASSIFICATION OF PRIOR YEAR AMOUNTS - Certain reclassifications have been
made to the 1995 and 1996 financial statements to conform to the 1997
presentation.
EARNINGS (LOSS) PER SHARE - Basic earnings (loss) per share is based on net
income or loss divided by the weighted average number of common shares
outstanding during the period. The weighted average
F-8
<PAGE>
number of shares outstanding used to compute diluted earnings per share
includes the number of additional common shares that would be outstanding if
the potential dilutive common shares and common share equivalents had been
issued at the beginning of the year.
STOCK BASED COMPENSATION - Common stock and warrants or options to acquire
common stock issued for services to non-employees are accounted for at
estimated fair value, as determined by the board of directors, in the absence
of a ready market for the Company's common stock. Stock-based compensation
awards to employees will be accounted for based on their intrinsic value as
of the grant date. At December 31, 1996, 1997 and March 31, 1998, there were
no outstanding stock-based compensation awards to employees.
RECENT ACCOUNTING PRONOUNCEMENTS - On January 1, 1997, the Company adopted
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments
of liabilities. The adoption of this statement did not have an impact on the
Company's accounting for mortgage servicing rights. In 1997, the Company's
two securitizations were accounted for under SFAS 125. There were no
securitizations in 1996.
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for the reporting and
display of comprehensive income and its components (revenues, expenses,
gains, losses and Series I preferred stock dividends) in a full set of
general-purpose financial statements. The Company's comprehensive income
(loss) for the years ended December 31, 1995, 1996 and 1997 and for the three
months ended March 31, 1997 and 1998 was $(154,000), $(1,680,000),
$1,252,000, $(32,000) and $(1,275,000), respectively.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," was issued. SFAS No. 131 establishes standards for the
way that public companies report selected information about operating
segments in annual financial statements and requires that those companies
report selected information about segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers.
Generally, financial information is required to be reported on the basis that
it is used internally for evaluating segment performance and deciding how to
allocate resources to segments. SFAS No. 131 requires that a public company
report a measure of segment profit or loss, certain specific revenue and
expense items, and segment assets. SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997. The Company has not
determined the effects, if any, that SFAS No. 131 will have on the
disclosures in its consolidated financial statements.
2. ORIGINATOR AND SERVICE APPROVAL
The Company has been approved by the Federal National Mortgage Association
(FNMA), the Colorado Housing and Finance Authority (CHFA), the Government
National Mortgage Association (GNMA) and the Federal Home Loan Mortgage
Corporation (FHLMC) (collectively, Agencies) as an authorized loan originator
and service.
The Company is also an approved HUD/VA lender. The Company was servicing 765,
559 and 508 FHA/VA insured/guaranteed mortgage loans at December 31, 1996,
1997 and March 31, 1998, respectively, with an unpaid principal balance of
$28,846,000, $22,727,000 and $21,878,000, respectively.
F-9
<PAGE>
As is required by the Agencies, the Company has a blanket Fidelity Bond
and an Errors and Omissions policy. This insurance is placed with Bankers
Insurance Service Corporation and provides coverage of the required
amounts.
3. MORTGAGE LOANS
Mortgage loans consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------- ----------------------
1996 1997 1998
(UNAUDITED)
<S> <C> <C> <C>
Adjustable rate loans $ 48,376 $ 108,592 $ 141,138
Fixed rate loans 15,942 9,282 13,296
--------- ---------
Subtotal 64,318 117,874 154,434
Premiums/discount on loans, net 906 3,681 4,871
Reserve for loan losses (451) (1,142) (1,364)
--------- ---------- ---------
Total $ 64,773 $ 120,413 157,941
========= ========== =========
</TABLE>
At December 31, 1997, the Company considers all loans as held for sale
except for loans of approximately $60 million. In February 1998, the
Company completed a whole loan sale of approximately $50 million of
adjustable rate loans.
Adjustable rate loans are 30-year loans and include six-month adjustable,
two-year fixed then adjustable and three-year fixed then adjustable
interest rate terms with interest based upon a spread over LIBOR. Fixed
rate loans are 30-year loans with a fixed interest rate. Generally, all
loans are first lien residential mortgages and are to homeowners that do
not have prime credit ratings. These loans are originated or acquired using
underwriting standards intended to provide mortgage loans for
"nonconforming credit." A "nonconforming credit" means a mortgage loan
which is ineligible for purchase by FNMA or FHLMC due to credit
characteristics that do not meet the FNMA or FHLMC underwriting guidelines,
including borrowers who may have limited or impaired credit histories,
limited documentation of income and/or higher debt service-to-income
ratios. Pursuant to the Company's underwriting guidelines, the loans are
categorized by risk grades based on the potential likelihood the borrower
will satisfy the repayment obligations, and as such, a maximum loan to
value ratio is established; the grade also impacts the interest rate paid
by the borrower. Accordingly, mortgage loans originated or acquired under
these underwriting standards are subject to higher credit risk and are
likely to experience rates of delinquency, foreclosure and loss that are
higher than mortgages originated using FNMA or FHLMC underwriting
guidelines.
F-10
<PAGE>
Activity in the reserve for credit losses is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1998
(UNAUDITED)
Reserve for credit losses,
beginning of the period $ - $ 142 $ 451 $ 451 $ 1,142
Current year provisions 142 552 730 173 245
Charge offs and other - (243) (39) (72) (23)
----- ------ -------- ------ --------
Reserve for credit losses,
end of the period $ 142 $ 451 $ 1,142 $ 552 $ 1,364
===== ====== ======== ====== ========
</TABLE>
Mortgage loans are subject to market risk, primarily related to
fluctuations in the general level of interest and prepayment rates. The
fair value of fixed rate mortgages generally changes inversely with changes
in interest rates. The fair value of adjustable rate mortgages is less
sensitive to changes in interest rates, however, they are still exposed to
market risk related to changes in secondary market investors' expectations
for the "spread" over LIBOR that is included in the mortgages' interest
payment terms. The value of both fixed and adjustable rate mortgages is
also dependent upon expectations of future prepayment rates of the
mortgages which may be impacted by, among other things, interest rates and
housing values.
The mortgage loans held at December 31, 1996, 1997 and March 31, 1998
contained a significant percentage of loans secured by mortgaged properties
in Colorado, Georgia, California, Connecticut and Massachusetts. Because of
the geographic concentration of the mortgage loans, the Company's exposure
to losses on the loans may be higher than would be the case if the mortgage
loans were more geographically diversified.
4. MORTGAGE SERVICING RIGHTS
Mortgage servicing rights activity is summarized below (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1997
(UNAUDITED)
Balance, beginning of period $ 1,543 $ 2,421 $ 2,016 $ 2,016 $ 3,413
Additions from the sale and
securitization of loans 1,636 515 2,013 4 489
Amortization (758) (643) (616) (136) (329)
Impairments - (277) - - -
---------- -------- -------- -------- -----------
Balance, end of period $ 2,421 $ 2,016 $ 3,413 $ 1,884 $ 3,573
========== ======== ======== ======== ===========
</TABLE>
Certain of the mortgage servicing contracts require that the Company comply
with various financial and operating covenants. The Company was in
compliance with all of these covenants at December 31, 1997 and March 31,
1998, except for a net worth requirement of $6,700,000 on an agreement for
the servicing of a $119 million pool of securitized mortgage loans. The
bond insurer due to this non-
F-11
<PAGE>
compliance could remove the Company as servicer of the pool. The Company has
discussed this situation with the bond insurer, which has elected not to
exercise its removal remedy at this time, although it has reserved its right
to exercise all of its remedies in the future.
5. DEBT
On June 30, 1997, the Company entered into a series of agreements with two
financial institutions (Strategic Alliance). The agreements include a
warehouse facility to finance the origination and acquisition of mortgage
loans, a long-term financing facility to finance certain of the Company's
retained securitization interests and a portion of the Company's working
capital requirements, and a long-term subordinated convertible note payable.
Pursuant to entering into these agreements, the Company issued warrants to
the lenders to purchase 81 shares of common stock of the Company through June
2002 at a de minimus exercise price. The warrants were recorded at estimated
fair value of $537,000, at issuance with a corresponding charge to debt
issuance costs which are being amortized over the term of the related debt.
The Company has a $160,000,000 warehouse facility, the balance of which was
$110,200,000 and $144,786,000 at December 31, 1997 and March 31, 1998,
respectively. The Company can borrow at a premium over the outstanding
principal balance of the mortgage loans that collateralize the facility. The
facility is generally used by the Company to finance the acquisition and
origination of adjustable rate loans. Interest is payable monthly and is
based upon a spread over LIBOR, ranging from 1.75% to 3.00%, dependent upon
the status of the financed loan. The warehouse facility matures on June 30,
1998. The carrying value of the loans that secure the warehouse facility was
$110,200,000 and $144,786,000 at December 31, 1997 and March 31, 1998,
respectively.
The Company has a $25,000,000 long-term, retained securitization interest and
working capital facility, the balance of which was $9,072,000 ($3,000,000
working capital facility and $6,072,000 residual financing) at December 31,
1997 and March 31, 1998. The Company can borrow funds collateralized by a
retained securitization interests. The borrowings at December 31, 1997 and
March 31, 1998 were collateralized by retained securitization interests with
a net carrying value of $10,923,000 and $11,570,000, respectively. The
facility includes a $3,000,000 working capital sub-limit secured by the net
assets of the Company. Interest is payable monthly and is based upon a spread
over LIBOR ranging from 3.25% to 4.00%. Cash received from the retained
securitization interest must be used to repay principal on the facility. One
third of the facility is required to be repaid in the event of a public
offering of the common stock of the Company. The facility matures in June
2002.
The Company also has a $10,000,000 convertible, subordinated note payable
to one of its lenders. The outstanding balance at December 31, 1997 and
March 31, 1998 was $6,660,000 and $9,810,000, respectively. Interest is
payable monthly at 10% and the note matures in June 2002. The note payable is
convertible into a percentage of the Company's outstanding common stock as
determined by a formula which is not to exceed 11.5% of the current
outstanding common stock of the Company. At December 31, 1997 and March 31,
1998, the percentages as calculated by this formula, are approximately 10.3%
and 11.5%, respectively. The subordinated note payable is secured by all
assets of the Company which are not pledged to other debt facilities.
On June 24, 1997, the Company entered into a term loan and security agreement
with another lender. The outstanding balance of the agreement for residual
financing was $5,055,000 and $4,957,000 at December 31, 1997 and March 31,
1998, respectively. The loan is secured by a retained securitization interest
with a net carrying value of $7,903,000 and $8,196,000 at December 31, 1997
and March 31,
F-12
<PAGE>
1998, respectively. Interest is payable monthly and is equal to LIBOR plus
3.25%. Cash from the retained securitization interest is used to repay the
loan. The loan matures in June 2002.
The Company has an additional warehouse facility of $21,100,000 which is
generally used to finance the acquisition and origination of fixed rate
mortgage loans. The warehouse facility includes a sublimit available for
working capital borrowings. The outstanding balances of the warehouse
facility at December 31, 1996, 1997 and March 31, 1998 were $15,781,000,
$9,088,000 and $11,282,000, respectively, and the outstanding balances of the
working capital sublimit to the facility were $1,020,000, $900,000 and
$900,000 at December 31, 1996, 1997 and March 31, 1998, respectively.
Interest is payable monthly and is based upon a spread over LIBOR, ranging
from 2.00% and 2.25%. Under the agreement, the Company has pledged as
collateral, certain loans with a net carrying value of $9,329,000 and
$11,462,000 at December 31, 1997 and March 31, 1998, respectively. The
warehouse facility expires on June 30, 1998.
The Company has an $8,000,000 secured line of credit with a bank. This line
of credit is used to finance certificates of deposits with maturities not to
exceed 90 days. Borrowings under this line of credit which are classified as
notes payable, at December 31, 1996, 1997 and March 31, 1998 were $5,000,000,
$0 and $4,147,000, respectively. Borrowings under the line of credit are
collateralized by the certificates of deposits purchased with the proceeds.
The interest under the line of credit is 2% and requires the Company to
maintain compensating escrow custodial balances. The line of credit matures
on May 31, 1998.
Of the Company's outstanding borrowings at December 31, 1997, $120,188,000 is
due in 1998 and $20,787,000 is due in 2002.
During 1995, 1996 and the first half of 1997, the Company utilized a
$78,900,000 line of credit from a warehouse lender to finance the origination
and acquisition of mortgage loans. The line of credit bore interest at a rate
based upon a spread over LIBOR, ranging from .65% to 2.25%. The lender
participated in an interest margin and gain or loss on the disposition of any
six-month adjustable rate first lien mortgages financed pursuant to the
agreement. Borrowings under the line of credit at December 31, 1996 were
$48,773,000 and were collateralized by the mortgage loans financed under the
agreement.
The Company's debt agreements require that the Company comply with various
financial covenants. The Company was in compliance with all covenants as of
December 31, 1996, except for the minimum servicing collateral. Such non-
compliance was cured within the five day grace period. At December 31, 1997,
the Company was in compliance with all financial covenants. In 1998, the
Company, effective retroactive to December 31, 1997, amended the agreements
with its lenders. The revised agreements modified the financial covenants,
with the most restrictive covenant requiring the Company to have
stockholders' equity, including Preferred Stock, of $10 million at September
30, 1998, and thereafter. At March 31, 1998, the Company was in compliance
with all financial covenants.
F-13
<PAGE>
6. COMMITMENTS AND CONTINGENCIES
The Company leases office space and computer hardware and software. The
future minimum lease payments under operating leases are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------- ------------
1997 1998
(UNAUDITED)
<S> <C> <C>
First year $ 956 $ 1,187
Second year 760 883
Third year 602 745
Fourth year 555 673
Fifth year 393 435
------- -------
$ 3,266 $ 3,923
======= =======
</TABLE>
Rent expense incurred for operating leases during the years ended December
31, 1995, 1996 and 1997 and the three months ended March 31, 1997 and 1998
were $283,000, $378,000, $541,000, $89,000 and $218,000, respectively.
In connection with the Strategic Alliance, the Company has agreed to offer
to sell to an affiliate of the lender, at least $100 million of mortgage
loans originated or acquired by the Company, on or before September 30,
1998. The penalty to the Company if it fails to offer such loans is $1
million.
Loans sold to investors by the Company generally meet the underwriting
guidelines of the Company at the time of acquisition by the Company. In the
event of default of the borrower and subsequent discovery that underwriting
standards were not met, the investor generally may resell a loan to the
Company.
Additionally, the Company is required to share with a certain investor any
losses incurred upon the disposal of properties which related to
collateralized loans that undergo foreclosure proceedings. As of December
31, 1996 and 1997 and March 31, 1998, the Company had established an
allowance totaling $230,000, $690,000 and $690,000, respectively, for such
loss contingencies.
In the normal course of business, the Company was committed to the funding
of approximately $8,300,000 and $10,500,000 of mortgage loans as of December
31, 1997 and March 31, 1998, respectively. This commitment exposes the
Company to the same market and credit risks as discussed in Note 3.
The Company has entered into contracts to provide mortgage loan servicing to
various investors. At December 31, 1995, 1996, 1997 and March 31, 1998,
respectively, the Company had servicing contracts with investors to service
7,302, 7,406, 8,173 and 7,897 loans, respectively, with an outstanding
principal balance of approximately $491 million, $525 million, $713 million
and $703 million, respectively. In providing such services, the Company is
committed to collecting and remitting principal, interest and fees to the
investors. Certain of these remittances are guaranteed whether or not
collected from the mortgagor. For the years ended December 31, 1995, 1996
and 1997, and for the three months ended March 31, 1998, such guaranteed
amounts included interest expense from curtailments in the amounts of
$206,000, $153,000, $213,000 and $139,000, respectively. The Company could
also incur losses on conforming mortgage loans serviced for a certain
investor due to the recourse
F-14
<PAGE>
provisions in the investor agreement. At December 31, 1997 and March 31,
1998, approximately $35 million and $33 million, respectively, of the
mortgage loans being serviced for investors had recourse to the Company.
7. RELATED PARTY TRANSACTIONS
The Company has an agreement with a company under common control, whereby
such company has agreed to make its shelf registration statement available to
the Company for the registration of mortgage-backed securities to be issued
in connection with securitizations of the Company's mortgage loans. The
Company paid $75,000 under this agreement in 1997 in connection with one of
their securitization transactions.
The Company has entered into various mortgage loan servicing agreements with
related parties whereby the Company services certain mortgage portfolios for
a stated fee which approximates market. As of December 31, 1995, 1996, 1997
and March 31, 1998, 1,249, 1,074, 928 and 874 loans with aggregate
outstanding principal balances of approximately $58 million, $48 million, $41
million and $38 million, respectively, were being serviced under such
contracts. Servicing fees related to these arrangements totaled $102,000,
$137,000, $76,000 and $20,000 for the years ended December 31, 1995, 1996 and
1997, and for the three months ended March 31, 1998, respectively.
During the years ended December 31, 1995, 1996, 1997 and the three months
ended March 31, 1998, the Company paid $299,000, $79,000, $25,000 and $8,000,
respectively, to an affiliate of a former officer of the Company for
consulting services. Additionally, the Company paid $232,000 to an affiliate
of the Company's sole shareholder for management services provided during the
year ended December 31, 1997.
Prior to the acquisition of BFRC, an administrative services agreement and
facilities use and office administration agreement existed between BFRC and
BFMC under which BFRC provided BFMC with certain administrative functions,
office space, accounting and other services. BFMC incurred fees of $1,890,000
in 1995 under these agreements. The facilities use and office administration
agreement was terminated in July 1995. The administrative services agreement
was terminated with the consummation of the BFRC acquisition on December 29,
1995.
During 1992, the Company sold a portion of the future cash flow associated
with certain servicing rights to an affiliate. This sale resulted in a
$355,000 gain to the Company, which was deferred. The Company recognized
$71,000 per year of this deferred revenue in 1995 and 1996 and $24,000 in
1997.
The Company's employees participate in a 401(k) Savings Plan sponsored by an
affiliated company under common control. The Company's contribution expense
was $18,000, $210,000, $161,000 and $63,000 for the years ended December 31,
1995, 1996 and 1997, and for the three months ended March 31, 1998,
respectively.
8. STOCKHOLDERS' EQUITY
The Company's Series A Preferred Stock was non-voting and was entitled to
cumulative cash dividends that were preferential to dividends on the
Company's common stock. Dividends accrued on the Series A Preferred Stock at
a rate equal to the six month LIBOR plus 4%, adjusted semi-annually.
Accumulated dividends were payable semi-annually upon declaration. The Series
A Preferred Stock had a liquidation preference of $1,000 per share plus
accrued dividends. The Board of Directors did not
F-15
<PAGE>
declare the semi-annual Series A Preferred Stock dividend for the years
ended December 31, 1995, 1996 and 1997.
During 1996, the Company's Board of Directors approved the repurchase of
100 shares of common stock at a cost of $100,000 from the former Chief
Executive Officer. Pursuant to the Colorado Business Corporation Act,
revised July 1994, which eliminated the concept of treasury stock, the 100
shares were canceled. The common stock was reduced by the par value, $1,
with the remainder charged against the additional paid-in capital.
The income (loss) and weighted average shares outstanding used in the
calculation of basic and diluted Earnings Per Share are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, March 31,
------------------------------------- -----------------------
1995 1996 1997 1997 1998
(unaudited)
<S> <C> <C> <C> <C> <C>
Income (loss) available
to common stockholders
(basic and diluted) $ (740) $ (1,680) $ 1,252 $ (32) $ (1,275)
====== ======== ======= ======= ========
Weighted average shares
outstanding - basic earnings
per share
Effect of dilutive securities
------ -------- ------- ------- --------
Weighted average shares
outstanding - diluted
earnings per share $ $ $ $ $
====== ======== ======= ======= ========
</TABLE>
9. REDEEMABLE PREFERRED STOCK
On July 1, 1997, the sole common stockholder of the Company exchanged the
Series A Preferred Stock and the approximate $2,123,000 of cumulative
unpaid dividends for 2,100 shares of Series I Preferred Stock and 100
shares of the Company's common stock. The Series I Preferred Stock is non-
voting, has a liquidation preference of $1,000 per share, accrues dividends
at a rate of 8% per annum and is callable by the Company at any time
subject to the required lender consents. The Series I Preferred Stock can
be put to the Company no earlier than July 1, 2002. At December 31, 1997
and March 31, 1998, cumulative unpaid dividends totalled $94,000 and
$126,000, respectively.
F-16
<PAGE>
10. INCOME TAXES
The Company computes deferred income taxes based on the difference between
the financial statement and income tax bases of assets and liabilities and
operating loss and tax credit carryforwards, using enacted tax rates. The
tax effects of significant items comprising the Company's net deferred tax
assets are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
<S> <C> <C>
Deferred tax assets:
Mortgage loans $ 684 $ 697
Loan loss allowance 258 534
Purchased mortgage servicing rights 55 14
Tax credit carryforwards and net
operating loss carryforwards 880 749
Excess servicing rights 123 300
Other 42 234
----- -----
Total 2,042 2,528
Deferred tax liabilities:
Originated mortgage servicing rights 403 982
Other - -
----- -----
Total 1,639 1,546
Valuation allowance 1,639 1,546
----- -----
Net deferred tax assets $ - $ -
===== =====
</TABLE>
The income tax provision for the years ended December 31, 1995, 1996 and
1997, and for the three months ended March 31, 1997 varies from the amount
expected, based on the Federal statutory rate, because of activity in the
deferred tax asset valuation allowance.
As of December 31, 1997 the Company has net operating loss carryforwards
for federal income tax purposes of approximately $2,023,000, of which
$335,000 will expire in 2009 and the remainder in 2010.
Beginning January 1, 1998, the Company intends to operate and qualify as a
Real Estate Investment Trust ("REIT"). Accordingly, no provision for taxes
has been provided in 1998.
11. MAJOR INVESTORS
During the years ended December 31, 1995, 1996 and 1997, 88.7%, 94.1% and
28.4%, respectively, of all loans sold by the Company were sold to two
investors. A division of one of these investors provides warehouse
financing for certain of the Company's mortgage loans. During the three
months ended March 31, 1998 a single sale of adjustable rate loans
accounted for approximately 82.0% of the Company's total loan sales.
F-17
<PAGE>
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable
to estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard the derived fair value estimates cannot be
substantiated by comparison to an independent market, and in many cases,
could not be realized in immediate settlement of the instruments. SFAS No.
107 excludes certain financial instruments and all non-financial instruments
from its disclosure requirements. Accordingly, the aggregate fair value
amounts presented do not represent the underlying fair value of the Company.
Fair value information for financial instruments is as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------------------------------- ---------------------
1996 1997 1998
(UNAUDITED)
FAIR CARRYING FAIR CARRYING FAIR CARRYING
VALUE VALUE VALUE VALUE VALUE VALUE
<S> <C> <C> <C> <C> <C> <C>
On-balance-sheet assets (liabilities):
Certificates of deposit $ 5,000 $ 5,000 $ - $ - $ 4,147 $ 4,147
Retained securitization interests - - 18,826 18,826 19,765 19,765
Mortgage loans 66,008 64,773 123,435 120,413 163,083 157,941
Mortgage servicing rights 2,424 2,016 3,913 3,413 4,160 3,573
Warehouse financing facilities (64,554) (64,554) (119,288) (119,288) (156,068) (156,068)
Residual financing - - (11,127) (11,127) (11,029) (11,029)
Working capital facilities (1,020) (1,020) (3,900) (3,900) (3,900) (3,900)
Convertible subordinated debt - - (6,660) (6,660) (9,810) (9,810)
Notes payable (5,000) (5,000) - - (4,147) (4,147)
Off-balance-sheet (liabilities):
Loan commitments (commitment
amounts - $45,000, $8,300 and 1,300 - 208 - 287 -
$10,500, (unaudited))
</TABLE>
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
CERTIFICATE OF DEPOSITS - Fair values for certificate of deposits are based
on quoted market prices where available. If not available, the fair values
are based on quoted market prices of comparable instruments. The carrying
amount reported in the balance sheet approximates fair value.
RETAINED SECURITIZATION INTERESTS - Fair values of retained securitization
interests are based on estimates of the market value using discounted cash
flows. Projected cash flows are computed based upon management's estimates
of mortgage loan prepayment rates defaults and loss severities. At December
31, 1997 and March 31, 1998, the Company utilized a 15% discount rate, to
value such retained interests. Losses were estimated at 75 basis points per
annum and prepayment speeds, as measured under the constant prepayment rate
(CPR) method ranged from 20 to 35 CPR with the highest CPR being applied to
collateral that is 12 to 30 months into the life of the loan. The carrying
amount reported in the consolidated balance sheet approximates fair value.
MORTGAGE LOANS - The fair values for mortgage loans are based on outstanding
sale commitments or quoted market prices of similar loans previously sold,
adjusted for differences in loan characteristics.
F-18
<PAGE>
LOAN COMMITMENTS - The fair values for off-balance-sheet loan commitments
are based upon quoted market prices of similar mortgage loans previously
sold and mortgage loans outstanding at December 31, 1996 and 1997, adjusted
for differences in loan characteristics.
MORTGAGE SERVICING RIGHTS - These rights, which consist of the Company's
contractual right to service loans for others, represent a distinct income
producing asset that could be realized by selling those rights. Certain of
those rights, to the extent permitted under SFAS No. 122, "Accounting for
Mortgage Servicing Rights," are capitalized on the balance sheet, and the
Company utilizes discounted cash flow analyses to estimate their fair value.
This analysis is based on current market conditions and the characteristics
of the portfolio of mortgage loans being serviced.
WAREHOUSING FINANCING FACILITIES, RESIDUAL FINANCING AND WORKING CAPITAL
FACILITY, CONVERTIBLE SUBORDINATED DEBT AND NOTES PAYABLE - Due to the
variable interest rate features and recent negotiation of the Company's
borrowings, the carrying amounts reported in the consolidated balance sheets
approximate the fair value of these liabilities.
13. SUBSEQUENT EVENTS (UNAUDITED)
In _____, 1998, the stockholders approved a __ to 1 split of the Company's
common stock and increased authorized shares to __. All references to
outstanding shares and earnings per share have been adjusted for the stock
split.
In April 1998, the Company increased the amount of credit available under
the $160,000,000 warehouse facility described in Note 5 to $200,000,000. The
Company also amended certain of the compliance covenants in the Strategic
Alliance agreements.
On April 22, 1998, the Company entered into a one-month repurchase agreement
with an investment banker to finance $138,093,000 of outstanding principal
balance of mortgage loans with a net carrying value of $142,087,000. The
loans were previously financed through the warehouse facility. The
repurchase agreement bears interest at 1.25% over the One Month LIBOR rate,
is limited to $200,000,000 in outstanding borrowings and renews
automatically for additional one-month terms unless the Company is notified
otherwise pursuant to notice provisions contained in the agreement.
In May 1998, the Company filed a registration statement with the Securities
and Exchange Commission concerning an initial public offering of units
comprised of common stock and stock purchase warrants. Assuming completion
of such initial public offering, the Company intends to operate in the
manner necessary to qualify as a REIT, effective January 1, 1998, for income
tax purposes.
In connection with the initial public offering, the Company plans to amend
certain provisions of the Subordinated Debt and Master Agreements forming a
part of the Strategic Alliance Documents, including among other things, the
elimination of the conversion feature of its subordinated debt and the
requirement of the Company to sell to an affiliate of one of the lenders at
least $100 million of mortgage loans or incur a financial liability. In
addition, the Company will use a portion of the proceeds from the initial
public offering to repay its residual financing facilities, working capital
facilities and convertible subordinated note payable and replace or modify
its existing warehouse facilities to provide for a lower borrowing advance
rate resulting in lower interest rates. The Company, in turn, will issue
warrants to purchase an additional 55 shares of common stock, with a de
minimis exercise price, plus termination payments of $1,250,000 to the
lenders. As a result, the Company will incur a $___________ charge for the
early extinguishment of debt for the consideration conveyed plus the write
off of unamortized debt issuance costs.
* * * * * *
F-19
<PAGE>
________________________________________________________________________________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.....................................................................
Risk Factors................................................................
Use of Proceeds.............................................................
Dividend Policy and Distributions...........................................
Dividend Reinvestment Plan..................................................
Dilution....................................................................
Capitalization..............................................................
Management's Discussion and Analysis of Financial...........................
Condition and Results of Operations........................................
Business....................................................................
Management..................................................................
Certain Relationships and Related Transactions..............................
Principal Stockholders......................................................
Description of Securities...................................................
Certain Provisions of Colorado Law and NMC's................................
Articles of Incorporation and Bylaws.......................................
Shares Eligible for Future Sale.............................................
Federal Income Tax Considerations...........................................
ERISA Considerations........................................................
Underwriting................................................................
Legal Matters...............................................................
Experts.....................................................................
Available Information.......................................................
Glossary....................................................................
Index to Financial Statements...............................................
</TABLE>
_______________________________
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
UNTIL ___________________ __, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE
UNITS, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
________________________________________________________________________________
_______________________________________________________________________________
6,700,000 UNITS
NATIONAL
MORTGAGE
CORPORATION
CONSISTING OF ONE SHARE OF COMMON STOCK AND
ONE STOCK PURCHASE WARRANT
_____________________
Prospectus
May ____, 1998
______________________
STIFEL, NICOLAUS & COMPANY INCORPORATED
PIPER JAFFRAY INC.
_____________________________________________________________________________
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses, other than underwriting
discount and commissions, payable by the Company in connection with the
registration, issuance and distribution of the Common Stock offered hereby. All
amounts are estimates except the Securities and Exchange Commission registration
fee, the NASD filing fee and the __________________ listing fee.
<TABLE>
<CAPTION>
EXPENSES AMOUNT
<S> <C>
Securities and Exchange Commission Registration Fee.......................... $73,826.23
National Association of Securities Dealers, Inc. Filing Fee.................. *
Stock Exchange Listing Fee............................................. *
Printing Expenses............................................................ *
Legal Fees and Expenses...................................................... *
Transfer Agent and Registrar Fees............................................ *
Accounting Fees and Expenses................................................. *
Blue Sky Fees and Expenses................................................... *
Miscellaneous Expenses....................................................... *
Total...................................................................... *
</TABLE>
_______________
*To be provided by amendment.
ITEM 32. SALES TO SPECIAL PARTIES
None, except as set forth in Item 33.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES.
The following paragraph of this Item 33 describes all sales by the Company
of the Company's securities within the past three years that were not registered
under the Securities Act. The numbers are adjusted to reflect the _______ -
for-1 stock split effected by NMC.
On July 1, 1997, NMC issued 2,100 shares of Series I Preferred Stock and
100 shares of Common Stock to TCG Investment Corporation, a corporation
controlled by Steven B. Chotin, in exchange for cancellation of all of NMC's
Series A Preferred Stock.
On June 30, 1997, NMC issued to ContiTrade Services L.L.C. ("Conti") and
Greenwich Capital Markets, Inc. ("Greenwich") warrants (the "Initial Warrants")
to purchase _____ shares and _____ shares, respectively, of Common Stock for $1
as part of the consideration for making certain borrowing facilities available
to NMC. Effective December 31, 1997, NMC issued to Conti a warrant to purchase
_____ shares of Common Stock in exchange for cancellation of the Initial Warrant
issued to Conti and in consideration for terminating and modifying certain of
the business arrangements relating to such borrowing facilities. Conti and
Greenwich have agreed to exercise such warrants upon completion of the Offering.
In connection with the related shares of Common Stock, Conti and Greenwich shall
have unlimited "piggyback" or incidental registration rights, and together shall
have the rights to require NMC to register some or all of their Common Stock on
two occasions, beginning ______ days after completion of the initial Offering.
II-1
<PAGE>
The Company issued the foregoing unregistered securities in reliance upon
an exemption from registration provided by Section 4(2) of the Securities Act.
ITEM 34. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Indemnification Provided Under NMC's Articles of Incorporation
The Colorado Business Corporation Act (the "CBCA") authorizes the
indemnification of and advancement of expenses to Directors, officers,
employees, fiduciaries and agents of a Colorado corporation against liabilities
which they may incur in such capacities. NMC's Articles of Incorporation
provide that the Company shall possess all powers of indemnification of
Directors, officers, employees, agents and others including the power and
authority to advance expenses and to purchase insurance, and that NMC shall
indemnify its Directors, officers and employees to the maximum extent permitted
under the CBCA. A summary of the circumstances in which indemnification is
allowable under the CBCA is provided below, but that description is qualified in
its entirety by reference to the relevant section of the CBCA.
In general, the CBCA provides that any director may be indemnified against
liabilities (including the obligation to pay a judgment, settlement, penalty,
fine or reasonable expense) incurred in a proceeding and have expenses advanced
for such a proceeding (including any civil, criminal, administrative or
investigative proceeding whether threatened, pending or completed and whether
formal or informal) to which the director was made a party because he is or was
a director. If the proceeding is brought by or in the right of the Company,
however, indemnification is permitted only with respect to reasonable expenses
incurred in connection with the proceeding, and, if the director is adjudged
liable in a proceeding brought by or in the right of the Company, no
indemnification is permitted. The CBCA prohibits indemnification of a director
in connection with any proceeding charging improper personal benefit to the
director in which the director is adjudged liable for receipt of an improper
personal benefit.
Indemnity may be provided only if the director's actions resulting in the
liability: (i) were taken in good faith; (ii) were reasonably believed to have
been in the Company's best interest with respect to actions taken in the
director's official capacity; (iii) were reasonably believed not to be opposed
to the Company's best interest with respect to actions other than those taken in
the director's official capacity; and (iv) with respect to any criminal action,
the director had no reasonable cause to believe his or her conduct was unlawful.
Indemnification may be awarded only after the applicable standard of conduct has
been met by the director to be indemnified as determined by (i) a majority vote
of Directors not party to the proceeding comprising a quorum of the Board of
Directors or, if a quorum cannot be obtained, by committee thereof consisting of
two or more Directors not party to the proceeding; (ii) independent legal
counsel selected by the Board of Directors; or (iii) the shareholders.
The CBCA further provides that unless limited by NMC's articles of
incorporation, a director or officer who is wholly successful, on the merits or
otherwise, in defense of any proceeding to which he was a party, is entitled to
receive indemnification against reasonable expenses, including attorneys' fees,
incurred in connection with the proceeding. NMC's Articles of Incorporation do
not limit the foregoing provisions.
The Company may indemnify or advance expenses to an officer, employee,
fiduciary or agent who is not a director to a greater extent than permitted for
indemnification of Directors, if consistent with law and public policy and if
provided for by its articles of incorporation, bylaws, resolution of its
shareholders or Directors or in a contract. The provision of indemnification to
persons other than Directors is subject to such limitations as may be imposed on
general public policy grounds.
Upon petition by a director or officer, a court may order the Company to
indemnify such director or officer against liabilities arising in connection
with any proceeding. A court may order the Company to provide such
indemnification, whether or not he was entitled to indemnification by the
Company. To order indemnification, the court must determine that the director
or officer is fairly and reasonably entitled to indemnification in light of the
circumstances. With respect to liability incurred by a director or officer, or
in any proceeding where liability results
II-2
<PAGE>
on the basis that a personal benefit was received improperly, a court may only
require that the director or officer be indemnified as to reasonable expenses
incurred.
The CBCA specifies that any provisions for indemnification of or advances
for expenses to Directors which may be contained in NMC's articles of
incorporation, bylaws, resolutions of its shareholders or Directors, or in a
contract (except for insurance policies) shall be valid only to the extent such
provisions are consistent with the CBCA and any limitations upon indemnification
set forth in the Articles of Incorporation.
The CBCA also grants the power to the Company to purchase and maintain
insurance policies which protect any director, officer, employee, fiduciary or
agent against any liability asserted against or incurred by them in such
capacity arising out of their status as such. Such policies may provide for
indemnification whether or not the corporation would otherwise have the power to
provide for it. The Company intends to obtain such a policy to be effective
after completion of the Offering.
NMC's Articles of Incorporation provide for the elimination of personal
liability for monetary damages for the breach of a fiduciary duty as a director
except for liability (i) resulting from a breach of the director's duty of
loyalty to the Company or its shareholders; (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of the
law; (iii) for approving a distribution to the extent that any such distribution
is prohibited by the CBCA; or (iv) of any transaction from which a director
derives an improper personal benefit.
Indemnification Provided in Connection With the Offering
The Company and the Underwriters for the Offering have agreed to indemnify
each other against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"), and, if such
indemnifications are unavailable or insufficient, the Company and the
Underwriters have agreed to damage contribution agreements between them based
upon relative benefits received from the Offering and relative fault resulting
in such damages.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED
Not applicable.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Consolidated Financial Statements (each included in the Prospectus):
Balance Sheets
Statements of Operations
Statements of Changes in Stockholders' Equity
Statements of Cash Flows
Notes to Consolidated Financial Statements
(b) Exhibits.
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
*1.1 Form of Underwriting Agreement
3.1 Amended and Restated Articles of Incorporation of NMC
*3.2 Form of Second Amended and Restated Articles
of Incorporation of NMC to be
effective concurrent with Offering
II-3
<PAGE>
3.3 Amended and Restated Bylaws of NMC
*4.1 Specimen of Certificate for Common Stock
*5.1 Opinion of Hunton & Williams
*8.1 Tax Opinion of Hunton & Williams
10.1 Amended and Restated Loan and Security Agreement dated
as of June 30, 1997 between NMC and Greenwich
Capital Financial Products, Inc. (together with amendments thereto)
*10.2 Master Agreement dated as of June 30, 1997 among
ContiFinancial Services Corporation, ContiTrade Services L.L.C.,
Greenwich Capital Markets, Inc. and NMC
(together with amendments thereto)
10.3 Warehousing Credit and Security Agreement dated as of
January 19, 1996 between Residential Funding
Corporation and NMC (together with amendments thereto)
10.4 Subsidiary Security Agreement, dated as of January 30, 1998, made by
National Mortgage Sales Corporation, in favor of Greenwich Capital
Financial Products, Inc. ("GCFP"), Greenwich Capital Markets, Inc.
("GCM"),
and ContiTrade Services, L.L.C. ("ContiTrade")
10.5 Subsidiary Guarantee, dated as of January 30, 1998, made by National
Mortgage
Sales Corporation, in favor of GCFP, GCM and ContiTrade
10.6 Pledge Agreement, dated as of January 30, 1998, made by NMC and
Steven B. Chotin, in favor of GCFP, GCM and ContiTrade
*10.7 Business Opportunity and Shared Employee Agreement among The
Chotin Group Corporation, Steven B. Chotin and NMC
*10.8 Right of First Refusal Agreement dated as of April 1, 1998 between
NMC
and Merchants Mortgage & Trust Corporation LLC
*10.9 Shelf Issuance Agreement between Fund America Investors
Corporation II and NMC, dated as of September 1, 1997
*10.10 1998 Employee Incentive Plan
*10.11 Directors' Stock Incentive Plan
*10.12 Management Shareholders Registration Rights
Agreements dated ______, 1998 among NMC,
Steven B. Chotin and TCG Investment Corporation
*10.13 Employment Agreement between NMC and James A. Weissenborn
*10.14 Employment Agreement between NMC and William J. Rogers
*10.15 Employment Agreement between NMC and Kevin J. Nystrom
*11.1 Statement re: Computation of Per Share Earnings
(see Note __ to the Consolidated Financial
Statements)
21.1 List of Subsidiaries of Registrant
*23.1 Consent of Deloitte & Touche LLP
*23.2 Consent of Hunton & Williams (included in Exhibit 5.1 and Exhibit
8.1)
24.1 Power of Attorney (included on Signature Page)
27.1 Financial Data Schedule
__________________
* To be filed by amendment.
ITEM 37. UNDERTAKINGS.
Insofar as indemnification for liabilities arising out of the Securities
Act of 1933 (the "Act") may be permitted to Directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that, in the opinion of the Securities and Exchange
Commission such
II-4
<PAGE>
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company 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 Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
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 Company 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,
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>
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Englewood, State of Colorado, on May 29, 1998.
NATIONAL MORTGAGE CORPORATION
By: /s/ Steven B. Chotin
---------------------------------
Steven B. Chotin
Chairman
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints each of Steven B. Chotin and Howard J.
Glicksman his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments, including post-effective
amendments and any registration statements filed pursuant to Rule 462(b), to
this Registration Statement, and to file the same, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE
DATE TITLE
<S> <C>
May 29, 1998 /s/ Steven B. Chotin
-----------------------------------------------
Steven B. Chotin
Chairman
May 29, 1998 /s/ James A. Weissenborn
-----------------------------------------------
James A. Weissenborn
President, Chief Executive Officer and Director
May 29, 1998 /s/ Kevin J. Nystrom
-----------------------------------------------
Kevin J. Nystrom
Executive Vice President and Chief Financial
Officer
(Principal Financial Officer and Principal
Accounting Officer)
May 29 1998 /s/ Howard J. Glicksman
-----------------------------------------------
Howard J. Glicksman
Director
May 29, 1998 /s/ Helen M. Dickens
-----------------------------------------------
Helen M. Dickens
Director
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
*1.1 Form of Underwriting Agreement..............................................
3.1 Amended and Restated Articles of Incorporation of NMC.......................
*3.2 Form of Second Amended and Restated Articles
of Incorporation of NMC to be
effective concurrent with Offering..........................................
3.3 Amended and Restated Bylaws of NMC..........................................
*4.1 Specimen of Certificate for Common Stock....................................
*5.1 Opinion of Hunton & Williams................................................
*8.1 Tax Opinion of Hunton & Williams............................................
10.1 Amended and Restated Loan and Security Agreement dated
as of June 30, 1997 between NMC and Greenwich
Capital Financial Products, Inc. (together with amendments thereto).........
*10.2 Master Agreement dated as of June 30, 1997 among
ContiFinancial Services Corporation, ContiTrade Services L.L.C.,
Greenwich Capital Markets, Inc. and Company
(together with amendments thereto)..........................................
10.3 Warehousing Credit and Security Agreement dated as of
January 19, 1996 between Residential Funding................................
Corporation and NMC (together with amendments thereto)
10.4 Subsidiary Security Agreement, dated as of January 30, 1998, made by
National Mortgage Sales Corporation, in favor of Greenwich Capital
Financial Products, Inc. ("GCFP"), Greenwich Capital Markets, Inc.
("GCM") and ContiTrade Services, L.L.C. ("ContiTrade")......................
10.5 Subsidiary Guarantee, dated as of January 30, 1998, made by National
Mortgage
Sales Corporation, in favor of GCFP, GCM and ContiTrade.....................
10.6 Pledge Agreement, dated as of January 30, 1998, made by NMC and
Steven B. Chotin, in favor of GCFP, GCM and ContiTrade......................
*10.7 Business Opportunity and Shared Employee Agreement among The
Chotin Group Corporation, Steven B. Chotin and NMC
*10.8 Right of First Refusal Agreement dated as of April 1, 1998 between NMC
and Merchants Mortgage & Trust Corporation LLC..............................
*10.9 Shelf Issuance Agreement between Fund America Investors
Corporation II and NMC, dated as of September 1, 1997.......................
*10.10 1998 Employee Incentive Plan................................................
*10.11 Directors' Stock Incentive Plan.............................................
*10.12 Management Shareholders Registration Rights
Agreements dated ______, 1998 among NMC,
Steven B. Chotin and TCG Investment Corporation.............................
*10.13 Employment Agreement between NMC and James A. Weissenborn...................
*10.14 Employment Agreement between NMC and William J. Rogers......................
*10.15 Employment Agreement between NMC and Kevin J. Nystrom.......................
*11.1 Statement re: Computation of Per Share Earnings............................
(see Note __ to the Consolidated Financial Statements)......................
21.1 List of Subsidiaries of Registrant..........................................
*23.1 Consent of Deloitte & Touche LLP............................................
*23.2 Consent of Hunton & Williams (included in Exhibit 5.1 and Exhibit
8.1)........................................................................
24.1 Power of Attorney (included on Signature Page)..............................
27.1 Financial Data Schedule.....................................................
</TABLE>
__________________
* To be filed by amendment.
II-7
<PAGE>
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
NATIONAL MORTGAGE CORPORATION
Pursuant to the provisions of the Colorado Business Corporation Act, the
undersigned corporation (the "Corporation") adopts the following Articles of
Incorporation:
ARTICLE ONE
NAME
----
The name of the corporation shall be: NATIONAL MORTGAGE CORPORATION.
ARTICLE TWO
PURPOSE
-------
The purpose for which the Corporation is formed is to transact any or all
lawful business, not required to be specifically stated in these Articles, for
which corporations may be incorporated under state law.
ARTICLE THREE
DURATION
--------
The Corporation shall have perpetual existence.
ARTICLE FOUR
CAPITAL STOCK
-------------
The number of authorized shares of capital stock of the Corporation is
sixty-two thousand (62,000), of which fifty thousand (50,000) shares shall be
Common Stock, each share having a par value of $0.01, and of which twelve
thousand (12,000) shares shall be Preferred Stock with a par value, or no par
value, to be determined at the time of issuance of the related series. Upon
issuance, all shares shall be fully paid and nonassessable, and the private
property of the shareholders shall not be liable for corporate debts.
The following is a description of each of said different classes of stock,
and a statement of the preferences, limitations, voting rights and relative
rights in respect of the shares of each such class:
A. The Board of Directors shall have authority, by resolution or
resolutions, at any time and from time to time, to divide and establish any or
all of the unissued shares of Preferred Stock not then allocated to any series
of Preferred Stock into one or more series, and, without limiting the generality
of the foregoing, to fix and determine the designation of each such series, the
number of shares which shall constitute such series and the following relative
rights and preferences of the shares of each series so established:
1. the annual or other periodic dividend rate payable on shares of
such series, the time of payment thereof, whether such dividends shall be
cumulative or non-
<PAGE>
cumulative, and the date or dates from which any cumulative dividends shall
commence to accrue;
2. the price or prices at which and the terms and conditions, if any,
on which shares of such series may be redeemed;
3. the amounts payable upon shares of such series in the event of the
voluntary or involuntary dissolution, liquidation or winding-up of the
affairs of the Corporation;
4. the sinking fund provisions, if any, for the redemption or
purchase of shares of such series;
5. the extent of the voting powers, if any, of the shares of such
series;
6. the terms and conditions, if any, on which shares of such series
may be converted into shares of stock of the Corporation of any other class
or classes or into shares of any other series of the same or any other
class or classes;
7. whether, and if so the extent to which, shares of such series may
participate with the Common Stock in any dividends in excess of the
preferential dividend fixed for shares of such series or in any
distribution of the assets of the Corporation, upon a liquidation,
dissolution or winding-up thereof, in excess of the preferential amount
fixed for shares of such series; and
8. any other preferences and relative, optional or other special
rights, and qualifications, limitations or restrictions of such preferences
or rights, of shares of such series not fixed and determined by law or in
this Article Four.
B. Each series of Preferred Stock shall be so designated as to
distinguish the shares thereof from the shares of all other series. Different
series of Preferred Stock shall not be considered to constitute different
classes of shares for the purpose of voting by classes except as otherwise fixed
by the Board of Directors with respect to any series at the time of the creation
thereof.
C. So long as any shares of Preferred Stock are outstanding, the
Corporation shall not declare and pay or set apart for payment any dividends
(other than dividends payable in Common Stock or other stock of the Corporation
ranking junior to the Preferred Stock as to dividends) or make any other
distribution on such junior stock, if at the time of making such declaration,
payment or distribution the Corporation shall be in default with respect to any
dividend payable on, or any obligation to retire, shares of Preferred Stock.
D. Shares of any series of Preferred Stock that have been redeemed or
otherwise reacquired by the Corporation (whether through the operation of a
sinking fund, upon conversion or otherwise) shall have the status of authorized
and unissued shares of Preferred Stock and may be redesignated and reissued as a
part of such series (unless prohibited by the articles of amendment creating
such series) or of any other series of Preferred Stock. Shares of
2
<PAGE>
Common Stock that have been reacquired by the Corporation shall have the status
of authorized and unissued shares of Common Stock and may be reissued.
E. Subject to the provisions of any applicable law or of the By-laws of
the Corporation as from time to time amended with respect to the closing of the
transfer books or the fixing of a record date for the determination of
shareholders entitled to vote, and except as otherwise provided by law or in
resolutions of the Board of Directors establishing any series of Preferred Stock
pursuant to the provisions of paragraph A of this Article Four, the holders of
outstanding shares of Common Stock of the Corporation shall exclusively possess
voting power for the election of directors and for all other purposes, each
holder of record of shares of Common Stock of the Corporation being entitled to
one vote for each share of such stock standing in his name on the books of the
Corporation.
F. No holder of shares of stock of any class of the Corporation shall, as
such holder, have any right to subscribe for or purchase (1) any shares of stock
of any class of the Corporation, or any warrants, options or other instruments
that shall confer upon the holder thereof the right to subscribe for or purchase
or receive from the Corporation any shares of stock of any class, whether or not
such shares of stock, warrants, options or other instruments are issued for cash
or services or property or by way of dividend or otherwise, or (2) any other
security of the Corporation that shall be convertible into, or exchangeable for,
any shares of stock of the Corporation of any class or classes, or to which
shall be attached or appurtenant any warrant, option or other instrument that
shall confer upon the holder of such security the right to subscribe for or
purchase or receive from the Corporation any shares of its stock of any class or
classes, whether or not such securities are issued for cash or services or
property or by way of dividend or otherwise, other than such right, if any, as
the Board of Directors, in its sole discretion, may from time to time determine.
If the Board of Directors shall offer to the holders of shares of stock of any
class of the Corporation, or any of them, any such shares of stock, options,
warrants, instruments or other securities of the Corporation, such offer shall
not, in any way, constitute a waiver or release of the right of the Board of
Directors subsequently to dispose of other securities of the Corporation without
offering the same to said holders.
G. Restrictions on Transfer. The Corporation shall have the right by
appropriate action to impose restrictions upon the transfer of any shares of its
stock, or any interest therein, that it may from time to time issue, provided
that such restrictions shall be set forth upon the face or back of the
certificates evidencing such shares.
H. Subject to the provisions hereof and except as otherwise provided by
law, shares of stock of any class of the Corporation, and rights and options to
acquire such shares, may be issued for such consideration and for such corporate
purposes as the Board of Directors may from time to time determine.
I. Series I Preferred Stock. There is hereby established a series of the
------------------------
Corporation's authorized Preferred Stock, to be designated as the "Series I
Preferred Stock," with a par value of $1 per share. The designation and number,
and relative rights, preferences and limitations of the Series I Preferred
Stock, insofar as not already fixed by any other provision of these Articles of
Incorporation, shall be as follows:
3
<PAGE>
SECTION 1. Designation and Number of Shares. The shares of such
--------------------------------
series shall be designated as "Series I Preferred Stock" (the "Series I
Preferred Stock"), par value $1 per share. The number of shares initially
constituting the Series I Preferred Stock shall be 2,100.
SECTION 2. Dividends and Distributions.
---------------------------
(a) Dividends. The holders of the outstanding shares of the Series I
Preferred Stock shall be entitled to receive, when, as and if declared by
the Board of Directors, out of funds legally available therefor, cumulative
preferential cash dividends accruing at an annual rate equal to 8.00% per
annum multiplied by the Liquidation Preference (as defined in subsection
5(a) hereof) attributable to such shares, based upon a 360-day year
consisting of four equal quarterly calendar accrual periods (except that
the last accrual period with respect to any shares shall terminate on the
date that such shares are retired), payable in arrears on January 1, April
1, July 1 and October 1 of each year, commencing October 1, 1997 (each, a
"Payment Date"); provided, however, that if such date shall not be a
Business Day, then the Payment Date shall be the next succeeding Business
Day. Dividends shall accrue from July 1, 1997 for the first Payment Date.
Each such dividend will be payable to holders of record as they appear on
the stock books of the Corporation on such record date, not less than 10,
nor more than 30, days preceding the Payment Dates therefor, as shall be
fixed by the Board of Directors. A dividend may only be declared and paid
to the extent (i) the Corporation has sufficient funds legally available to
pay such dividend as described in Section 7-106-401(3) of the Colorado
Business Corporation Act (the "Act") or any successor provision and (ii) at
the time such dividend is declared, there exists no uncured and unwaived
"Default" under, and as defined in, the Amended and Restated Loan and
Security Agreement (the "Warehouse Agreement"), dated as of June 30, 1997,
between the Corporation, as borrower, and Greenwich Capital Financial
Products, Inc., as lender, the Residual and Working Capital Financing
Agreement (the "Residual Agreement"), dated as of June 30, 1997, among the
Corporation, as borrower, and ContiTrade Services L.L.C. ("Conti") and
Greenwich Capital Markets, Inc. ("Greenwich"), as lenders, and the
Subordinated Debt Agreement (the "Subordinated Debt Agreement," and,
together with the Warehouse Agreement and the Residual Agreement, the
"Financing Agreements"), dated as of June 30, 1997, between the
Corporation, as borrower, and Conti, as lender.
(b) Dividend Accrual and Accumulation. To the extent the accrued
dividend on the Series I Preferred Stock for any quarterly accrual period
are not paid on the related Payment Date, such dividend shall accumulate
from the Payment Date first following the quarterly period for which it
accrued, and accordingly shall be considered accrued dividends for each
successive Payment Date until paid. Dividends shall accrue in each quarter
regardless of whether there shall be funds legally available for the
payment thereof and regardless of whether such dividends are declared.
Notwithstanding the foregoing, dividends shall only accrue on the Series I
Preferred Stock for any quarter to the extent the Corporation has earnings
for that quarter at least equal to the amount of such dividend. Accumulated
dividends shall not bear interest.
4
<PAGE>
SECTION 3. Certain Restrictions on Dividends on Common Stock and
-----------------------------------------------------
Other Stock.
-----------
Whenever quarterly dividends or other dividends or distributions
payable on the Series I Preferred Stock (including, without limitation,
amounts to which the holders of the Series I Preferred Stock are entitled
pursuant to Sections 5 and 6 below), thereafter and until all accrued and
unpaid dividends and distributions, whether or not declared, on shares of
Series I Preferred Stock outstanding and all other amounts to which the
holders of the Series I Preferred Stock are entitled pursuant to these
Articles shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends on, make any other distributions
on, or redeem or purchase or otherwise acquire for consideration any
shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series I Preferred
Stock including, without limitation, the Common Stock;
(ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Series I Preferred Stock, except dividends paid ratably on the Series
I Preferred Stock and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which the
holders of all such shares are then entitled; or
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Series I
Preferred Stock; provided that the Corporation may at any time redeem,
--------
purchase or otherwise acquire shares of any such parity stock in
exchange for shares of any stock of the Corporation ranking junior
(either as to dividends or upon dissolution, liquidation or winding
up) to the Series I Preferred Stock.
SECTION 4. Voting Provisions.
-----------------
(a) Except as otherwise provided in Section 4(b), the holders of the
Series I Preferred Stock shall not have any voting rights other than those
required by Colorado law.
(b) So long as any shares of Series I Preferred Stock are
outstanding, the Corporation shall not amend any of the provisions of its
Articles of Incorporation or undertake any other action (1) to authorize or
create any shares of stock ranking senior to, or on a parity with, the
Series I Preferred Stock as to dividends or as to distributions in the
event of the Corporation's liquidation, dissolution or winding up, or (2)
altering or changing the rights, preferences or limitations of the Series I
Preferred Stock so as to affect such rights, preferences or limitations
adversely without, in either case, approval by the affirmative vote of the
holders of at least two-thirds of the total number of outstanding shares of
Series I Preferred Stock, voting together as a single voting group.
5
<PAGE>
SECTION 5. Liquidation, Dissolution or Winding Up.
--------------------------------------
(a) Rights upon Dissolution. The holders of Series I Preferred Stock
shall be entitled to receive, out of the Corporation's assets that remain
after full satisfaction of all creditors' valid claims and that are
available for payment to shareholders, before any amount shall be paid or
distributed among the holders of Common Stock or any other shares ranking
junior to the Series I Preferred Stock in respect of distributions, upon
the Corporation's liquidation, dissolution or winding up, liquidating
distributions in an amount equal to $2,100,000.00 (the "Liquidation
Preference") plus all dividends accrued and unpaid to the date fixed for
distribution, and no more. If, upon any liquidation, dissolution or winding
up of the Corporation, the amounts payable with respect to the Series I
Preferred Stock are not paid in full, the holders of the Series I Preferred
Stock shall share ratably in any distribution of assets in proportion to
the full respective preferential amounts to which they are entitled. After
payment of the full amount to which the holders of Series I Preferred Stock
are entitled as provided by the foregoing provisions of this subsection,
the holders of Series I Preferred Stock shall not be entitled to any future
right or claim to any of the remaining assets of the Corporation.
(b) Merger or Consolidation Not Deemed Liquidation. Neither the
merger or consolidation of the Corporation with or into any other
corporation, nor the merger or consolidation of any other corporation with
or into the Corporation, nor the sale, lease, exchange or other transfer of
all or any portion of the assets of the Corporation, shall be deemed to be
a dissolution, liquidation or winding up of the affairs of the Corporation
for purposes of this Section 5.
SECTION 6. Redemption.
----------
(a) Rights to Call for Redemption. With the prior written consent of
Conti and Greenwich until repayment (or conversion into common stock, in
the case of the subordinated debt issued under the Subordinated Debt
Agreement) of all amounts owing to the lenders under the Financing
Agreements, and at any time after such repayment or conversion, the
Corporation shall have the right to call any or all of the outstanding
shares of Series I Preferred Stock for redemption by providing notice
thereof as set forth in Section 7(a). Upon such call, the Corporation shall
deliver to the holders thereof in exchange for each such share called for
redemption, the sum of $1,000 plus all dividends accrued and unpaid thereon
to the date fixed for redemption. If fewer than all the outstanding shares
of Series I Preferred Stock are to be redeemed, the shares of Series I
Preferred Stock to be redeemed shall be selected by the Corporation from
the outstanding shares of Series I Preferred Stock by lot or pro rata, or
by any other method determined by the Board of Directors of the Corporation
in its sole discretion to be equitable.
(b) Redemption Procedure. Upon payment of the redemption price
against delivery of the shares to be redeemed, or upon deposit in trust of
the redemption price with a bank in Denver, Colorado on or before the
redemption date, together with irrevocable instructions to such bank to pay
the redemption price against delivery of the shares to be redeemed, such
shares shall be deemed no longer outstanding for any purpose, and all
rights with respect to such shares shall thereupon cease, except only the
6
<PAGE>
right of the holders of the certificates for such shares to receive the
redemption price out of the funds so deposited.
(c) Redemption at Option of Holders. At any time after the later of
(i) five years after the issuance of the Series I Preferred Stock or (ii)
repayment (or conversion into common stock, in the case of the subordinated
debt issued under the Subordinated Debt Agreement) of all amounts owing to
lenders under the Financing Agreements, any holder of Series I Preferred
Stock shall have the option, upon written notice to the Corporation, to
demand that the Corporation repurchase the shares held by such holder for a
price per share equal to $1,000 plus all dividends accrued and unpaid
thereon to the date fixed for redemption, which shall be specified in such
notice and shall be not less than 30 days following the date of such
notice. Upon receipt of such demand from any holder of Series I Preferred
Stock, the Corporation shall repurchase such holder's shares on the date
fixed for redemption in the demand notice, for the price per share
specified above.
SECTION 7. Miscellaneous.
-------------
(a) Notices. Written notice of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation stating the
payment date or dates when, and the place or places where, the amounts
distributable to the holders of shares of Series I Preferred Stock in such
circumstances shall be payable, shall be given by hand delivery, by
overnight courier, by standard form of telecommunication or by first-class
mail (postage prepaid), delivered, sent or mailed as the case may be, not
less than 20 days prior to any payment date stated in that notice, to each
holder of shares of Series I Preferred Stock, at the address shown for such
holder on the books of the Corporation. Any holder of Series I Preferred
Stock may give notice as above provided to the Corporation at the office of
its registered agent in Colorado.
(b) No Pre-emptive Rights. Holders of the Series I Preferred Stock
shall not have any preferential right to acquire any authorized shares of
stock that the Corporation proposes to issue, or any bonds, debentures or
other securities, rights, warrants or options convertible into stock of the
Corporation or carrying any right to purchase shares of stock in accordance
with their proportionate equity in the Corporation.
ARTICLE FIVE
OFFICE OF CORPORATION
---------------------
The principal office and principal place of business of the Corporation is
located at Harlequin Plaza, Suite 330S, 7600 East Orchard Road, Englewood,
Colorado 80111-4943. The Board of Directors may, however, from time to time,
establish such other principal place or places of business, offices, branches,
subsidiaries or divisions or such other place or places of business within or
without the state of Colorado as it deems advisable. The address of the
Corporation's registered office in Colorado for the purpose of the Colorado
Business Corporation Act is Plaza Tower One, Suite 1200, 6400 South Fiddler's
Green Circle, Englewood, Colorado 80111. The name of the Corporation's
registered agent for the purpose of the Act is Howard J. Glicksman.
7
<PAGE>
ARTICLE SIX
DIRECTORS
---------
The affairs of the Corporation shall be governed by a Board of Directors.
The number of Directors shall be fixed by the Bylaws of the Corporation, but
shall be not less than three unless the number of Directors shall at least be
equal to the number of stockholders. The organization and conduct of the Board
shall be in accordance with the following:
A. Directors of the corporation need not be residents of Colorado nor
holders of shares of the Corporation's stock.
B. Meetings of the Board of Directors, regular or special, may be held
within or without Colorado upon such notice as may be prescribed by the By-Laws
of the Corporation. Attendance of a Director at a meeting shall constitute a
waiver by him of notice of such meeting unless he attends only for the express
purpose of objecting to the transaction of business, and the majority act of the
Directors of the Corporation at a meeting of the Board of Directors shall
constitute an act of the Board of Directors.
C. By resolution adopted by a majority of the number of Directors at any
time constituting the Board of Directors, the Board of Directors may designate
one (1) or more Directors to constitute an Executive Committee which shall have
and may exercise to the extent permitted by law or in such resolution all of the
authority of the Board of Directors in their management of the Corporation; but
the designation of any such committee and the delegation of authority thereto
shall not operate to relieve the Board of Directors or any member thereof of any
responsibilities imposed on it or him by law.
D. Any vacancy in the Board of Directors, however caused, may only be
filled by the majority vote of all the remaining Directors, though less than a
quorum of the Board of Directors. A Director elected to fill a vacancy shall be
elected for the unexpired term of his predecessor in office.
E. The Board of Directors may, from time to time and to the extent
permitted by law and by the other provisions of these Articles of Incorporation,
authorize a distribution to the shareholders in partial liquidation, out of
stated capital or capital surplus of the corporation, of a portion of the
corporate assets, in cash or property.
F. Cumulative voting for Directors shall not be permitted.
ARTICLE SEVEN
OFFICERS
--------
The officers of the Corporation shall consist of those stated in the
Corporation's minutes and as later amended from time to time and as authorized
by the Bylaws of the Corporation. Each shall be elected by the Board of
Directors at such time and in such manner as may be prescribed by the Bylaws of
the Corporation. Any two or more offices may be held by the same person.
8
<PAGE>
ARTICLE EIGHT
BYLAWS
------
The Board of Directors shall have the power to make and adopt Bylaws for
the government of the Corporation not inconsistent with the laws of the State of
Colorado for the purpose of regulating and carrying on the business of the
Corporation; and the Board of Directors by majority vote from time to time may
change, alter or amend the Bylaws as may be beneficial to the interests of the
Corporation.
ARTICLE NINE
SHAREHOLDER MEETINGS
--------------------
Meetings of the shareholders of the Corporation shall be held at such
places within or without the State of Colorado and at such times as may be
prescribed in the Bylaws of the Corporation. Special meetings of the
shareholders of the Corporation may be called by the President of the
Corporation or by the Board of Directors or the Executive Committee. At any
meeting of the shareholders, except to the extent otherwise provided by the
Bylaws or by law, a quorum shall consist of a majority of the outstanding shares
entitled to vote at the meeting; and the affirmative vote of a majority of the
shares represented at the meeting and entitled to vote thereat shall be the act
of the shareholders.
ARTICLE TEN
INTEREST OF DIRECTORS IN CONTRACTS
----------------------------------
Any contract or other transaction between the Corporation and one (1) or
more of its Directors, between the Corporation and any firm of which one (1) or
more of its Directors are members or employees, or in which they are interested,
or between the Corporation and any corporation and association of which one (1)
or more of its Directors are shareholders, members, directors, officers, or
employees or in which they are interested, shall be valid for all purposes,
notwithstanding his or their participation in such action, if the provisions of
Section 7-108-501 of the Act (or any successor provision) are complied with in
respect of such transaction.
ARTICLE ELEVEN
INDEMNIFICATION OF OFFICERS, DIRECTORS,
EMPLOYEES AND AGENTS
AND LIMITATION OF LIABILITY
---------------------------
A. To the fullest extent permitted by the Act, each Director and each
Officer shall be indemnified by the Corporation against liabilities, fines,
penalties and claims imposed on or asserted against him or her (including
amounts paid in settlement) by reason of having been such Director or Officer or
by reason of having served at the request of the Corporation as director,
trustee, partner or officer of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, whether or not then continuing
so to be, and against all expenses (including counsel fees) reasonably incurred
by him or her in connection therewith, except in relation to matters as to which
he or she shall have been finally adjudged liable by reason of his or her
willful misconduct or a knowing violation of criminal law in the performance of
his or her duty as such Director or Officer. The determination that the
indemnification under this
9
<PAGE>
paragraph is permissible shall be made as provided by law. The right of
indemnification provided hereby shall not be exclusive of any other rights to
which any Director or Officer may be entitled.
B. To the fullest extent permitted by the Act, the Directors shall bear
no personal liability to the Corporation or its shareholders for monetary
damages for breach of fiduciary duty as director.
C. The provisions of this Article shall be applicable to all proceedings
commenced after the adoption hereof by the shareholders of the Corporation,
arising from any act or omission, whether occurring before or after such
adoption. No amendment or repeal of this Article shall have any effect on the
rights provided under this Article with respect to any act or omission occurring
prior to such amendment or repeal. The Corporation shall promptly take all such
actions, and make all such determinations, as shall be necessary or appropriate
to comply with its obligation to make any indemnity under this Article and shall
promptly pay or reimburse all reasonable expenses, including attorneys' fees,
incurred by any such director, officer, employee or agent in connection with
such actions and determinations or proceedings of any kind arising therefrom.
D. The termination of any proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not of
itself create a presumption that the applicant did not meet the standard of
conduct described in Section B or C of this Article.
E. The Corporation shall pay for or reimburse the reasonable expenses
incurred by any applicant who is a party to a proceeding in advance of final
disposition of the proceeding or the making of any determination under Section B
if the applicant furnishes the Corporation:
(a) a written statement of his good faith belief that he has met the
standard of conduct described in Section B; and
(b) a written undertaking, executed personally or on his behalf, to
repay the advance if it is ultimately determined that he did not meet such
standard of conduct.
The undertaking required by paragraph (b) of subsection 1 of this section
shall be an unlimited general obligation of the applicant but need not be
secured and may be accepted without reference to financial ability to make
repayment.
F. To the fullest extent permitted by the Act, the Corporation shall
indemnify any person not specified in Section A or B of this Article who was, is
or may become a party to any proceeding, by reason of the fact that he is or was
an employee of the Corporation, or is or was serving at the request of the
Corporation as director, officer or employee of another corporation,
partnership, limited liability company, joint venture, trust, employee benefit
plan or other enterprise, to the same extent as if such person were specified as
one to whom indemnification is granted in Section B. The Board of Directors is
hereby empowered, by majority vote of a quorum consisting of disinterested
Directors, to cause the Corporation to indemnify or contract to indemnify any
other person not specified in Section A or B of this Article who was, is or may
become a party to any proceeding, by reason of the fact that he is or was an
agent of the
10
<PAGE>
Corporation, or is or was serving at the request of the Corporation as an agent
of another corporation, partnership, limited liability company, joint venture,
trust, employee benefit plan or other enterprise, to the same extent as if such
person were specified as one to whom indemnification is grated in Section B. The
provisions of Sections C through E this Article shall be applicable to any
indemnification provided pursuant to this Section F.
G. The Corporation may purchase and maintain insurance to indemnify it
against the whole or any portion of the liability assumed by it in accordance
with this Article and may also procure insurance, in such amounts as the Board
of Directors may determine, on behalf of any person who is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against any liability asserted against or incurred by him in any
such capacity or arising from his status as such, whether or not the Corporation
would have power to indemnify him against such liability under the provisions of
this Article.
H. Every reference herein to directors, officers, employees or agents
shall include former directors, officers, employees and agents and their
respective heirs, executors and administrators. The indemnification hereby
provided and provided hereafter pursuant to the power hereby conferred by this
Article on the Board of Directors shall not be exclusive of any other rights to
which any person may be entitled, including any right under policies of
insurance that may be purchased and maintained by the Corporation or others,
with respect to claims, issues or matters in relation to which the Corporation
would not have the power to indemnify such person under the provisions of this
Article. Such rights shall not prevent or restrict the power of the Corporation
to make or provide for any further indemnity, or provisions for determining
entitlement to indemnity, pursuant to one or more indemnification agreements,
bylaws, or other arrangements (including, without limitation, creation of trust
funds or security interests funded by letters of credit or other means) approved
by the Board of Directors (whether or not any of the directors of the
Corporation shall be a party to or beneficiary of any such agreements, bylaws or
arrangements); provided, however, that any provision of such agreements, bylaws
or other arrangements shall not be effective if and to the extent that it is
determined to be contrary to this Article or applicable laws of the State of
Colorado.
I. Each provision of this Article shall be severable, and an adverse
determination as to any such provision shall in no way affect the validity of
any other provision.
ARTICLE TWELVE
AMENDMENTS
----------
Except to the extent prohibited from doing so by Article Four hereof, the
Corporation expressly reserves the right to amend or restate these Articles of
Incorporation and to alter, change or repeal any provision contained herein in
any manner now or hereafter permitted as provided by the Act, as amended from
time to time, and the rights of all shareholders are expressly made subject to
such power of amendment.
11
<PAGE>
IN WITNESS WHEREOF, I have hereunto set my hand this 31st day of July,
1997.
NATIONAL MORTGAGE CORPORATION
By:___________________________
President
And By:_______________________
SECRETARY
12
<PAGE>
STATE OF COLORADO )
) SS.
COUNTY OF ARAPAHOE )
The foregoing instrument was acknowledged before me, in the County of
Arapahoe, State of Colorado, this ___th day of July 1997, by Steven B. Chotin,
as President and Helen M. Dickens, as Secretary, of National Mortgage
Corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this _____ day of
July, 1997.
_____________________________________
Notary Public
My commission expires _____________________
13
<PAGE>
EXHIBIT 3.3
AMENDED AND RESTATED BYLAWS
OF
NATIONAL MORTGAGE CORPORATION
A COLORADO CORPORATION
ARTICLE I
OFFICES
-------
1. BUSINESS OFFICES. The principal office of the corporation shall be in
----------------
Colorado. The corporation may also have one or more offices at such other place
or places within or without the State of Colorado as the Board of Directors may
from time to time determine or as the business of the corporation may require.
2. REGISTERED OFFICE. The registered office of the corporation shall be
-----------------
set forth in the Articles of Incorporation unless changed as provided by the
Colorado Corporation Code.
ARTICLE II
SHAREHOLDERS' MEETINGS
----------------------
1. ANNUAL MEETINGS. The annual meetings of shareholders for the election
---------------
of directors to succeed those whose terms expire and for the transaction of such
other business as may come before the meeting shall be held in each year on the
second Tuesday of December. If the day so fixed for such meeting shall be a
legal holiday, then such meeting shall be held on the succeeding business day.
2. SPECIAL MEETINGS. Special meetings of shareholders for any purposes,
----------------
unless otherwise prescribed by statute or by the Articles of Incorporation may
be called at any time by the President or by the Board of Directors and shall be
called by the President or Secretary upon the request (which shall state the
purpose or purposes therefor) of the holders of not less than one-fourth (1/4)
of the outstanding common shares of the corporation entitled to vote at the
meeting.
<PAGE>
3. PLACE OF MEETING. Meetings of shareholders shall be held at the
----------------
principal office of the corporation or at such other place or places, within or
without the State of Colorado as may be from time to time determined by the
Board of Directors.
4. NOTICE OF MEETINGS. Notice of each meeting of shareholders, whether
------------------
annual or special, shall be given not less than ten (10) nor more than fifty
(50) days prior thereto to each shareholder of record entitled to vote thereat
by delivering written or printed notice thereof to such shareholder personally
or by mailing the same to this address as it appears on the stock transfer books
of the corporation; provided, however, that if the authorized shares of the
corporation are proposed to be increased, at least thirty (30) days notice in
like manner shall be given. The notice of all meetings shall state the place,
day and hour thereof. The notice of the special meeting shall, in addition,
state the purposes thereof.
5. FIXING RECORD DATA. The Board of Directors shall fix in advance a
------------------
date, not less than ten (10) nor more than fifty (50) days preceding the date of
any meeting of shareholders, or the day for payment of any dividend, or the date
for the allotment of rights or the date when any change or conversion or
exchange of authorized shares shall go into effect, or a date fixed as the final
date for obtaining such consent, as a record date for the determination of the
shareholders entitled to notice of, or entitled to receive any dividend, or to
any such allotment of rights, or to exercise the rights in respect of any such
consent, and in such case only such shareholders as shall be entitled to notice
of, and to vote at, such meeting and any adjournment thereof, or to receive
payment of such dividend, or to receive allotment of rights, or to exercise such
rights, or to give such consent, as the case may be, notwithstanding any
transfer of any shares on the books of the corporation after any such record
date fixed as aforesaid.
6. VOTING LIST. At least ten (10) days before every meeting of
-----------
shareholders, a complete list of shareholders entitled to vote thereat or any
adjournment thereof, arranged in alphabetical order, showing the address of each
shareholder and the number of shares held by each, shall be prepared by the
officer or agent of the corporation who has charge of the stock transfer books
of the corporation. Such list shall be open at the principal office of the
corporation to the inspection of any shareholder during usual business hours for
a period of at least ten (10) days prior to such meeting, and such list shall be
produced and kept at the time and place of the meeting during the whole time
thereof and subject to the inspection of any shareholder who may be present.
7. ORGANIZATION. The President or Vice President shall call meetings of
------------
shareholders to order and act as chairman at such meetings. In the absence of
said officers, any shareholder entitled to vote thereat, or any proxy of any
such shareholder, may call the meeting to order and a chairman shall be elected
in the absence of the Secretary and Assistant Secretaries of the corporation,
any person appointed by the chairman shall act as secretary of such meeting.
2
<PAGE>
8. QUORUM. The holders of a majority of the shares issued and
------
outstanding and entitled to vote thereat shall, when present in person or
represented by proxy, be requisite to and shall constitute a quorum at all
meetings of shareholders for the transaction of business except as otherwise
provided by statute, by the Articles of Incorporation or by these By-Laws. In
the absence of a quorum at any such meeting, a majority of the shareholders
present in person or represented by proxy and entitled to vote thereat may
adjourn the meeting from time to time without further notice until a quorum
shall be present or represented.
9. VOTING. At every meeting of shareholders, each shareholder having the
------
right to vote shall be entitled to vote in person or by proxy executed in
writing by such shareholder or his duly authorized attorney in fact; provided,
however, that no such proxy shall be valid after eleven (11) months from the
date of its execution, unless such proxy expressly provides for a longer period.
When a quorum is present at any meeting, the vote of the holders of a
majority of the shares having voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the question
is voted upon which express provision of a statute, or the Articles of
Incorporation, or these By-Laws, a different vote is required, in which case
such express provision shall govern and control the decision of such question.
Shares standing in the name of another corporation may be voted by such
officer, agent or proxy as the By-Laws of such corporation may prescribe, or, in
the absence of such provision, as the Board of Directors of such corporation may
determine.
Shares held by an administrator, executor, guardian or conservator may be
voted by him, either in person or by proxy, without a transfer of such shares
into his name. Shares standing in the name of a trustee may be voted by him,
either in person or by proxy, but no trustee shall be entitled to vote shares
held by without a transfer of such shares into his name.
Shares standing in the name of a receiver may be voted by such receiver,
and shares held by or under the control of a receiver may be voted by such
receiver without the transfer into his name, if such authority so to do be
contained in appropriate order of the court by which such receiver was
appointed.
ARTICLE III
BOARD OF DIRECTORS
------------------
1. ELECTION AND TENURE. The business and affairs of the corporation
-------------------
shall be managed by a Board of Directors who shall be elected at the annual
meeting of shareholders, and each director shall be elected to serve until the
next succeeding meeting and until his successor shall be elected and shall
qualify.
3
<PAGE>
2. NUMBER AND QUALIFICATIONS. The Board of Directors shall consist of at
-------------------------
least two (2) and no more than seven (7) members. Directors need not be
shareholders or residents of the State of Colorado. If the number of directors
is less than three (3), the number of directors must be at least equal to the
number of shareholders.
3. ORGANIZATION MEETINGS. After each annual election of directors, the
---------------------
Board of Directors shall meet for the purpose of organization, selection of a
Chairman of the Board, the election of officers and the transaction of any other
business.
4. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be
----------------
held at such time or times as may be determined by the Board of Directors and
specified in the notice of such meeting.
5. SPECIAL MEETINGS. Special meeting of the Board of Directors may be
----------------
called by the Chairman of the Board on three (3) days' notice to each director,
either personally, by mail, by telephone or by telegram, and shall be called by
the Chairman of the Board or Secretary in like manner and on like notice on the
written request of any two directors. The purpose of a special meeting of the
Board of Directors need not be stated in the notice thereof.
6. PLACE OF MEETINGS. Any meeting of the Board of Directors may be held
-----------------
at such place or places either within or without the State of Colorado as shall
from time to time be determined by the Board of Directors or fixed by the
Chairman of the Board and designated in the notice of the meeting.
7. QUORUM. A majority of the directors fixed by Paragraph 2 of this
------
Article III shall constitute a quorum at all meetings of the Board of Directors,
and the majority act of the directors at a meeting shall be the act of the Board
of Directors. In the absence of a quorum at any such meeting, a majority of the
directors present may adjourn the meeting from time to time without further
notice until a quorum shall be present. If the number of directors are less than
three (3), only the unanimous act of the directors shall constitute the act of
the Board of Directors.
8. VACANCIES. Any vacancy occurring in the Board of Directors may be
---------
filled by the unanimous vote of the directors. A director elected to fill a
vacancy shall be elected for the unexpired term of his predecessor in office.
Any directorship to be filled by reason of an increase in the number of
directors shall be filled by the unanimous vote of the directors then in office
or by an election at a meeting or at a special meeting of shareholders called
for that purpose. A director chosen to fill a position resulting from an
increase in the number of directors shall hold office until the annual meeting
of shareholders and until his predecessor shall be elected and shall qualify.
4
<PAGE>
9. EXECUTIVE COMMITTEE. The Board of Directors, by resolution
-------------------
unanimously adopted by the directors may designate two (2) or more directors to
constitute an executive committee, which committee, to the extent provided in
such resolution, shall have and may exercise all of the authority of the Board
of Directors in the management of the corporation; provided, however, that such
committee shall in no case act to the exclusion of the Board of Directors in
session or not.
10. COMPENSATION OF DIRECTORS. Directors who are not employees of the
-------------------------
corporation may be paid such annual compensation as may from time to time be
fixed by resolution of the Board of Directors. All directors may be allowed a
fixed sum and expenses incurred for attendance at each regular or special
meeting of the Board of Directors as may from time to time be fixed by
resolution of the Board of Directors. Nothing herein contained shall be
construed to preclude any director from serving the corporation in any other
capacity and receiving compensation therefor.
ARTICLE IV
NOTICE AND ACTION WITHOUT MEETING
---------------------------------
1. NOTICE. Whenever under the provisions of a statute or of the Articles
------
of Incorporation or of these By-Laws, notice is required to be given to any
director or shareholder, it shall not be construed to mean personal notice, but
such notice may be given in writing, by mail, postage prepaid and addressed to
such director or shareholder at such address as appears on the books of the
corporation, and such notice shall be deemed to be given at the time when the
same shall be thus mailed.
2. WAIVER OF NOTICE. Whenever any notice whatever is required to be
---------------
given under the provisions of a statute or of the Articles of Incorporation, or
by these By-Laws, a waiver thereof in writing, signed by the person or persons
entitled to said notice, whether before, at or after the time stated therein, or
the appearance of such person or persons at such meeting, or in the case of a
shareholders' meeting by proxy, shall be deemed equivalent thereto.
3. ACTION WITHOUT A MEETING. Any action required or which may be taken
------------------------
at a meeting of the directors, shareholders or members of any executive
committee of the corporation, may be taken without a meeting with consent in
writing, setting forth the action so taken, and shall be signed by all of the
directors, shareholders or members of the executive committee as the case may
be, entitled to vote with respect to the subject matter thereof.
5
<PAGE>
ARTICLE V
OFFICERS
--------
1. ELECTION AND TENURE. The Board of Directors annually shall elect a
-------------------
Chief Executive Officer, a Chief Operating Officer, a President, one or more
Vice Presidents, and a Secretary/Treasurer. The Board may also elect or appoint
such other officers and assistant officers as may be determined by the Board.
Any two or more offices may be held by the same person, except the offices of
President and Secretary. Each officer so elected or appointed shall continue in
office until his successor shall be elected or appointed and shall qualify or
until resignation removal, death or other disqualifications.
2. RESIGNATION, REMOVAL AND VACANCIES. Any officer may resign at any
----------------------------------
time by giving written notice thereof to the Board of Directors or to the
Chairman of the Board. Such resignation shall take effect on the date specified
therein and no acceptance of the same shall be necessary to render the same
effective.
Any officer may at any time be removed by the unanimous vote of the
directors.
If any office becomes vacant for any reason, the vacancy may be filled by
the Board of Directors. An officer appointed to fill a vacancy shall be
appointed for the unexpired term of his predecessor in office.
3. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall, subject
-----------------------
to the direction and supervision of the Board of Directors, be the chief
executive officer of the corporation and shall have general and active control
of its affairs and business and general supervision of its officers, agents and
employees. He shall, unless otherwise directed by the Board of Directors, attend
in person or by substitute appointed by him, or shall execute on behalf of the
corporation written instruments appointing a proxy or proxies to represent the
corporation, at all meetings of the stockholders of any other corporation in
which the corporation shall hold any stock. He may, on behalf of the
corporation, in person or by substitute or by proxy, execute written waivers of
notice and consents with regard to any such meetings. At all such meetings and
otherwise, the Chief Executive Officer, in person or by substitute or proxy as
aforesaid, may vote the stock so held by the corporation and may execute written
consents and other instruments with respect of such stock and may exercise any
and all rights and powers incident to the ownership of said stock, subject,
however, to the instructions, if any, of the Board of Directors. The Chief
Executive Officer shall have custody of the Treasurer's bond, if any.
4. CHIEF OPERATING OFFICER. The Chief Operating Officer shall assist the
-----------------------
Chief Executive Officer and shall perform such duties as may be assigned to him
by the Chief Executive Officer or by the Board of Directors. The Chief Operating
Officer shall supervise the preparation of periodic financial reports, budgets
and capital plans for the operations of the corporation, for the review and
approval of the Board of Directors.
6
<PAGE>
5. PRESIDENT. The President shall assist the chief executive officer of
---------
the corporation. He shall preside at all meetings of the shareholders and shall
have general and active management of the business of the corporation. He shall
see that all orders and resolutions of the Board of Directors are carried into
effect in general shall perform all duties as may from time to time be assigned
to him by the Board of Directors or by the Chief Executive Officer. In the
absence or inability of the Chief Executive Officer, the President shall have
the powers and perform the duties of the Chief Executive Officer.
6. VICE PRESIDENT. The Vice President shall perform such duties and
--------------
possess such powers as from time to time may be assigned to them by the Board of
Directors, by the Chief Executive Officer, or by the President. In the absence
or inability of the President, the Executive Vice President, if elected by the
Board of Directors or (if there is no such Executive Vice President serving)
designated in writing by the President, shall perform the duties of the
President.
7. SECRETARY. The Secretary shall give, or cause to be given, notice of
---------
all meetings of shareholders and the Board of Directors and shall attend all
such meetings and keep a record of their proceedings. The Secretary shall be the
custodian of the seal of the corporation and shall have the power to affix the
same to all documents, the execution of which on behalf of the corporation is
authorized by these By-Laws or by the action of the Board of Directors, and in
general shall perform all duties incident to the office of the Secretary and
such other duties as from time to time may be assigned to the Secretary by the
Board of Directors or the President.
8. TREASURER. The treasurer shall give a bond for the faithful discharge
---------
of his duties if, and in such sum and with sureties as, the Board of Directors
require. The Treasurer shall have charge and custody of and be responsible for
all funds and securities of the corporation in such banks or other depositories
as shall be selected by the Board of Directors. The Treasurer shall perform all
the duties incident to the office of the Treasurer and such other duties as from
time to time may be assigned to the Treasurer by the Board of Directors or by
the President.
ARTICLE VI
INDEMNIFICATION
---------------
The corporation shall indemnify any and all of its directors or officers,
or former directors or officers, or any person who may have served at its
request as a director or officer of another corporation in which it owns shares
of capital stock of or which it is a creditor, against expenses actually and
necessarily incurred by them in connection with the defense of any action, suit
or proceeding in which they, or any of them, are made parties, or a party, by
reason of being or having been directors or officers or a director or officer of
the corporation or of such other corporation, except in relation to matters as
to which any such director or officer or former director or person shall be
adjudged in such action, suit or proceeding to be liable for negligence or
misconduct in the performance of duty. Such indemnification shall not be deemed
exclusive
7
<PAGE>
of any other rights to which those indemnified may be entitled, under any by-
law, agreement, vote of shareholders or otherwise.
ARTICLE VII
EXECUTION OF INSTRUMENTS
------------------------
1. EXECUTION OF INSTRUMENTS. The President and any Vice President shall
------------------------
have power to execute on behalf and in the name of the corporation any deed,
contract, bond, debenture, note or other obligations or evidences of
indebtedness, or proxy, or other instruments requiring the signature of an
officer of the corporation, except where signing and execution thereof shall be
expressly delegated by the Board of Directors to some other officer or agent of
the corporation. Unless so authorized, no officer, agent or employee shall have
any power or authority to bind the corporation in any way, to pledge its credit,
or to render it liable pecuniary for any purpose of in any amount.
2. CHECKS AND ENDORSEMENT. All checks and drafts upon the funds to the
----------------------
credit of the corporation in any of its depositories shall be signed by such of
its officers or agents as shall from time to time be determined by resolution of
the Board of Directors which may provide for the use of facsimile signatures
under specified conditions, and all notes, bills receivable, trade acceptances,
drafts and other evidences of indebtedness payable to the corporation shall, for
the purpose of the deposit, discount or collection, be endorsed by such officers
or agents of the corporation or in such manner as shall from time to time be
determined by resolution of the Board of Directors.
ARTICLE VIII
SHARES OF STOCK
---------------
1. CERTIFICATE OF STOCK. The certificates of shares of the corporation
--------------------
shall be in such form not inconsistent with the Colorado Corporation Code and
the Articles of Incorporation as shall be approved by the Board of Directors,
and shall be numbered and shall be entered in the book of the corporation as
they are issued. They shall exhibit the holder's name and the number of shares,
such other matters as shall be required by law, and shall be signed by the
President, or a Vice President, and the Secretary or an Assistant Secretary and
shall be sealed with the seal of the Corporation or a facsimile thereof.
In case any officer who has signed a certificate ceases to hold such office
prior to the issuance or delivery of the certificate, such certificate may
nevertheless be issued and delivered by the corporation as though the officer
who signed such certificate, or whose facsimile signature shall have been used
thereon, had not ceased to be such officer of the corporation.
8
<PAGE>
2. LOST AND DESTROYED CERTIFICATES. In case any certificates of stock of
-------------------------------
the corporation shall be alleged to have been destroyed or lost, the corporation
shall not be required to issue evidence satisfactory to the Board of Directors
to the destruction or loss of such certificate, and, if so required by the Board
of Directors, upon receipt also of a bond in such sum as the Board may direct,
not exceeding double the value of such stock and, if so required, with surety or
sureties satisfactory to the Board, to indemnify the corporation against any
claim that may be made against it on account of the alleged destruction or loss
of such certificate.
ARTICLE IX
CORPORATE SEAL
--------------
The corporate seal shall be in such form as shall be approved by resolution
of the Board of Directors. Said seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise. The impression
of the seal may be made and attested by either the Secretary or an Assistant
Secretary for the authentication of contracts or other papers requiring the
seal.
ARTICLE X
FISCAL YEAR
-----------
The fiscal year of the corporation shall be such year as shall be adopted
by the Board of Directors.
ARTICLE XI
CORPORATE BOOKS AND RECORDS
---------------------------
Except as otherwise required by statute, the books and records of the
corporation may be kept within or without the State of Colorado at such place or
places as may from time to time designated by the Board of Directors.
ARTICLE XII
EMERGENCY BY-LAWS AND AMENDMENTS
--------------------------------
1. EMERGENCY BY-LAWS. The Board of Directors may adopt emergency by-
-----------------
laws, which shall, notwithstanding any different provision elsewhere, be
operative during any emergency resulting from an attack on the United States or
any nuclear or atomic disaster and
9
<PAGE>
which may make any provision that may be practical and necessary for the
circumstances of the emergency.
2. AMENDMENTS. All by-laws of the corporation shall be subject to
----------
alteration, amendment or repeal, and new by-laws may be added, by the unanimous
vote of all of the members of the Board of Directors at any regular or special
meeting.
CERTIFICATE
-----------
The undersigned hereby certifies that he is the duly elected, qualified,
acting and hereto authorized Secretary of the aforesaid corporation and that the
foregoing and annexed By-Laws constitute a true and complete copy of the By-Laws
of said corporation present in full force and effect.
IN WITNESS WHEREOF, the undersigned has signed this Certificate and affixed
hereto the seal of said corporation.
DATED: Effective June 17, 1993 /S/
------------------------------------
Secretary of NATIONAL MORTGAGE
CORPORATION
10
<PAGE>
EXHIBIT 10.1
================================================================================
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
______________________________
DATED AS OF JUNE 30, 1997
______________________________
MORTGAGE SERVICING ACQUISITION CORPORATION
D/B/A NATIONAL MORTGAGE CORPORATION
AS BORROWER
AND
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
AS LENDER
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
RECITALS................................................................................ 1
SECTION 1. DEFINITIONS AND ACCOUNTING MATTERS.......................................... 1
1.01 Certain Defined Terms.......................................................... 1
1.02 Accounting Terms and Determinations............................................ 14
SECTION 2. ADVANCES, NOTE AND PREPAYMENTS.............................................. 14
2.01 Advances....................................................................... 14
2.02 Notes.......................................................................... 15
2.03 Procedure for Borrowing........................................................ 15
2.04 Repayment of Advances; Interest................................................ 17
2.05 Limitation on Types of Advances; Illegality.................................... 17
2.06 Mandatory Prepayments or Pledge................................................ 18
2.07 Optional Prepayments........................................................... 19
2.08 Requirements of Law............................................................ 19
2.09 Purpose of Advances............................................................ 19
SECTION 3. PAYMENTS; COMPUTATIONS; ETC................................................. 20
3.01 Payments....................................................................... 20
3.02 Computations................................................................... 20
SECTION 4. COLLATERAL SECURITY......................................................... 20
4.01 Collateral; Security Interest.................................................. 20
4.02 Further Documentation.......................................................... 21
4.03 Changes in Locations, Name, etc................................................ 21
4.04 Lender's Appointment as Attorney-in-Fact....................................... 22
4.05 Performance by Lender of Borrower's Obligations................................ 23
4.06 Proceeds....................................................................... 23
4.07 Remedies....................................................................... 23
4.08 Limitation on Duties Regarding Presentation of Collateral...................... 24
4.09 Powers Coupled with an Interest................................................ 24
4.10 Release of Security Interest................................................... 24
SECTION 5. CONDITIONS PRECEDENT........................................................ 25
5.01 Initial Advance................................................................ 25
5.02 Initial and Subsequent Advances................................................ 26
SECTION 6. REPRESENTATIONS AND WARRANTIES.............................................. 28
6.01 Financial Condition............................................................ 28
6.02 No Change...................................................................... 28
6.03 Corporate Existence; Compliance with Law....................................... 28
6.04 Corporate Power; Authorization; Enforceable Obligations........................ 28
6.05 No Legal Bar................................................................... 29
6.06 No Material Litigation......................................................... 29
6.07 No Default..................................................................... 29
</TABLE>
<PAGE>
<TABLE>
<S> <C>
6.08 Collateral; Collateral Security................................................ 29
6.09 Chief Executive Office......................................................... 30
6.10 Location of Books and Records.................................................. 30
6.11 Burdensome Restrictions........................................................ 30
6.12 Taxes.......................................................................... 30
6.13 Margin Regulations............................................................. 30
6.14 Investment Company Act; Other Regulations...................................... 30
6.15 Subsidiaries................................................................... 31
6.16 Bulk Transfer.................................................................. 31
6.17 Origination and Collection of Mortgage Loans................................... 31
6.18 No Adverse Selection........................................................... 31
6.19 Borrower Solvent; Fraudulent Conveyance........................................ 31
6.20 ERISA.......................................................................... 31
6.21 True Disclosure................................................................ 31
6.22 Eligibility.................................................................... 32
6.23 Licenses....................................................................... 32
6.24 Relevant States................................................................ 32
6.25 Forms of Mortgage Loan Documents............................................... 32
6.26 Settlement Agents.............................................................. 32
SECTION 7. COVENANTS OF THE BORROWER................................................... 32
7.01 Financial Statements........................................................... 32
7.02 Existence, Etc................................................................. 33
7.03 Maintenance of Property; Insurance............................................. 34
7.04 Notices........................................................................ 34
7.05 Other Information.............................................................. 36
7.06 Further Identification of Collateral........................................... 36
7.07 Repayment of Advances if Mortgage Loan is Found Defective...................... 36
7.08 Monthly Reporting.............................................................. 36
7.09 Financial Condition Covenants.................................................. 37
7.10 Limitation on Indebtedness; Guarantee Obligations.............................. 37
7.11 Subordination; Limitations on Payment or Modification of Certain Indebtedness.. 38
7.12 Prohibition of Fundamental Changes............................................. 38
7.13 Limitation on Sale or Other Disposition of Collateral.......................... 38
7.14 Limitation on Transactions with Affiliates..................................... 38
7.15 Underwriting Guidelines........................................................ 39
7.16 Limitations on Modifications, Waivers and Extensions of Mortgage Loans......... 39
7.17 Servicing...................................................................... 39
SECTION 8. EVENTS OF DEFAULT........................................................... 39
SECTION 9. REMEDIES UPON DEFAULT....................................................... 42
SECTION 10. NO DUTY OF LENDER.......................................................... 43
SECTION 11. MISCELLANEOUS.............................................................. 43
11.01 Waiver........................................................................ 43
11.02 Notices....................................................................... 43
11.03 Indemnification and Expenses.................................................. 43
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
11.04 Amendments.................................................................... 44
11.05 Successors and Assigns........................................................ 44
11.06 Survival...................................................................... 44
11.07 Captions...................................................................... 45
11.08 Counterparts.................................................................. 45
11.09 Loan Agreement Constitutes Security Agreement; Governing Law.................. 45
11.10 Submission to Jurisdiction; Waivers........................................... 45
11.11 Waiver of Jury Trial.......................................................... 46
11.12 Acknowledgments............................................................... 46
11.13 Hypothecation or Pledge of Advances........................................... 46
11.14 Assignments, Participations................................................... 46
11.15 Servicing..................................................................... 47
11.16 Periodic Due Diligence Review................................................. 48
11.17 Set-Off....................................................................... 48
</TABLE>
SCHEDULES
- ---------
SCHEDULE 1 Representations and Warranties re: Mortgage Loans
SCHEDULE 2 Filing Jurisdictions and Offices
SCHEDULE 3 Subsidiaries
SCHEDULE 4 [Intentionally Omitted]
SCHEDULE 5 Litigation
SCHEDULE 6 Settlement Agents
SCHEDULE 7 Relevant States
SCHEDULE 8 Existing Indebtedness
SCHEDULE 9 Authorized Representatives of the Borrower
SCHEDULE 10 Forms of Mortgage Loan Documents
EXHIBITS
- --------
EXHIBIT A Form of Promissory Note
EXHIBIT B Form of Custodial Agreement
EXHIBIT C [Intentionally Omitted]
EXHIBIT D Form of Notice of Borrowing and Pledge
EXHIBIT E Underwriting Guidelines
EXHIBIT F Covenant Compliance Certificate
-iii-
<PAGE>
EXHIBIT G Form of Instruction Letter
EXHIBIT H Form of Affiliate Subordination Agreement
EXHIBIT I Form of Instruction Letter Power of Attorney
-iv-
<PAGE>
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT, dated as of June 30,
1997, between MORTGAGE SERVICING ACQUISITION CORPORATION d/b/a NATIONAL MORTGAGE
CORPORATION, a Colorado corporation (the "Borrower"), and GREENWICH CAPITAL
--------
FINANCIAL PRODUCTS, INC., a Delaware corporation (the "Lender").
------
RECITALS
The Borrower and the Lender are parties to the Interim Loan and
Security Agreement, dated as of April 24, 1997 (as in effect on the date hereof,
the "Existing Loan Agreement"). Pursuant to the Existing Loan Agreement, the
-----------------------
Borrower has obtained financing from time to time to provide interim funding for
the origination and acquisition of certain Mortgage Loans (as defined herein),
which Mortgage Loans are to be sold or contributed by the Borrower to one or
more trusts or other entities to be sponsored by the Borrower or an Affiliate
thereof, or to third-parties with consent of the Lender, and which Mortgage
Loans secure Advances (as defined in the Existing Loan Agreement).
The Lender has agreed, subject to the terms and conditions of the
Existing Loan Agreement, to provide short-term financing to the Borrower, with a
portion of the proceeds of the sale of all mortgage-backed securities issued by
any such trust or other entity, together with a portion of the proceeds of any
permitted whole loan sales, together with other funds of the Borrower, if
necessary, being used to repay any Advances made thereunder.
The Borrower and the Lender desire to amend and restate the Existing
Loan Agreement, subject to the terms and conditions of this Loan Agreement, to
provide for the Lender to continue to provide financing to the Borrower in
respect of such Mortgage Loans.
Accordingly, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree
that the Existing Agreement shall be amended and restated in its entirety as
provided in the heading and recitals hereto and as follows:
Section 1. Definitions and Accounting Matters.
----------------------------------
1.01 Certain Defined Terms. As used herein, the following terms
---------------------
shall have the following meanings (all terms defined in this Section 1.01 or in
other provisions of this Loan Agreement in the singular to have the same
meanings when used in the plural and vice versa):
---- -----
"Accepted Servicing Practices" shall have the meaning assigned thereto
----------------------------
in Section 11.15(a) hereof.
"Advance" shall have the meaning assigned thereto in Section 2.01
-------
hereof.
"Advance Balance" shall mean, with respect to each Mortgage Loan and
---------------
any related Advance, the original principal balance of such Advance made in
respect of such Mortgage Loan reduced by all Principal Paydowns on such Mortgage
Loan that have been remitted to the Lender pursuant to Section 2.06(d) hereof.
<PAGE>
"Affiliate" means, with respect to any Person, any other Person which,
---------
directly or indirectly, controls, is controlled by, or is under common control
with, such Person. For purposes of this definition, "control" (together with
the correlative meanings of "controlled by" and "under common control with")
means possession, directly or indirectly, of the power (a) to vote 10% or more
of the securities (on a fully diluted basis) having ordinary voting power for
the directors or managing general partners (or their equivalent) of such Person,
or (b) to direct or cause the direction of the management or policies of such
Person, whether through the ownership of voting securities, by contract, or
otherwise.
"Affiliate Subordination Agreement" shall mean an Affiliate
---------------------------------
Subordination Agreement, substantially in the form of Exhibit H hereto, as
---------
amended, supplemented or otherwise modified from time to time.
"Applicable Collateral Percentage" for any Fallout Loan shall be 90%;
--------------------------------
provided, however, that if a Fallout Loan:
- -------- -------
(a) is 60 days or more Delinquent in respect of the first Monthly
Payment, the Applicable Collateral Percentage for such Fallout Loan shall
be 60% (notwithstanding that clause (b), below may otherwise be applicable
to such Fallout Loan);
(b) is 90 days or more Delinquent in respect of any Monthly Payment
(other than the first Monthly Payment), the Applicable Collateral
Percentage for such Fallout Loan shall be 75%; or
(c) is a Fallout Loan described in clause (ii) of the definition of
Fallout Loan, the Applicable Collateral Percentage for such Fallout Loan
shall be the percentage determined by the Lender on the applicable Funding
Date.
"Applicable Margin" shall mean:
-----------------
(a) to the extent an Advance is a Wet-Ink Advance or a Correspondent
Advance, 2.25% per annum,
(b) to the extent an Advance is a Fallout Advance, 3.00% per annum,
and
(c) to the extent an Advance is not a Wet-Ink Advance, a Correspondent
Advance or a Fallout Advance, 1.75% per annum.
"Attorney Bailee Letter" shall have the meaning assigned to such term
----------------------
in the Custodial Agreement.
"Bankruptcy Code" shall mean the United States Bankruptcy Code of
---------------
1978, as amended from time to time.
"Borrower" shall have the meaning provided in the heading hereof.
--------
"Borrowing Base" shall mean the aggregate Collateral Value of (a) all
--------------
Eligible Mortgage Loans and (b) all Fallout Loans.
"Borrowing Base Deficiency" shall have the meaning provided in Section
-------------------------
2.06 hereof.
-2-
<PAGE>
"BPO" shall mean a broker's price opinion reasonably acceptable to the
---
Lender, obtained at the sole cost and expense of the Borrower.
"Business Day" shall mean any day other than (i) a Saturday or Sunday
------------
or (ii) a day on which the New York Stock Exchange, the Federal Reserve Bank of
New York or the Custodian is authorized or obligated by law or executive order
to be closed.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
----
time to time.
"Collateral" shall have the meaning provided in Section 4.01(b)
----------
hereof.
"Collateral Value" shall mean, with respect to (a) each Eligible
----------------
Mortgage Loan, the lesser of (i) 98% of the Market Value of such Eligible
Mortgage Loan and (ii) 103% of the Par Amount of such Eligible Mortgage Loan
(subject, however, to the second proviso to clause (v)(F) of the proviso to this
definition); and (b) each Fallout Loan, an amount equal to the lesser of (x) the
Applicable Collateral Percentage of the Par Amount of such Fallout Loan and (y)
the Market Value of such Fallout Loan; provided that the following additional
--------
limitations on Collateral Value shall apply:
(i) the aggregate Collateral Value of all Wet-Ink Mortgage Loans
and Correspondent Mortgage Loans may not at any one time exceed
$15,000,000;
(ii) the aggregate Collateral Value of all Fallout Loans may not at
any time exceed $5,000,000;
(iii) the aggregate Collateral Value of all Non-Conforming Mortgage
Loans may not at any time exceed $5,000,000;
(iv) the aggregate Collateral Value of all Fallout Loans which are
past due in respect of the first Monthly Payment under the related Mortgage
Note (without regard to applicable grace periods) may not at any time
exceed $1,000,000;
(v) the Collateral Value shall be zero for each Mortgage Loan:
----
(A) which is 30 days or more Delinquent in respect of the first
Monthly Payment on the applicable Funding Date;
(B) which has been released from the possession of the
Custodian under Section 5(a) of the Custodial Agreement to any Person
other than the Lender or its bailee for a period in excess of fifteen
(15) days (or if such fifteenth day is not a Business Day, the next
succeeding Business Day);
(C) which has been released from the possession of the
Custodian (i) under Section 5(b) of the Custodial Agreement under any
Transmittal Letter in excess of the time period stated in such
Transmittal Letter for release, or (ii) under Section 5(c) of the
Custodial Agreement under an Attorney Bailee Letter in excess of three
(3) Business Days after such Attorney's Bailee Letter is terminated or
ceases to be in full force and effect;
-3-
<PAGE>
(D) in respect of which the related Mortgage Note has been
extinguished under relevant state law in connection with a judgment of
foreclosure or foreclosure sale or otherwise;
(E) which is an Eligible Mortgage Loan, as to which 180 days have
passed since such Eligible Mortgage Loan was first pledged to the
Lender hereunder;
(F) which is a Fallout Loan, as to which 90 days have passed
since such Fallout Loan became a Fallout Loan; provided, that if the
--------
Lender has received a BPO in respect of such Fallout Loan on, or no
more than 10 Business Days prior to, such 90th day, the Collateral
Value for such Fallout Loan shall be the lesser of (i) 75% of the Par
Amount of such Fallout Loan (or, in the case of a Fallout Loan which
is 60 days or more Delinquent in respect of the first Monthly Payment,
60% of the Par Amount of such Fallout Loan) and (ii) the Market Value
of such Fallout Loan, until 180 days have passed since such Fallout
Loan was first pledged to the Lender hereunder, at which time the
Collateral Value for such Fallout Loan shall be zero; and provided,
--------
further, that with respect to any Mortgage Loan that became a Fallout
-------
Loan as a result of the failure to satisfy the representations
contained in clause (b) of Part I of Schedule 1 (other than subclause
(i) of such clause (b)) (x) as to which more than 90 days has passed
since such Mortgage Loan became a Fallout Loan, (y) which was entitled
to a Collateral Value of more than zero pursuant to the immediately
preceding proviso, and (z) which has after such 90 day period again
become an Eligible Mortgage Loan, the Collateral Value for such
Mortgage Loan shall be determined for such Eligible Mortgage Loan
without regard to such Eligible Mortgage Loan having previously been a
Fallout Loan; and provided, further, that, if so requested by the
-------- -------
Lender, if any Eligible Mortgage Loan described in the immediately
preceding proviso again becomes a Fallout Loan for any reason, such
Mortgage Loan shall remain a Fallout Loan permanently thereafter;
(G) which is a Wet-Ink Mortgage Loan and for which (except as a
result of the Custodian's negligence including, without limitation,
the Custodian's failure to comply with the timing deadlines under the
Custodial Agreement) (1) the Lender has not received a Trust Receipt
and an Exception Report showing no Material Exceptions in respect
thereof by 4:00 p.m. on the eighth Business Day following the
applicable Funding Date, or (2) the Lender has failed to receive
confirmation from the Custodian by 11:00 a.m. on the fifteenth
Business Day after such Trust Receipt and Exception Report are
delivered by the Custodian that all missing Mortgage Loan Documents
listed as Exceptions on such Exception Report have been delivered to
the Custodian and all other Exceptions relating thereto have been
cured (other than Exceptions acceptable to the Lender in its sole
discretion exercised in good faith);
(H) which is a Correspondent Mortgage Loan and for which (except
as a result of the Custodian's negligence including, without
limitation, the Custodian's failure to comply with the timing
deadlines under the Custodial Agreement) (1) the Lender has not
received a Trust Receipt and an Exception Report showing no Material
Exceptions in respect thereof by 4:00 p.m. on the Business Day
following the applicable Funding Date, or (2) the Lender has failed to
receive confirmation from the Custodian by 11:00 a.m. on the fifteenth
Business Day after such Trust Receipt and Exception Report are
delivered by the Custodian that all missing Mortgage Loan Documents
listed as Exceptions on such Exception Report have been delivered to
the Custodian and all other
-4-
<PAGE>
Exceptions relating thereto have been cured (other than Exceptions
acceptable to the Lender in its sole discretion exercised in good
faith);
(I) as to which (i) the related Mortgage Note or the related
Mortgage is not genuine or is not the legal, valid, binding and
enforceable obligation of the maker thereof, subject to no right of
rescission, set-off, counterclaim or defense, or (ii) such Mortgage,
is not a valid, subsisting, enforceable and perfected first or second
lien on the Mortgaged Property.
"Commonly Controlled Entity" shall mean an entity, whether or not
--------------------------
incorporated, which is under common control with the Borrower within the meaning
of Section 4001 of ERISA or is part of a group which includes the Borrower and
which is treated as a single employer under Section 414 of the Code.
"Consolidated Tangible Equity" shall mean the aggregate "assets" of
----------------------------
the Borrower and its Subsidiaries less the aggregate "liabilities" of the
Borrower and its Subsidiaries and all intangible assets. The term "asset" shall
have the meaning ascribed to such term by GAAP. The term "liability" shall mean
those obligations or liabilities of the Borrower and its Subsidiaries which, in
accordance with GAAP, would be included in the liability side of the Borrower's
balance sheet on a consolidated basis. The term "intangible assets" shall have
the meaning ascribed to such term in accordance with GAAP, and shall include
amounts on account of unamortized goodwill (including an amount representing the
cost of acquisitions of subsidiaries in excess of underlying tangible assets),
patents, trademarks, trade names, copyrights, leasehold improvements not
recoverable at the expiration of a lease, franchise and operating rights but
excluding capitalized servicing rights.
"Contractual Obligation" shall mean as to any Person, any provision of
----------------------
any agreement, instrument or other undertaking to which such Person is a party
or by which it or any of its property is bound or any provision of any security
issued by such Person.
"Correspondent Advance" shall mean an Advance secured by a
---------------------
Correspondent Mortgage Loan. A Correspondent Advance shall cease to be a
Correspondent Advance on the date that the underlying Correspondent Mortgage
Loan ceases to be a Correspondent Mortgage Loan (in accordance with the
definition thereof).
"Correspondent Mortgage Loan" shall mean an Eligible Mortgage Loan
---------------------------
originated by a correspondent lender or broker which is pledged to the Lender
simultaneously with purchase thereof by the Borrower, which purchase is financed
in part or in whole with proceeds of Advances distributed to the seller thereof
by the Custodian and as to which the Custodian has possession of the related
Mortgage File but has not yet issued a Trust Receipt and an Exception Report to
the Lender. A Mortgage Loan shall cease to be a Correspondent Mortgage Loan on
the date on which the Lender has received a Trust Receipt from the Custodian
with respect to such Mortgage Loan confirming that the Custodian has physical
possession of the related Mortgage File, which Trust Receipt indicates the
presence of no Material Exceptions in the related Mortgage File.
"Custodial Agreement" shall mean the Amended and Restated Custodial
-------------------
Agreement, dated as of the date hereof, among the Borrower, the Custodian and
the Lender, substantially in the form of Exhibit B hereto, as the same shall be
---------
modified and supplemented and in effect from time to time.
-5-
<PAGE>
"Custodian" shall mean Texas Commerce Bank National Association, as
---------
custodian under the Custodial Agreement, and its successors and permitted
assigns thereunder.
"Default" shall mean an Event of Default or an event that with notice
-------
or lapse of time or both would become an Event of Default.
"Delinquency Rate" shall mean a fraction, expressed as a percentage,
----------------
the numerator of which is the aggregate principal amount of all mortgage loans
for which delinquencies are being measured which are 90 or more days
contractually past due which shall include mortgage loans subject to bankruptcy,
forbearance, in foreclosure and REO Properties and the denominator of which is
the aggregate principal amount of all mortgage loans in the related portfolio or
pool, as specified.
"Delinquent" shall mean, in respect of a Mortgage Loan, delinquent in
----------
respect of a Monthly Payment under the applicable Mortgage Note (without regard
to applicable grace periods).
"Dollars" and "$" shall mean lawful money of the United States of
------- -
America.
"Due Diligence Review" shall mean the performance by the Lender of any
--------------------
or all of the reviews permitted under Section 11.16 hereof with respect to any
or all of the Mortgage Loans, as desired by the Lender from time to time.
"Effective Date" shall mean the date upon which the conditions
--------------
precedent set forth in Section 5.01 shall have been satisfied.
"Eligible Mortgage Loan" shall mean a Mortgage Loan secured by a first
----------------------
or second mortgage lien on a one-to-four family residential property, bearing a
fixed rate or LIBOR-based adjustable interest rate, as to which the
representations and warranties on Schedule 1 hereof are true and correct;
provided, however, that if one or more representations or warranties on Schedule
- -------- -------
1 are not true and correct, and (i) such breach does not constitute a Material
Breach and (ii) the Borrower did not have knowledge of such breach at the time
such Mortgage Loan was pledged to the Lender and included in the Borrowing Base,
then the Borrower shall have 30 days after its receipt of knowledge of such
breach to cure the same, during which time such Mortgage Loan shall continue to
be an Eligible Mortgage Loan.
"ERISA" shall mean the Employee Retirement Income Security Act of
-----
1974, as amended from time to time.
"ERISA Affiliate" shall mean any corporation or trade or business that
---------------
is a member of any group of organizations (i) described in Section 414(b) or (c)
of the Code of which the Borrower is a member and (ii) solely for purposes of
potential liability under Section 302(c)(11) of ERISA and Section 412(c)(11) of
the Code and the lien created under Section 302(f) of ERISA and Section 412(n)
of the Code, described in Section 414(m) or (o) of the Code of which the
Borrower is a member.
"Event of Default" shall have the meaning provided in Section 8
----------------
hereof.
"Exception Report" shall mean the exception report prepared by the
----------------
Custodian pursuant to the Custodial Agreement.
"Exception" shall have the meaning assigned thereto in the Custodial
---------
Agreement.
"Fallout Advance" shall mean an Advance secured by one or more Fallout
---------------
Loans.
-6-
<PAGE>
"Fallout Loans" shall mean (i) Mortgage Loans which were Eligible
-------------
Mortgage Loans on the applicable Funding Date but which have ceased to be
Eligible Mortgage Loans, and (ii) Mortgage Loans which are not Eligible Mortgage
Loans and as to which on the applicable Funding Dates the Lender waived one or
more requirements of the definition of Eligible Mortgage Loan in making an
Advance secured thereby.
"Federal Funds Rate" shall mean, for any day, the weighted average of
------------------
the rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers, as published on the next
succeeding Business Day by the Federal Reserve Bank of New York, or, if such
rate is not so published for any day which is a Business Day, the average of the
quotations for the day of such transactions received by the Lender from three
federal funds brokers of recognized standing selected by it.
"FHA" shall mean the Federal Housing Administration and any successor
---
thereto.
"FHLMC" shall mean the Federal Home Loan Mortgage Corporation and any
-----
successor thereto.
"First Lien Mortgage Loan" shall mean an Eligible Mortgage Loan
------------------------
secured by the lien on the Mortgaged Property, subject to no prior liens on such
Mortgaged Property other than Permitted Exceptions.
"FNMA" shall mean the Federal National Mortgage Association and any
----
successor thereto.
"Funding Date" shall mean the date on which an Advance is made
------------
hereunder, or if later (solely in the case of Wet-Ink Advances), the date on
which the proceeds of such Advance are used to fund a Wet-Ink Mortgage Loan.
"GAAP" shall mean generally accepted accounting principles as in
----
effect from time to time in the United States of America.
"Governmental Authority" shall mean any nation or government, any
----------------------
state or other political subdivision thereof, any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government and any court or arbitrator having jurisdiction over the Borrower,
any of its Subsidiaries or any of its properties.
"GNMA" shall mean the Government National Mortgage Association and any
----
successor thereto.
"Guarantee Obligation" as to any Person (the "guaranteeing person"),
-------------------- -------------------
shall mean any obligation of (a) the guaranteeing person or (b) another Person
(including, without limitation, any bank under any letter of credit) with
respect to which the guaranteeing person has issued a reimbursement,
counterindemnity or similar obligation, in either case guaranteeing or in effect
guaranteeing any Indebtedness, leases, dividends or other obligations (the
"primary obligations") of any other third Person (the "primary obligor") in any
------------------- ---------------
manner, whether directly or indirectly, including, without limitation, any
obligation of the guaranteeing person, whether or not contingent, (i) to
purchase any such primary obligation or any property constituting direct or
indirect security therefor, (ii) to advance or supply funds (1) for the purchase
or payment of any such primary obligation or (2) to maintain working capital or
equity capital of the primary obligor or otherwise to maintain the net worth or
-7-
<PAGE>
solvency of the primary obligor, (iii) to purchase property, securities or
services primarily for the purpose of assuring the owner of any such primary
obligation of the ability of the primary obligor to make payment of such primary
obligation or (iv) otherwise to assure or hold harmless the owner of any such
primary obligation against loss in respect thereof; provided, however, that the
-------- -------
term Guarantee Obligation shall not include endorsements of instruments for
deposit or collection in the ordinary course of business. The terms "Guarantee"
---------
and "Guaranteed" used as a verb shall have a correlative meaning. The amount of
----------
any Guarantee Obligation of any guaranteeing person shall be deemed to be the
lower of (a) an amount equal to the stated or determinable amount of the primary
obligation in respect of which such Guarantee Obligation is made and (b) the
maximum amount for which such guaranteeing person may be liable pursuant to the
terms of the instrument embodying such Guarantee Obligation, unless such primary
obligation and the maximum amount for which such guaranteeing person may be
liable are not stated or determinable, in which case the amount of such
Guarantee Obligation shall be such guaranteeing person's maximum reasonably
anticipated liability in respect thereof as determined by the Borrower in good
faith.
"Indebtedness" shall mean, of any Person at any date, without
------------
duplication, (a) all indebtedness of such Person for borrowed money (whether by
loan or the issuance and sale of debt securities) or for the deferred purchase
price of property or services (other than current trade liabilities incurred in
the ordinary course of business and payable in accordance with customary
practices), (b) any other indebtedness of such Person which is evidenced by a
note, bond, debenture or similar instrument, (c) all obligations of such Person
under financing leases, (d) all obligations of such Person in respect of letters
of credit, acceptances or similar instruments issued or created for the account
of such Person and (e) all liabilities secured by any Lien on any property owned
by such Person even though such Person has not assumed or otherwise become
liable for the payment therefor; provided, that for purposes of this Loan
--------
Agreement, Indebtedness shall not include Indebtedness subject to the terms of
an Affiliate Subordination Agreement not due within one (1) year of such date.
"Instruction Letter" shall mean a letter in the form of Exhibit G
------------------ ---------
hereto.
"Insured Closing Letter" shall mean a master letter of indemnity from
----------------------
a title insurance company addressed to the Borrower with coverage that is
customarily acceptable to Persons engaged in the origination of mortgage loans
similar to the Mortgage Loans, and, subject to the 30-day grace period provided
for in Section 7.04(d), listing or otherwise identifying the Settlement Agents
covered thereby (the Lender hereby agreeing that for purposes of this Loan
Agreement, a letter of indemnity from a title insurance company which is
substantially similar to the forms attached hereto as Schedule 11 shall be
acceptable as an Insured Closing Letter).
"Interest Period" shall mean, with respect to any Advance, (i)
---------------
initially, for any Advance, the period commencing on the borrowing date with
respect to such Advance and ending on the tenth Business Day of the next
succeeding month, and (ii) thereafter, each period commencing on the tenth
Business Day of a month and ending on the tenth Business Day of the next
succeeding month. Notwithstanding the foregoing, no Interest Period may begin
before and end after the Termination Date.
"Interest Rate Protection Agreement" shall mean, with respect to any
----------------------------------
or all of the Mortgage Loans, any interest rate swap, cap or collar agreement or
similar arrangements providing for protection against fluctuations in interest
rates or the exchange of nominal interest obligations, either generally or under
specific contingencies, or for any forward sale of Mortgage Loans, entered into
by the Borrower and reasonably acceptable to the Lender.
-8-
<PAGE>
"Investment Company Act" shall mean the Investment Company Act of
----------------------
1940, as amended.
"Invoice Date" shall have the meaning provided in Section 2.04(b).
------------
"Lender" shall have the meaning provided in the heading hereto.
------
"LIBO Base Rate" shall mean for any Advance, with respect to each day
--------------
during each Interest Period pertaining to such Advance, the rate per annum equal
to the rate appearing at page 3750 of the Telerate Screen as one-month LIBOR on
the first day of such Interest Period, and if such rate shall not be so quoted,
the rate per annum at which the Lender is offered Dollar deposits at or about
11:00 a.m., New York City time, on such date by prime banks in the interbank
eurodollar market where the eurodollar and foreign currency exchange operations
in respect of its Advances are then being conducted for delivery on such day for
a period of one month, and in an amount comparable to the amount of the Advances
to be outstanding on such day.
"LIBO Rate" shall mean with respect to each day during each Interest
---------
Period pertaining to an Advance, a rate per annum determined by the Lender in
its sole good-faith discretion in accordance with the following formula (rounded
upwards to the nearest 1/100th of one percent), which rate as determined by the
Lender shall be conclusive absent manifest error by the Lender:
LIBO Base Rate
------------------------------------
1.00 - LIBO Reserve Requirements
"LIBO Reserve Requirements" shall mean for any Interest Period for any
-------------------------
Advance and for any Lender as to which LIBO Reserve Requirements are actually
required to be maintained, the aggregate (without duplication) of the rates
(expressed as a decimal fraction) of reserve requirements in effect on such day
or during such Interest Period, as applicable (including, without limitation,
basic, supplemental, marginal and emergency reserves under any regulations of
the Board of Governors of the Federal Reserve System or other Governmental
Authority having jurisdiction with respect thereto), dealing with reserve
requirements prescribed for eurocurrency funding (currently referred to as
"Eurocurrency Liabilities" in Regulation D of such Board) maintained by a member
bank of such Governmental Authority.
"Lien" shall mean any mortgage, lien, pledge, charge, security
----
interest or similar encumbrance.
"Loan Agreement" shall mean this Amended and Restated Loan and
--------------
Security Agreement, as the same may be amended, supplemented or otherwise
modified from time to time.
"Loan Documents" shall mean, collectively, this Loan Agreement, the
--------------
Note and the Custodial Agreement.
"Market Value" shall mean, with respect to any Mortgage Loan, the
------------
price at which such Mortgage Loan could be sold to a third-party, as determined
by the Lender in its reasonable discretion (exercised in good faith), which
Market Value may be determined to be zero.
-9-
<PAGE>
"Material Adverse Effect" shall mean an actual material adverse effect
-----------------------
on (a) the financial condition or business operations of the Borrower, (b) the
validity or enforceability of any of the Loan Documents, or (c) the Collateral
taken as a whole.
"Material Breach" shall mean the breach of a representation and
---------------
warranty set forth in paragraphs (a), (b), (d), (e), (g), (h), (j), (k), (m),
(v), (w), (cc), (dd), (gg), (hh), (jj), (pp), (ss) or (tt) of Part I of Schedule
1 hereto; provided, that in the case of paragraph (h), a Material Breach shall
--------
not be deemed to have occurred in connection with a Payoff unless the Borrower
fails to comply with Section 2.06(b) hereof.
"Material Exception" shall mean, with respect to any Mortgage Loan,
------------------
any Exception listed on an Exception Report consisting of the absence from the
Mortgage File, or deficiency in respect of, any of the Mortgage Loan Documents
set forth in Section 2(b)(i), 2(b)(iii), 2(b)(iv), 2(b)(v), 2(b)(vi) or
2(b)(vii) of the Custodial Agreement.
"Maximum Credit" shall mean $100,000,000.
--------------
"Monthly Payment" means the scheduled monthly payment of principal and
---------------
interest on a Mortgage Loan as adjusted in accordance with changes in the
Mortgage Interest Rate pursuant to the provisions of the Mortgage Note for an
adjustable rate Mortgage Loan.
"Monthly Payment Date" shall mean, with respect to any calendar month,
--------------------
the Business Day next succeeding the Invoice Date occurring during such month.
"Mortgage" shall mean the mortgage, deed of trust or other instrument
--------
securing a Mortgage Note, which creates a first or second lien on the fee in
real property securing the Mortgage Note.
"Mortgage File" shall have the meaning assigned thereto in the
-------------
Custodial Agreement.
"Mortgage Interest Rate" means the annual rate of interest borne on a
----------------------
Mortgage Note, which shall be adjusted from time to time with respect to
adjustable rate Mortgage Loans.
"Mortgage Loan" shall mean a mortgage loan which the Custodian has
-------------
been instructed to hold for the Lender pursuant to the Custodial Agreement, and
which Mortgage Loan includes, without limitation (i) a Mortgage Note and related
Mortgage and (ii) all right, title and interest of the Borrower in and to the
Mortgaged Property covered by such Mortgage.
"Mortgage Loan Documents" shall mean, with respect to a Mortgage Loan,
-----------------------
the documents comprising the Mortgage File for such Mortgage Loan.
"Mortgage Loan Schedule" shall mean a schedule of Mortgage Loans
----------------------
containing the following information with respect to each Mortgage Loan, to be
delivered by the Borrower to the Lender pursuant to Section 2.03(a) hereof: (i)
the Borrower's Mortgage Loan number; (ii) the Mortgagor's name and the street
address; (iii) the current principal balance; (iv) the original principal amount
with respect to any Mortgage Loan originated by the Borrower and the principal
amount purchased by the Borrower with respect to a Mortgage Loan acquired by the
Borrower subsequent to its origination; (v) the combined loan-to-value ratio as
of the date of the origination of the related Mortgage Loan; (vi) the next due
date, (vii) the mortgage interest rate, (viii) the final maturity date under the
Mortgage Note; (ix) the Monthly Payment; (x) whether such Mortgage Loan is a
First Lien Mortgage Loan or a Second Lien
-10-
<PAGE>
Mortgage Loan, (xi) whether such Mortgage Loan is a Wet-Ink Mortgage Loan; (xii)
in the case of a Wet-Ink Mortgage Loan, the Settlement Agent therefor; and
(xiii) such other information as shall be mutually agreed upon by Borrower and
Lender.
"Mortgage Note" shall mean the original executed promissory note or
-------------
other evidence of the indebtedness of a mortgagor/borrower with respect to a
Mortgage Loan.
"Mortgaged Property" shall mean the real property (including all
------------------
improvements, buildings, fixtures, building equipment and personal property
thereon and all additions, alterations and replacements made at any time with
respect to the foregoing) and all other collateral securing repayment of the
debt evidenced by a Mortgage Note.
"Mortgagor" shall mean the obligor on a Mortgage Note.
---------
"Multiemployer Plan" shall mean a Plan which is a multiemployer plan
------------------
as defined in Section 4001(a)(3) of ERISA.
"Non-Conforming Mortgage Loan" shall mean a Mortgage Loan originated
----------------------------
or re-underwritten generally pursuant to, but which does not fully comply with,
the Underwriting Guidelines, but as to which variances from the Underwriting
Guidelines have been specifically approved by the Borrower's chief credit
officer or chief underwriter after making a determination that mitigating
factors in respect thereof justified such approval.
"Non-Excluded Taxes" shall have the meaning provided in Section 2.09
------------------
hereof.
"Note" shall mean the amended and restated promissory note provided
----
for by Section 2.02(a) hereof for Advances and any promissory note delivered in
substitution or exchange therefor, in each case as the same shall be modified
and supplemented and in effect from time to time.
"Notice of Borrowing and Pledge" shall have the meaning provided in
------------------------------
Section 2.03(a) hereof.
"Other Agreements" shall mean any Significant Documents (other than
----------------
this Loan Agreement) and any other agreement between Borrower and the Lender or
any of its Affiliates, whether now existing or hereafter entered into, as any
such agreement may be amended, supplemented or otherwise modified from time to
time.
"Par Amount" shall mean, in respect of a Mortgage Loan at any time,
----------
the outstanding unpaid principal balance of such Mortgage Loan at such time.
"Participants" shall have the meaning set forth in Section 11.14(b)
------------
hereof.
"Paydown Account" shall have the meaning assigned to such term in the
---------------
Custodial Agreement.
"Payoff" shall mean, with respect to any Mortgage Loan, repayment by
------
the applicable Mortgagor of all outstanding principal thereunder together with
all interest accrued thereon to the date of such repayment and any penalty or
premium thereon.
-11-
<PAGE>
"Payoff Proceeds" shall mean, with respect to any Mortgage Loan, all
---------------
funds received from the applicable Mortgagor in connection with a Payoff.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
----
entity succeeding to any or all of its functions under ERISA.
"Permitted Exceptions" shall mean the exceptions to lien priority set
--------------------
forth in the second sentence of paragraph (j) on Schedule 1 hereof.
"Person" shall mean any individual, corporation, company, voluntary
------
association, partnership, joint venture, limited liability company, trust,
unincorporated association or Governmental Authority.
"Plan" shall mean at a particular time, any employee benefit plan
----
which is covered by ERISA and in respect of which the Borrower or a Commonly
Controlled Entity is (or, if such plan were terminated at such time, would under
Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5)
of ERISA.
"Pledged Mortgage Loans" shall have the meaning provided in Section
----------------------
4.01(b)(i).
"Post-Default Rate" shall mean, in respect of any principal of any
-----------------
Advance or any other amount under this Loan Agreement, the Note or any other
Loan Document that is not paid when due to the Lender (whether at stated
maturity, by acceleration, by optional or mandatory prepayment or otherwise), a
rate per annum during the period from and including the due date to but
excluding the date on which such amount is paid in full equal to 4% per annum
plus (a) the interest rate otherwise applicable to such Advance or other amount,
- ----
or (b) if no interest rate is otherwise applicable, the interest rate applicable
to Wet-Ink Advances.
"Principal Paydowns" shall mean, with respect to any Mortgage Loan,
------------------
any payment or other recovery of principal on such Mortgage Loan (other than
Payoff Proceeds), which is received by or on behalf of the Borrower, including
any penalty or premium thereon.
"Property" shall mean any right or interest in or to property of any
--------
kind whatsoever, whether real, personal or mixed and whether tangible or
intangible.
"RDC Indebtedness" shall mean Indebtedness of the Borrower in favor of
----------------
RDC III, Inc., an Affiliate of the Borrower, not to exceed $2,000,000, which is
borrowed from time to time to meet the working capital needs of the Borrower
pending the establishment of a working capital facility with a third-party
lender.
"Regulations G, T, U and X" shall mean Regulations G, T, U and X of
-------------------------
the Board of Governors of the Federal Reserve System (or any successor), as the
same may be modified and supplemented and in effect from time to time.
"Reportable Event" shall mean any of the events set forth in Section
----------------
4043(b) of ERISA, other than those events as to which the thirty day notice
period is waived under subsections .13, .14, .16, .18, .19 or .20 of PBGC Reg.
(S) 2615.
"Responsible Officer" shall mean, as to any Person, the chief
-------------------
executive officer (other than, in the case of the Borrower, the current interim
chief executive officer), chief operating officer or,
-12-
<PAGE>
with respect to financial matters, the chief financial officer of such Person;
provided, that in the event any such officer is unavailable at any time he or
- --------
she is required to take any action hereunder, Responsible Officer shall mean any
officer authorized to act on such officer's behalf as demonstrated to the Lender
to its reasonable satisfaction.
"Requirement of Law" shall mean as to any Person, the certificate of
------------------
incorporation and by-laws or other organizational or governing documents of such
Person, and any law, treaty, rule or regulation or determination of an
arbitrator or a court or other Governmental Authority, in each case applicable
to or binding upon such Person or any of its property or to which such Person or
any of its property is subject.
"Second Lien Mortgage Loan" shall mean an Eligible Mortgage Loan
-------------------------
secured by the lien on the Mortgaged Property, subject to one prior lien on such
Mortgaged Property securing financing obtained by the related Mortgagor and to
Permitted Exceptions.
"Secured Obligations" shall have the meaning provided in Section
-------------------
4.01(c) hereof.
"Servicing Records" shall have the meaning provided in Section
-----------------
11.15(b) hereof.
"Settlement Agent" shall have the meaning assigned thereto in the
----------------
Custodial Agreement.
"Significant Documents" shall mean this Loan Agreement; the Residual
---------------------
and Working Capital Financing Agreement, dated as of June 30, 1997, (the
"Residual Agreement"), among the Borrower, the Lender, and ContiTrade Services
------------------
L.L.C., a Delaware limited liability company ("ContiTrade"); the Secured Notes
----------
issued pursuant to the Residual Agreement; the Master Agreement, dated as of
June 30, 1997 (the "Master Agreement"), among the Borrower, the Lender,
----------------
ContiTrade and ContiFinancial Services Corporation; the Warrants issued by the
Borrower in favor of the Lender and ContiTrade pursuant to the Master Agreement;
the Subordinated Debt Agreement, dated as of June 30, 1997 (the "Subordinated
------------
Debt Agreement", between the Borrower and ContiTrade; and the Intercreditor
- --------------
Agreement, dated as of June 30, 1997 (the "Intercreditor Agreement", among the
-----------------------
Borrower, the Lender and ContiTrade; as any of the foregoing documents may be
amended, supplemented or otherwise modified in accordance with the terms of the
Residual Agreement.
"Significant Jurisdiction" shall mean any state or other jurisdiction
------------------------
in which Mortgage Loans constituting 15% or more of the aggregate Par Amount of
all Mortgage Loans have been originated during the preceding six-month period
ending December 31 or June 30, as the case may be.
"Single Employer Plan" shall mean any Plan which is covered by Title
--------------------
IV of ERISA, but which is not a Multiemployer Plan.
"Subsidiary" shall mean, with respect to any Person, any corporation,
----------
partnership or other entity of which at least a majority of the securities or
other ownership interests having by the terms thereof ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions of such corporation, partnership or other entity (irrespective of
whether or not at the time securities or other ownership interests of any other
class or classes of such corporation, partnership or other entity shall have or
might have voting power by reason of the happening of any contingency) is at the
time directly or indirectly owned or controlled by such Person or one or more
Subsidiaries of such Person or by such Person and one or more Subsidiaries of
such Person.
-13-
<PAGE>
"Termination Date" shall mean June 28, 1998 or such earlier date on
----------------
which this Loan Agreement shall terminate in accordance with the provisions
hereof or by operation of law.
"Transmittal Letter" shall have the meaning assigned to such term in
------------------
the Custodial Agreement.
"Trust Account" shall have the meaning assigned to such term in the
-------------
Custodial Agreement.
"Trust Receipt" shall have the meaning assigned to such term in the
-------------
Custodial Agreement.
"Underwriting Guidelines" shall mean the underwriting guidelines
-----------------------
attached as Exhibit E hereto, as amended from time to time in accordance with
---------
Section 7.15.
"Uniform Commercial Code" shall mean the Uniform Commercial Code as in
-----------------------
effect on the date hereof in the State of New York; provided that if by reason
of mandatory provisions of law, the perfection or the effect of perfection or
non-perfection of the security interest in any Collateral is governed by the
Uniform Commercial Code as in effect in a jurisdiction other than New York,
"Uniform Commercial Code" shall mean the Uniform Commercial Code as in effect in
such other jurisdiction for purposes of the provisions hereof relating to such
perfection or effect of perfection or non-perfection.
"VA" shall mean the U.S. Department of Veterans Affairs and any
--
successor thereto.
"Wet-Ink Advance" shall mean an Advance secured by a Wet-Ink Mortgage
---------------
Loan. A Wet-Ink Advance shall cease to be a Wet-Ink Advance on the date that
the underlying Wet-Ink Mortgage Loan ceases to be a Wet-Ink Mortgage Loan (in
accordance with the definition thereof).
"Wet-Ink Mortgage Loan" shall mean a Mortgage Loan originated by the
---------------------
Borrower or by a correspondent lender or broker in a transaction table-funded by
the Borrower, which is pledged to the Lender simultaneously with the origination
or table-funding thereof by the Borrower, which origination or table funding is
financed in part or in whole with proceeds of Advances distributed to a
Settlement Agent by the Custodian and as to which the Custodian has not yet
received the related Mortgage File. A Mortgage Loan shall cease to be a Wet-Ink
Mortgage Loan on the date on which the Lender has received a Trust Receipt from
the Custodian with respect to such Mortgage Loan confirming that the Custodian
has physical possession of the related Mortgage File, which Trust Receipt
indicates the presence of no Material Exceptions in the related Mortgage File.
1.02 Accounting Terms and Determinations. Except as otherwise
-----------------------------------
expressly provided herein, all accounting terms used herein shall be
interpreted, and all financial statements and certificates and reports as to
financial matters required to be delivered to the Lender hereunder shall be
prepared, in accordance with GAAP as in effect from time to time in the United
States.
Section 2. Advances, Note and Prepayments.
------------------------------
2.01 Advances.
--------
Subject to the terms and conditions of this Loan Agreement, the Lender
agrees to make loans (individually, an "Advance"; collectively, the "Advances")
------- --------
to the Borrower, from time to time on any Business Day from and including the
Effective Date to but excluding the Termination Date, in an
-14-
<PAGE>
aggregate principal amount at any one time outstanding up to but not exceeding
the lesser of (i) the Maximum Credit, and (ii) the Borrowing Base at such time.
Subject to the terms and conditions of this Loan Agreement, the Borrower may
borrow, repay and reborrow hereunder.
2.02 Notes.
-----
(a) The Advances made by the Lender shall be evidenced by a single
promissory note of the Borrower substantially in the form of Exhibit A hereto
---------
(the "Note"), dated the date hereof, payable to the Lender in a principal amount
----
equal to the amount of the Maximum Credit and otherwise duly completed. The
Lender shall have the right to have its Note subdivided, by exchange for
promissory notes of lesser denominations or otherwise.
(b) The date, amount and interest rate of each Advance made by the
Lender to the Borrower, and each payment made on account of the principal
thereof, shall be recorded by the Lender on its books and, prior to any transfer
of the Note, endorsed by the Lender on the schedule attached to the Note or any
continuation thereof; provided that the failure of the Lender to make any such
--------
recordation or endorsement shall not affect the obligations of the Borrower to
make a payment when due of any amount owing hereunder or under the Note in
respect of the Advances.
2.03 Procedure for Borrowing.
-----------------------
(a) The Borrower may request a borrowing hereunder, on any Business
Day during the period from and including the Effective Date to and including the
Termination Date, by delivering to the Lender, with a copy to the Custodian, an
irrevocable written Notice of Borrowing and Pledge substantially in the form of
Exhibit D hereto (a "Notice of Borrowing and Pledge"), appropriately completed,
- --------- ------------------------------
which Notice of Borrowing and Pledge must be received by the Lender, with a copy
to the Custodian, prior to 6:00 p.m., New York City time, on the Business Day
prior to the requested Funding Date. Such Notice of Borrowing and Pledge shall
(i) attach a Mortgage Loan Schedule (in hard copy, accompanied by a data
transmission in a form agreed to by between the Borrower and the Lender) in
respect of the Eligible Mortgage Loans that the Borrower proposes to pledge to
the Lender and be included in the Borrowing Base in connection with such
Advance, (ii) contain an estimate of the aggregate amount of the Advances to be
made on such Funding Date (with the estimated amount of the Advance allocable to
each Mortgage Loan set forth on the attached Mortgage Loan Schedule), (iii)
specify the requested Funding Date, which shall be in conformity with the
applicable timing requirement set forth above, (iv) if such Advance is to
include one or more Wet-Ink Advances, attach a schedule for each Wet-Ink Advance
specifying the identity and wiring instructions (including amounts estimated to
be funded) for each Settlement Agent, (v) if such Advance is to be secured by
one or more Non-Conforming Mortgage Loans, the Mortgage Loan Schedule attached
to such Notice of Borrowing and Pledge shall identify each such Non-Conforming
Mortgage Loan by code and shall specify the variance(s) from the Underwriting
Guidelines in respect thereof, (v) contain (by attachment) such other
information reasonably requested by the Lender from time to time, and (vi) shall
be signed by one of the officers of the Borrower identified in Schedule 9 hereto
----------
as it may be amended from time to time in accordance with Section 7.19. In
addition, prior to 12:00 noon, New York City time, on the Funding Date, the
Borrower may, with respect to Wet-Ink Advances, deliver to the Lender, with a
copy to the Custodian, (A) a revised copy of such Notice of Borrowing and Pledge
for purposes of amending the requested Advance amount and/or to remove Wet-Ink
Mortgage Loans which are no longer to be funded on such Funding Date from the
Mortgage Loan Schedule (it being understood that any such revised copy fully
supersedes the Notice of Borrowing and Pledge delivered on the previous Business
Day), and (B) an additional
-15-
<PAGE>
Notice of Borrowing and Pledge requesting Wet-Ink Advances to be made on such
Funding Date against additional Wet-Ink Mortgage Loans of which the Borrower was
unaware on the prior Business Day.
(b) The Borrower shall deliver (or cause to be delivered) and release
to the Custodian no later than 1:00 p.m., New York City time, one (1) Business
Day prior to the requested Funding Date, a complete Mortgage File pertaining to
each Eligible Mortgage Loan (other than Wet-Ink Mortgage Loans or Correspondent
Mortgage Loans) to be pledged to the Lender and included in the Borrowing Base
on such requested Funding Date, in accordance with the terms and conditions of
the Custodial Agreement.
(c) With respect to each Mortgage Loan which is a Correspondent
Mortgage Loan, no later than 12:00 noon, New York City time, on the applicable
Funding Date, the Borrower shall deliver (or cause to be delivered) and release
to the Custodian the complete Mortgage File pertaining to each Correspondent
Mortgage Loan being pledged to the Lender on such Funding Date.
(d) Pursuant to the Custodial Agreement, the Custodian shall deliver
to the Lender and the Borrower, no later than 4:00 p.m., New York City time, on
a Funding Date, a Trust Receipt in respect of all Mortgage Loans (other than
Wet-Ink Mortgage Loans or Correspondent Mortgage Loans) pledged to the Lender on
such Funding Date and an Exception Report in respect of all Mortgage Loans so
pledged to the Lender. Pursuant to the Custodial Agreement, the Custodian shall
deliver to the Lender, via facsimile, no later than 4:00 p.m., New York City
time, on such Funding Date, an Initial Certification (Correspondent Mortgage
Loans) (as defined in the Custodial Agreement) appropriately completed, with
respect to each such Correspondent Mortgage Loan being pledged to the Lender on
such Funding Date. Subject to Section 5 hereof, such Advance will then be made
available to the Borrower by the Lender transferring, via wire transfer, (i) if
such Advance is not a Wet-Ink Advance, pursuant to wire transfer instructions
provided by the Borrower on or prior to such Funding Date, in the aggregate
amount of such Advance in immediately available funds, and (ii) if such Advance
is a Wet-Ink Advance, to the Custodian for disbursement to the Settlement
Agent(s) specified in the Notice of Borrowing and Pledge.
(e) After the funding of a Wet-Ink Mortgage Loan on any Funding Date,
the Borrower shall be permitted to take delivery of the related Mortgage File
from the applicable Settlement Agent for the purpose of completing the
Borrower's due diligence with respect to such Mortgage File and correcting any
document deficiencies that may exist in respect thereof; provided, however, that
-------- -------
the Borrower shall deliver (or cause to be delivered) and release to the
Custodian a complete Mortgage File pertaining to each Wet-Ink Mortgage Loan
pledged to the Lender hereunder no later than seven (7) Business Days following
the applicable Funding Date in accordance with the terms and conditions of the
Custodial Agreement; and provided, further, that if the Lender shall become
-------- -------
reasonably insecure in good faith, the Lender may deliver an Instruction Letter
to each Settlement Agent, with a copy to the Borrower instructing each such
Settlement Agent to thereafter deliver all Mortgage Files in respect of all
Mortgage Loans funded by the Lender directly to the Custodian, and/or to take
instructions exclusively from the Lender with respect to Advances disbursed to
each such Settlement Agent by the Custodian, whereupon all Mortgage Files shall
thereafter be delivered by the Settlement Agents directly to the Custodian, and
the Lender shall have the exclusive right to direct the Settlement Agent with
respect to any such disbursed Advances.
(f) No later than 4:00 p.m., New York City time, one (1) Business Day
after its receipt of the Mortgage File in respect of any Correspondent Mortgage
Loan or Wet-Ink Mortgage Loan(s), the Custodian shall deliver to the Lender and
the Borrower a Trust Receipt and an Exception
-16-
<PAGE>
Report in respect of such Wet-Ink Mortgage Loan(s) in accordance with the terms
and conditions of the Custodial Agreement.
(g) The Lender shall deliver to the Borrower (i) prior to the close
of business on each Business Day, by fax, a daily activity report with respect
to the activity under the facility provided for hereunder, in such form and
containing such information as the Borrower and Lender may from time to time
mutually agree, and (ii) not less frequently than weekly, by fax, a summary of
the activity disclosed for such week in the daily activity reports delivered
pursuant to clause (i) of this Section 2.03(h).
2.04 Repayment of Advances; Interest.
-------------------------------
(a) The Borrower hereby promises to repay in full on the Termination
Date the then aggregate outstanding principal amount of the Advances.
(b) The Borrower hereby promises to pay to the Lender interest on the
unpaid principal amount of each Advance for the period from and including the
borrowing date of such Advance to but excluding the date such Advance shall be
paid in full, at a rate per annum equal to the LIBO Rate plus the Applicable
----
Margin. Accrued interest on each Advance shall be payable to the Lender on each
Monthly Payment Date and on the Termination Date. The Lender shall provide the
Borrower with a statement of interest due as soon as practicable after the end
of each Interest Period (but in any event no later than the third Business Day
after the end of such Interest Period) (each date of delivery of such statement,
an "Invoice Date"). Notwithstanding the foregoing, on the Effective Date the
------------
Borrower shall repay in full all interest accrued and unpaid on Advances
previously made under the Existing Loan Agreement, and a new Interest Period for
all such Advances shall commence on the Effective Date. Also, on the Effective
Date, the Lender shall, with respect to each Advance outstanding under the
Existing Loan Agreement, advance to the Borrower the amount by which the
Collateral Value of the related Mortgage Loan as calculated hereunder exceeds
the amount thereof as calculated under the Existing Loan Agreement.
(c) Notwithstanding the foregoing, the Borrower hereby promises to
pay to the Lender interest at the applicable Post-Default Rate on any principal
of any Advance and on any other amount payable by the Borrower hereunder or
under the Note that shall not be paid in full when due (whether at stated
maturity, by acceleration or by mandatory prepayment or otherwise) for the
period from and including the due date thereof to but excluding the date the
same is paid in full. Interest accruing at the Post-Default Rate shall be
payable to the Lender on demand.
(d) Promptly after the determination of any interest rate provided
for herein or any change therein, the Lender shall give notice thereof to the
Borrower. Notwithstanding anything in this Loan Agreement to the contrary,
interest on any Advance shall be calculated from and including the first day of
the Interest Period applicable thereto, to but excluding the last day of such
Interest Period.
2.05 Limitation on Types of Advances; Illegality. Anything herein to
-------------------------------------------
the contrary notwithstanding, if, on or prior to the determination of any LIBO
Base Rate:
(a) the Lender determines, which determination shall be conclusive,
that quotations of interest rates for the relevant deposits referred to in
the definition of "LIBO Base Rate" in Section 1.01 hereof are not being
provided in the relevant amounts or for the relevant maturities for
purposes of determining rates of interest for Advances as provided herein;
or
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<PAGE>
(b) the Lender determines, which determination shall be conclusive,
that the relevant rate of interest referred to in the definition of "LIBO
Base Rate" in Section 1.01 hereof upon the basis of which the rate of
interest for Advances is to be determined is not likely adequately to cover
the cost to the Lender of making or maintaining Advances; or
(c) it becomes unlawful for the Lender to honor its obligation to
make or maintain Advances hereunder using a LIBO Rate;
then the Lender shall give the Borrower prompt notice thereof and, so long as
such condition remains in effect, interest hereunder shall be calculated by
reference to the Lender's cost of funds in a manner that correlates
approximately to the relationship between the LIBOR Rate and the Lender's cost
of funds immediately prior to the occurrence of such condition, as determined by
the Lender in good faith. If requested by the Borrower, the Lender shall take
reasonable steps to provide the basis for the Lender's determinations under this
Section 2.05.
2.06 Determination of Borrowing Base; Mandatory Prepayments or Pledge.
----------------------------------------------------------------
(a) If at any time the aggregate outstanding principal amount of
Advances exceeds the Borrowing Base (a "Borrowing Base Deficiency"), as
-------------------------
determined by the Lender and notified to the Borrower on any Business Day, the
Borrower shall no later than one (1) Business Day after receipt of such notice,
at the option of the Borrower, either prepay the Advances in part or in whole or
pledge additional Eligible Mortgage Loans (which shall be in all respects
acceptable to the Lender) to the Lender, such that after giving effect to such
prepayment or pledge the aggregate outstanding principal amount of the Advances
does not exceed the Borrowing Base.
(b) No later than three (3) Business Days following the Borrower's
receipt of any Payoff Proceeds, the Borrower shall prepay all Advances and
accrued and unpaid interest thereon in respect of the Mortgage Loans subject to
such Payoff.
(c) The Borrower shall prepay the Advances on the 10th day of each
month (or if such 10th day is not a Business Day, the next succeeding Business
Day), in an amount equal to all Principal Paydowns received by the Borrower from
time to time during the calendar month preceding such Business Day of
prepayment. Each Principal Paydown received with respect to a particular
Mortgage Loan shall be applied to reduce the Advance Balance for such Mortgage
Loan.
(d) The Borrower shall apply the net proceeds of any securitization
of Pledged Mortgage Loans to prepay the Advance Balance with respect to such
Mortgage Loans and accrued and unpaid interest thereon, on the date of
settlement of any securitization of Mortgage Loans.
(e) The Borrower shall apply the net proceeds of any whole loan sale
of any Mortgage Loan to prepay the Advance Balance with respect to such Mortgage
Loan, and accrued and unpaid interest thereon, on the date of settlement of any
such whole loan sale. The amount to be paid to the Lender pursuant to this
Section 2.06(e) shall be paid directly to the Lender by the purchaser of such
Mortgage Loan.
(f) The Borrower shall pay the Advance Balance for any Mortgage Loan
in respect of which the related Mortgage Note has been extinguished under
relevant state law in connection with a judgment of foreclosure or foreclosure
sale or otherwise, no later than one (1) Business Day after the date such
Mortgage Note is extinguished.
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<PAGE>
(g) Amounts returned to the Paydown Account shall be applied to the
prepayment of the Loans in accordance with Section 6(b)(ii) of the Custodial
Agreement.
2.07 Optional Prepayments. The Advances are prepayable without
--------------------
premium or penalty, in whole or in part. Any amounts prepaid shall be applied to
repay the outstanding principal amount of any Advances (together with interest
thereon) until paid in full. Amounts repaid may be reborrowed in accordance with
the terms of this Loan Agreement. If the Borrower intends to prepay an Advance
in whole or in part from a source other than the proceeds of the Mortgage Loans,
the Borrower shall give one (1) Business Day's prior written notice thereof to
the Lender. If such notice is given, the amount specified in such notice shall
be due and payable on the date specified therein, together with accrued interest
to such date on the amount prepaid. Partial prepayments shall be in an aggregate
principal amount of at least $100,000.
2.08 Requirements of Law.
-------------------
(a) If any Requirement of Law or any change in the interpretation or
application thereof or compliance by the Lender with any request or directive
(whether or not having the force of law) from any central bank or other
Governmental Authority made subsequent to the date hereof:
(i) shall subject the Lender to any tax of any kind whatsoever with
respect to this Loan Agreement, the Note or any Advance made by it
(excluding net income taxes) or change the basis of taxation of payments to
the Lender in respect thereof;
(ii) shall impose, modify or hold applicable any reserve, special
deposit, compulsory Advance or similar requirement against assets held by,
deposits or other liabilities in or for the account of, advances, Advances
or other extensions of credit by, or any other acquisition of funds by, any
office of the Lender which is not otherwise included in the determination
of the Base Rate hereunder;
(iii) shall impose on the Lender any other condition;
and the result of any of the foregoing is to increase the cost to the Lender, by
an amount which the Lender deems to be material, of making, continuing or
maintaining any Advance or to reduce any amount receivable hereunder in respect
thereof, then, in any such case, the Borrower shall promptly pay the Lender such
additional amount or amounts as will compensate the Lender for such increased
cost or reduced amount receivable. If requested by the Borrower, the Lender
shall take reasonable steps to provide to the Borrower the basis for the
Lender's determinations under this Section 2.08(a).
(b) If the Lender shall have determined that the adoption of or any
change in any Requirement of Law regarding capital adequacy or in the
interpretation or application thereof or compliance by the Lender or any
corporation controlling the Lender with any request or directive regarding
capital adequacy (whether or not having the force of law) from any Governmental
Authority made subsequent to the date hereof shall have the effect of reducing
the rate of return on the Lender's or such corporation's capital as a
consequence of its obligations hereunder to a level below that which the Lender
or such corporation (taking into consideration the Lender's or such
corporation's policies with respect to capital adequacy) by an amount deemed by
the Lender to be material, then from time to time, the Borrower shall promptly
pay to the Lender such additional amount or amounts as will compensate the
Lender for such reduction. If requested by the Borrower, the Lender shall take
reasonable steps to provide to the Borrower the basis for the Lender's
determinations under this Section 2.08(b).
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<PAGE>
2.09 Purpose of Advances. Each Advance shall be used to finance the
-------------------
origination or purchase of Eligible Mortgage Loans, and to finance Fallout
Loans, identified to the Lender in writing on each Notice of Borrowing and
Pledge, as may be amended from time to time.
Section 3. Payments; Computations; Etc.
----------------------------
3.01 Payments.
--------
(a) Except to the extent otherwise provided herein, all payments of
principal, interest and other amounts to be made by the Borrower under this Loan
Agreement and the Note, shall be made in Dollars, in immediately available
funds, without deduction, set-off or counterclaim, to the Paydown Account not
later than 1:00 p.m., New York City time, on the date on which such payment
shall become due (and each such payment made after such time on such due date
shall be deemed to have been made on the next succeeding Business Day). The
Borrower acknowledges that it has no rights of withdrawal from the foregoing
account.
(b) Except to the extent otherwise expressly provided herein, if the
due date of any payment under this Loan Agreement or the Note would otherwise
fall on a day that is not a Business Day, such date shall be extended to the
next succeeding Business Day, and interest shall be payable for any principal so
extended for the period of such extension (at the interest rate applicable on
the immediately preceding Business Day).
3.02 Computations. Interest on the Advances shall be computed on the
------------
basis of a 360-day year for the actual days elapsed (including the first day but
excluding the last day) occurring in the period for which payable.
Section 4. Collateral Security.
-------------------
4.01 Collateral; Security Interest.
------------------------------
(a) Pursuant to the Custodial Agreement, the Custodian shall hold the
Mortgage Loan Documents as exclusive bailee and agent for the Lender pursuant to
terms of the Custodial Agreement and shall deliver Trust Receipts to the Lender
each to the effect that it has reviewed such Mortgage Loan Documents in the
manner and to the extent required by the Custodial Agreement and identifying any
exceptions in such Mortgage Loan Documents as so reviewed in Exception Reports.
(b) All of the Borrower's right, title and interest in, to and under
each of the following items of property, whether now owned or hereafter
acquired, now existing or hereafter created and wherever located, is hereinafter
referred to as the "Collateral":
----------
(i) all Mortgage Loans identified on a Notice of Borrowing and Pledge
delivered by the Borrower to the Lender and the Custodian from time to time
("Pledged Mortgage Loans");
----------------------
(ii) all Mortgage Loan Documents, including without limitation all
promissory notes, and all Servicing Records, Servicing Agreements and any
other collateral pledged or otherwise relating to such Pledged Mortgage
Loans, together with all files, documents, instruments, surveys,
certificates, correspondence, appraisals, computer programs, computer
storage media, accounting records and other books and records relating
thereto;
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<PAGE>
(iii) all mortgage guaranties and insurance relating to such Pledged
Mortgage Loans (issued by governmental agencies or otherwise) and any
mortgage insurance certificate or other document evidencing such mortgage
guaranties or insurance relating to such Pledged Mortgage Loans and all
claims and payments thereunder;
(iv) all other insurance policies and insurance proceeds relating
to any Pledged Mortgage Loan or the related Mortgaged Property;
(v) all purchase or take-out commitments relating to such Pledged
Mortgage Loans;
(vi) all Interest Rate Protection Agreements relating to such
Pledged Mortgage Loans;
(vii) the Trust Account, the Paydown Account and the balance from
time to time standing to the credit of the Trust Account and the Paydown
Account and all rights with respect thereto;
(viii) all Insured Closing Letters;
(ix) all "general intangibles" as defined in the Uniform Commercial
Code relating to or constituting any and all of the foregoing;
(x) all "collateral", however defined, under any Other Agreements;
(xi) any and all replacements, substitutions, distributions on or
proceeds of any and all of the foregoing.
(c) The Borrower hereby assigns, pledges and grants a security
interest in the Collateral to the Lender to secure the repayment of principal of
and interest on all Advances and all other amounts owing to the Lender
hereunder, under the Note and under the other Loan Documents (collectively, the
"Secured Obligations"). The Borrower agrees to mark its computer records and
-------------------
tapes to evidence the interests granted to the Lender hereunder.
4.02 Further Documentation. At any time and from time to time, upon
---------------------
the written request of the Lender, and at the sole expense of the Borrower, the
Borrower will promptly and duly execute and deliver, or will promptly cause to
be executed and delivered, such further instruments and documents and take such
further action as the Lender may reasonably request for the purpose of obtaining
or preserving the full benefits of this Loan Agreement and of the rights and
powers herein granted, including, without limitation, the filing of any
financing or continuation statements under the Uniform Commercial Code in effect
in any jurisdiction with respect to the Liens created hereby. The Borrower also
hereby authorizes the Lender to file any such financing or continuation
statement with respect to the Collateral without the signature of the Borrower
to the extent permitted by applicable law. A carbon, photographic or other
reproduction of this Loan Agreement shall be sufficient as a financing statement
for filing in any jurisdiction.
4.03 Changes in Locations, Name, etc. The Borrower shall not (i)
-------------------------------
change the location of its chief executive office/chief place of business from
that specified in Section 6 hereof or (ii) change its name, identity or
corporate structure (or the equivalent) or change the location where it
maintains its records with respect to the Collateral unless it shall have given
the Lender at least 30 days prior written notice thereof and shall have
delivered to the Lender all Uniform Commercial Code financing statements
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<PAGE>
and amendments thereto as the Lender shall request and taken all other actions
deemed necessary by the Lender to continue its perfected status in the
Collateral with the same or better priority.
4.04 Lender's Appointment as Attorney-in-Fact.
----------------------------------------
(a) The Borrower hereby irrevocably constitutes and appoints the
Lender and any officer or agent thereof, with full power of substitution, as its
true and lawful attorney-in-fact with full irrevocable power and authority in
the place and stead of the Borrower and in the name of the Borrower or in its
own name, from time to time in the Lender's discretion, for the purpose of
carrying out the terms of this Loan Agreement, to take any and all appropriate
action and to execute any and all documents and instruments which may be
necessary or desirable to accomplish the purposes of this Loan Agreement, and,
without limiting the generality of the foregoing, the Borrower hereby gives the
Lender the power and right, on behalf of the Borrower, without assent by, but
with notice to, the Borrower, if an Event of Default shall have occurred and be
continuing, to do the following:
(i) in the name of the Borrower or its own name, or otherwise, to
take possession of and endorse and collect any checks, drafts, notes,
acceptances or other instruments for the payment of moneys due under any
mortgage insurance with respect to Pledged Mortgage Loans or with respect
to any other Collateral and to file any claim or to take any other action
or proceeding in any court of law or equity or otherwise deemed appropriate
by the Lender for the purpose of collecting any and all such moneys due
under any such mortgage insurance or with respect to any other Collateral
whenever payable;
(ii) to pay or discharge taxes and Liens levied or placed on or
threatened against the Collateral; and
(iii) (A) to direct any party liable for any payment under any
Collateral to make payment of any and all moneys due or to become due
thereunder directly to the Lender or as the Lender shall direct; (B) to ask
or demand for, collect, receive payment of and receipt for, any and all
moneys, claims and other amounts due or to become due at any time in
respect of or arising out of any Collateral; (C) to sign and endorse any
invoices, assignments, verifications, notices and other documents in
connection with any of the Collateral; (D) to commence and prosecute any
suits, actions or proceedings at law or in equity in any court of competent
jurisdiction to collect the Collateral or any thereof and to enforce any
other right in respect of any Collateral; (E) to defend any suit, action or
proceeding brought against the Borrower with respect to any Collateral; (F)
to settle, compromise or adjust any suit, action or proceeding described in
clause (E) above and, in connection therewith, to give such discharges or
releases as the Lender may deem appropriate; and (G) generally, to sell,
transfer, pledge and make any agreement with respect to or otherwise deal
with any of the Collateral as fully and completely as though the Lender
were the absolute owner thereof for all purposes, and to do, at the
Lender's option and the Borrower's expense, at any time, and from time to
time, all acts and things which the Lender deems necessary to protect,
preserve or realize upon the Collateral and the Lender's Liens thereon and
to effect the intent of this Loan Agreement, all as fully and effectively
as the Borrower might do.
The Borrower hereby ratifies all that said attorneys shall lawfully do or cause
to be done by virtue hereof. This power of attorney is a power coupled with an
interest and shall be irrevocable.
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<PAGE>
(b) The Borrower also authorizes the Lender, at any time and from
time to time, to execute, in connection with any sale provided for in Section
4.07 hereof, any endorsements, assignments or other instruments of conveyance or
transfer with respect to the Collateral.
(c) The powers conferred on the Lender are solely to protect the
Lender's interests in the Collateral and shall not impose any duty upon the
Lender to exercise any such powers. The Lender shall be accountable only for
amounts that it actually receives as a result of the exercise of such powers,
and neither the Lender nor any of its officers, directors, or employees shall be
responsible to the Borrower for any act or failure to act hereunder, except for
its own gross negligence or willful misconduct.
4.05 Performance by Lender of Borrower's Obligations. If the
-----------------------------------------------
Borrower fails to perform or comply with any of its agreements contained in the
Loan Documents and the Lender may itself perform or comply, or otherwise cause
performance or compliance, with such agreement, the reasonable expenses of the
Lender incurred in connection with such performance or compliance, together with
interest thereon at a rate per annum equal to the Post-Default Rate, shall be
payable by the Borrower to the Lender on demand and shall constitute Secured
Obligations.
4.06 Proceeds. If an Event of Default shall occur and be
--------
continuing, (a) all proceeds of Collateral received by the Borrower consisting
of cash, checks and other near-cash items shall be held by the Borrower in trust
for the Lender, segregated from other funds of the Borrower, and shall forthwith
upon receipt by the Borrower be turned over to the Lender in the exact form
received by the Borrower (duly endorsed by the Borrower to the Lender, if
required) and (b) any and all such proceeds received by the Lender (whether from
the Borrower or otherwise) may, in the sole discretion of the Lender, be held by
the Lender as collateral security for, and/or then or at any time thereafter may
be applied by the Lender against, the Secured Obligations (whether matured or
unmatured), such application to be in such order as the Lender shall elect. Any
balance of such proceeds remaining after the Secured Obligations shall have been
paid in full and this Loan Agreement shall have been terminated shall be paid
over to the Borrower or to whomsoever may be lawfully entitled to receive the
same. For purposes hereof, proceeds shall include, but not be limited to, all
principal and interest payments, all prepayments and payoffs, insurance claims,
condemnation awards, sale proceeds, real estate owned rents and any other income
and all other amounts received with respect to the Collateral.
4.07 Remedies. If an Event of Default shall occur and be
--------
continuing, the Lender may exercise, in addition to all other rights and
remedies granted to it in this Loan Agreement and in any other instrument or
agreement securing, evidencing or relating to the Secured Obligations, all
rights and remedies of a secured party under the Uniform Commercial Code.
Without limiting the generality of the foregoing, the Lender without demand of
performance or other demand, presentment, protest, advertisement or notice of
any kind (except any notice required by law referred to below) to or upon the
Borrower or any other Person (each and all of which demands, presentments,
protests, advertisements and notices are hereby waived), may in such
circumstances forthwith collect, receive, appropriate and realize upon the
Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give
option or options to purchase, or otherwise dispose of and deliver the
Collateral or any part thereof (or contract to do any of the foregoing), in one
or more parcels or as an entirety at public or private sale or sales, at any
exchange, broker's board or office of the Lender or elsewhere upon such terms
and conditions as it may deem advisable and at such prices as it may deem best,
for cash or on credit or for future delivery without assumption of any credit
risk. The Lender shall have the right upon any such public sale or sales, and,
to the extent permitted by law, upon any such private sale or sales, to purchase
the whole or any part of the Collateral so sold, free of any right or equity of
redemption in the Borrower, which right
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<PAGE>
or equity is hereby waived or released. The Borrower further agrees, at the
Lender's request, to assemble the Collateral and make it available to the Lender
at places which the Lender shall reasonably select, whether at the Borrower's
premises or elsewhere. The Lender shall apply the net proceeds of any such
collection, recovery, receipt, appropriation, realization or sale, after
deducting all reasonable costs and expenses of every kind incurred therein or
incidental to the care or safekeeping of any of the Collateral or in any way
relating to the Collateral or the rights of the Lender hereunder, including
without limitation reasonable attorneys' fees and disbursements, to the payment
in whole or in part of the Secured Obligations, in such order as the Lender may
elect, and only after such application and after the payment by the Lender of
any other amount required or permitted by any provision of law, including
without limitation Section 9-504(1)(c) of the Uniform Commercial Code, need the
Lender account for the surplus, if any, to the Borrower. To the extent permitted
by applicable law, the Borrower waives all claims, damages and demands it may
acquire against the Lender arising out of the exercise by the Lender of any of
its rights hereunder, other than those claims, damages and demands arising from
the gross negligence or willful misconduct of the Lender. If any notice of a
proposed sale or other disposition of Collateral shall be required by law, such
notice shall be deemed reasonable and proper if given at least 10 days before
such sale or other disposition. The Borrower shall remain liable for any
deficiency (plus accrued interest thereon as contemplated pursuant to Section
2.05(b) hereof) if the proceeds of any sale or other disposition of the
Collateral are insufficient to pay the Secured Obligations and the fees and
disbursements of any attorneys employed by the Lender to collect such
deficiency.
4.08 Limitation on Duties Regarding Presentation of Collateral. The
---------------------------------------------------------
Lender's duty with respect to the custody, safekeeping and physical preservation
of the Collateral in its possession, under Section 9-207 of the Uniform
Commercial Code or otherwise, shall be to deal with it in the same manner as the
Lender deals with similar property for its own account. Neither the Lender nor
any of its directors, officers or employees shall be liable for failure to
demand, collect or realize upon all or any part of the Collateral or for any
delay in doing so or shall be under any obligation to sell or otherwise dispose
of any Collateral upon the request of the Borrower or otherwise.
4.09 Powers Coupled with an Interest. All authorizations and
-------------------------------
agencies herein contained with respect to the Collateral are irrevocable and
powers coupled with an interest.
4.10 Release of Security Interest. (a) Upon termination of this
----------------------------
Loan Agreement and repayment to the Lender of all Secured Obligations and the
performance of all obligations under the Loan Documents the Lender shall release
its security interest in any remaining Collateral; provided that if any payment,
--------
or any part thereof, of any of the Secured Obligations is rescinded or must
otherwise be restored or returned by the Lender upon the insolvency, bankruptcy,
dissolution, liquidation or reorganization of the Borrower, or upon or as a
result of the appointment of a receiver, intervenor or conservator of, or a
trustee or similar officer for, the Borrower or any substantial part of its
Property, or otherwise, this Loan Agreement, all rights hereunder and the Liens
created hereby shall continue to be effective, or be reinstated, as though such
payments had not been made.
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<PAGE>
(b) So long as no Event of Default has occurred and is continuing,
upon the Borrower's repayment in full in immediately available funds of the
Advance Balance with respect to a Pledged Mortgage Loan, together with accrued
and unpaid interest in respect thereof, such Pledged Mortgage Loan shall be
automatically released from the Lien of this Loan Agreement, and the Lender
shall cause the Custodian to release the related Mortgage File and any other
documents held by the Custodian or the Lender with respect to such Mortgage Loan
to the Borrower or the Borrower's designee. In addition, the Lender shall
execute and deliver such instruments or other documents reasonably requested by
the Borrower that are prepared by the Borrower in order to effect the release of
such Pledged Mortgage Loan from the Lien of the Lender.
Section 5. Conditions Precedent.
--------------------
5.01 Amendment and Restatement . The effectiveness of the amendment
--------------------------
and restatement of the Existing Agreement is subject to the satisfaction,
immediately prior to or concurrently therewith, of the following conditions
precedent:
(a) Loan Agreement. The Lender shall have received this Loan
--------------
Agreement, executed and delivered by a duly authorized officer of the
Borrower.
(b) Note. The Lender shall have received the Note, conforming to the
----
requirements hereof and executed by a duly authorized officer of the
Borrower.
(c) Custodial Agreement. The Lender shall have received the Custodial
-------------------
Agreement, conforming to the requirements hereof and executed by a duly
authorized officer of the Borrower and the Custodian.
(d) Affiliate Subordination Agreement of RDC III, Inc. The Lender
-------------------------------------------------
shall be satisfied that the Affiliate Subordination Agreement will continue
in full force and effect after giving effect to the amendment and
restatement of the Existing Agreement.
(e) Significant Documents. Each of the Significant Documents shall
---------------------
have been, or shall be concurrently, executed and delivered by the parties
thereto.
(f) Powers of Attorney. The Lender shall have received an executed
------------------
copy of a power of attorney, substantially in the form of Exhibit I and
duly executed and delivered by a duly authorized officer of the Borrower,
authorizing the Lender to execute and deliver on behalf of the Borrower,
Instruction Letters for the Settlement Agents in accordance with the terms
hereof.
(g) Filings, Registrations, Recordings. Any documents (including,
----------------------------------
without limitation, financing statements) required to be filed, registered
or recorded in order to create, in favor of the Lender, a perfected, first-
priority security interest in the Collateral, subject to no Liens other
than those created hereunder and under the other Significant Documents,
shall have been properly prepared for filing, registration or recording in
each office in each jurisdiction in which such filings, registrations and
recordations are required to perfect such first-priority security interest.
(h) Corporate Proceedings. The Lender shall have received a
---------------------
certificate of the Secretary or Assistant Secretary of the Borrower, dated
as of the date hereof, and certifying (A) that attached thereto is a true,
complete and correct copy of (i) the articles of incorporation of the
Borrower, (ii) the by-laws of the Borrower, and (iii) resolutions duly
adopted by the Board of
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<PAGE>
Directors of the Borrower authorizing the execution, delivery and
performance of this Loan Agreement, the Notes and the other Loan Documents
to which it is a party, and the borrowings contemplated hereunder, and that
such resolutions have not been amended, modified, revoked or rescinded, and
(B) as to the incumbency and specimen signature of each officer executing
any Loan Documents on behalf of the Borrower, and authorized to execute any
Notice of Borrowing and Pledge, and such certificate and the resolutions
attached thereto shall be in form and substance satisfactory to the Lender.
(i) Good Standing Certificates. The Lender shall have received copies
--------------------------
of certificates evidencing the good standing of the Borrower, dated as of a
recent date, from the Secretary of State (or other appropriate authority)
of the State of Colorado and in each jurisdiction where the ownership,
lease or operation of property, or the conduct of business, requires the
Borrower to qualify as a foreign corporation, except where the failure to
qualify would not have a Material Adverse Effect, and except as to which
the Lender has agreed to accept such good standing certificates as soon as
possible following the initial Funding Date, but in no event later than 15
Business Days after the initial Funding Date.
(j) Legal Opinion. The Lender shall have received the executed legal
-------------
opinion of Hunton & Williams, special counsel to the Borrower, Worsham,
Forsythe & Wooldridge, L.L.P., special Texas counsel to the Borrower,
Haligman & Lottner, special Colorado counsel to the Borrower, and Howard
Glicksman, Esq., General Counsel and Vice-President of the Borrower, in
form and substance satisfactory to the Lender. Each such legal opinion
shall be dated the initial Funding Date and otherwise in form and substance
acceptable to the Lender and cover such other matters incident to the
transactions contemplated by this Loan Agreement as the Lender shall
reasonably request.
(k) Fees and Expenses. The Lender shall have received all fees and
-----------------
expenses required to be paid by the Borrower on or prior to the initial
Funding Date pursuant to Section 11.03(b).
(l) Financial Statements. The Lender shall have received the
--------------------
financial statements referenced in Section 6.01(a).
(m) Underwriting Guidelines. The Lender and the Borrower shall have
-----------------------
agreed upon the Borrower's current underwriting guidelines for Mortgage
Loans (the "Underwriting Guidelines") and the Lender shall have received a
-----------------------
certified copy thereof.
(n) Consents, Licenses, Approvals, etc. The Lender shall have
-----------------------------------
received copies certified by the Borrower of all consents, licenses and
approvals, if any, required in connection with the execution, delivery and
performance by the Borrower of, and the validity and enforceability of, the
Loan Documents, which consents, licenses and approvals shall be in full
force and effect.
(o) Insurance. The Lender shall have received evidence in form and
---------
substance satisfactory to the Lender showing compliance by the Borrower as
of such initial Funding Date with Section 7.03 hereof.
(p) Other Documents. The Lender shall have received such other
---------------
documents as the Lender or its counsel may reasonably request.
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<PAGE>
5.02 Initial and Subsequent Advances. The making of each Advance to
-------------------------------
the Borrower (including the initial Advance) on any Business Day is subject to
the satisfaction of the following further conditions precedent, both immediately
prior to the making of such Advance and also after giving effect thereto and to
the intended use thereof:
(a) No Default. No Default (other than (i) a Default (but not an
----------
Event of Default) under Section 8(d), (ii) a Default (but not an Event of
Default) under Section 8(f) (provided that this representation is made as
to a Default under Section 8(f) in respect of the payment of principal
and/or interest (or the equivalent) under Indebtedness or a Guarantee
Obligation in an aggregate amount in excess of $250,000), or (iii) a
Default (but not an Event of Default) under Section 8(g) in respect of a
final judgment or judgments not in excess of $250,000 in the aggregate), or
Event of Default shall have occurred and be continuing.
(b) Representations and Warranties. Each representation and
------------------------------
warranty made by the Borrower in Section 6 hereof and elsewhere in each of
the Loan Documents, shall be true and correct on and as of the date of the
making of such Advance in all material respects (in the case of the
representations and warranties in Schedule 1, solely with respect to
Mortgage Loans to be added to the Borrowing Base on such date) with the
same force and effect as if made on and as of such date (or, if any such
representation or warranty is expressly stated to have been made as of a
specific date, as of such specific date). The Lender shall also be in
compliance with all governmental licenses and authorizations and is
qualified to do business and in good standing in all required jurisdictions
where the failure to be so qualified should reasonably be expected to have
a Material Adverse Effect.
(c) Borrowing Base. The aggregate outstanding principal amount of
--------------
the Advances shall not exceed the Borrowing Base.
(d) Notice of Borrowing and Pledge. The Lender shall have received
------------------------------
a Notice of Borrowing and Pledge and Mortgage Loan Schedule in accordance
with Section 2.03(a) hereof, appropriately completed.
(e) Trust Receipt. The Lender shall have received from the
-------------
Custodian (i) in the case of Mortgage Loans to be pledged hereunder on such
Business Day other than Wet-Ink Mortgage Loans or Correspondent Mortgage
Loans, a Trust Receipt in respect thereof and a Mortgage Loan Schedule and
an Exception Report, with Exceptions in respect of such Mortgage Loans
acceptable to the Lender in its sole discretion, and (ii) in the case of
Correspondent Mortgage Loans to be pledged hereunder on such Business Day,
an Initial Certification (Correspondent Mortgage Loans) in respect thereof,
in each case dated such Business Day and duly completed.
(f) Interest Rate Protection Agreements. The Lender shall have
-----------------------------------
received fully-executed copies of any Interest Rate Protection Agreements
required by Section 7.18, each certified as a true, correct and complete
copy of the original.
(g) Additional Matters. All corporate and other proceedings, and
------------------
all documents, instruments and other legal matters in connection with the
transactions contemplated by this Loan Agreement and the other Loan
Documents shall be reasonably satisfactory in form and substance to the
Lender, and the Lender shall have received such other documents and legal
opinions in respect of any aspect or consequence of the transactions
contemplated hereby or thereby as it shall reasonably request.
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(h) No Material Adverse Effect. There shall not have occurred one
--------------------------
or more events that, in the reasonable judgment of the Lender exercised in
good faith, constitutes or should reasonably be expected to constitute a
Material Adverse Effect.
Section 6. Representations and Warranties. The Borrower represents
------------------------------
and warrants to the Lender that on the date hereof:
6.01 Financial Condition.
-------------------
(a) The audited consolidated balance sheets of the Borrower and
its consolidated Subsidiaries as at December 31, 1996, reported thereon by
Deloitte & Touche, and the related statements of income and cash flows for the
fiscal year then ended, copies of which have heretofore been furnished to the
Lender, are complete and correct and present fairly the consolidated financial
condition of the Borrower and its consolidated Subsidiaries as at such dates and
the consolidated results of their operations and their consolidated cash flows
for the fiscal year then ended. The unaudited consolidated balance sheets of the
Borrower and its consolidated Subsidiaries as at March 31, 1997, and the related
statements of income and cash flows for the three-month period then ended,
certified by a Responsible Officer, copies of which have heretofore been
furnished to the Lender, are complete and correct and present fairly the
consolidated financial condition of the Borrower and its consolidated
Subsidiaries as at such dates and the consolidated results of their operations
and their consolidated cash flows for the three-month period then ended.
(b) Such financial statements, including the related schedules and
notes thereto, have been prepared in accordance with GAAP applied consistently
throughout the periods involved (except as approved by such accountants or
Responsible Officer, as the case may be, and as disclosed therein).
(c) Neither the Borrower nor any of its consolidated Subsidiaries
had, at the date of the most recent balance sheet referred to above, any
material Guarantee Obligation, contingent liability or liability for taxes, or
any long-term lease or unusual forward or long-term commitment, including,
without limitation, any interest rate or foreign currency swap or exchange
transaction, or other financial derivative, which is not reflected in the
foregoing statements or in the notes thereto.
6.02 No Change. Since December 31, 1996, there has been no
---------
development or event which has had or should reasonably be expected to have a
Material Adverse Effect.
6.03 Corporate Existence; Compliance with Law. The Borrower (a) is
----------------------------------------
a corporation duly organized, validly existing and in good standing under the
laws of the State of Colorado, (b) has the corporate power and authority, and
has all governmental licenses, authorizations, consents and approvals necessary,
to own and operate its property, to lease the property it operates as lessee and
to carry on its business as now being conducted, (c) is duly qualified to do
business and is in good standing under the laws of each jurisdiction in which
the nature of the business conducted by it makes such qualification necessary
and where failure so to qualify should be reasonably expected (either
individually or in the aggregate) to have a Material Adverse Effect, and (d) is
in compliance in all material respects with all Requirements of Law.
6.04 Corporate Power; Authorization; Enforceable Obligations. (a)
-------------------------------------------------------
The Borrower has the corporate power and authority, and the legal right, to
make, deliver and perform this Loan Agreement, the Note, and each other Loan
Document, and to borrow and to grant Liens hereunder, and
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<PAGE>
has taken all necessary corporate action to authorize the borrowings and the
granting of Liens on the terms and conditions of this Loan Agreement, the Note,
and each other Loan Document to which it is a party, and the execution, delivery
and performance of this Loan Agreement, the Note, and each other Loan Document.
(b) No consent or authorization of, approval by, notice to, filing
with or other act by or in respect of, any Governmental Authority or any other
Person is required or necessary in connection with the borrowings hereunder or
with the execution, delivery, performance, validity or enforceability of this
Loan Agreement or the Note or any other Loan Document, except (i) for filings
and recordings in respect of the Liens created pursuant to this Loan Agreement,
and (ii) as previously obtained and currently in full force and effect.
(c) This Loan Agreement has been duly and validly executed and
delivered by the Borrower and constitutes, and the Note and each other Loan
Document when executed and delivered on behalf of the Borrower will constitute,
a legal, valid and binding obligation of the Borrower, enforceable against the
Borrower in accordance with its terms, except as enforceability may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally and by general
equitable principles (whether enforcement is sought by proceedings in equity or
at law).
6.05 No Legal Bar. The execution, delivery and performance of this
------------
Loan Agreement and the Note, the borrowings hereunder and the use of the
proceeds thereof will not violate any Requirement of Law or Contractual
Obligation of the Borrower or of any of its Subsidiaries and will not result in,
or require, the creation or imposition of any Lien (other than the Liens created
hereunder) on any of its or their respective properties or revenues pursuant to
any such Requirement of Law or Contractual Obligation.
6.06 No Material Litigation. There are no actions, suits,
----------------------
arbitrations, investigations or proceedings of or before any arbitrator or
Governmental Authority pending or, to the knowledge of the Borrower, threatened
against the Borrower or any of its Subsidiaries or against any of its or their
respective properties or revenues, other than those actions, suits,
arbitrations, investigations or proceedings described on Schedule 5 hereto, none
of which should reasonably be expected to have a Material Adverse Effect.
6.07 No Default. Neither the Borrower nor any of its Subsidiaries
----------
is in default under or with respect to any of its Contractual Obligations in any
respect which should reasonably be expected to have a Material Adverse Effect.
No Default (other than (i) a Default (but not an Event of Default) under Section
8(d), (ii) a Default (but not an Event of Default) under Section 8(f) (provided
that this representation is made as to a Default under Section 8(f) in respect
of the payment of principal and/or interest (or the equivalent) under
Indebtedness or a Guarantee Obligation in an aggregate amount in excess of
$250,000), or (iii) a Default (but not an Event of Default) under Section 8(g)
in respect of a final judgment or judgments not in excess of $250,000 in the
aggregate, in each case unless the Borrower has failed to notify the Lender of
such Default in accordance with Section 7.04(a)(i)), or Event of Default has
occurred and is continuing.
6.08 Collateral; Collateral Security.
-------------------------------
(a) The Borrower has not assigned, pledged, or otherwise conveyed
or encumbered any of the Collateral to any Person other than the Lender, other
than the security interest in favor of
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<PAGE>
ContiTrade Services L.L.C. and Greenwich Capital Markets, Inc. pursuant to the
Significant Documents, and immediately prior to the pledge of such Collateral,
the Borrower was the sole owner of the Collateral and had good and marketable
title thereto, free and clear of all Liens, in each case except for Liens that
have been released or are to be released simultaneously with the Liens granted
in favor of the Lender hereunder. No Pledged Mortgage Loan was acquired by the
Borrower from an Affiliate of the Borrower.
(b) The provisions of this Loan Agreement are effective to create
in favor of the Lender a valid security interest in all right, title and
interest of the Borrower in, to and under the Collateral.
(c) Upon receipt by the Custodian of each Mortgage Note (or, in
the case of a Wet-Ink Mortgage Loan, upon notice to the related Settlement Agent
of the security interest of the Lender in such Wet-Ink Mortgage Loan and the
funding thereof by the Lender), and the filing of financing statements on Form
UCC-1 naming the Lender as "Secured Party" and the Borrower as "Debtor", and
describing the Collateral, in the jurisdictions and recording offices listed on
Schedule 2 attached hereto, the security interests granted hereunder in the
Collateral will constitute fully perfected security interests under the Uniform
Commercial Code (and of first priority, except for the Collateral described in
Section 4.01(b)(x)) in all right, title and interest of the Borrower in, to and
under such Collateral.
6.09 Chief Executive Office. The Borrower's chief executive office
----------------------
on the Effective Date is located at 7600 East Orchard Road, Suite 330-S,
Englewood, CO 80111.
6.10 Location of Books and Records. The location where the Borrower
-----------------------------
keeps its books and records, including all computer tapes and records relating
to the Collateral is its chief executive office.
6.11 No Burdensome Restrictions. No Requirement of Law or
--------------------------
Contractual Obligation of the Borrower or any of its Subsidiaries has a Material
Adverse Effect.
6.12 Taxes. Each of the Borrower and its Subsidiaries has filed all
-----
Federal and state income tax returns and all other material tax returns that are
required to be filed by them and has paid all taxes due pursuant to such returns
or pursuant to any assessment received by any of them, except for any such taxes
or assessments, if any, that are being appropriately contested in good faith by
appropriate proceedings diligently conducted and with respect to which adequate
reserves in conformity with GAAP have been provided. No tax Lien has been filed,
and, to the knowledge of the Borrower, no claim is being asserted, with respect
to any such tax or assessment.
6.13 Margin Regulations. Neither the making of any Advance
------------------
hereunder, nor the use of the proceeds thereof, will violate or be inconsistent
with the provisions of Regulation G, T, U or X.
6.14 Investment Company Act; Other Regulations. The Borrower is not
-----------------------------------------
an "investment company", or a company "controlled" by an "investment company",
within the meaning of the Investment Company Act of 1940, as amended. The
Borrower is not subject to regulation under any Federal or state statute or
regulation which limits its ability to incur indebtedness.
6.15 Subsidiaries. All of the Subsidiaries of the Borrower at the
------------
date hereof are listed on Schedule 3 to this Loan Agreement.
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<PAGE>
6.16 Bulk Transfer. The pledge of the Mortgage Loans and the Mortgage
-------------
Loan Documents by the Borrower pursuant to this Loan Agreement are not subject
to the bulk transfer or any similar statutory provisions in effect in any
applicable jurisdiction.
6.17 Origination and Collection of Mortgage Loans. The Mortgage Loans
--------------------------------------------
were originated or acquired by the Borrower, and the origination and collection
practices used by the Borrower with respect to the Mortgage Loans have been
legal, proper and prudent in all material respects, customary in the residential
mortgage loan servicing business, and, except in the case of Non-Conforming
Mortgage Loans, in accordance with the Underwriting Guidelines. With respect to
Mortgage Loans acquired by the Borrower, all such Mortgage Loans, other than
Non-Conforming Mortgage Loans, are in conformity with the Underwriting
Guidelines.
6.18 No Adverse Selection. The Borrower used no selection procedures
--------------------
that identified the Mortgage Loans as being less desirable or valuable than
other comparable Mortgage Loans owned by the Borrower.
6.19 Borrower Solvent; Fraudulent Conveyance. As of the date hereof
---------------------------------------
and immediately after giving effect to each Advance, the fair value of the
assets of the Borrower is greater than the fair value of the liabilities
(including, without limitation, contingent liabilities if and to the extent
required to be recorded as a liability on the financial statements of the
Borrower in accordance with GAAP) of the Borrower and the Borrower is and will
be solvent, is and will be able to pay its debts as they mature and does not and
will not have an unreasonably small capital to engage in the business in which
it is engaged. Borrower does not intend to incur, or believe that it has
incurred, debts beyond its ability to pay such debts as they mature. Borrower
is not contemplating the commencement of insolvency, bankruptcy, liquidation or
consolidation proceedings or the appointment of a receiver, liquidator,
conservator, trustee or similar official in respect of Borrower or any of its
assets. Borrower is not transferring any Mortgage Loans with any intent to
hinder, delay or defraud any of its creditors.
6.20 ERISA. Each Plan to which the Borrower or its Subsidiaries make
-----
direct contributions, and, to the knowledge of the Borrower, each other Plan and
each Multiemployer Plan, is in compliance in all material respects with, and has
been administered in all material respects in compliance with, the applicable
provisions of ERISA, the Code and any other Federal or State law.
6.21 True Disclosure. The information, reports, financial statements,
---------------
exhibits and schedules furnished in writing by or on behalf of the Borrower to
the Lender in connection with the negotiation, preparation or delivery of this
Loan Agreement and the other Loan Documents or included herein or therein or
delivered pursuant hereto or thereto, when taken as a whole, do not contain any
untrue statement of material fact. All written information furnished after the
date hereof by or on behalf of the Borrower to the Lender in connection with
this Loan Agreement and the other Loan Documents and the transactions
contemplated hereby and thereby will be true, correct and accurate in every
material respect, or (in the case of projections) based on reasonable estimates,
on the date as of which such information is stated or certified. There is no
fact known to a Responsible Officer of the Borrower that, after due inquiry,
should reasonably be expected to have a Material Adverse Effect that has not
been disclosed herein, in the other Loan Documents or in a report, financial
statement, exhibit, schedule, disclosure letter or other writing furnished to
the Lender for use in connection with the transactions contemplated hereby or
thereby.
6.22 Eligibility. The Borrower represents that on the Closing Date
-----------
(and after the Closing Date, solely to the extent necessary to carry on its
business substantially as it is then being
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<PAGE>
conducted), it is approved and qualified and in good standing as a lender or
seller/servicer, as set forth below, and meets all requirements applicable to
its status as such:
(a) The Borrower is a GNMA approved seller/servicer of Mortgage Loans
and issuer of mortgage-backed securities guaranteed by GNMA.
(b) The Borrower is an FNMA approved seller/servicer of Mortgage
Loans, eligible to originate, purchase, hold, sell, and service Mortgage
Loans to be sold to FNMA.
(c) The Borrower is a FHLMC approved seller/servicer of Mortgage
Loans, eligible to originate, purchase, hold, sell and service Mortgage
Loans to be sold to FHLMC.
(d) The Borrower is a lender in good standing under the VA loan
guarantee program eligible to originate, purchase, hold, sell and service
VA-guaranteed Mortgage Loans.
(e) The Borrower is an FHA approved mortgagee, eligible to originate,
purchase, hold, sell and service FHA-fully-insured Mortgage Loans.
6.23 Licenses. The Lender will not be required as a result of taking a
--------
pledge of the Mortgage Loans to be licensed, registered or approved or to obtain
permits or otherwise qualify (i) to do business in any state in which it
currently so required or (ii) under any state consumer lending, fair debt
collection or other applicable state statute or regulation.
6.24 Relevant States. Schedule 7 sets forth all of the states or
---------------
other jurisdictions (the "Relevant States") in which the Borrower originates
---------------
Mortgage Loans in its own name or through table-funding transactions on the date
of this Loan Agreement. The Relevant States indicated by asterisk on Schedule 7
constitute all of the Significant Jurisdictions as of the date of this Loan
Agreement.
6.25 Forms of Mortgage Loan Documents. Attached hereto as Schedule 10
--------------------------------
are the forms of Mortgage Notes, Mortgages (or deeds of trust), and riders
thereto that the Borrower uses on the date of this Loan Agreement to originate
Mortgage Loans (or to have Mortgage Loans originated on its behalf).
6.26 Settlement Agents. Schedule 12 lists all Settlement Agents
-----------------
utilized by the Borrower as of May 31, 1997.
Section 7. Covenants of the Borrower. The Borrower covenants and
-------------------------
agrees with the Lender that, so long as any Advance is outstanding and until
payment in full of all Secured Obligations:
7.01 Financial Statements. The Borrower shall deliver to the Lender:
--------------------
(a) as soon as available, but in any event not later than twenty (20)
days after the end of each calendar month, unaudited consolidated balance sheets
of the Borrower and its consolidated Subsidiaries as at the end of each such
month and the related unaudited consolidated statements of income and cash flows
of the Borrower and its consolidated Subsidiaries for such month and the portion
of the fiscal year through such date, setting forth in each case in comparative
form the figures for the previous year, certified by a Responsible Officer as
being fairly stated in all material respects and prepared in accordance with
GAAP consistently applied.
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<PAGE>
(b) if available, as soon as available and in any event within forty-
five (45) days after the end of each of the first three quarterly fiscal periods
of each fiscal year of the Borrower, the consolidated and consolidating balance
sheets of the Borrower and its consolidated Subsidiaries as at the end of such
period and the related unaudited consolidated and consolidating statements of
income and of cash flows for the Borrower and its consolidated Subsidiaries for
such period and the portion of the fiscal year through the end of such period,
setting forth in each case in comparative form the figures for the previous
year, accompanied by a certificate of a Responsible Officer of the Borrower,
which certificate shall state that said consolidated financial statements fairly
present the consolidated and consolidating financial condition and results of
operations of the Borrower and its Subsidiaries in accordance with GAAP,
consistently applied, as at the end of, and for, such period (subject to normal
year-end audit adjustments); and
(c) as soon as available and in any event within ninety (90) days
after the end of each fiscal year of the Borrower, the audited consolidated and
consolidating balance sheets 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 of cash flows for the Borrower
and its consolidated Subsidiaries for such year, setting forth in each case in
comparative form the figures for the previous year, accompanied by an opinion
thereon of independent certified public accountants of recognized national
standing, which opinion shall not be qualified as to scope of audit or going
concern and shall state that said consolidated and consolidating financial
statements fairly present the consolidated and consolidating financial condition
and results of operations of the Borrower and its consolidated Subsidiaries as
at the end of, and for, such fiscal year in accordance with GAAP.
(d) from time to time such other information regarding the financial
condition, operations, or business of the Borrower and its Subsidiaries as the
Lender may reasonably request.
7.02 Existence, Etc. Each of the Borrower and its Subsidiaries will:
---------------
(a) preserve and maintain its legal existence;
(b) preserve and maintain all of its material rights, privileges,
licenses and franchises;
(c) comply with the requirements of all applicable Requirements of
Law (including, without limitation, the Real Estate Settlement Procedures
Act and all environmental laws) if failure to comply with such requirements
should reasonably be expected (either individually or in the aggregate) to
have a Material Adverse Effect; and
(d) keep adequate records and books of account, in which complete
entries will be made in accordance with GAAP consistently applied.
7.03 Maintenance of Property; Insurance; Inspection. (a) The Borrower
----------------------------------------------
shall keep all property useful and necessary in its business in good working
order and condition.
(b) The Borrower shall maintain blanket bond coverage (under a
"Mortgage Bankers Bond" or otherwise) which includes errors and omissions
coverage and a blanket fidelity bond with broad coverage covering criminal
actions such as theft and embezzlement by all officers, directors, and employees
of the Borrower, in such amounts as satisfy prevailing FNMA, FHLMC and GNMA
requirements applicable to a qualified mortgage originating institution and the
other requirements of this
-33-
<PAGE>
Section 7.03 (which insurance shall, beginning 10 Business Days after the
Effective Date and at all times thereafter, name the Lender as an additional
insured and loss payee effective as of the Effective Date). Such insurance and
fidelity bond shall be maintained with insurance companies with a rating of "A"
or better by Best & Co. This insurance collectively shall protect the Borrower
and the Lender against losses resulting from forgery, theft, embezzlement and
fraud of such persons. The bonds shall each show the Lender as an additional
insured and shall provide that the insurers or bonding company shall give the
Lender thirty (30) days written notice prior to any cancellation. This provision
shall not diminish or relieve the Borrower from its duties and obligations as
set forth in this Loan Agreement. The minimum coverage under (i) any such errors
and omissions policy of insurance shall be three hundred thousand dollars
($300,000), or such greater coverage amount as FNMA or FHLMC may require for the
Borrower and (ii) any such fidelity bond shall be at least equal to five hundred
thousand dollars ($500,000), or such greater coverage amount as FNMA or FHLMC
may require for the Borrower. The deductible amount on such errors and omissions
policy of insurance and such fidelity bond shall not exceed $50,000, without the
written consent of the Lender.
(c) If reasonably requested by the Lender at any time, the Borrower
shall deliver to the Lender promptly a copy of any power of attorney described
in paragraph (tt) of Schedule 1, or such other evidence of the existence and
continued effectiveness of such power of attorney as the Lender may reasonably
request.
(d) In addition to any review pursuant to Section 11.16, the
Borrower agrees that from time to time and upon reasonable prior notice to the
Borrower (which notice shall not be required after the occurrence and during the
continuance of an Event of Default), the Lender or its authorized
representatives will be permitted during normal business hours to examine,
inspect, and make copies or extracts of the Insured Closing Letters then in
effect. The Borrower acknowledges and agrees that, if the Lender in its
reasonable discretion is dissatisfied as a result of any such inspection with
the compliance by the Borrower with the terms and conditions of this Loan
Agreement with respect to Insured Closing Letters (including, without
limitation, paragraph (ss) of Part I of Schedule 1), the Lender may decline to
fund additional Advances hereunder until such time as the Lender ceases to be so
dissatisfied or the Loan Documents are modified in a manner satisfactory to the
Lender to provide alternative mechanisms to verify such compliance.
7.04 Notices. (a) The Borrower shall give notice to the Lender
-------
promptly:
(i) upon the Borrower becoming aware of, and in any event within
three (3) Business Days after (A) the occurrence of any Default or Event of
Default, and (B) of an event of default (meaning a default and the passage
of any grace or cure period provided in such agreement without the default
having been cured or waived) under any material agreement of the Borrower;
(ii) upon the Borrower becoming aware of (A) any default related to
any Collateral, (B) any Material Adverse Effect and (C) any event or change
in circumstances which should reasonably be expected to have a Material
Adverse Effect;
(iii) upon the Borrower becoming aware of, and in any event within
ten (10) days after, service of process on the Borrower or any of its
Subsidiaries, or any agent thereof for service of process, of notice of all
legal or arbitrable proceedings affecting the Borrower or any of its
Subsidiaries (A) that questions or challenges the validity or
enforceability of any of the Loan Documents or (B) in which the amount in
contest is greater than $200,000;
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<PAGE>
(iv) of the entry of any judgment or decree against the Borrower if
the aggregate amount of all judgments and decrees then outstanding against
the Borrower exceeds $75,000 after deducting (A) the amount with respect to
which the Borrower is insured and with respect to which the insurer has
assumed responsibility in writing, and (B) the amount for which the
Borrower is otherwise indemnified if the terms of such indemnification are
reasonably satisfactory to the Lender;
(v) upon the Borrower's receipt of any Payoff Proceeds of any Pledged
Mortgage Loan, and in any event within one (1) Business Day after receipt
thereof; and
(vi) upon the Borrower becoming aware that the Mortgaged Property in
respect of any Pledged Mortgage Loan has been damaged by waste, fire,
earthquake or earth movement, windstorm, flood, tornado or other casualty,
or otherwise damaged so as to materially and adversely affect the
Collateral Value of such Pledged Mortgage Loan.
Each notice pursuant to this Section 7.04(a) (other than 7.04(a)(v)) shall be
accompanied by a statement of a Responsible Officer of the Borrower setting
forth details of the occurrence referred to therein and stating what action the
Borrower has taken or proposes to take with respect thereto. The parties hereto
agree that, to the extent any of the events which require notice under this
Section 7.04(a) also require notice under Section 4.01(a) of the Residual
Agreement (as defined in the definition of "Significant Documents"), and no
period of time within which such notice shall be made is otherwise specified in
this Section 7.04(a), the parties hereto agree that notice under this Section
7.04(a) shall be deemed prompt if made within the time periods specified in
Section 4.01(a) of the Residual Agreement for the notice required thereunder for
such event.
(b) No later than 6:00 p.m., New York City time, on each Business
Day, the Borrower shall send to the Lender and the Custodian a data transmission
identifying (x) Mortgage Loans that were identified for funding by the Lender on
the prior Business Day but were not funded, and (y) Pledged Mortgage Loans
expected by the Borrower to be released from the Lien of this Loan Agreement on
the next succeeding Business Day, including, without limitation, in connection
with a sale or foreclosure of such Pledged Mortgage Loan. Such data transmission
shall specify for each such Mortgage Loan and Pledged Mortgage Loan, (i) its
loan identification number, and (ii) in the case of a Pledged Mortgage Loan, (A)
the date on which it was first pledged to the Lender hereunder, and (B) a code
indicating the basis for the repayment of such Pledged Mortgage Loan.
(c) The Borrower shall give the Lender notice as soon as practicable
after the end of each six-month period ending December 31 and June 30 of any
state which becomes a Significant Jurisdiction during such period and is not
indicated as such on Schedule 7. If requested by the Lender upon receipt of
such notice, the Borrower will as soon as practicable after receipt of such
request obtain an opinion of counsel to the Borrower in such new Significant
Jurisdiction covering the matters covered by the opinions of the Borrower's
counsel in Colorado delivered on the Effective Date and covering such other
matters as the Lender may reasonably request.
(d) The Borrower shall (i) within 30 days after the date it commences
using such Person as a Settlement Agent, either obtain an Insured Closing Letter
covering such additional Settlement Agent or cause an existing Insured Closing
Letter to be supplemented by an appropriate instrument to cause such additional
Settlement Agent to be covered by such Insured Closing Letter, and (ii) not less
frequently than monthly provide a list to the Lender of all Settlement Agents
then being used by the Borrower.
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7.05 Other Information. The Borrower shall furnish to the Lender, as
-----------------
soon as available, copies of any and all proxy statements, financial statements
and reports which the Borrower sends to its stockholders, and copies of all
regular, periodic and special reports, and all registration statements filed
with the Securities and Exchange Commission, any Governmental Authority which
supervises the issuance of securities by the Borrower.
7.06 Further Identification of Collateral. The Borrower will furnish
------------------------------------
to the Lender from time to time statements and schedules further identifying and
describing the Collateral and such other reports in connection with the
Collateral as the Lender or any Lender may reasonably request, all in reasonable
detail.
7.07 Notice if Mortgage Loan is Found Defective. Upon discovery by
------------------------------------------
the Borrower or the Lender of any breach of any representation or warranty
listed on Schedule 1 hereto applicable to any Mortgage Loan, the party
discovering such breach shall promptly give notice of such discovery to the
other.
7.08 Reporting.
---------
(a) The Borrower shall deliver to the Lender, no later than twenty
(20) days after the last day of each calendar month, a certificate of a
Responsible Officer of the Borrower to the effect that, (i) to the best of such
Responsible Officer's knowledge, after due inquiry, the Borrower during such
calendar month has observed or performed in all material respects all of its
covenants and other agreements, and satisfied in all material respects every
condition, contained in this Loan Agreement and the other Loan Documents to be
observed, performed or satisfied by it, (ii) the Borrower was, as of the end of
the prior calendar month, in compliance and in good standing with applicable HUD
or GNMA net worth requirements, and (iii) that such Responsible Officer has
obtained no knowledge of any Default or Event of Default except as specified in
such certificate (and, if any Default or Event of Default has occurred and is
continuing, describing the same in reasonable detail and describing the action
the Borrower has taken or proposes to take with respect thereto).
(b) The Borrower shall deliver to the Lender, concurrently with the
delivery of the financial statements required to be delivered pursuant to
Section 7.01(b) and (c) a covenant compliance certificate in the form of Exhibit
-------
F hereto (a "Covenant Compliance Certificate"), appropriately completed and
- - -------------------------------
accompanied by supporting documentation and calculations showing compliance with
the covenants referenced therein.
(c) The Borrower shall deliver or cause to be delivered to the
Lender, no later than ten (10) days after the last day of each calendar month a
monthly servicing report in a computer-readable format reasonably acceptable to
the Lender, listing and setting forth such information in respect of, all
Pledged Mortgage Loans as the Lender may reasonably request, including, without
limitation, the outstanding principal balance and delinquency status of each
such Pledged Mortgage Loan as at the last day of the prior calendar month.
(d) The Borrower shall deliver or cause to be delivered to the
Lender, no later than ten (10) days after the last day of each calendar month an
updated copy of Schedule 6, listing the names, mailing addresses and telecopy
numbers of all Settlement Agents used by the Borrower during such calendar
month, along with an undated Instruction Letter executed by the Borrower in
blank for each Settlement Agent added to Schedule 6.
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(e) The Borrower shall deliver to the Lender, no later than ten (10)
days after the last day of any calendar month in which the list of Relevant
States listed on Schedule 7 is not complete, an updated complete copy of
Schedule 7.
7.09 Financial Condition Covenants. The Borrower shall not:
-----------------------------
(a) Maintenance of Consolidated Tangible Equity. The Borrower shall
-------------------------------------------
not permit Consolidated Tangible Equity as of the end of any fiscal quarter to
be less than (i) for the fiscal quarters occurring in the fiscal year ending on
December 31, 1997, $4.0 million, (ii) for the fiscal quarters occurring in the
fiscal year ending on December 31, 1998, the greater of $10.0 million and 65% of
actual Consolidated Tangible Equity as of December 31, 1997, and (iii) for any
fiscal quarter during each fiscal year thereafter, the greater of $10.0 million
and 80% of actual Consolidated Tangible Equity as of the last day of the
immediately preceding fiscal year.
(b) Maintenance of Current Ratio. The Borrower shall not permit the
----------------------------
ratio of current assets to current liabilities (as determined in accordance with
GAAP and presented on the quarterly financial statements of the Borrower) to be
less than (i) 1.01:1 for the fiscal year ending December 31, 1997, and (ii)
1.05:1 thereafter.
(c) Delinquency Rate. The Borrower shall not permit the Delinquency
----------------
Rate for all mortgage loans in the Borrower's servicing portfolio to be 12.5% or
greater.
7.10 Limitation on Indebtedness; Guarantee Obligations. Neither the
-------------------------------------------------
Borrower nor any of its Subsidiaries shall create, incur, assume or suffer to
exist any Indebtedness or Guarantee Obligations, except:
(a) Indebtedness of the Borrower under this Loan Agreement or any
Other Agreement;
(b) Indebtedness to an Affiliate subject to an Affiliate
Subordination Agreement;
(c) Guarantee Obligations incurred after the date hereof in an
aggregate amount not to exceed $100,000 at any one time outstanding or
those created by endorsement of negotiable instruments for deposit or
collection in the ordinary course of business;
(d) Existing Indebtedness listed on Schedule 8;
(e) Indebtedness under a residual interest facility having as terms
reasonably acceptable to the Lender; and
(f) Indebtedness (in addition to Existing Indebtedness listed on
Schedule 8) under one or more financing leases in respect of office
equipment not exceeding $250,000 at any one time.
7.11 Subordination; Limitations on Optional Payments or Modification
---------------------------------------------------------------
of Certain Indebtedness.
- -----------------------
(a) The Borrower shall cause any Indebtedness of the Borrower to any
shareholder, director, officer or Affiliate of the Borrower, which Indebtedness
is in excess of $100,000, to be subordinated to the Secured Obligations on or
prior to the Closing Date, or if incurred later, at the time of
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<PAGE>
the incurrence thereof, by the execution and delivery of an Affiliate
Subordination Agreement and shall deliver to the Lender an executed copy of each
such agreement, certified by the Secretary or Assistant Secretary of the
Borrower to be true and complete and in full force and effect; and
(b) The Borrower shall not (i) make any optional payment or
prepayment on or redemption or purchase of any Indebtedness subject to an
Affiliate Subordination Agreement, or (ii) amend, modify or change, or consent
or agree to any amendment, modification or change to any of the terms of any
such Indebtedness, other than in accordance with the terms of such Affiliate
Subordination Agreement; provided, however, that so long as no Event of Default
-------- -------
has occurred and is continuing, the Borrower may repay the RDC Indebtedness with
the proceeds of (w) borrowings in respect of a working capital facility which
may be established by the Borrower with a third-party lender, (x) borrowings
under a residual interest financing facility permitted by Section 7.10(f) to the
extent such proceeds are not required to be paid to the Lender hereunder, (y)
whole loan sales or securitizations to the extent such proceeds are not required
to be paid to the Lender hereunder, or (z) the issuance of Capital Stock of the
Borrower.
7.12 Prohibition of Fundamental Changes. Neither the Borrower nor any
----------------------------------
of its Subsidiaries shall (i) enter into any transaction of merger or
consolidation or amalgamation, or (ii) liquidate, wind up or dissolve itself (or
suffer any liquidation, winding up or dissolution) or (iii) sell all or
substantially all of its assets (other than mortgage loans), without the prior
written consent of the Lender.
7.13 Limitation on Sale or Other Disposition of, or Encumbrances on,
---------------------------------------------------------------
Collateral. The Borrower will not lease, transfer, assign, sell or otherwise
- ----------
dispose of any Collateral without the prior written consent of the Lender,
except for a sale of Collateral in connection with which Advances are prepaid in
accordance with Section 2.06(d), 2.06(e) or 2.06(f) hereof, as applicable. The
Borrower shall not grant any security interest, lien or other encumbrance on any
Collateral other than (a) to the Lender or any Affiliate thereof, (b) with
respect to taxes and assessments related thereto which are not yet due and
payable, or which are being contested in good faith, and (c) to the extent a
release of the lien granted in favor of the Lender is permitted to be released
pursuant to Section 4.10.
7.14 Limitation on Transactions with Affiliates. (a) Neither the
------------------------------------------
Borrower nor any of its Subsidiaries shall enter into any transaction,
including, without limitation, any purchase, sale, lease or exchange of property
or the rendering of any service, with any Affiliate unless such transaction is
(a) not otherwise prohibited under this Loan Agreement, (b) is in the ordinary
course of the Borrower's business and (c) upon fair and reasonable terms no less
favorable to the Borrower, as the case may be, then it would obtain in a
comparable arm's length transaction with a Person which is not an Affiliate.
7.15 Underwriting Guidelines. Without prior written consent of the
-----------------------
Lender, the Borrower shall not amend or otherwise modify the Underwriting
Guidelines. In the event that the Borrower proposes to amend the Underwriting
Guidelines, the Borrower shall submit the proposed amendment to the Lender in
writing. Unless the Lender objects to the proposed amendment within 10 days
following receipt of such proposed amendment, the Lender shall be deemed to have
approved such proposed amendment.
7.16 Limitations on Modifications, Waivers and Extensions of Mortgage
----------------------------------------------------------------
Loans. The Borrower will not, nor will it permit or allow others to, amend,
- -----
modify, terminate or waive any provision of any Mortgage Loan to which the
Borrower is a party in any manner which should reasonably be expected to
materially adversely affect the value of such Mortgage Loan as Collateral;
provided, that the
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<PAGE>
Borrower may enter into forbearance agreements or plans with Mortgagors
consistent with its collection activities as servicer of the Mortgage Loans and
in conformity with Accepted Servicing Practices.
7.17. Servicing. The Borrower shall not permit any other Person to
---------
service Pledged Mortgage Loans without the prior written consent of the Lender.
7.18 Hedging. The Borrower shall enter into and maintain Interest
-------
Rate Protection Agreements, having a notional amount not less than 80% of the
aggregate unpaid principal amount of the fixed rate Mortgage Loans, having terms
with respect to protection against fluctuations in interest rates or forward
commitments to purchase fixed-rate Mortgage Loans reasonably acceptable to the
Lender; provided that such notional amount may drop from time to time to not
--------
less than 60% for a period not to exceed five (5) Business Days.
7.19 Authorized Officers. If at any time the list of authorized
-------------------
officers listed on Schedule 9 becomes incomplete or incorrect, the Borrower
shall promptly deliver to the Lender an updated complete and correct copy of
Schedule 9. Until such updated copy of Schedule 9 is delivered, the Lender
shall be entitled to rely exclusively upon the most recently delivered copy of
Schedule 9. Accordingly, the Borrower's failure to deliver such updated copy
shall not constitute an Event of Default.
Section 8. Events of Default. Each of the following events shall
-----------------
constitute an event of default (an "Event of Default") hereunder:
----------------
(a) the Borrower shall default in the payment of any principal of or
interest on any Advance when due (whether at stated maturity, upon
acceleration or at mandatory or optional prepayment) and such default shall
remain uncured for one Business Day; or
(b) the Borrower shall default in the payment of any other amount
payable by it hereunder or under any other Loan Document, and such default
shall have continued unremedied for three Business Days after receipt of
notice from the Lender of such default; or
(c) any representation, warranty or certification made or deemed made
by the Borrower herein (other than those in Schedule 1 hereto) or by the
Borrower in any other Loan Document or any certificate furnished to the
Lender pursuant to the provisions thereof, shall prove to have been false
in any material respect as of the time made or furnished; or
(d) the Borrower shall:
(i) fail to comply with the requirements of Section 7 hereof
(other than Sections 7.01, 7.02(b), 7.02(d), 7.03, 7.04(b), 7.05,
7.06, 7.08, 7.09 or 7.17),
(ii) fail to comply with the requirements of Section 7.04(b) and
the Borrower shall not be (A) making a good faith effort to comply
with the requirements of such Section 7.04(b) promptly after the
deadline set forth therein and (B) using its best efforts to
communicate promptly to the Lender by other means the information
required by the Lender to calculate the Borrowing Base,
(iii) fail to comply with the requirements of Sections 7.01,
7.03, 7.05, 7.06, 7.08 or 7.17 and such default shall continue
unremedied for a period of five (5) Business Days,
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<PAGE>
(iv) fail at any time to comply with the requirements of Section
7.09 and any of the following shall be true:
(1) the Borrower shall have failed to notify the Lender of
such Default within three Business Days after the Borrower became
aware, or reasonably should have become aware, of such Default
(the Lender acknowledging that, in the normal course of its
business, the Borrower does not calculate Delinquency Rate other
than after the close of the Borrower's books after the end of
each calendar month and that Consolidated Tangible Equity and
current ratio are only to be measured quarterly as described in
Section 7.09); or
(2) such Default shall have continued unremedied for 10
Business Days after the Borrower became aware, or reasonably
should have become aware, of such Default (the Lender
acknowledging that, in the normal course of its business, the
Borrower does not calculate Delinquency Rate other than after the
close of the Borrower's books at the end of each calendar month
and that Consolidated Tangible Equity and current ratio are only
to be measured quarterly as described in Section 7.09);
(v) fail to observe or perform any other agreement contained
in this Loan Agreement or any other Loan Document and such failure to
observe or perform shall continue unremedied for a period of fifteen
(15) Business Days; or
(e) an "event of termination" shall occur under any Other Agreement
which has not been waived by the Lender or its Affiliate, as applicable; or
(f) the Borrower or any of its Subsidiaries shall:
(i) default in any payment of principal of or interest of any
Indebtedness (other than the Advances) or in the payment of any
Guarantee Obligation, beyond the period of grace (not to exceed 30
days), if any, provided in the instrument or agreement under which
such Indebtedness or Guarantee Obligation was created, if the
aggregate amount of the Indebtedness and/or Guarantee Obligations in
respect of which such default or defaults shall have occurred is at
least $100,000; or
(ii) default in the observance or performance of any other
agreement or condition relating to any such Indebtedness or Guarantee
Obligation or contained in any instrument or agreement evidencing,
securing or relating thereto, or contained in any Other Agreement, in
each case beyond the period of grace (not to exceed 30 days), if any,
provided in the instrument or agreement under which such Indebtedness
or Guarantee Obligation was created, or any other event shall occur or
condition exist,
the effect of which default or other event or condition is to cause, or
give the holder or holders of such Indebtedness or the beneficiary or
beneficiaries of such Guarantee Obligation (or a trustee or agent on behalf
of such holder or holders or beneficiary or beneficiaries) to the immediate
right to cause, with the giving of a notice of acceleration if required,
such Indebtedness to become due prior to its stated maturity or such
Guarantee Obligation to become payable; or
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<PAGE>
(g) a final judgment or judgments for the payment of money in excess
of $100,000 in the aggregate shall be rendered against the Borrower or any
of its Subsidiaries by one or more courts, administrative tribunals or
other bodies having jurisdiction over them and the same shall not be
discharged (or provision shall not be made for such discharge) or bonded,
or a stay of execution thereof shall not be procured, within 60 days from
the date of entry thereof and the Borrower or any such Subsidiary shall
not, within said period of 60 days, or such longer period during which
execution of the same shall have been stayed or bonded, appeal therefrom
and cause the execution thereof to be stayed during such appeal; or
(h) the Borrower shall admit in writing its inability to pay its debts
as such debts become due; or
(i) the Borrower or any of its Subsidiaries shall (i) apply for or
consent to the appointment of, or the taking of possession by, a receiver,
custodian, trustee, examiner or liquidator of itself or of all or a
substantial part of its property, (ii) make a general assignment for the
benefit of its creditors, (iii) commence a voluntary case under the
Bankruptcy Code, (iv) file a petition seeking to take advantage of any
other law relating to bankruptcy, insolvency, reorganization, liquidation,
dissolution, arrangement or winding-up, or composition or readjustment of
debts, (v) fail to controvert in a timely and appropriate manner, or
acquiesce in writing to, any petition filed against it in an involuntary
case under the Bankruptcy Code or (vi) take any corporate or other action
for the purpose of effecting any of the foregoing; or
(j) a proceeding or case shall be commenced, without the application
or consent of the Borrower or any of its Subsidiaries, in any court of
competent jurisdiction, seeking (i) its reorganization, liquidation,
dissolution, arrangement or winding-up, or the composition or readjustment
of its debts, (ii) the appointment of a receiver, custodian, trustee,
examiner, liquidator or the like of the Borrower or any such Subsidiary or
of all or any substantial part of its property, or (iii) similar relief in
respect of the Borrower or any such Subsidiary under any law relating to
bankruptcy, insolvency, reorganization, winding-up, or composition or
adjustment of debts, and such proceeding or case shall continue
undismissed, or an order, judgment or decree approving or ordering any of
the foregoing shall be entered and continue unstayed and in effect, for a
period of 45 or more days; or an order for relief against the Borrower or
any such Subsidiary shall be entered in an involuntary case under the
Bankruptcy Code; or
(k) the Custodial Agreement, or any other Loan Document shall for
whatever reason be terminated or cease to be in full force and effect, or
the enforceability thereof shall be contested by any party thereto, unless
terminated by the Lender or in connection with the implementation of a
replacement Custodial Agreement acceptable to the Lender; or
(l) (i) any Person shall engage in any "prohibited transaction" (as
defined in Section 406 of ERISA or Section 4975 of the Code) involving any
Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302
of ERISA), whether or not waived, shall exist with respect to any Plan or
any Lien in favor of the PBGC or a Plan shall arise on the assets of the
Borrower or any Commonly Controlled Entity, (iii) a Reportable Event shall
occur with respect to, or proceedings shall commence to have a trustee
appointed, or a trustee shall be appointed, to administer or to terminate,
any Single Employer Plan, which Reportable Event or commencement of
proceedings or appointment of a trustee is, in the reasonable opinion of
the Lenders, likely to result in the termination of such Plan for purposes
of Title IV of ERISA, (iv)
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<PAGE>
any Single Employer Plan shall terminate for purposes of Title IV of ERISA,
(v) the Borrower or any Commonly Controlled Entity shall, or in the
reasonable opinion of the Lenders is likely to, incur any liability in
connection with a withdrawal from, or the insolvency or reorganization of,
a Multiemployer Plan or (vi) any other event or condition shall occur or
exist with respect to a Plan; and in each case in clauses (i) through (vi)
above, such event or condition, together with all other such events or
conditions, if any, could reasonably be expected to have a Material Adverse
Effect; or
(m) (i) there shall occur any event of default (meaning a default
and the passage of any grace or cure period provided in such agreement
without the default being cured or waived) under any of the Residual
Agreement or the Subordinated Debt Agreement (as defined in the
definition of "Significant Documents") or any other material agreement
which contains an event of default provision and such event of default
shall have continued for five days, or
(ii) there shall occur any material breach under any of the
Master Agreement, the Warrants, the Intercreditor Agreement (each as
defined in the definition of "Significant Documents") or the Custodial
Agreement or any other material agreement which does not contain an
event of default provision, and such breach shall have continued for
twenty Business Days; provided, however, that for this clause (ii) an
-------- -------
"Event of Default" will not occur until twenty Business Days after the
occurrence of such event of default or material breach if the ability
to cure, and substantial effort towards curing, such event of default
or material breach can be demonstrated in writing satisfactory to the
Lender in its sole discretion; provided, further, however, that for
-------- ------- -------
clause (ii) above, that if it is not possible or practicable within
twenty Business Days to cure such event of default or material breach,
an "Event of Default" shall be deemed to have occurred immediately
upon the occurrence of such event of default or material breach; or
(n) any event (other than those set forth above in paragraphs (a)
through (n)) shall occur which, in the reasonable discretion of the Lender,
has had a Material Adverse Effect, and shall not have been remedied within
fifteen (15) calendar days after the earlier of (i) the Borrower's receipt
of notice thereof, or (ii) the Borrower's actual knowledge of the Lender's
determination thereof; provided, that such cure period shall in no event be
--------
deemed to supersede the cure period applicable to another Default under
this Section 8.
Section 9. Remedies Upon Default.
---------------------
(a) Upon the occurrence of one or more Events of Default other than
those referred to in Sections 8(h) or (i), the Lender may immediately declare
the principal amount of the Advances then outstanding under the Note to be
immediately due and payable, together with all interest thereon and fees and
expenses accruing under this Loan Agreement. Upon the occurrence of an Event of
Default referred to in Sections 8(h) or (i), such amounts shall immediately and
automatically become due and payable without any further action by any Person.
Upon such declaration or such automatic acceleration, the balance then
outstanding on the Note shall become immediately due and payable, without
presentment, demand, protest or other formalities of any kind, all of which are
hereby expressly waived by the Borrower.
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<PAGE>
(b) Upon the occurrence of one or more Events of Default, the
Lender shall have the right to obtain physical possession of the Servicing
Records and all other files of the Borrower relating to the Collateral and all
documents relating to the Collateral which are then or may thereafter come in to
the possession of the Borrower or any third party acting for the Borrower and
the Borrower shall deliver to the Lender such assignments as the Lender shall
request. The Lender shall be entitled to specific performance of all agreements
of the Borrower contained in this Loan Agreement.
Section 10. No Duty of Lender. The powers conferred on the Lender
-----------------
hereunder are solely to protect the Lender's interests in the Collateral and
shall not impose any duty upon it to exercise any such powers. The Lender shall
be accountable only for amounts that it actually receives as a result of the
exercise of such powers, and neither it nor any of its officers, directors,
employees or agents shall be responsible to the Borrower for any act or failure
to act hereunder, except for its or their own gross negligence or willful
misconduct.
Section 11. Miscellaneous.
-------------
11.01 Waiver. No failure on the part of the Lender to exercise and
------
no delay in exercising, and no course of dealing with respect to, any right,
power or privilege under any Loan Document shall operate as a waiver thereof,
nor shall any single or partial exercise of any right, power or privilege under
any Loan Document preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
11.02 Notices. Except as otherwise expressly permitted by this Loan
-------
Agreement, all notices, requests and other communications provided for herein
and under the Custodial Agreement (including without limitation any
modifications of, or waivers, requests or consents under, this Loan Agreement)
shall be given or made in writing (including without limitation by telex or
telecopy) delivered to the intended recipient at the "Address for Notices"
specified below its name on the signature pages hereof or thereof); or, as to
any party, at such other address as shall be designated by such party in a
written notice to each other party. Except as otherwise provided in this Loan
Agreement and except for notices given under Section 2 (which shall be effective
only on receipt), all such communications shall be deemed to have been duly
given when transmitted by telex or telecopy or personally delivered or, in the
case of a mailed notice, upon receipt, in each case given or addressed as
aforesaid.
11.03 Indemnification and Expenses.
----------------------------
(a) The Borrower agrees to hold the Lender harmless from and
indemnify the Lender against all liabilities, losses, damages, judgments, costs
and expenses of any kind which may be imposed on, incurred by or asserted
against the Lender in any suit, action, claim or proceeding relating to or
arising out of this Loan Agreement, the Note, any other Loan Document or any
transaction contemplated hereby or thereby, or any amendment, supplement or
modification of, or any waiver or consent under or in respect of, this Loan
Agreement, the Note, any other Loan Document or any transaction contemplated
hereby or thereby, that, in each case, results from anything other than the
Lender's gross negligence or willful misconduct. In any suit, proceeding or
action brought by the Lender in connection with any Mortgage Loan for any sum
owing thereunder, or to enforce any provisions of any Mortgage Loan, the
Borrower will save, indemnify and hold the Lender harmless from and against all
expense, loss or damage suffered by reason of any defense, set-off,
counterclaim, recoupment or reduction or liability whatsoever of the account
debtor or obligor thereunder, arising out of a breach by the Borrower of any
obligation thereunder or arising out of any other agreement, indebtedness or
liability
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<PAGE>
at any time owing to or in favor of such account debtor or obligor or its
successors from the Borrower. The Borrower also agrees to reimburse the Lender
as and when billed by the Lender for all the Lender's costs and expenses
incurred in connection with the enforcement or the preservation of the Lender's
rights under this Loan Agreement, the Note, any other Loan Document or any
transaction contemplated hereby or thereby, including without limitation the
fees and disbursements of its counsel (including all fees and disbursements
incurred in any action between the Borrower and the Lender or between the Lender
and any third party) and additional due diligence expenses beyond those provided
for in Section 11.16 hereof incurred after the occurrence of an Event of Default
or in connection with a suit, action, claim or proceeding described in the first
sentence of this Section 11.03(a). The Borrower hereby acknowledges that,
notwithstanding the fact that the Note is secured by the Collateral, the
obligation of the Borrower under the Note is a recourse obligation of the
Borrower.
(b) The Borrower agrees to pay as and when billed by the Lender all
of the reasonable out-of-pocket costs and expenses incurred by the Lender in
connection with the negotiation, preparation and execution of, and any
amendment, supplement or modification to, this Loan Agreement, the Note, any
other Loan Document or any other documents prepared in connection herewith or
therewith (except to the extent any such amendment, supplement or modification
was requested by the Lender for internal or regulatory reasons not specific to
the Borrower). The Borrower agrees to pay as and when billed by the Lender all
of the reasonable out-of-pocket costs and expenses incurred in connection with
the consummation and administration of the transactions contemplated hereby and
thereby; provided, that the Borrower shall not be responsible for paying fees,
--------
disbursements and expenses of counsel to the Lender in excess of $120,000 in
connection with the negotiation, preparation and execution of the Existing
Agreement, this Loan Agreement and each other Loan Document (but not any
amendment, waiver or other modification thereto); provided further, that the
-------- -------
Borrower shall not be responsible for paying any due diligence expenses
specifically included within Section 11.16 hereof in excess of the limitations
on the Lender's right to reimbursement set forth in such Section 11.16.
11.04 Amendments. Except as otherwise expressly provided in this
----------
Loan Agreement, any provision of this Loan Agreement may be modified or
supplemented only by an instrument in writing signed by the Borrower and the
Lender and any provision of this Loan Agreement may be waived by the Lender.
11.05 Successors and Assigns. This Loan Agreement shall be binding
----------------------
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
11.06 Survival. The obligations of the Borrower under Section 11.03
--------
hereof shall survive the repayment of the Advances and the termination of this
Loan Agreement. In addition, each representation and warranty made or deemed to
be made by a request for a borrowing herein or pursuant hereto shall survive the
making of such representation and warranty, and the Lender shall not be deemed
to have waived, by reason of making any Advance, any Default that may arise
because any such representation or warranty shall have proved to be false or
misleading, notwithstanding that the Lender may have had notice or knowledge or
reason to believe that such representation or warranty was false or misleading
at the time such Advance was made.
11.07 Captions. The table of contents and captions and section
--------
headings appearing herein are included solely for convenience of reference and
are not intended to affect the interpretation of any provision of this Loan
Agreement.
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<PAGE>
11.08 Counterparts. This Loan Agreement may be executed in any
------------
number of counterparts, all of which taken together shall constitute one and the
same instrument, and any of the parties hereto may execute this Loan Agreement
by signing any such counterpart.
11.09 Loan Agreement Constitutes Security Agreement; Governing Law.
------------------------------------------------------------
This Loan Agreement shall be governed by New York law without reference to
choice of law doctrine (but with reference to Section 5-1401 of the New York
General Obligations Law, which by its terms applies to this Loan Agreement), and
shall constitute a security agreement within the meaning of the Uniform
Commercial Code.
11.10 SUBMISSION TO JURISDICTION; WAIVERS. THE BORROWER HEREBY
-----------------------------------
IRREVOCABLY AND UNCONDITIONALLY:
(A) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR
PROCEEDING RELATING TO THIS LOAN AGREEMENT, THE NOTE AND THE OTHER LOAN
DOCUMENTS, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT
THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE
STATE OF NEW YORK, THE FEDERAL COURTS OF THE UNITED STATES OF AMERICA FOR
THE SOUTHERN DISTRICT OF NEW YORK, AND APPELLATE COURTS FROM ANY THEREOF;
(B) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN
SUCH COURTS AND, TO THE EXTENT PERMITTED BY LAW, WAIVES ANY OBJECTION THAT
IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING
IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN
INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME;
(C) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING
MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL
(OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO ITS
ADDRESS SET FORTH UNDER ITS SIGNATURE BELOW OR AT SUCH OTHER ADDRESS OF
WHICH THE LENDER SHALL HAVE BEEN NOTIFIED; AND
(D) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT
SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE
RIGHT TO SUE IN ANY OTHER JURISDICTION.
11.11 WAIVER OF JURY TRIAL. EACH OF THE BORROWER AND THE LENDER
--------------------
HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW,
ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR
RELATING TO THIS LOAN AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY.
-45-
<PAGE>
11.12 Acknowledgments. The Borrower hereby acknowledges that:
---------------
(a) it has been advised by counsel in the negotiation, execution
and delivery of this Loan Agreement, the Note and the other Loan Documents;
(b) the Lender has no fiduciary relationship to the Borrower, and
the relationship between the Borrower and the Lender is solely that of
debtor and creditor; and
(c) no joint venture exists between the Lender and the Borrower.
11.13 Hypothecation or Pledge of Advances. The Lender shall have
-----------------------------------
free and unrestricted use of all Collateral and nothing in this Loan Agreement
shall preclude the Lender from engaging in repurchase transactions with the
Collateral or otherwise pledging, repledging, transferring, hypothecating, or
rehypothecating the Collateral. Nothing contained in this Loan Agreement shall
obligate the Lender to segregate any Collateral delivered to the Lender by the
Borrower.
11.14 Assignments; Participations.
---------------------------
(a) The Borrower may not assign any of its rights or obligations
hereunder or under the Note without the prior consent of the Lender. The Lender
may assign or transfer to any bank or other financial institution that makes or
invests in loans all or any of its rights or obligations under this Loan
Agreement and the other Loan Documents.
(b) The Lender may, in accordance with applicable law, at any time
sell to one or more lenders or other entities ("Participants") participating
------------
interests in any Advance, the Note, its commitment to make Advances, or any
other interest of the Lender hereunder and under the other Loan Documents. In
the event of any such sale by the Lender of participating interests to a
Participant, the Lender's obligations under this Loan Agreement to the Borrower
shall remain unchanged, the Lender shall remain solely responsible for the
performance thereof, the Lender shall remain the holder of the Note for all
purposes under this Loan Agreement and the other Loan Documents, and the
Borrower and the Lender shall continue to deal solely and directly with the
Lender in connection with the Lender's rights and obligations under this Loan
Agreement and the other Loan Documents. The Borrower agrees that if amounts
outstanding under this Loan Agreement and the Note are due or unpaid, or shall
have been declared or shall have become due and payable upon the occurrence of
an Event of Default, each Participant shall be deemed to have the right of set-
off in respect of its participating interest in amounts owing under this Loan
Agreement and the Note to the same extent as if the amount of its participating
interest were owing directly to it as a Lender under this Loan Agreement or the
Note; provided, that such Participant shall only be entitled to such right of
--------
set-off if it shall have agreed in the agreement pursuant to which it shall have
acquired its participating interest to share with the Lender the proceeds
thereof. The Lender also agrees that each Participant shall be entitled to the
benefits of Sections 2.08 and 11.03 with respect to its participation in the
Advances outstanding from time to time; provided, that the Lender and all
--------
Participants shall be entitled to receive no greater amount in the aggregate
pursuant to such Sections than the Lender would have been entitled to receive
had no such transfer occurred.
(c) The Lender may furnish any information concerning the Borrower
or any of its Subsidiaries in the possession of such Lender from time to time to
assignees and participants (including prospective assignees and participants).
-46-
<PAGE>
(d) The Borrower agrees to cooperate with the Lender in connection
with any such assignment and/or participation, to execute and deliver such
replacement notes, and to enter into such restatements of, and amendments,
supplements and other modifications to, this Loan Agreement and the other Loan
Documents in order to give effect to such assignment and/or participation. The
Borrower further agrees to furnish to any Participant identified by the Lender
to the Borrower copies of all reports and certificates to be delivered by the
Borrower to the Lender hereunder, as and when delivered to the Lender.
11.15 Servicing.
---------
(a) The Borrower covenants to maintain or cause the servicing of
the Mortgage Loans to be maintained in conformity with accepted and prudent
servicing practices in the industry for the same type of Mortgage Loans as the
Mortgage Loans and in a manner at least equal in quality to the servicing the
Borrower provides for Mortgage Loans which it owns ("Accepted Servicing
------------------
Practices"). In the event that the preceding language is interpreted as
- ---------
constituting one or more servicing contracts, each such servicing contract shall
terminate automatically upon the earlier of (i) an Event of Default, or (ii) the
Termination Date.
(b) The Borrower agrees that the Lender is the collateral assignee
of all servicing records, including but not limited to any and all servicing
agreements, files, documents, records, data bases, computer tapes, copies of
computer tapes, proof of insurance coverage, insurance policies, appraisals,
other closing documentation, payment history records, and any other records
relating to or evidencing the servicing of Mortgage Loans (the "Servicing
---------
Records"), and (ii) the Borrower grants the Lender a security interest in all of
- -------
the Borrower's rights relating to the Mortgage Loans and all Servicing Records
to secure the obligation of the Borrower or its designee to service in
conformity with this Section and any other obligation of the Borrower to the
Lender. The Borrower covenants to safeguard such Servicing Records and to
deliver them promptly to the Lender or its designee (including the Custodian) at
the Lender's request.
(c) After the Funding Date, until the pledge of any Mortgage Loan
is relinquished by the Custodian, the Borrower will have no right to modify or
alter the terms of such Mortgage Loan except with the prior written consent of
the Lender, and the Borrower will have no obligation or right to repossess such
Mortgage Loan or substitute another Mortgage Loan, except as provided in the
Custodial Agreement; provided, that the Borrower may enter into forbearance
agreements or plans with Mortgagors consistent with its collection activities as
servicer of the Mortgage Loans and in conformity with Accepted Servicing
Practices.
(d) The Borrower shall permit the Lender to inspect the Borrower's
or its Affiliate's servicing facilities, as the case may be, for the purpose of
satisfying the Lender that the Borrower or its Affiliate, as the case may be,
has the ability to service the Mortgage Loans as provided in this Loan
Agreement.
11.16 Periodic Due Diligence Review. The Borrower acknowledges that
-----------------------------
the Lender has the right to perform continuing due diligence reviews with
respect to the Mortgage Loans, for purposes of verifying compliance with the
representations, warranties and specifications made hereunder, or otherwise, and
the Borrower agrees that upon reasonable (but no less than one (1) Business
Day's) prior notice to the Borrower (which prior notice shall not be required
after the occurrence and during the continuation of an Event of Default), the
Lender or its authorized representatives will be permitted during normal
business hours to examine, inspect, and make copies and extracts of, the
-47-
<PAGE>
Mortgage Files and any and all documents, records, agreements, instruments or
information relating to such Mortgage Loans in the possession or under the
control of the Borrower and/or the Custodian. The Borrower also shall make
available to the Lender a knowledgeable financial or accounting officer for the
purpose of answering questions respecting the Mortgage Files and the Mortgage
Loans. Without limiting the generality of the foregoing, the Borrower
acknowledges that the Lender may make Advances to the Borrower based solely upon
the information provided by the Borrower to the Lender and the representations,
warranties and covenants contained herein, and that the Lender, at its option,
has the right at any time to conduct a partial or complete due diligence review
on some or all of the Mortgage Loans securing such Advance, including without
limitation ordering new credit reports and new appraisals on the related
Mortgaged Properties and otherwise re-generating the information used to
originate such Mortgage Loan. The Lender may underwrite such Mortgage Loans
itself or engage a mutually agreed upon third party underwriter to perform such
underwriting. The Borrower agrees to cooperate with the Lender and any third
party underwriter in connection with such underwriting, including, but not
limited to, providing the Lender and any third party underwriter with access to
any and all documents, records, agreements, instruments or information relating
to such Mortgage Loans in the possession, or under the control, of the Borrower.
The Borrower further agrees that the Borrower shall reimburse the Lender for all
out-of-pocket costs and expenses incurred by the Lender in connection with the
Lender's activities pursuant to this Section 11.16 in an amount not to exceed
$75,000 for the period from the date hereof until the Termination Date as
originally in effect; provided that from time to time at the Lender's reasonable
--------
request, the Borrower will provide the Lender with a copy of Mortgage Files in
lieu of an on-site underwriter visit; and provided further, that the foregoing
-------- -------
limitation shall not apply with respect to expenses incurred during the
continuance of an Event of Default.
11.17 Set-Off. In addition to any rights and remedies of the Lender
-------
provided by this Loan Agreement and by law, the Lender shall have the right,
without prior notice to the Borrower, any such notice being expressly waived by
the Borrower to the extent permitted by applicable law, upon any amount becoming
due and payable by the Borrower hereunder (whether at the stated maturity, by
acceleration or otherwise) to set-off and appropriate and apply against such
amount any and all deposits (general or special, time or demand, provisional or
final), in any currency, and any other credits, indebtedness or claims, in any
currency, in each case whether direct or indirect, absolute or contingent,
matured or unmatured, at any time held or owing by the Lender or any Affiliate
thereof to or for the credit or the account of the Borrower. The Lender agrees
promptly to notify the Borrower after any such set-off and application made by
the Lender; provided that the failure to give such notice shall not affect the
--------
validity of such set-off and application.
[SIGNATURE PAGE FOLLOWS]
-48-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement
to be duly executed and delivered as of the day and year first above written.
BORROWER
--------
MORTGAGE SERVICING ACQUISITION CORPORATION D/B/A
NATIONAL MORTGAGE CORPORATION
By______________________________
Name:
Title:
Address for Notices:
-------------------
7600 East Orchard Road
Suite 330-S
Englewood, Colorado 80111
Attention: Craig Stulz, EVP
Telecopier No.: 303-741-8131
Telephone No.: 303-741-8101
With a copy to:
--------------
The Chotin Group Corporation
Plaza Tower One, Suite 1200
6400 South Fiddler's Green Circle
Englewood, Colorado 80111
Attention: Howard J. Glicksman
Telecopier No.: 303-741-2630
Telephone No.: 303-741-0100
-49-
<PAGE>
LENDER
------
GREENWICH CAPITAL FINANCIAL PRODUCTS,
INC.
By____________________________
Name:
Title:
Address for Notices:
-------------------
600 Steamboat Road
Greenwich, Connecticut 06830
Attention: Bhavana Desai
Telecopier No.: 203-629-4640
Telephone No.: 203-622-5636
With a Copy To:
--------------
600 Steamboat Road
Greenwich, Connecticut 06830
Attention: Joseph Bartolotta
Telecopier No.: 203-629-3650
Telephone No.: 203-625-6675
and
600 Steamboat Road
Greenwich, Connecticut 06830
Attention: General Counsel
Telecopier No.: 203-629-5718
Telephone No.: 203-625-2700
-50-
<PAGE>
AMENDMENT
AMENDMENT, dated as of August 21, 1997 (this "Amendment"), to the Amended
---------
and Restated Loan and Security Agreement, dated as of June 30, 1997 (as amended,
supplemented or otherwise modified prior to the date hereof, the "Existing Loan
-------------
Agreement" and, as amended pursuant to this Amendment, the "Loan Agreement"),
- --------- --------------
between NATIONAL MORTGAGE CORPORATION, a Colorado corporation, (formerly
MORTGAGE SERVICING ACQUISITION CORPORATION) (the "Borrower"), and GREENWICH
--------
CAPITAL FINANCIAL PRODUCTS, INC., a Delaware corporation (the "Lender").
------
RECITALS
The Borrower has requested the Lender to agree to amend the Existing Loan
Agreement to increase the maximum credit available thereunder to $120,000,000
for the period commencing on the effective date of this Amendment to and
including the earlier of (a) the date of the first securitization of mortgage
loans by the Borrower following the date hereof and (b) September 30, 1997. The
Lender is willing to agree to such amendment, but only on the terms and subject
to the conditions set forth in this Amendment.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Borrower and the Lender hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, terms defined in the
-------------
Existing Loan Agreement are used herein as therein defined.
2. Amendment. (a) The Existing Loan Agreement is hereby amended by
---------
deleting the definition of "Maximum Credit" contained in Section 1.01 thereof
and substituting in lieu thereof the following new definition:
""Maximum Credit" shall mean (a) from and after the First Amendment
--------------
Effective Date to and including the earlier of (i) the date of the first
securitization of Mortgage Loans by the Borrower following the First
Amendment Effective Date and (ii) September 30, 1997, $120,000,000, and (b)
thereafter, $100,000,000."
(b) The Existing Loan Agreement is hereby amended by adding to Section
1.01 thereof the following new definitions in the appropriate alphabetical
order:
""First Amendment" shall mean the Amendment, dated as of August 21,
---------------
1997, to this Loan Agreement, between the Borrower and the Lender."
""First Amendment Effective Date" shall mean the date on which all of
------------------------------
the conditions precedent to the effectiveness of the First Amendment set
forth in Section 3 of the First Amendment shall first have been satisfied
or waived."
3. Effectiveness. The effectiveness of the amendments to the Existing
-------------
Loan Agreement set forth in this Amendment shall be subject to the satisfaction,
immediately prior to or concurrently
<PAGE>
therewith, of the following conditions precedent (the date such conditions are
first satisfied or waived being referred to herein as the "Amendment Effective
-------------------
Date"):
- ----
(a) Amendment. The Lender shall have received this Amendment,
---------
executed and delivered by a duly authorized officer of the Borrower.
(b) Endorsement. The Lender shall have received an Endorsement to the
-----------
Note, substantially in the form of Exhibit A to this Amendment (the
"Endorsement"), executed by a duly authorized officer of the Borrower.
-----------
(c) Other Documents. The Lender shall have received such other
---------------
documents as the Lender or its counsel may reasonably request.
4. Conditions Subsequent. It shall be a condition subsequent to the
---------------------
effectiveness of the amendments set forth in this Amendment that the Lender
shall have received, within five Business Days following the Amendment Effective
Date, the following:
(a) Corporate Proceedings. A certificate of the Secretary or
---------------------
Assistant Secretary of the Borrower, dated as of a date within five
Business Days after the Amendment Effective Date, and certifying (A) that
the copies of the articles of incorporation and by-laws of the Borrower
attached to the certificate of the Secretary of the Borrower delivered on
the Effective Date are, as of the Amendment Effective Date, true, complete
and correct copies thereof and that such articles of incorporation and by-
laws have not been modified since the Effective Date and continue to be in
full force and effect, (B) that attached thereto is a true, complete and
correct copy of the resolutions duly adopted by the Board of Directors of
the Borrower authorizing the execution, delivery and performance of this
Amendment and the Endorsement, and the borrowings contemplated under the
Loan Agreement and the Note (as modified by the Endorsement), and that such
resolutions have not been amended, modified, revoked or rescinded, and (C)
as to the incumbency and specimen signature of each officer executing any
of this Amendment or the Endorsement on behalf of the Borrower, and such
certificate and the resolutions attached thereto shall be in form and
substance satisfactory to the Lender.
(b) Good Standing Certificates. Copies of certificates evidencing the
--------------------------
good standing of the Borrower, dated as of a recent date, from the
Secretary of State of the State of Colorado.
(c) Legal Opinion. The executed legal opinion of Howard Glicksman,
-------------
Esq., General Counsel and Vice-President of the Borrower, dated within five
Business Days after the Amendment Effective Date, as to the due
organization, power and authority of the Borrower to enter into the
Amendment and the Endorsement, the due authorization, execution, and
delivery by the Borrower of the Amendment and the Endorsement, the
enforceability of the Amendment and the Endorsement as against the
Borrower, and that the execution, delivery and performance of the Amendment
and the Endorsement will not conflict with any requirement of law or
contractual obligation of the Borrower. Such opinion shall additionally
cover such other matters incident to the transactions contemplated by this
Amendment as the Lender may reasonably request and be in form and substance
acceptable to the Lender.
(d) Financial Statements. The monthly financial statements for July
--------------------
1997 required pursuant to Section 7.01(a) of the Loan Agreement, the
monthly officer's certificate for July 1997 required pursuant to Section
7.08(a) of the Loan Agreement, and the quarterly financial
-2-
<PAGE>
statements for the quarter ended June 30, 1997 required pursuant to Section
7.01(b) of the Loan Agreement, and the Covenant Compliance Certificate for
that quarter, required pursuant to Section 7.08(b) of the Loan Agreement
(collectively the "Current Financial Statement Deliveries").
The parties agree that, if the foregoing conditions subsequent to effectiveness
are not satisfied within such five Business Day period, the amendments provided
for in this Amendment shall cease to be of effective, with effect from the date
hereof as if the Amendment Effective Date had not occurred.
5. Representations and Warranties; Waiver. (a) To induce the Lender to
--------------------------------------
enter into this Amendment, the Borrower hereby represents and warrants to the
Lender that, after giving effect to the amendments provided for herein, the
representations and warranties contained in the Loan Agreement and the Custodial
Agreement will be true and correct in all material respects as if made on and as
of the date hereof and that no Default or Event of Default will have occurred
and be continuing, except that (i) the Borrower is late in delivering the
Current Financial Statement Deliveries and (ii) the Borrower has not satisfied
the financial covenant contained in Section 7.09(b) of the Loan Agreement for
the quarter ended June 30, 1997.
(b) The Lender hereby waives any Default or Event of Default arising from
any of the matters described in the preceding paragraph 5(a), unless the Current
Financial Statement Deliveries are not delivered as required under Section 4(d)
above.
6. No Other Amendments. Except as expressly amended hereby and by the
-------------------
Endorsement, the Loan Agreement, the Note and the Custodial Agreement shall
remain in full force and effect in accordance with their respective terms,
without any waiver, amendment or modification of any provision thereof.
7. Counterparts. This Amendment may be executed by one or more of the
------------
parties hereto on any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
8. Expenses. The Borrower agrees to pay and reimburse the Lender for all
--------
of the out-of-pocket costs and expenses incurred by the Lender in connection
with the preparation, execution and delivery of this Amendment, including,
without limitation, the fees and disbursements of Cadwalader, Wickersham & Taft,
counsel to the Lender.
9. Applicable Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED
--------------
AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
[SIGNATURE PAGES FOLLOW]
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered as of the day and year first above written.
NATIONAL MORTGAGE CORPORATION
(formerly MORTGAGE SERVICING
ACQUISITION CORPORATION)
By:_______________________________
Title:
GREENWICH CAPITAL FINANCIAL PRODUCTS,
INC.
By:_______________________________
Title:
-4-
<PAGE>
EXHIBIT A
---------
NOTE ENDORSEMENT NO. 1
August 21, 1997
New York, New York
The undersigned Borrower hereby agrees with Greenwich Capital
Financial Products, Inc. (the "Lender") that the Amended and Restated Promissory
------
Note of the Borrower, dated April 24, 1997, as amended and restated as of June
30, 1997, in the maximum principal amount of $100,000,000 (the "Original Note"),
-------------
to which this Note Endorsement No. 1 is attached, is hereby amended by (a)
deleting the amount "$100,000,000" where it first occurs in the Original Note
and substituting in lieu thereof the amount $120,000,000", and by deleting the
first paragraph of the Original Note and substituting in lieu thereof the
following paragraph:
"FOR VALUE RECEIVED, NATIONAL MORTGAGE CORPORATION, a Colorado
corporation, (formerly MORTGAGE SERVICING ACQUISITION CORPORATION) (the
"Borrower"), hereby promises to pay to the order of GREENWICH CAPITAL
--------
FINANCIAL PRODUCTS, INC. a Delaware Corporation (the "Lender"), at the
------
principal office of the Lender at 600 Steamboat Road, Greenwich,
Connecticut 06830, in lawful money of the United States, and in
immediately available funds, the principal sum of ONE HUNDRED TWENTY
MILLION DOLLARS ($120,000,000) (or such lesser amount as shall equal the
aggregate unpaid principal amount of the Advances made by the Lender to the
Borrower under the Loan Agreement as defined below), on the dates and in
the principal amounts provided in the Loan Agreement, and to pay interest
on the unpaid principal amount of each such Advance, at such office, in
like money and funds, for the period commencing on the date of such Advance
until such Advance shall be paid in full, at the rates per annum and on the
dates provided in the Loan Agreement."
This Note Endorsement No. 1 is given as a rearrangement and amendment
of the obligations of the Borrower to the Lender under the Original Note and is
not given in substitution therefor or extinguishment thereof. Except as
expressly amended by this Note Endorsement No. 1, all of the terms and
conditions of the Original Note shall continue in full force and effect. This
Note Endorsement No. 1 shall constitute part of the Note and the Lender is
hereby authorized to attach this Note Endorsement No. 1 to the Original Note and
to insert the following legend on the face of the Original Note: "This Note has
been amended pursuant to Note Endorsement No. 1 dated August 21, 1997."
-5-
<PAGE>
Borrower: NATIONAL MORTGAGE CORPORATION
- --------
(formerly MORTGAGE SERVICING
ACQUISITION CORPORATION)
By:_____________________________
Name:
Title:
Lender: GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
- ------
By:______________________________
Name:
Title:
-6-
<PAGE>
SECOND AMENDMENT
SECOND AMENDMENT, dated as of September 2, 1997 (this "Second Amendment"),
----------------
to the Amended and Restated Loan and Security Agreement, dated as of June 30,
1997 (as amended, supplemented or otherwise modified prior to the date hereof,
the "Existing Loan Agreement" and, as amended pursuant to this Second Amendment,
-----------------------
the "Loan Agreement"), between NATIONAL MORTGAGE CORPORATION, a Colorado
--------------
corporation, (formerly MORTGAGE SERVICING ACQUISITION CORPORATION) (the
"Borrower"), and GREENWICH CAPITAL FINANCIAL PRODUCTS, INC., a Delaware
--------
corporation (the "Lender").
------
RECITALS
The Borrower has requested the Lender to agree to amend the Existing Loan
Agreement to increase the maximum credit available thereunder to $130,000,000
for the period commencing on the effective date of this Second Amendment to and
including the earlier of (a) the date of the first securitization of mortgage
loans by the Borrower following the date hereof and (b) September 30, 1997. The
Lender is willing to agree to such amendment, but only on the terms and subject
to the conditions set forth in this Second Amendment.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Borrower and the Lender hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, terms defined in the
-------------
Existing Loan Agreement are used herein as therein defined.
2. Amendment. (a) The Existing Loan Agreement is hereby amended by
---------
deleting the definition of "Maximum Credit" contained in Section 1.01 thereof
and substituting in lieu thereof the following new definition:
""Maximum Credit" shall mean (a) from and after the Second Amendment
--------------
Effective Date to and including the earlier of (i) the date of the
settlement of proceeds of the first securitization of Mortgage Loans by the
Borrower following the Second Amendment Effective Date and (ii) September
30, 1997, $130,000,000, and (b) thereafter, $100,000,000."
(b) The Existing Loan Agreement is hereby amended by adding to Section
1.01 thereof the following new definitions in the appropriate alphabetical
order:
""Second Amendment" shall mean the Second Amendment, dated as of
----------------
September 2, 1997, to this Loan Agreement, between the Borrower and the
Lender."
""Second Amendment Effective Date" shall mean the date on which all of
-------------------------------
the conditions precedent to the effectiveness of the Second Amendment set
forth in Section 3 of the Second Amendment shall first have been satisfied
or waived."
<PAGE>
3. Effectiveness. The effectiveness of the amendments to the Existing
-------------
Loan Agreement set forth in this Second Amendment shall be subject to the
satisfaction, immediately prior to or concurrently therewith, of the following
conditions precedent (the date such conditions are first satisfied or waived
being referred to herein as the "Second Amendment Effective Date"):
-------------------------------
(a) Amendment. The Lender shall have received this Second Amendment,
---------
executed and delivered by a duly authorized officer of the Borrower.
(b) Endorsement. The Lender shall have received an Endorsement No. 2
-----------
to the Note, substantially in the form of Exhibit A to this Second
Amendment (the "Second Endorsement"), executed by a duly authorized officer
of the Borrower.
(c) Other Documents. The Lender shall have received such other
---------------
documents as the Lender or its counsel may reasonably request.
4. Conditions Subsequent. It shall be a condition subsequent to the
---------------------
effectiveness of the amendments set forth in this Second Amendment that the
Lender shall have received, within five Business Days following the Second
Amendment Effective Date, the following:
(a) Corporate Proceedings. A certificate of the Secretary or
---------------------
Assistant Secretary of the Borrower, dated as of a date within five
Business Days after the Second Amendment Effective Date, and certifying (A)
that the copy of the by-laws of the Borrower attached to the certificate of
the Secretary of the Borrower delivered on the Effective Date and the copy
of the articles of incorporation of the Borrower attached to the
certificate of the Secretary of the Borrower delivered in connection with
the First Amendment to the Loan Agreement, dated as of August 21, 1997,
are, as of the Second Amendment Effective Date, true, complete and correct
copies thereof and that such articles of incorporation and by-laws have not
been modified since the Effective Date and continue to be in full force and
effect, (B) that attached thereto is a true, complete and correct copy of
the resolutions duly adopted by the Board of Directors of the Borrower
authorizing the execution, delivery and performance of this Second
Amendment and the Second Endorsement, and the borrowings contemplated under
the Loan Agreement and the Note (as modified by the Second Endorsement),
and that such resolutions have not been amended, modified, revoked or
rescinded, and (C) as to the incumbency and specimen signature of each
officer executing any of this Second Amendment or the Second Endorsement on
behalf of the Borrower, and such certificate and the resolutions attached
thereto shall be in form and substance satisfactory to the Lender.
(b) Legal Opinion. The executed legal opinion of Howard Glicksman,
-------------
Esq., General Counsel and Vice-President of the Borrower, dated within five
Business Days after the Second Amendment Effective Date, as to the due
organization, power and authority of the Borrower to enter into the Second
Amendment and the Second Endorsement, the due authorization, execution, and
delivery by the Borrower of the Second Amendment and the Second
Endorsement, the enforceability of the Second Amendment and the Second
Endorsement as against the Borrower, and that the execution, delivery and
performance of the Second Amendment and the Second Endorsement will not
conflict with any requirement of law or contractual obligation of the
Borrower. Such opinion shall additionally cover such other matters incident
to the transactions contemplated by this Second Amendment as the Lender may
reasonably request and be in form and substance acceptable to the Lender.
-2-
<PAGE>
(c) Financial Statements. The monthly financial statements for July
--------------------
1997 required pursuant to Section 7.01(a) of the Loan Agreement, the
monthly officer's certificate for July 1997 required pursuant to Section
7.08(a) of the Loan Agreement, and the quarterly financial statements for
the quarter ended June 30, 1997 required pursuant to Section 7.01(b) of the
Loan Agreement, and the Covenant Compliance Certificate for that quarter,
required pursuant to Section 7.08(b) of the Loan Agreement (collectively
the "Current Financial Statement Deliveries").
--------------------------------------
The parties agree that, if the foregoing conditions subsequent to effectiveness
are not satisfied within such five Business Day period, the amendments provided
for in this Second Amendment shall cease to be effective, with effect from the
date hereof as if the Second Amendment Effective Date had not occurred.
5. Representations and Warranties; Waiver. (a) To induce the Lender to
--------------------------------------
enter into this Second Amendment, the Borrower hereby represents and warrants to
the Lender that, after giving effect to the amendments provided for herein, the
representations and warranties contained in the Loan Agreement and the Custodial
Agreement will be true and correct in all material respects as if made on and as
of the date hereof and that no Default or Event of Default will have occurred
and be continuing, except that (i) the Borrower is late in delivering the
Current Financial Statement Deliveries and (ii) the Borrower has not satisfied
the financial covenant contained in Section 7.09(b) of the Loan Agreement for
the quarter ended June 30, 1997.
(b) The Lender hereby waives any Default or Event of Default arising from
any of the matters described in the preceding paragraph 5(a), unless the Current
Financial Statement Deliveries are not delivered as required under Section 4(d)
above.
6. No Other Amendments. Except as expressly amended hereby and by the
-------------------
Second Endorsement, the Loan Agreement, the Note and the Custodial Agreement
shall remain in full force and effect in accordance with their respective terms,
without any waiver, amendment or modification of any provision thereof.
7. Counterparts. This Second Amendment may be executed by one or more of
------------
the parties hereto on any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
8. Expenses. The Borrower agrees to pay and reimburse the Lender for all
--------
of the out-of-pocket costs and expenses incurred by the Lender in connection
with the preparation, execution and delivery of this Second Amendment,
including, without limitation, the fees and disbursements of Cadwalader,
Wickersham & Taft, counsel to the Lender.
9. Applicable Law. THIS SECOND AMENDMENT SHALL BE GOVERNED BY, AND
--------------
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
[SIGNATURE PAGES FOLLOW]
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to
be duly executed and delivered as of the day and year first above written.
NATIONAL MORTGAGE CORPORATION
By:_______________________________
Title:
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
By:_______________________________
Title:
-4-
<PAGE>
EXHIBIT A
---------
NOTE ENDORSEMENT NO. 2
September 2, 1997
New York, New York
The undersigned Borrower hereby agrees with Greenwich Capital
Financial Products, Inc. (the "Lender") that the Amended and Restated Promissory
------
Note of the Borrower, dated April 24, 1997, as amended and restated as of June
30, 1997, in the maximum principal amount of $100,000,000 (the "Original Note"),
-------------
as modified by the Note Endorsement No. 1, dated August 21, 1997 (the Original
Note, as so modified, the "Note"), to which this Note Endorsement No. 2 is
----
attached, is hereby amended by (a) deleting the amount "$120,000,000" where it
first occurs in the Note and substituting in lieu thereof the amount
"$130,000,000", and by deleting the first paragraph of the Note and substituting
in lieu thereof the following paragraph:
"FOR VALUE RECEIVED, NATIONAL MORTGAGE CORPORATION, a Colorado
corporation, (formerly MORTGAGE SERVICING ACQUISITION CORPORATION) (the
"Borrower"), hereby promises to pay to the order of GREENWICH CAPITAL
--------
FINANCIAL PRODUCTS, INC. a Delaware Corporation (the "Lender"), at the
------
principal office of the Lender at 600 Steamboat Road, Greenwich,
Connecticut 06830, in lawful money of the United States, and in
immediately available funds, the principal sum of ONE HUNDRED THIRTY
MILLION DOLLARS ($130,000,000) (or such lesser amount as shall equal the
aggregate unpaid principal amount of the Advances made by the Lender to the
Borrower under the Loan Agreement as defined below), on the dates and in
the principal amounts provided in the Loan Agreement, and to pay interest
on the unpaid principal amount of each such Advance, at such office, in
like money and funds, for the period commencing on the date of such Advance
until such Advance shall be paid in full, at the rates per annum and on the
dates provided in the Loan Agreement."
This Note Endorsement No. 2 is given as a rearrangement and amendment
of the obligations of the Borrower to the Lender under the Note and is not given
in substitution therefor or extinguishment thereof. Except as expressly amended
by this Note Endorsement No. 2, all of the terms and conditions of the Note
shall continue in full force and effect. This Note Endorsement No. 2 shall
constitute part of the Note and the Lender is hereby authorized to attach this
Note Endorsement No. 2 to the Note and to insert the following legend on the
face of the Original Note: "This Note has been amended pursuant to Note
Endorsement No. 2 dated September 2, 1997."
-5-
<PAGE>
Borrower: NATIONAL MORTGAGE CORPORATION
- --------
(formerly MORTGAGE SERVICING
ACQUISITION CORPORATION)
By:_____________________________
Name:
Title:
Lender: GREENWICH CAPITAL FINANCIAL
- ------
PRODUCTS, INC.
By:______________________________
Name:
Title:
-6-
<PAGE>
THIRD AMENDMENT
THIRD AMENDMENT, dated as of September 15, 1997 (this "Third Amendment"),
---------------
to the Amended and Restated Loan and Security Agreement, dated as of June 30,
1997 (as amended, supplemented or otherwise modified prior to the date hereof,
the "Existing Loan Agreement" and, as amended pursuant to this Third Amendment,
-----------------------
the "Loan Agreement"), between NATIONAL MORTGAGE CORPORATION, a Colorado
--------------
corporation, (formerly MORTGAGE SERVICING ACQUISITION CORPORATION) (the
"Borrower"), and GREENWICH CAPITAL FINANCIAL PRODUCTS, INC., a Delaware
--------
corporation (the "Lender").
------
RECITALS
The Borrower has requested the Lender to agree to amend the Existing Loan
Agreement to increase the maximum credit available thereunder to $145,000,000
for the period commencing on the effective date of this Third Amendment to and
including the earlier of (a) the date of the first securitization of mortgage
loans by the Borrower following the date hereof and (b) September 30, 1997. The
Lender is willing to agree to such amendment, but only on the terms and subject
to the conditions set forth in this Third Amendment.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Borrower and the Lender hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, terms defined in the
-------------
Existing Loan Agreement are used herein as therein defined.
2. Amendment. (a) The Existing Loan Agreement is hereby amended by
---------
deleting the definition of "Maximum Credit" contained in Section 1.01 thereof
and substituting in lieu thereof the following new definition:
""Maximum Credit" shall mean (a) from and after the Third Amendment
--------------
Effective Date to and including the earlier of (i) the date of the
settlement of proceeds of the first securitization of Mortgage Loans by the
Borrower following the Third Amendment Effective Date and (ii) September
30, 1997, $145,000,000, and (b) thereafter, $100,000,000."
(b) The Existing Loan Agreement is hereby amended by adding to Section
1.01 thereof the following new definitions in the appropriate alphabetical
order:
""Third Amendment" shall mean the Third Amendment, dated as of
---------------
September 15, 1997, to this Loan Agreement, between the Borrower and the
Lender."
""Third Amendment Effective Date" shall mean the date on which all of
------------------------------
the conditions precedent to the effectiveness of the Third Amendment set
forth in Section 3 of the Third Amendment shall first have been satisfied
or waived."
3. Effectiveness. The effectiveness of the amendments to the Existing
-------------
Loan Agreement set forth in this Third Amendment shall be subject to the
satisfaction, immediately prior to or concurrently
<PAGE>
therewith, of the following conditions precedent (the date such conditions are
first satisfied or waived being referred to herein as the "Third Amendment
---------------
Effective Date"):
- --------------
(a) Amendment. The Lender shall have received this Third Amendment,
---------
executed and delivered by a duly authorized officer of the Borrower.
(b) Endorsement. The Lender shall have received an Endorsement No. 3
-----------
to the Note, substantially in the form of Exhibit A to this Third Amendment
(the "Third Endorsement"), executed by a duly authorized officer of the
-----------------
Borrower.
(c) Other Documents. The Lender shall have received such other
---------------
documents as the Lender or its counsel may reasonably request.
4. Conditions Subsequent. It shall be a condition subsequent to the
---------------------
effectiveness of the amendments set forth in this Third Amendment that the
Lender shall have received, within five Business Days following the Third
Amendment Effective Date, the following:
(a) Corporate Proceedings. A certificate of the Secretary or
---------------------
Assistant Secretary of the Borrower, dated as of a date within five
Business Days after the Third Amendment Effective Date, and certifying (A)
that the copy of the by-laws of the Borrower attached to the certificate of
the Secretary of the Borrower delivered on the Effective Date and the copy
of the articles of incorporation of the Borrower attached to the
certificate of the Secretary of the Borrower delivered in connection with
the First Amendment to the Loan Agreement, dated as of August 21, 1997 are,
as of the Third Amendment Effective Date, true, complete and correct copies
thereof and that such articles of incorporation and by-laws have not been
modified since the Effective Date and continue to be in full force and
effect, (B) that attached thereto is a true, complete and correct copy of
the resolutions duly adopted by the Board of Directors of the Borrower
authorizing the execution, delivery and performance of this Third Amendment
and the Third Endorsement, and the borrowings contemplated under the Loan
Agreement and the Note (as modified by the Third Endorsement), and that
such resolutions have not been amended, modified, revoked or rescinded, and
(C) as to the incumbency and specimen signature of each officer executing
any of this Third Amendment or the Third Endorsement on behalf of the
Borrower, and such certificate and the resolutions attached thereto shall
be in form and substance satisfactory to the Lender.
(b) Legal Opinion. The executed legal opinion of Howard Glicksman,
-------------
Esq., General Counsel and Vice-President of the Borrower, dated within five
Business Days after the Third Amendment Effective Date, as to the due
organization, power and authority of the Borrower to enter into the Third
Amendment and the Third Endorsement, the due authorization, execution, and
delivery by the Borrower of the Third Amendment and the Third Endorsement,
the enforceability of the Third Amendment and the Third Endorsement as
against the Borrower, and that the execution, delivery and performance of
the Third Amendment and the Third Endorsement will not conflict with any
requirement of law or contractual obligation of the Borrower. Such opinion
shall additionally cover such other matters incident to the transactions
contemplated by this Third Amendment as the Lender may reasonably request
and be in form and substance acceptable to the Lender.
(c) Financial Statements. The monthly financial statements for July
--------------------
1997 required pursuant to Section 7.01(a) of the Loan Agreement, the
monthly officer's certificate for July
-2-
<PAGE>
1997 required pursuant to Section 7.08(a) of the Loan Agreement, and the
quarterly financial statements for the quarter ended June 30, 1997 required
pursuant to Section 7.01(b) of the Loan Agreement, and the Covenant
Compliance Certificate for that quarter, required pursuant to Section
7.08(b) of the Loan Agreement (collectively the "Current Financial
-----------------
Statement Deliveries").
--------------------
The parties agree that, if the foregoing conditions subsequent to effectiveness
are not satisfied within such five Business Day period, the amendments provided
for in this Third Amendment shall cease to be effective, with effect from the
date hereof as if the Third Amendment Effective Date had not occurred.
5. Representations and Warranties; Waiver. (a) To induce the Lender to
--------------------------------------
enter into this Third Amendment, the Borrower hereby represents and warrants to
the Lender that, after giving effect to the amendments provided for herein, the
representations and warranties contained in the Loan Agreement and the Custodial
Agreement will be true and correct in all material respects as if made on and as
of the date hereof and that no Default or Event of Default will have occurred
and be continuing, except that (i) the Borrower is late in delivering the
Current Financial Statement Deliveries and (ii) the Borrower has not satisfied
the financial covenant contained in Section 7.09(b) of the Loan Agreement for
the quarter ended June 30, 1997.
(b) The Lender hereby waives any Default or Event of Default arising from
any of the matters described in the preceding paragraph 5(a), unless the Current
Financial Statement Deliveries are not delivered as required under Section 4(d)
above.
6. No Other Amendments. Except as expressly amended hereby and by the
-------------------
Third Endorsement, the Loan Agreement, the Note and the Custodial Agreement
shall remain in full force and effect in accordance with their respective terms,
without any waiver, amendment or modification of any provision thereof.
7. Counterparts. This Third Amendment may be executed by one or more of
------------
the parties hereto on any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
8. Expenses. The Borrower agrees to pay and reimburse the Lender for all
--------
of the out-of-pocket costs and expenses incurred by the Lender in connection
with the preparation, execution and delivery of this Third Amendment, including,
without limitation, the fees and disbursements of Cadwalader, Wickersham & Taft,
counsel to the Lender.
9. Applicable Law. THIS THIRD AMENDMENT SHALL BE GOVERNED BY, AND
--------------
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
[SIGNATURE PAGES FOLLOW]
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to
be duly executed and delivered as of the day and year first above written.
NATIONAL MORTGAGE CORPORATION
By:_______________________________
Title:
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
By:_______________________________
Title:
-4-
<PAGE>
EXHIBIT A
---------
NOTE ENDORSEMENT NO. 3
September 15, 1997
New York, New York
The undersigned Borrower hereby agrees with Greenwich Capital
Financial Products, Inc. (the "Lender") that the Amended and Restated Promissory
------
Note of the Borrower, dated April 24, 1997, as amended and restated as of June
30, 1997, in the maximum principal amount of $100,000,000 (the "Original Note"),
-------------
as modified by the Note Endorsement No. 1, dated August 21, 1997 and the Note
Endorsement No. 2, dated September 2, 1997 (the Original Note, as so modified,
the "Note"), to which this Note Endorsement No. 3 is attached, is hereby amended
----
by (a) deleting the amount "$130,000,000" where it first occurs in the Note and
substituting in lieu thereof the amount "$145,000,000", and by deleting the
first paragraph of the Note and substituting in lieu thereof the following
paragraph:
"FOR VALUE RECEIVED, NATIONAL MORTGAGE CORPORATION, a Colorado
corporation, (formerly MORTGAGE SERVICING ACQUISITION CORPORATION) (the
"Borrower"), hereby promises to pay to the order of GREENWICH CAPITAL
--------
FINANCIAL PRODUCTS, INC. a Delaware Corporation (the "Lender"), at the
------
principal office of the Lender at 600 Steamboat Road, Greenwich,
Connecticut 06830, in lawful money of the United States, and in
immediately available funds, the principal sum of ONE HUNDRED FORTY-FIVE
MILLION DOLLARS ($145,000,000) (or such lesser amount as shall equal the
aggregate unpaid principal amount of the Advances made by the Lender to the
Borrower under the Loan Agreement as defined below), on the dates and in
the principal amounts provided in the Loan Agreement, and to pay interest
on the unpaid principal amount of each such Advance, at such office, in
like money and funds, for the period commencing on the date of such Advance
until such Advance shall be paid in full, at the rates per annum and on the
dates provided in the Loan Agreement."
This Note Endorsement No. 3 is given as a rearrangement and amendment
of the obligations of the Borrower to the Lender under the Note and is not given
in substitution therefor or extinguishment thereof. Except as expressly amended
by this Note Endorsement No. 3, all of the terms and conditions of the Note
shall continue in full force and effect. This Note Endorsement No. 3 shall
constitute part of the Note and the Lender is hereby authorized to attach this
Note Endorsement No. 3 to the Note and to insert the following legend on the
face of the Original Note: "This Note has been amended pursuant to Note
Endorsement No. 3 dated September 15, 1997."
-5-
<PAGE>
Borrower: NATIONAL MORTGAGE CORPORATION
- --------
(formerly MORTGAGE SERVICING
ACQUISITION CORPORATION)
By:_____________________________
Name:
Title:
Lender: GREENWICH CAPITAL FINANCIAL
- ------
PRODUCTS, INC.
By:______________________________
Name:
Title:
-6-
<PAGE>
FOURTH AMENDMENT
FOURTH AMENDMENT, dated as of September 25, 1997 (this "Fourth Amendment"),
----------------
to the Amended and Restated Loan and Security Agreement, dated as of June 30,
1997 (as amended, supplemented or otherwise modified prior to the date hereof,
the "Existing Loan Agreement" and, as amended pursuant to this Fourth Amendment,
-----------------------
the "Loan Agreement"), between NATIONAL MORTGAGE CORPORATION, a Colorado
--------------
corporation, (formerly MORTGAGE SERVICING ACQUISITION CORPORATION) (the
"Borrower"), and GREENWICH CAPITAL FINANCIAL PRODUCTS, INC., a Delaware
--------
corporation (the "Lender").
------
RECITALS
The Borrower has requested the Lender to agree to amend the Existing Loan
Agreement to increase the maximum credit available thereunder to $155,000,000
for the period commencing on the effective date of this Fourth Amendment to and
including the earlier of (a) the date of the first securitization of mortgage
loans by the Borrower following the date hereof and (b) September 30, 1997. The
Lender is willing to agree to such amendment, but only on the terms and subject
to the conditions set forth in this Fourth Amendment.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Borrower and the Lender hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, terms defined in the
-------------
Existing Loan Agreement are used herein as therein defined.
2. Amendment. (a) The Existing Loan Agreement is hereby amended by
---------
deleting the definition of "Maximum Credit" contained in Section 1.01 thereof
and substituting in lieu thereof the following new definition:
""Maximum Credit" shall mean (a) from and after the Fourth Amendment
--------------
Effective Date to and including the earlier of (i) the date of the
settlement of proceeds of the first securitization of Mortgage Loans by the
Borrower following the Fourth Amendment Effective Date and (ii) September
30, 1997, $155,000,000, and (b) thereafter, $100,000,000."
(b) The Existing Loan Agreement is hereby amended by adding to Section
1.01 thereof the following new definitions in the appropriate alphabetical
order:
""Fourth Amendment" shall mean the Fourth Amendment, dated as of
----------------
September 25, 1997, to this Loan Agreement, between the Borrower and the
Lender."
""Fourth Amendment Effective Date" shall mean the date on which all of
-------------------------------
the conditions precedent to the effectiveness of the Fourth Amendment set
forth in Section 3 of the Fourth Amendment shall first have been satisfied
or waived."
3. Effectiveness. The effectiveness of the amendments to the Existing
-------------
Loan Agreement set forth in this Fourth Amendment shall be subject to the
satisfaction, immediately prior to or concurrently
<PAGE>
therewith, of the following conditions precedent (the date such conditions are
first satisfied or waived being referred to herein as the "Fourth Amendment
----------------
Effective Date"):
- --------------
(a) Amendment. The Lender shall have received this Fourth Amendment,
---------
executed and delivered by a duly authorized officer of the Borrower.
(b) Endorsement. The Lender shall have received an Endorsement No. 4
-----------
to the Note, substantially in the form of Exhibit A to this Fourth
Amendment (the "Fourth Endorsement"), executed by a duly authorized officer
------------------
of the Borrower.
(c) Other Documents. The Lender shall have received such other
---------------
documents as the Lender or its counsel may reasonably request.
4. Conditions Subsequent. It shall be a condition subsequent to the
---------------------
effectiveness of the amendments set forth in this Fourth Amendment that the
Lender shall have received, within five Business Days following the Fourth
Amendment Effective Date, the following:
(a) Corporate Proceedings. A certificate of the Secretary or
---------------------
Assistant Secretary of the Borrower, dated as of a date within five
Business Days after the Fourth Amendment Effective Date, and certifying (A)
that the copy of the by-laws of the Borrower attached to the certificate of
the Secretary of the Borrower delivered on the Effective Date and the copy
of the articles of incorporation of the Borrower attached to the
certificate of the Secretary of the Borrower delivered in connection with
the First Amendment to the Loan Agreement, dated as of August 21, 1997 are,
as of the Fourth Amendment Effective Date, true, complete and correct
copies thereof and that such articles of incorporation and by-laws have not
been modified since the Effective Date and continue to be in full force and
effect, (B) that attached thereto is a true, complete and correct copy of
the resolutions duly adopted by the Board of Directors of the Borrower
authorizing the execution, delivery and performance of this Fourth
Amendment and the Fourth Endorsement, and the borrowings contemplated under
the Loan Agreement and the Note (as modified by the Fourth Endorsement),
and that such resolutions have not been amended, modified, revoked or
rescinded, and (C) as to the incumbency and specimen signature of each
officer executing any of this Fourth Amendment or the Fourth Endorsement on
behalf of the Borrower, and such certificate and the resolutions attached
thereto shall be in form and substance satisfactory to the Lender.
(b) Legal Opinion. The executed legal opinion of Howard Glicksman,
-------------
Esq., General Counsel and Vice-President of the Borrower, dated within five
Business Days after the Fourth Amendment Effective Date, as to the due
organization, power and authority of the Borrower to enter into the Fourth
Amendment and the Fourth Endorsement, the due authorization, execution, and
delivery by the Borrower of the Fourth Amendment and the Fourth
Endorsement, the enforceability of the Fourth Amendment and the Fourth
Endorsement as against the Borrower, and that the execution, delivery and
performance of the Fourth Amendment and the Fourth Endorsement will not
conflict with any requirement of law or contractual obligation of the
Borrower. Such opinion shall additionally cover such other matters incident
to the transactions contemplated by this Fourth Amendment as the Lender may
reasonably request and be in form and substance acceptable to the Lender.
(c) Financial Statements. The monthly financial statements for
--------------------
August 1997 required pursuant to Section 7.01(a) of the Loan Agreement and
the monthly officer's certificate for
-2-
<PAGE>
August 1997 required pursuant to Section 7.08(a) of the Loan Agreement,
(collectively the "Current Financial Statement Deliveries").
--------------------------------------
The parties agree that, if the foregoing conditions subsequent to effectiveness
are not satisfied within such five Business Day period, the amendments provided
for in this Fourth Amendment shall cease to be effective, with effect from the
date hereof as if the Fourth Amendment Effective Date had not occurred.
5. Representations and Warranties; Waiver. (a) To induce the Lender to
--------------------------------------
enter into this Fourth Amendment, the Borrower hereby represents and warrants to
the Lender that, after giving effect to the amendments provided for herein, the
representations and warranties contained in the Loan Agreement and the Custodial
Agreement will be true and correct in all material respects as if made on and as
of the date hereof and that no Default or Event of Default will have occurred
and be continuing, except that (i) the Borrower is late in delivering the
Current Financial Statement Deliveries and (ii) the Borrower has not satisfied
the financial covenant contained in Section 7.09(b) of the Loan Agreement for
the quarter ended June 30, 1997.
(b) The Lender hereby waives any Default or Event of Default arising from
any of the matters described in the preceding paragraph 5(a), unless the Current
Financial Statement Deliveries are not delivered as required under Section 4(d)
above.
6. No Other Amendments. Except as expressly amended hereby and by the
-------------------
Fourth Endorsement, the Loan Agreement, the Note and the Custodial Agreement
shall remain in full force and effect in accordance with their respective terms,
without any waiver, amendment or modification of any provision thereof.
7. Counterparts. This Fourth Amendment may be executed by one or more of
------------
the parties hereto on any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
8. Expenses. The Borrower agrees to pay and reimburse the Lender for all
--------
of the out-of-pocket costs and expenses incurred by the Lender in connection
with the preparation, execution and delivery of this Fourth Amendment,
including, without limitation, the fees and disbursements of Cadwalader,
Wickersham & Taft, counsel to the Lender.
9. Applicable Law. THIS FOURTH AMENDMENT SHALL BE GOVERNED BY, AND
--------------
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
[SIGNATURE PAGES FOLLOW]
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Fourth Amendment to
be duly executed and delivered as of the day and year first above written.
NATIONAL MORTGAGE CORPORATION
By:_______________________________
Title:
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
By:_______________________________
Title:
-4-
<PAGE>
EXHIBIT A
---------
NOTE ENDORSEMENT NO. 4
September 25, 1997
New York, New York
The undersigned Borrower hereby agrees with Greenwich Capital
Financial Products, Inc. (the "Lender") that the Amended and Restated Promissory
------
Note of the Borrower, dated April 24, 1997, as amended and restated as of June
30, 1997, in the maximum principal amount of $100,000,000 (the "Original Note"),
-------------
as modified by the Note Endorsement No. 1, dated August 21, 1997, the Note
Endorsement No. 2, dated September 2, 1997, the Note Endorsement No. 3, dated
September 15, 1997 (the Original Note, as so modified, the "Note"), to which
----
this Note Endorsement No. 4 is attached, is hereby amended by (a) deleting the
amount "$145,000,000" where it first occurs in the Note and substituting in lieu
thereof the amount "$155,000,000", and by deleting the first paragraph of the
Note and substituting in lieu thereof the following paragraph:
"FOR VALUE RECEIVED, NATIONAL MORTGAGE CORPORATION, a Colorado
corporation, (formerly MORTGAGE SERVICING ACQUISITION CORPORATION) (the
"Borrower"), hereby promises to pay to the order of GREENWICH CAPITAL
--------
FINANCIAL PRODUCTS, INC. a Delaware Corporation (the "Lender"), at the
------
principal office of the Lender at 600 Steamboat Road, Greenwich,
Connecticut 06830, in lawful money of the United States, and in
immediately available funds, the principal sum of ONE HUNDRED FIFTY-FIVE
MILLION DOLLARS ($155,000,000) (or such lesser amount as shall equal the
aggregate unpaid principal amount of the Advances made by the Lender to the
Borrower under the Loan Agreement as defined below), on the dates and in
the principal amounts provided in the Loan Agreement, and to pay interest
on the unpaid principal amount of each such Advance, at such office, in
like money and funds, for the period commencing on the date of such Advance
until such Advance shall be paid in full, at the rates per annum and on the
dates provided in the Loan Agreement."
This Note Endorsement No. 4 is given as a rearrangement and amendment
of the obligations of the Borrower to the Lender under the Note and is not given
in substitution therefor or extinguishment thereof. Except as expressly amended
by this Note Endorsement No. 4, all of the terms and conditions of the Note
shall continue in full force and effect. This Note Endorsement No. 3 shall
constitute part of the Note and the Lender is hereby authorized to attach this
Note Endorsement No. 4 to the Note and to insert the following legend on the
face of the
-5-
<PAGE>
Original Note: "This Note has been amended pursuant to Note Endorsement No. 4
dated September 25, 1997."
Borrower: NATIONAL MORTGAGE CORPORATION
- --------
(formerly MORTGAGE SERVICING
ACQUISITION CORPORATION)
By:_____________________________
Name:
Title:
Lender: GREENWICH CAPITAL FINANCIAL
- ------
PRODUCTS, INC.
By:______________________________
Name:
Title:
-6-
<PAGE>
FIFTH AMENDMENT
FIFTH AMENDMENT, dated as of November 25, 1997 (this "Fifth Amendment"), to
---------------
the Amended and Restated Loan and Security Agreement, dated as of June 30, 1997
(as amended, supplemented or otherwise modified prior to the date hereof, the
"Existing Loan Agreement" and, as amended pursuant to this Fifth Amendment, the
-----------------------
"Loan Agreement"), between NATIONAL MORTGAGE CORPORATION, a Colorado
--------------
corporation, (formerly MORTGAGE SERVICING ACQUISITION CORPORATION) (the
"Borrower"), and GREENWICH CAPITAL FINANCIAL PRODUCTS, INC., a Delaware
--------
corporation (the "Lender").
------
RECITALS
The Borrower has requested the Lender to agree to amend the Existing Loan
Agreement to increase the maximum credit available thereunder to $150,000,000
for the period commencing on the effective date of this Fifth Amendment to the
earlier of (a) the close of business on the date of the securitization of
mortgage loans by the Borrower following the date hereof and (b) the close of
business on January 30, 1998. The Lender is willing to agree to such amendment,
but only on the terms and subject to the conditions set forth in this Fifth
Amendment.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Borrower and the Lender hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, terms defined in the
-------------
Existing Loan Agreement are used herein as therein defined.
2. Amendment. (a) The Existing Loan Agreement is hereby amended by
---------
deleting the definition of "Maximum Credit" contained in Section 1.01 thereof
and substituting in lieu thereof the following new definition:
""Maximum Credit" shall mean (a) from and after the Fifth Amendment
--------------
Effective Date to the earlier of (i) the close of business on the date of
the settlement of proceeds of the securitization of Mortgage Loans by the
Borrower following the Fifth Amendment Effective Date and (ii) the close of
business on January 30, 1998, $150,000,000 and (b) thereafter,
$100,000,000; provided, however, that unless and until an amendment to the
Forward Loan Participation Agreement, dated as of August 21, 1997 (as
amended, supplemented or otherwise modified, the "Participation
Agreement"), between the Lender and ContiTrade Services L.L.C. is executed
and delivered by the parties thereto, which, among other purposes, changes
the maximum amount of Designated Advances (as defined in the Participation
Agreement) to $150,000,000, the Maximum Credit shall be $125,000,000."
(b) The Existing Loan Agreement is hereby amended by adding to Section
1.01 thereof the following new definitions in the appropriate alphabetical
order:
""Fifth Amendment" shall mean the Fifth Amendment, dated as of
---------------
November 25, 1997, to this Loan Agreement, between the Borrower and the
Lender."
<PAGE>
""Fifth Amendment Effective Date" shall mean the date on which all of
------------------------------
the conditions precedent to the effectiveness of the Fifth Amendment set
forth in Section 3 of the Fifth Amendment shall first have been satisfied
or waived."
3. Effectiveness. The effectiveness of the amendments to the Existing
-------------
Loan Agreement set forth in this Fifth Amendment shall be subject to the
satisfaction, immediately prior to or concurrently therewith, of the following
conditions precedent (the date such conditions are first satisfied or waived
being referred to herein as the "Fifth Amendment Effective Date"):
------------------------------
(a) Amendment. The Lender shall have received this Fifth Amendment,
---------
executed and delivered by a duly authorized officer of the Borrower.
(b) Other Documents. The Lender shall have received such other
---------------
documents as the Lender or its counsel may reasonably request.
4. Conditions Subsequent. It shall be a condition subsequent to the
---------------------
effectiveness of the amendments set forth in this Fifth Amendment that the
Lender shall have received, within five Business Days following the Fifth
Amendment Effective Date, the following:
(a) Corporate Proceedings. A certificate of the Secretary or
---------------------
Assistant Secretary of the Borrower, dated as of a date within five
Business Days after the Fifth Amendment Effective Date, and certifying (A)
that the copy of the by-laws of the Borrower attached to the certificate of
the Secretary of the Borrower delivered on the Effective Date and the copy
of the articles of incorporation of the Borrower attached to the
certificate of the Secretary of the Borrower delivered in connection with
the First Amendment to the Loan Agreement, dated as of August 21, 1997 are,
as of the Fifth Amendment Effective Date, true, complete and correct copies
thereof and that such articles of incorporation and by-laws have not been
modified since the date of delivery thereof to the Lender and continue to
be in full force and effect, (B) that attached thereto is a true, complete
and correct copy of the resolutions duly adopted by the Board of Directors
of the Borrower authorizing the execution, delivery and performance of this
Fifth Amendment, and the borrowings contemplated under the Loan Agreement
and the Note, and that such resolutions have not been amended, modified,
revoked or rescinded, and (C) as to the incumbency and specimen signature
of each officer executing this Fifth Amendment on behalf of the Borrower,
and such certificate and the resolutions attached thereto shall be in form
and substance satisfactory to the Lender.
(b) Legal Opinion. The executed legal opinion of Howard Glicksman,
-------------
Esq., General Counsel and Vice-President of the Borrower, dated within five
Business Days after the Fifth Amendment Effective Date, as to the due
organization, power and authority of the Borrower to enter into the Fifth
Amendment, the due authorization, execution, and delivery by the Borrower
of the Fifth Amendment, the enforceability of the Fifth Amendment as
against the Borrower, and that the execution, delivery and performance of
the Fifth Amendment will not conflict with any requirement of law or
contractual obligation of the Borrower. Such opinion shall additionally
cover such other matters incident to the transactions contemplated by this
Fifth Amendment as the Lender may reasonably request and be in form and
substance acceptable to the Lender.
(c) Financial Statements. The monthly financial statements for
--------------------
October 1997 and the quarterly financial statements for the period ending
September 30, 1997 required pursuant to Section 7.01(a) of the Loan
Agreement and the monthly officer's certificate for October 1997
-2-
<PAGE>
and the quarterly officer's certificate for the period ending September 30,
1997 required pursuant to Section 7.08(a) of the Loan Agreement,
(collectively the "Current Financial Statement Deliveries").
--------------------------------------
The parties agree that, if the foregoing conditions subsequent to effectiveness
are not satisfied within such five Business Day period, the amendments provided
for in this Fifth Amendment shall cease to be effective, with effect from the
date hereof as if the Fifth Amendment Effective Date had not occurred.
5. Representations and Warranties; Waiver. (a) To induce the Lender to
--------------------------------------
enter into this Fifth Amendment, the Borrower hereby represents and warrants to
the Lender that, after giving effect to the amendments provided for herein, the
representations and warranties contained in the Loan Agreement and the Custodial
Agreement will be true and correct in all material respects as if made on and as
of the date hereof and that no Default or Event of Default will have occurred
and be continuing, except that (i) the Borrower is late in delivering the
Current Financial Statement Deliveries and (ii) the Borrower has not satisfied
the financial covenant contained in Section 7.09(b) of the Loan Agreement for
the quarters ended June 30, 1997 and September 30, 1997.
(b) The Lender hereby waives any Default or Event of Default arising from
any of the matters described in the preceding paragraph 5(a), unless the Current
Financial Statement Deliveries are not delivered as required under Section 4(c)
above.
6. No Other Amendments. Except as expressly amended hereby, the Loan
-------------------
Agreement, the Note and the Custodial Agreement shall remain in full force and
effect in accordance with their respective terms, without any waiver, amendment
or modification of any provision thereof.
7. Counterparts. This Fifth Amendment may be executed by one or more of
------------
the parties hereto on any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
8. Expenses. The Borrower agrees to pay and reimburse the Lender for all
--------
of the out-of-pocket costs and expenses incurred by the Lender in connection
with the preparation, execution and delivery of this Fifth Amendment, including,
without limitation, the fees and disbursements of Cadwalader, Wickersham & Taft,
counsel to the Lender.
9. Applicable Law. THIS FIFTH AMENDMENT SHALL BE GOVERNED BY, AND
--------------
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
[SIGNATURE PAGES FOLLOW]
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Fifth Amendment to
be duly executed and delivered as of the day and year first above written.
NATIONAL MORTGAGE CORPORATION
By:_______________________________
Title:
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
By:_______________________________
Title:
-4-
<PAGE>
EXHIBIT A
---------
NOTE ENDORSEMENT NO. 5
November 25, 1997
New York, New York
The undersigned Borrower hereby agrees with Greenwich Capital
Financial Products, Inc. (the "Lender") that the Amended and Restated Promissory
------
Note of the Borrower, dated April 24, 1997, as amended and restated as of June
30, 1997, in the maximum principal amount of $100,000,000 (the "Original Note"),
-------------
as modified by the Note Endorsement No. 1, dated August 21, 1997, the Note
Endorsement No. 2, dated September 2, 1997, the Note Endorsement No. 3, dated
September 15, 1997, the Note Endorsement No. 4 dated September 25, 1997 (the
Original Note, as so modified, the "Note"), to which this Note Endorsement No. 5
----
is attached, is hereby amended by (a) deleting the amount "$155,000,000" where
it first occurs in the Note and substituting in lieu thereof the amount
"$150,000,000, and by deleting the first paragraph of the Note and substituting
in lieu thereof the following paragraph:
"FOR VALUE RECEIVED, NATIONAL MORTGAGE CORPORATION, a Colorado
corporation, (formerly MORTGAGE SERVICING ACQUISITION CORPORATION) (the
"Borrower"), hereby promises to pay to the order of GREENWICH CAPITAL
--------
FINANCIAL PRODUCTS, INC. a Delaware Corporation (the "Lender"), at the
------
principal office of the Lender at 600 Steamboat Road, Greenwich,
Connecticut 06830, in lawful money of the United States, and in
immediately available funds, the principal sum of ONE HUNDRED FIFTY MILLION
DOLLARS ($150,000,000) (or such lesser amount as shall equal the aggregate
unpaid principal amount of the Advances made by the Lender to the Borrower
under the Loan Agreement as defined below), on the dates and in the
principal amounts provided in the Loan Agreement, and to pay interest on
the unpaid principal amount of each such Advance, at such office, in like
money and funds, for the period commencing on the date of such Advance
until such Advance shall be paid in full, at the rates per annum and on the
dates provided in the Loan Agreement."
This Note Endorsement No. 5 is given as a rearrangement and amendment
of the obligations of the Borrower to the Lender under the Note and is not given
in substitution therefor or extinguishment thereof. Except as expressly amended
by this Note Endorsement No. 5, all of the terms and conditions of the Note
shall continue in full force and effect. This Note Endorsement No. 5 shall
constitute part of the Note and the Lender is hereby authorized to attach this
Note Endorsement No. 5 to the Note and to insert the following legend on the
face of the Original Note: "This Note has been amended pursuant to Note
Endorsement No. 5 dated November 25, 1997."
-5-
<PAGE>
Borrower: NATIONAL MORTGAGE CORPORATION
- --------
(formerly MORTGAGE SERVICING
ACQUISITION CORPORATION)
By:_____________________________
Name:
Title:
Lender: GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
- ------
By:______________________________
Name:
Title:
-6-
<PAGE>
SIXTH AMENDMENT
SIXTH AMENDMENT, dated as of January 30, 1998 (this "Sixth Amendment"), to
---------------
the Amended and Restated Loan and Security Agreement, dated as of June 30, 1997
(as amended, supplemented or otherwise modified prior to the date hereof, the
"Existing Loan Agreement" and, as amended pursuant to this Sixth Amendment, the
-----------------------
"Loan Agreement"), between NATIONAL MORTGAGE CORPORATION, a Colorado
--------------
corporation, (formerly MORTGAGE SERVICING ACQUISITION CORPORATION) (the
"Borrower"), and GREENWICH CAPITAL FINANCIAL PRODUCTS, INC., a Delaware
--------
corporation (the "Lender").
------
RECITALS
The Borrower has requested the Lender to agree to amend the Existing Loan
Agreement to increase the maximum credit available thereunder to $160,000,000
for the period commencing on the effective date of this Sixth Amendment to the
earlier of (a) the close of business on the date of the securitization of
mortgage loans by the Borrower following the date hereof and (b) the close of
business on March 31, 1998. The Lender is willing to agree to such amendment,
but only on the terms and subject to the conditions set forth in this Sixth
Amendment.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Borrower and the Lender hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, terms defined in the
-------------
Existing Loan Agreement are used herein as therein defined.
2. Amendment. (a) The Existing Loan Agreement is hereby amended by
---------
deleting the definition of "Maximum Credit" contained in Section 1.01 thereof
and substituting in lieu thereof the following new definition:
""Maximum Credit" shall mean (a) from and after the Sixth Amendment
--------------
Effective Date to the earlier of (i) the close of business on the date of
the settlement of proceeds of the securitization of Mortgage Loans by the
Borrower following the Sixth Amendment Effective Date and (ii) the close of
business on March 31, 1998, $160,000,000 and (b) thereafter, $100,000,000;
provided, however, that unless and until an amendment to the Forward Loan
Participation Agreement, dated as of August 21, 1997 (as amended,
supplemented or otherwise modified, the "Participation Agreement"), between
the Lender and ContiTrade Services L.L.C. is executed and delivered by the
parties thereto, which, among other purposes, changes the maximum amount of
Designated Advances (as defined in the Participation Agreement) to
$160,000,000, the Maximum Credit shall be $130,000,000."
(b) The Existing Loan Agreement is hereby amended by adding to Section
1.01 thereof the following new definitions in the appropriate alphabetical
order:
""Sixth Amendment" shall mean the Sixth Amendment, dated as of January
---------------
30 1998, to this Loan Agreement, between the Borrower and the Lender."
<PAGE>
""Sixth Amendment Effective Date" shall mean the date on which all of
------------------------------
the conditions precedent to the effectiveness of the Sixth Amendment set
forth in Section 3 of the Sixth Amendment shall first have been satisfied
or waived."
3. Effectiveness. The effectiveness of the amendments to the Existing
-------------
Loan Agreement set forth in this Sixth Amendment shall be subject to the
satisfaction, immediately prior to or concurrently therewith, of the following
conditions precedent (the date such conditions are first satisfied or waived
being referred to herein as the "Sixth Amendment Effective Date"):
------------------------------
(a) Amendment. The Lender shall have received this Sixth Amendment,
---------
executed and delivered by a duly authorized officer of the Borrower.
(b) Endorsement. The Lender shall have received an Endorsement No. 5
-----------
to the Note, substantially in the form of Exhibit A to this Sixth Amendment
(the "Fifth Endorsement"), executed by a duly authorized officer of the
-----------------
Borrower.
(c) Other Documents. The Lender shall have received such other
---------------
documents as the Lender or its counsel may reasonably request.
4. Conditions Subsequent. It shall be a condition subsequent to the
---------------------
effectiveness of the amendments set forth in this Sixth Amendment that the
Lender shall have received, within five Business Days following the Sixth
Amendment Effective Date, the following:
(a) Corporate Proceedings. A certificate of the Secretary or
---------------------
Assistant Secretary of the Borrower, dated as of a date within five
Business Days after the Sixth Amendment Effective Date, and certifying (A)
that the copy of the by-laws of the Borrower attached to the certificate of
the Secretary of the Borrower delivered on the Effective Date and the copy
of the articles of incorporation of the Borrower attached to the
certificate of the Secretary of the Borrower delivered in connection with
the First Amendment to the Loan Agreement, dated as of August 21, 1997 are,
as of the Sixth Amendment Effective Date, true, complete and correct copies
thereof and that such articles of incorporation and by-laws have not been
modified since the date of delivery thereof to the Lender and continue to
be in full force and effect, (B) that attached thereto is a true, complete
and correct copy of the resolutions duly adopted by the Board of Directors
of the Borrower authorizing the execution, delivery and performance of this
Sixth Amendment and the Fifth Endorsement, and the borrowings contemplated
under the Loan Agreement and the Note (as modified by the Fifth
Endorsement), and that such resolutions have not been amended, modified,
revoked or rescinded, and (C) as to the incumbency and specimen signature
of each officer executing this Sixth Amendment or the Fifth Endorsement on
behalf of the Borrower, and such certificate and the resolutions attached
thereto shall be in form and substance satisfactory to the Lender.
(b) Legal Opinion. The executed legal opinion of Howard Glicksman,
-------------
Esq., General Counsel and Vice-President of the Borrower, dated within five
Business Days after the Sixth Amendment Effective Date, as to the due
organization, power and authority of the Borrower to enter into the Sixth
Amendment and the Fifth Endorsement, the due authorization, execution, and
delivery by the Borrower of the Sixth Amendment and the Fifth Endorsement,
the enforceability of the Sixth Amendment and the Fifth Endorsement as
against the Borrower, and that the execution, delivery and performance of
the Sixth Amendment and the Fifth Endorsement will not conflict with any
requirement of law or contractual obligation of the Borrower. Such opinion
-2-
<PAGE>
shall additionally cover such other matters incident to the transactions
contemplated by this Sixth Amendment as the Lender may reasonably request
and be in form and substance acceptable to the Lender.
(c) Financial Statements. The monthly financial statements for
--------------------
December 1997 required pursuant to Section 7.01(a) of the Loan Agreement
and the monthly officer's certificate for December 1997 and the quarterly
officer's certificate for the period ending December 31, 1997 required
pursuant to Section 7.08(a) of the Loan Agreement, (collectively the
"Current Financial Statement Deliveries"). Further, the quarterly
--------------------------------------
financial statements for the period ending December 31, 1997 shall be
delivered within 45 days of the end of the quarter, pursuant to Section
7.01(b) of the Loan Agreement.
The parties agree that, if the foregoing conditions subsequent to effectiveness
are not satisfied within such five Business Day period, the amendments provided
for in this Sixth Amendment shall cease to be effective, with effect from the
date hereof as if the Sixth Amendment Effective Date had not occurred.
5. Representations and Warranties; Waiver. (a) To induce the Lender to
--------------------------------------
enter into this Sixth Amendment, the Borrower hereby represents and warrants to
the Lender that, after giving effect to the amendments provided for herein, the
representations and warranties contained in the Loan Agreement and the Custodial
Agreement will be true and correct in all material respects as if made on and as
of the date hereof and that no Default or Event of Default will have occurred
and be continuing, except that (i) the Borrower is late in delivering the
Current Financial Statement Deliveries and (ii) the Borrower has not satisfied
the financial covenant contained in Section 7.09(b) of the Loan Agreement for
the quarters ended June 30, 1997 and September 30, 1997.
(b) The Lender hereby waives any Default or Event of Default arising from
any of the matters described in the preceding paragraph 5(a), unless the Current
Financial Statement Deliveries are not delivered as required under Section 4(c)
above.
6. No Other Amendments. Except as expressly amended hereby and by the
-------------------
Fifth Endorsement, the Loan Agreement, the Note and the Custodial Agreement
shall remain in full force and effect in accordance with their respective terms,
without any waiver, amendment or modification of any provision thereof.
7. Counterparts. This Sixth Amendment may be executed by one or more of
------------
the parties hereto on any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
8. Expenses. The Borrower agrees to pay and reimburse the Lender for all
--------
of the out-of-pocket costs and expenses incurred by the Lender in connection
with the preparation, execution and delivery of this Sixth Amendment, including,
without limitation, the fees and disbursements of Cadwalader, Wickersham & Taft,
counsel to the Lender.
9. Applicable Law. THIS SIXTH AMENDMENT SHALL BE GOVERNED BY, AND
--------------
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
[SIGNATURE PAGES FOLLOW]
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Sixth Amendment to
be duly executed and delivered as of the day and year first above written.
NATIONAL MORTGAGE CORPORATION
By:_______________________________
Title:
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
By:_______________________________
Title:
-4-
<PAGE>
EXHIBIT A
NOTE ENDORSEMENT NO. 5
January 30 1998
New York, New York
The undersigned Borrower hereby agrees with Greenwich Capital
Financial Products, Inc. (the "Lender") that the Amended and Restated Promissory
------
Note of the Borrower, dated April 24, 1997, as amended and restated as of June
30, 1997, in the maximum principal amount of $100,000,000 (the "Original Note"),
-------------
as modified by the Note Endorsement No. 1, dated August 21, 1997, the Note
Endorsement No. 2, dated September 2, 1997, the Note Endorsement No. 3, dated
September 15, 1997, the Note Endorsement No. 4 dated September 25, 1997 (the
Original Note, as so modified, the "Note"), to which this Note Endorsement No. 5
----
is attached, is hereby amended by (a) deleting the amount "$155,000,000" where
it first occurs in the Note and substituting in lieu thereof the amount
"$160,000,000, and by deleting the first paragraph of the Note and substituting
in lieu thereof the following paragraph:
"FOR VALUE RECEIVED, NATIONAL MORTGAGE CORPORATION, a Colorado
corporation, (formerly MORTGAGE SERVICING ACQUISITION CORPORATION) (the
"Borrower"), hereby promises to pay to the order of GREENWICH CAPITAL
--------
FINANCIAL PRODUCTS, INC. a Delaware Corporation (the "Lender"), at the
------
principal office of the Lender at 600 Steamboat Road, Greenwich,
Connecticut 06830, in lawful money of the United States, and in
immediately available funds, the principal sum of ONE HUNDRED SIXTY MILLION
DOLLARS ($160,000,000) (or such lesser amount as shall equal the aggregate
unpaid principal amount of the Advances made by the Lender to the Borrower
under the Loan Agreement as defined below), on the dates and in the
principal amounts provided in the Loan Agreement, and to pay interest on
the unpaid principal amount of each such Advance, at such office, in like
money and funds, for the period commencing on the date of such Advance
until such Advance shall be paid in full, at the rates per annum and on the
dates provided in the Loan Agreement."
This Note Endorsement No. 5 is given as a rearrangement and amendment
of the obligations of the Borrower to the Lender under the Note and is not given
in substitution therefor or extinguishment thereof. Except as expressly amended
by this Note Endorsement No. 5, all of the terms and conditions of the Note
shall continue in full force and effect. This Note Endorsement No. 5 shall
constitute part of the Note and the Lender is hereby authorized to attach this
Note Endorsement No. 5 to the Note and to insert the following legend on the
face of the Original Note: "This Note has been amended pursuant to Note
Endorsement No. 5 dated January 30 1998."
-5-
<PAGE>
Borrower: NATIONAL MORTGAGE CORPORATION
- --------
(formerly MORTGAGE SERVICING
ACQUISITION CORPORATION)
By:_____________________________
Name:
Title:
Lender: GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
- ------
By:______________________________
Name:
Title:
-6-
<PAGE>
SEVENTH AMENDMENT TO
LOAN AND SECURITY AGREEMENT
This Seventh Amendment, dated as of January 30, 1998 (the
"Amendment"), to the Amended and Restated Loan and Security Agreement, dated as
---------
of June 30, 1997 (as amended, supplemented or otherwise modified from time to
time, the "Warehouse Agreement"), between NATIONAL MORTGAGE CORPORATION,
-------------------
formerly Mortgage Servicing Acquisition Corporation (the "Borrower"), a Colorado
--------
corporation, and GREENWICH CAPITAL FINANCIAL PRODUCTS, INC. ("GCFP" or the
----
"Warehouse Lender"), a Delaware corporation.
----------------
RECITALS
The Borrower and the Warehouse Lender are parties to the Warehouse
Agreement, pursuant to which the Borrower has obtained financing from the
Warehouse Lender to provide interim funding for the origination and acquisition
of certain Mortgage Loans (as defined therein), which Mortgage Loans secure
Advances (as so defined).
The Borrower has created a subsidiary, National Mortgage Sales
Corporation, a Colorado corporation ("NMSC"), ninety-five percent of the common
----
stock of which is owned by the Borrower and which has entered into a Mortgage
Loan Flow Contribution and Subservicing Agreement, dated as of January 30, 1998,
between the Borrower and NMSC, pursuant to which the Borrower shall make a
capital contribution of certain of the Mortgage Loans it currently holds to NMSC
and shall continue to make such capital contributions from time to time of
certain of the Mortgage Loans it hereafter acquires, through origination or
otherwise.
It is the intent of the Borrower and the Warehouse Lender that the
Mortgage Loans remain subject to a security interest in favor of the Warehouse
Lender and continue to be used in the calculation of the Borrowing Base (as
defined in the Warehouse Agreement), and that such Mortgage Loans constitute
Primary Warehouse Loan Collateral (as defined in the Intercreditor and
Subordination Agreement, dated as of June 30, 1997 (as amended, supplemented or
otherwise modified from time to time, the "Intercreditor Agreement) among the
-----------------------
Borrower, ContiTrade Services, LLC ("CTS" or a "Lender") and Greenwich Capital
--- ------
Markets, Inc. ("GCM" or a "Lender") (together with the Warehouse Lender, the
--- ------
"Lenders") notwithstanding the transfer of such Mortgage Loans to NMSC.
-------
To induce the Lenders to amend the Intercreditor Agreement, and to
induce the Warehouse Lender to amend the Warehouse Agreement and the Custodial
Agreement (as defined in the Warehouse Agreement) in each case to permit the
transfer of Mortgage Loans to NMSC subject to the terms of the Warehouse
Agreement and the Intercreditor Agreement, (i) NMSC shall execute a Security
Agreement whereby it pledges all of its interests in all Mortgage Loans to the
Warehouse Lender and the other Lenders (ii) NMSC shall execute a Guarantee
whereby it guarantees the borrowings of the Borrower under the Financing
Agreements, as defined below and (iii) the Pledgors (as defined in the Pledge
Agreement) shall execute the Pledge Agreement whereby they pledge all of their
respective interests in the stock of the Borrower.
Accordingly, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree
that the Warehouse Agreement shall be amended as provided in the heading and
recitals hereto and as follows:
<PAGE>
1. DEFINED TERMS. (a) Unless otherwise specified herein, all
-------------
capitalized terms used in this Amendment shall have the same meanings given to
such terms in the Warehouse Agreement.
(b) The following definitions shall be added to the Warehouse
Agreement in proper alphabetical order:
`Contribution Agreement' shall mean the Mortgage Loan Flow
----------------------
Contribution and Subservicing Agreement, dated as of January 30, 1998, between
the Borrower and the Guarantor.
`Financing Agreements' shall means, collectively, the Custodial
--------------------
Agreement, the Intercreditor Agreement, the Residual Agreement, Subordinated
Debt Agreement and the Warehouse Agreement.
`Guarantee' shall mean the Guarantee, dated as of the date hereof,
---------
made by the Guarantor in favor of GCFP, GCM and CTS, as amended, supplemented,
or otherwise modified from time to time.
`Guarantor' shall mean National Mortgage Sales Corporation, a Colorado
---------
corporation.
`Guarantor Documents' shall mean the Guarantee, the Security
-------------------
Agreement, the Pledge Agreement and any other related documents executed by the
Guarantor.
`Intercreditor Agreement' shall mean the Intercreditor and
-----------------------
Subordination Agreement, dated as of June 30, 1997 (as amended, supplemented or
otherwise modified from time to time) among the Borrower, CTS (a "Lender") and
------
GCM (a "Lender") (together with the Warehouse Lender, the "Lenders").
-------
"Pledge Agreement" shall mean the Pledge Agreement, dated as of
----------------
January 30, 1998 (as amended, supplemented or otherwise modified from time to
time) made by the Borrower (in such capacity, a "Pledgor") and Steven B. Chotin
-------
(the "Individual Pledgor") (each one, a "Pledgor" and, together, the "Pledgors")
------------------ ------- --------
on behalf of CTS, GCM and GCFP.
`Security Agreement' shall mean the Security Agreement, dated as of
------------------
even date herewith, made by the Guarantor, in favor of GCFP as the lender under
the Warehouse Agreement (in such capacity, the "Warehouse Lender"), GCM as a
----------------
lender under the Residual Agreement (in such capacity, a "Residual Lender"), CTS
---------------
as a lender under the Residual Agreement (in such capacity, a "Residual Lender")
---------------
and CTS as the lender under the Subordinated Debt Agreement (in such capacity,
the "Subordinated Debt Lender"), parties to the various Financing Agreements."
------------------------
(b) The following definitions in the Warehouse Agreement shall be
amended as follows:
`Mortgage Loans' shall be amended by deleting section (ii) and
replacing it with the following:
"(ii) all right, title and interest of the Borrower or any Subsidiary
in and to the Mortgaged Property covered by such Mortgage."
-2-
<PAGE>
`Other Agreements' shall be amended by adding at the end thereof
"including but not limited to the Security Agreement."
2. COVENANTS OF THE BORROWER.
-------------------------
a. Section 7 is hereby amended
(i) by adding to Section 7.09(b) the following phrase after
the word "GAAP":
"on a consolidated basis for the Borrower, the Guarantor, and other
Subsidiaries"
(ii) by adding to Section 7.13 the following sentence at the
end thereof:
"The Warehouse Lender expressly allows the transfer of Mortgage Loans
from the Borrower to the Guarantor pursuant to the Contribution Agreement
and in accordance with section 11.18."
(iii) by adding the following after Section 7.19:
"7.20 Application of covenants to the Guarantor.
-----------------------------------------
(a) The following sections that are otherwise applicable only to
the Borrower shall apply to the Guarantor to the same extent and with the
same consequences as they apply to the Borrower: 7.03(a) and (b), 7.13,
7.16 and 7.19.
(b) The Borrower shall be required to fulfill the reporting
requirements of 7.04(a)(v), 7.08(a)(i) and (iii) as they apply, mutatis
mutandi, to the Guarantor."
3. EVENTS OF DEFAULT. Section 8 is hereby amended
-----------------
(i) by adding to Section (c) "or by the Guarantor in any
Guarantor Document" after ". . . in any other Loan Document."
(ii) by adding to Section (d)(v) ", any Guarantor Documents"
after ". . . Loan Documents."
(iii) by adding to Section (h) "or the Guarantor" after "the
Borrower."
(iv) by adding to Section (k) "any Guarantor Document" after
"the Custodial Agreement."
4. MISCELLANEOUS. Section 11 is hereby amended by adding at the
-------------
end thereof:
"11.18 Amended Calculation of Borrowing Base.
-------------------------------------
"(a) Notwithstanding any provision in this Warehouse Agreement to the
contrary, any and all Mortgage Loans transferred from the Borrower to the
Guarantor which, but for such transfer, would otherwise be included in the
Borrowing Base, shall continue to be included therein; provided, however,
-------- -------
that such Mortgage Loans are transferred in accordance with
-3-
<PAGE>
sections 11.18(b) and 11.18(c) and are subject to a security interest
pursuant to the Security Agreement dated as of January 30, 1998 granted by
the Guarantor on behalf of the Lenders named therein.
(b) Mortgage Loans transferred from the Borrower to the Guarantor
shall be transferred only as a contribution to capital, and such transfer
shall be so recorded in the books and records of the Borrower.
(c) The Warehouse Lender acknowledges and agrees that the formation
of the Guarantor and the contribution of Mortgage Loans by the Borrower to
the Guarantor do not and shall not constitute any violation of the
Warehouse Agreement, including, without limitation, Section 7.14 thereof.
5. CONDITIONS TO EFFECTIVENESS; REPRESENTATIONS AND WARRANTIES;
------------------------------------------------------------
POST-CLOSING OPINIONS.
- ----------------------
(a) This Warehouse Agreement shall become effective upon
satisfaction of the following conditions precedent:
(i) the execution and delivery hereof by each of the Warehouse
Lender and the Borrower, and the acknowledgment hereof by NMSC as Guarantor
to the Warehouse Agreement;
(ii) the execution and delivery of (A) the Guarantee by the
Guarantor, (B) the Security Agreement by the Guarantor and (C) the Pledge
Agreement by the Pledgors.
(iii) Filings, Registrations, Recordings. Any documents (including,
----------------------------------
without limitation, financing statements) required to be filed, registered
or recorded in order to create, in favor of the Warehouse Lender, a
perfected, first-priority security interest in the Collateral pledged by
the Guarantor, subject to no Liens other than those created hereunder and
under the other Financing Documents, shall have been properly prepared for
filing, registration or recording in each office in each jurisdiction in
which such filings, registrations and recordations are required to perfect
such first-priority security interest.
(iv) the execution and delivery of a list of the authorized officers
of the Guarantor.
(v) the execution and delivery of a revised Schedule 3, listing
Subsidiaries.
(b) The Borrower hereby confirms the accuracy and completeness of
the representations and warranties in Section 6 of the Warehouse Agreement,
provided that all references to the "Warehouse Agreement" therein shall be
deemed references to the Warehouse Agreement as amended by this Amendment;
provided, further, that representation (m) in Schedule 1 to the Warehouse
Agreement shall be amended to provide as follows:
(m) Ownership. (i) The Borrower or the Guarantor is the sole owner
---------
of record and holder of the Mortgage Loan; (ii) the Mortgage Loan is not
assigned or pledged (other than as contemplated under the Loan Agreement or
the Security Agreement), and the Borrower or the Guarantor has good
indefeasible and marketable title thereto, and has the full right to
transfer and pledge the Mortgage Loan to the Lender free and clear of any
encumbrance, equity, participation interest, lien, pledge, charge, claim or
security interest, and has full right and
-4-
<PAGE>
authority subject to no interest or participation of, or agreement with,
any other party, to pledge and assign each Mortgage Loan pursuant to this
Loan Agreement.
(c) The Borrower hereby represents and warrants that, after giving
effect to the amendments and waivers effected hereby, as of the date hereof
there has not occurred or is not continuing any Event of Default or an event
that, with the lapse of time or the giving of notice, or both, would become an
Event of Default, the Borrower has been and is in full compliance with all of
its covenants and obligations under the Warehouse Agreement (as amended by this
Amendment) except as has been waived by the Lender.
(d) The Lender shall receive no later than February 9, 1998 the
executed legal opinion of Hunton & Williams, special counsel to the
Borrower and Howard Glicksman, Esq., General Counsel and Vice President of
the Borrower, in form and substance satisfactory to the Lender. Each such
legal opinion shall be dated as of the Effective Date of this Amendment and
otherwise in form and substance acceptable to the Lender and cover such
other matters incident to the transactions contemplated by this Amendment
as the Lender shall reasonably request. The failure to comply with this
Section 5(d) shall constitute an Event of Default under the Warehouse
Agreement.
6. INCORPORATION OF AMENDMENT. The parties acknowledge and agree
--------------------------
that this Amendment is incorporated into and made a part of the Warehouse
Agreement, the terms and provisions of which, unless expressly modified herein,
or unless no longer applicable by their terms, are hereby affirmed and ratified
and remain in full force and effect. To the extent that any term or provision
of this Amendment is or may be deemed expressly inconsistent with any term or
provision of the Warehouse Agreement, the terms and provisions of this Amendment
shall control. Each reference to the Warehouse Agreement shall be a reference
to the Warehouse Agreement as amended by this Amendment. Nothing contained
herein is intended nor shall be construed to be a novation or an accord and
satisfaction of the outstanding Loan or any of Borrower's obligations to the
Warehouse Lender.
7. BORROWER REMAINS LIABLE. The Borrower hereby confirms that the
-----------------------
Warehouse Agreement and each document executed by the Borrower in connection
therewith continue unimpaired and in full force and effect and shall cover and
secure all of Borrower's existing and future obligations to the Warehouse
Lender.
8. HEADINGS. The paragraph headings contained in this Amendment are
--------
for convenience of reference only and shall not be considered a part of this
Amendment in any respect.
9. GOVERNING LAW, ETC.; WAIVER OF TRIAL BY JURY. THIS AMENDMENT
--------------------------------------------
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
NEW YORK. BORROWER HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE
UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF ANY
NEW YORK STATE COURT SITTING IN NEW YORK CITY FOR THE PURPOSES OF ALL LEGAL
PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY. BORROWER IRREVOCABLY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING
OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIMS THAT
ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT
FORUM.
-5-
<PAGE>
(B) THE BORROWER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY.
10. EXECUTION IN COUNTERPARTS. This Amendment may be executed in any
-------------------------
number of counterparts and by different parties hereto in separate counterparts,
each of which, when so executed and delivered, shall be deemed to be an original
and all of which taken together shall constitute one and the same instrument.
11. FAXED DOCUMENTS. In order to expedite the acceptance and
---------------
execution of this Amendment, each of the parties hereto agree that a faxed copy
of this Amendment shall have the same binding effect on the party so executing
the faxed document as an original handwritten executed copy thereof.
IN WITNESS WHEREOF, the undersigned have entered into this Amendment
as of January 30, 1998.
NATIONAL MORTGAGE CORPORATION
By:__________________________________
Name:
Title:
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
By:__________________________________
Name:
Title:
-6-
<PAGE>
AMENDMENT NO. 8
TO THE
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
This is AMENDMENT NO. 8, dated as of December 31, 1997 (the "Amendment"),
to that certain AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT, dated as of
June 30, 1997 (as heretofore supplemented and amended, the "Original Agreement,"
and as further amended by this Amendment, the "Agreement"), among NATIONAL
MORTGAGE CORPORATION f/k/a MORTGAGE SERVICING ACQUISITION CORPORATION, a
Colorado corporation, as Borrower, and GREENWICH CAPITAL FINANCIAL PRODUCTS,
INC., a Delaware corporation, as Lender.
RECITALS
WHEREAS, the Borrower and the Lender entered into the Original Agreement
and the other Significant Documents referred to in the Original Agreement to
provide a mechanism under which each of the Borrower and the Lender would
benefit from NMC's successful completion of an initial public offering of its
common stock, and such provisions were based on NMC's business plan as it stood
as of June 30, 1997;
WHEREAS, the Borrower and the Lender recognize that the market in which NMC
operates has undergone changes since June 30, 1997, and the Borrower and the
Lender recognize that it has been in the best interests of each of them, given
the overall purpose of the Agreement and the other Significant Documents, for
NMC to make certain changes in its business plan in order to position itself for
successful completion of an initial public offering of its common stock;
WHEREAS, the Borrower and the Lender agree that certain amendments need to
be made to the Original Agreement in order to reflect NMC's new business plan,
and that such amendments are for the benefit of both parties to the Agreement
and all parties to the other Significant Documents, inasmuch as these amendments
strengthen NMC's capability to execute its business plan and to conduct a
successful initial public offering of its common stock in a manner and on terms
satisfactory to both parties to the Agreement and all parties to each of the
other Significant Documents.
AGREEMENT
NOW, THEREFORE, in consideration of the above premises, and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
<PAGE>
1. The definition of the defined term "Consolidated Tangible Equity" in
Article I is hereby amended by the deletion of the third sentence of
such definition and the replacement of the following therefor:
The term "liability" shall mean those obligations or liabilities
of the Borrower and its Subsidiaries which, in accordance with
GAAP, would be included in the liability side of the Borrower's
balance sheet on a consolidated basis; provided, however, that
indebtedness of the Borrower to Key Bank of Colorado ("Key Bank")
in an amount up to $5,000,000 pursuant to a revolving line of
credit to be made by Key Bank to the Borrower (the "Bridge Loan")
shall not constitute a "liability" of the Borrower for purposes
of this definition; and provided, further, that the Series I
Preferred Stock issued by the Borrower shall not constitute a
"liability" of the Borrower for purposes of this definition.
2. Section 6.01(c) is amended by the addition of the following at the end
of such Section:
; provided, however, that National Mortgage Sales Corporation, a
Subsidiary of the Borrower, is a party to that certain Guarantee,
dated as of January 30, 1998, in favor of the Lender, Greenwich
Capital Markets, Inc., and ContiTrade Services, L.L.C., and that
this shall not constitute a breach of this representation.
3. The following proviso is added at the end of Section 7.04(a)(i):
; provided, however, that the Lender expressly waives any
notification of default by the Borrower under the Servicing
Agreement, dated as of September 1, 1997, among Fund America
Investors Trust 1997-NMC1, the Borrower, as servicer, and Norwest
Bank Minnesota, National Association, as trustee (the "1997-NMC1
Servicing Agreement"), or any related agreement with MBIA
Insurance Corporation, arising solely out of any default by the
Borrower under its net worth requirements under Section 6.01(f)
of the 1997-NMC1 Servicing Agreement as of the end of any fiscal
quarter ending on or prior to the IPO Target Date (as defined in
the Residual Agreement)
4. Clause (ii) in Section 7.09(a) is hereby deleted and is replaced by
the following:
for any quarter during 1998, the greater of (x) 65% of the
Consolidated Tangible Equity as of December 31, 1997 and (y) (A)
$5 million, in the case of the quarter ended March 31, 1998, (B)
$4 million, in the case of the quarter ended June 30, 1998, and
(C) $10 million, in the case of the quarters ended September 30,
1998 and December 31, 1998, and
-2-
<PAGE>
5. Section 7.09(b) is restated in its entirety as follows:
Maintenance of Current Ratio. The Borrower shall not permit the
----------------------------
ratio of current assets to current liabilities (as determined in
accordance with GAAP on a consolidated basis and calculated as
described on Schedule 1 attached hereto) to be less than 1.01:1,
----------
in any event without considering amounts owing under the Bridge
Loan "current liabilities" until after the IPO Target Date.
6. Section 7.10(c) is amended by the addition of the following at the end
of such Section:
; provided, however, that the Guarantee, dated as of January 30,
1998, made by National Mortgage Sales Corporation in favor of the
Lender, Greenwich Capital Markets, Inc. and ContiTrade Services,
L.L.C., is approved by the Lender
7. Section 8.01(m)(i) is amended by the addition of the following at the
end of such Section:
; provided, further, that the Lenders acknowledge and agree that
there shall be no Default or Event of Default under this Section
7.01(c) as a result of any default or event of default by the
Borrower under Section 6.01(f) of the 1997-NMC1 Servicing
Agreement resulting solely from the Borrower's failure to meet
the net worth standards set forth in such Section 6.01(f) as of
the end of any fiscal quarter ending on or prior to the IPO
Target Date.
-3-
<PAGE>
8. The Lenders acknowledge and agree that the Borrower has complied with
all of its reporting obligations under Sections 7.01(a) and 7/08 as of
December 31, 1997.
9. Capitalized terms used and not otherwise defined herein shall have the
respective meanings assigned to such terms in the Original Agreement.
10. The execution and delivery of this Amendment shall not, except as
specifically provided above, constitute a waiver of any right, power
or remedy of the Lender under the Agreement or any document related
thereto, and, except as specifically provided above, the Agreement and
each other document related thereto shall remain in full force and
effect and are hereby ratified and confirmed. Further, execution and
delivery of this Amendment does not imply in any manner that the
Lender shall be willing to make any similar or other amendments in the
future.
11. This Amendment shall be governed by and construed in accordance with
the laws of the State of New York, without regard to the conflict of
laws rules applied in the State of New York.
12. For the purpose of facilitating the execution of this Amendment and
for other purposes, this Amendment may be executed simultaneously in
any number of counterparts, each of which shall be deemed to be an
original, and together shall constitute and be one and the same
instrument.
-4-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused its duly authorized
representative to set his hand as of the date first above written.
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
By:______________________________
Name:____________________________
Title:_____________________________
NATIONAL MORTGAGE CORPORATION
By:______________________________
Name:____________________________
Title:_____________________________
-5-
<PAGE>
NINTH AMENDMENT
NINTH AMENDMENT, dated as of March 31, 1998 (this "Ninth Amendment"), to
---------------
the Amended and Restated Loan and Security Agreement, dated as of June 30, 1997
(as amended, supplemented or otherwise modified prior to the date hereof, the
"Existing Loan Agreement" and, as amended pursuant to this Ninth Amendment, the
-----------------------
"Loan Agreement"), between NATIONAL MORTGAGE CORPORATION, a Colorado
--------------
corporation, (formerly MORTGAGE SERVICING ACQUISITION CORPORATION) (the
"Borrower"), and GREENWICH CAPITAL FINANCIAL PRODUCTS, INC., a Delaware
--------
corporation (the "Lender").
------
RECITALS
The Borrower has requested the Lender to agree to amend the Existing Loan
Agreement to increase the maximum credit available thereunder to $200,000,000
for the period commencing on the effective date of this Ninth Amendment to the
close of business on June 26, 1998, in accordance with the Termination Date of
the Loan Agreement. The Lender is willing to agree to such amendment, but only
on the terms and subject to the conditions set forth in this Ninth Amendment.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Borrower and the Lender hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, terms defined in the
-------------
Existing Loan Agreement are used herein as therein defined.
2. Amendment. (a) The Existing Loan Agreement is hereby amended by
---------
deleting the definition of "Maximum Credit" contained in Section 1.01 thereof
and substituting in lieu thereof the following new definition:
""Maximum Credit" shall mean (a) from and after the Ninth Amendment
--------------
Effective Date to the close of business on June 26, 1998, $200,000,000;
provided, however, that unless and until an amendment to the Forward Loan
Participation Agreement, dated as of August 21, 1997 (as amended,
supplemented or otherwise modified, the "Participation Agreement"), between
the Lender and ContiTrade Services L.L.C. is executed and delivered by the
parties thereto, which, among other purposes, changes the maximum amount of
Designated Advances (as defined in the Participation Agreement) to
$200,000,000, the Maximum Credit shall be $150,000,000."
(b) The Existing Loan Agreement is hereby amended by adding to Section
1.01 thereof the following new definitions in the appropriate alphabetical
order:
""Ninth Amendment" shall mean the Ninth Amendment, dated as of March
---------------
31, 1998, to this Loan Agreement, between the Borrower and the Lender."
""Ninth Amendment Effective Date" shall mean the date on which all of
------------------------------
the conditions precedent to the effectiveness of the Ninth Amendment set
forth in Section 3 of the Ninth Amendment shall first have been satisfied
or waived."
<PAGE>
3. Effectiveness. The effectiveness of the amendments to the Existing
-------------
Loan Agreement set forth in this Ninth Amendment shall be subject to the
satisfaction, immediately prior to or concurrently therewith, of the following
conditions precedent (the date such conditions are first satisfied or waived
being referred to herein as the "Ninth Amendment Effective Date"):
------------------------------
(a) Amendment. The Lender shall have received this Ninth Amendment,
---------
executed and delivered by a duly authorized officer of the Borrower.
(b) Endorsement. The Lender shall have received an Endorsement No.
-----------
6 to the Note, substantially in the form of Exhibit A to this Ninth
Amendment (the "Sixth Endorsement"), executed by a duly authorized officer
-----------------
of the Borrower.
(c) Other Documents. The Lender shall have received such other
---------------
documents as the Lender or its counsel may reasonably request.
4. Conditions Subsequent. It shall be a condition subsequent to the
---------------------
effectiveness of the amendments set forth in this Ninth Amendment that the
Lender shall have received, within five Business Days following the Ninth
Amendment Effective Date, the following:
(a) Corporate Proceedings. A certificate of the Secretary or
---------------------
Assistant Secretary of the Borrower, dated as of a date within five
Business Days after the Ninth Amendment Effective Date, and certifying (A)
that the copy of the by-laws of the Borrower attached to the certificate of
the Secretary of the Borrower delivered on the Effective Date and the copy
of the articles of incorporation of the Borrower attached to the
certificate of the Secretary of the Borrower delivered in connection with
the First Amendment to the Loan Agreement, dated as of August 21, 1997 are,
as of the Ninth Amendment Effective Date, true, complete and correct copies
thereof and that such articles of incorporation and by-laws have not been
modified since the date of delivery thereof to the Lender and continue to
be in full force and effect, (B) that attached thereto is a true, complete
and correct copy of the resolutions duly adopted by the Board of Directors
of the Borrower authorizing the execution, delivery and performance of this
Ninth Amendment and the Sixth Endorsement, and the borrowings contemplated
under the Loan Agreement and the Note (as modified by the Sixth
Endorsement), and that such resolutions have not been amended, modified,
revoked or rescinded, and (C) as to the incumbency and specimen signature
of each officer executing this Ninth Amendment or the Sixth Endorsement on
behalf of the Borrower, and such certificate and the resolutions attached
thereto shall be in form and substance satisfactory to the Lender.
(b) Legal Opinion. The executed legal opinion of Howard Glicksman,
-------------
Esq., General Counsel and Vice-President of the Borrower, dated within five
Business Days after the Ninth Amendment Effective Date, as to the due
organization, power and authority of the Borrower to enter into the Ninth
Amendment and the Sixth Endorsement, the due authorization, execution, and
delivery by the Borrower of the Ninth Amendment and the Sixth Endorsement,
the enforceability of the Ninth Amendment and the Sixth Endorsement as
against the Borrower, and that the execution, delivery and performance of
the Ninth Amendment and the Sixth Endorsement will not conflict with any
requirement of law or contractual obligation of the Borrower. Such opinion
shall additionally cover such other matters incident to the transactions
contemplated by this Ninth Amendment as the Lender may reasonably request
and be in form and substance acceptable to the Lender.
-2-
<PAGE>
(c) Financial Statements. The monthly financial statements for
--------------------
February 1998 required pursuant to Section 7.01(a) of the Loan Agreement
and the monthly officer's certificate for February 1998 and the quarterly
officer's certificate for the period ending December 31, 1997 required
pursuant to Section 7.08(a) of the Loan Agreement, (collectively the
"Current Financial Statement Deliveries"). Further, the quarterly
--------------------------------------
financial statements for the period ending March 31, 1998 shall be
delivered within 45 days of the end of the quarter, pursuant to Section
7.01(b) of the Loan Agreement and the annual financial statements for the
fiscal year ending December 31, 1998 shall be delivered within 90 days of
the end of the year, pursuant to Section 7.01(c) of the Loan Agreement.
The parties agree that, if the foregoing conditions subsequent to effectiveness
are not satisfied within such five Business Day period, the amendments provided
for in this Ninth Amendment shall cease to be effective, with effect from the
date hereof as if the Ninth Amendment Effective Date had not occurred.
5. Representations and Warranties; Waiver. (a) To induce the Lender to
--------------------------------------
enter into this Ninth Amendment, the Borrower hereby represents and warrants to
the Lender that, after giving effect to the amendments provided for herein, the
representations and warranties contained in the Loan Agreement and the Custodial
Agreement will be true and correct in all material respects as if made on and as
of the date hereof and that no Default or Event of Default will have occurred
and be continuing, except that (i) the Borrower is late in delivering the
Current Financial Statement Deliveries and (ii) the Borrower has not satisfied
the financial covenant contained in Section 7.09(b) of the Loan Agreement for
the quarters ended September 30, 1997 and December 31, 1997.
(b) The Lender hereby waives any Default or Event of Default arising from
any of the matters described in the preceding paragraph 5(a), unless the Current
Financial Statement Deliveries are not delivered as required under Section 4(c)
above.
6. No Other Amendments. Except as expressly amended hereby and by the
-------------------
Sixth Endorsement, the Loan Agreement, the Note and the Custodial Agreement
shall remain in full force and effect in accordance with their respective terms,
without any waiver, amendment or modification of any provision thereof.
7. Counterparts. This Ninth Amendment may be executed by one or more of
------------
the parties hereto on any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
8. Expenses. The Borrower agrees to pay and reimburse the Lender for all
--------
of the out-of-pocket costs and expenses incurred by the Lender in connection
with the preparation, execution and delivery of this Ninth Amendment, including,
without limitation, the fees and disbursements of Cadwalader, Wickersham & Taft,
counsel to the Lender.
9. Applicable Law. THIS NINTH AMENDMENT SHALL BE GOVERNED BY, AND
--------------
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
[SIGNATURE PAGES FOLLOW]
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Ninth Amendment to
be duly executed and delivered as of the day and year first above written.
NATIONAL MORTGAGE CORPORATION
By:_______________________________
Title:
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
By:_______________________________
Title:
-4-
<PAGE>
EXHIBIT A
---------
NOTE ENDORSEMENT NO. 6
March 31, 1998
New York, New York
The undersigned Borrower hereby agrees with Greenwich Capital
Financial Products, Inc. (the "Lender") that the Amended and Restated Promissory
------
Note of the Borrower, dated April 24, 1997, as amended and restated as of June
30, 1997, in the maximum principal amount of $100,000,000 (the "Original Note"),
-------------
as modified by the Note Endorsement No. 1, dated August 21, 1997, the Note
Endorsement No. 2, dated September 2, 1997, the Note Endorsement No. 3, dated
September 15, 1997, the Note Endorsement No. 4 dated September 25, 1997, the
Note Endorsement No. 5 dated January 30, 1998, (the Original Note, as so
modified, the "Note"), to which this Note Endorsement No. 6 is attached, is
----
hereby amended by (a) deleting the amount "$160,000,000" where it first occurs
in the Note and substituting in lieu thereof the amount "$200,000,000, and by
deleting the first paragraph of the Note and substituting in lieu thereof the
following paragraph:
"FOR VALUE RECEIVED, NATIONAL MORTGAGE CORPORATION, a
Colorado corporation, (formerly MORTGAGE SERVICING ACQUISITION CORPORATION)
(the "Borrower"), hereby promises to pay to the order of GREENWICH CAPITAL
--------
FINANCIAL PRODUCTS, INC. a Delaware Corporation (the "Lender"), at the
------
principal office of the Lender at 600 Steamboat Road, Greenwich,
Connecticut 06830, in lawful money of the United States, and in
immediately available funds, the principal sum of TWO HUNDRED MILLION
DOLLARS ($200,000,000) (or such lesser amount as shall equal the aggregate
unpaid principal amount of the Advances made by the Lender to the Borrower
under the Loan Agreement as defined below), on the dates and in the
principal amounts provided in the Loan Agreement, and to pay interest on
the unpaid principal amount of each such Advance, at such office, in like
money and funds, for the period commencing on the date of such Advance
until such Advance shall be paid in full, at the rates per annum and on the
dates provided in the Loan Agreement."
This Note Endorsement No. 6 is given as a rearrangement and amendment
of the obligations of the Borrower to the Lender under the Note and is not given
in substitution therefor or extinguishment thereof. Except as expressly amended
by this Note Endorsement No. 6, all of the terms and conditions of the Note
shall continue in full force and effect. This Note Endorsement No. 6 shall
constitute part of the Note and the Lender is hereby authorized to attach this
Note Endorsement No. 6 to the Note and to insert the following legend on the
face of the Original Note: "This Note has been amended pursuant to Note
Endorsement No. 6 dated March 31, 1998."
-5-
<PAGE>
Borrower: NATIONAL MORTGAGE CORPORATION
- --------
(formerly MORTGAGE SERVICING
ACQUISITION CORPORATION)
By:_____________________________
Name:
Title:
Lender: GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
- ------
By:______________________________
Name:
Title:
-6-
<PAGE>
EXHIBIT 10.3
________________________________________________
________________________________________________
WAREHOUSING CREDIT AND SECURITY AGREEMENT
(SINGLE-FAMILY MORTGAGE LOANS)
BETWEEN
NATIONAL MORTGAGE CORPORATION,
a Colorado corporation
AND
RESIDENTIAL FUNDING CORPORATION,
a Delaware corporation
_____________________________
Dated as of January 19, 1996
________________________________________________
________________________________________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
1. DEFINITIONS............................................................ 1
1.1 Defined Terms..................................................... 1
1.2 Other Definitional Provisions..................................... 15
2. THE CREDIT............................................................. 15
2.1 The Warehousing Commitment........................................ 15
2.2 Procedures for Obtaining Advances................................. 17
2.3 Notes............................................................. 19
2.4 Interest.......................................................... 20
2.5 Principal Payments................................................ 22
2.6 Expiration of Commitment.......................................... 25
2.7 Method of Making Payments......................................... 25
2.8 Commitment Fees................................................... 26
2.9 Warehousing Fees.................................................. 26
2.10 Miscellaneous Charges............................................. 26
2.11 Interest Limitation............................................... 27
2.12 Increased Costs; Capital Requirements............................. 27
3. COLLATERAL............................................................. 29
3.1 Grant of Security Interest........................................ 29
3.2 Release of Security Interest in Collateral........................ 32
3.3 Delivery of Additional Collateral or Mandatory Prepayment......... 34
</TABLE>
i
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<TABLE>
<S> <C>
3.4 Release of Collateral........................................... 34
3.5 Collection and Servicing Rights................................. 35
3.6 Return of Collateral at End of Commitment....................... 35
4. CONDITIONS PRECEDENT................................................. 36
4.1 Initial Advance................................................. 36
4.2 Each Advance.................................................... 38
5. REPRESENTATIONS AND WARRANTIES....................................... 40
5.1 Organization; Good Standing; Subsidiaries....................... 40
5.2 Authorization and Enforceability................................ 40
5.3 Approvals....................................................... 41
5.4 Financial Condition............................................. 41
5.5 Litigation...................................................... 42
5.6 Compliance with Laws............................................ 42
5.7 Regulations G and U............................................. 43
5.8 Investment Company Act.......................................... 43
5.9 Payment of Taxes................................................ 43
5.10 Agreements...................................................... 43
5.11 Title to Properties............................................. 44
5.12 ERISA........................................................... 44
5.13 Eligibility..................................................... 45
5.14 Place of Business............................................... 45
5.15 Special Representations Concerning Collateral................... 45
5.16 Servicing....................................................... 48
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
5.17 Special Representations Concerning Pledged Servicing Contracts.. 48
6. AFFIRMATIVE COVENANTS................................................ 51
6.1 Payment of Notes................................................ 51
6.2 Financial Statements and Other Reports.......................... 51
6.3 Maintenance of Existence; Conduct of Business................... 53
6.4 Compliance with Applicable Laws................................. 54
6.5 Inspection of Properties and Books.............................. 54
6.6 Notice.......................................................... 54
6.7 Payment of Debt, Taxes, etc..................................... 55
6.8 Insurance....................................................... 56
6.9 Closing Instructions............................................ 56
6.10 Subordination of Certain Indebtedness........................... 56
6.11 Other Loan Obligations.......................................... 57
6.12 Use of Proceeds of Advances..................................... 57
6.13 Special Affirmative Covenants Concerning Collateral............. 57
6.14 Servicing Collateral Value...................................... 59
7. NEGATIVE COVENANTS................................................... 59
7.1 Contingent Liabilities.......................................... 59
7.2 Sale or Pledge of Servicing Contracts........................... 59
7.3 Merger; Sale of Assets; Acquisitions............................ 60
7.4 Deferral of Subordinated Debt................................... 60
7.5 Loss of Eligibility............................................. 60
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
7.6 Debt to Adjusted Tangible Net Worth............................. 59
7.7 Minimum Adjusted Tangible Net Worth............................. 60
7.8 Liquidity....................................................... 60
7.9 Acquisition of Recourse Servicing Contracts..................... 60
7.10 Special Negative Covenants Concerning Collateral................ 61
8. DEFAULTS; REMEDIES................................................... 61
8.1 Events of Default............................................... 61
8.2 Remedies........................................................ 67
8.3 Application of Proceeds......................................... 71
8.4 Lender Appointed Attorney-in-Fact............................... 72
8.5 Right of Set-Off................................................ 72
9. NOTICES.............................................................. 73
10. REIMBURSEMENT OF EXPENSES; INDEMNITY................................. 74
11. FINANCIAL INFORMATION................................................ 75
12. MISCELLANEOUS........................................................ 75
12.1 Terms Binding Upon Successors; Survival of Representations...... 75
12.2 Assignment...................................................... 76
12.3 Amendments...................................................... 76
12.4 Governing Law................................................... 76
12.5 Participations.................................................. 76
12.6 Relationship of the Parties..................................... 76
12.7 Severability.................................................... 77
</TABLE>
iv
<PAGE>
<TABLE>
<S> <C>
12.8 Operational Reviews........................................... 77
12.9 Consent to Credit References.................................. 78
12.10 Consent to Jurisdiction....................................... 78
12.11 Counterparts.................................................. 78
12.12 Entire Agreement.............................................. 78
12.13 Waiver of Jury Trial.......................................... 79
</TABLE>
v
<PAGE>
EXHIBITS
--------
Exhibit A-1 Warehousing Promissory Note
Exhibit A-2 Working Capital Promissory Note
Exhibit B (INTENTIONALLY OMITTED)
Exhibit C-SF Request for Advance Against Single Family Mortgage Loans
Exhibit C-WC Working Capital Advance Request
Exhibit D-SF Procedures and Documentation for Warehousing Single Family
Mortgage Loans
Exhibit E-1 Schedule of Servicing Portfolio
Exhibit E-2 Schedule of Pledged Servicing Contracts
Exhibit F Subordination of Debt Agreement
Exhibit G Subsidiaries
Exhibit H Legal Opinion
Exhibit I-SF Officer's Certificate
Exhibit J Schedule of Existing Warehouse Lines
Exhibit K-1 Funding Bank Agreement (Wire)
Exhibit K-2 Funding Bank Agreement (Checks)
Exhibit L Commitment Summary Report
Exhibit M Bailee Pledge Agreement
Exhibit N Litigation Matters
vi
<PAGE>
THIS WAREHOUSING CREDIT AND SECURITY AGREEMENT, dated as of January 19,
1996, between NATIONAL MORTGAGE CORPORATION, a Colorado corporation (the
"Company"), having its principal office at 7600 East Orchard Road, Suite 330S,
Englewood, CO 80111-4943 and RESIDENTIAL FUNDING CORPORATION, a Delaware
corporation (the "Lender"), having its principal office at 8400 Normandale Lake
Blvd., Suite 600, Minneapolis, Minnesota 55437.
WHEREAS, the Company and the Lender desire to set forth herein the terms
and conditions upon which the Lender shall provide warehouse financing and
working capital financing to the Company;
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. DEFINITIONS.
1.1 Defined Terms. Capitalized terms defined below or elsewhere in this
-------------
Agreement (including the Exhibits hereto) shall have the following meanings:
"Acknowledgment Agreement" has the meaning set forth in Section 8.2(i)
------------------------
hereof.
"Adjustable Rate Mortgage Loan" means a Single-family Mortgage Loan that
-----------------------------
bears interest at a fluctuating rate and that is eligible for purchase by an
Investor.
"Adjusted Servicing Portfolio" means, for any Person, the Servicing
----------------------------
Portfolio of such Person, but excluding the principal balance of Mortgage Loans
included in the Servicing Portfolio at such date (a) which are past due for
principal or interest for ninety (90) days or more or are in foreclosure, (b)
with respect to which such Person is obligated to repurchase delinquent Mortgage
Loans or indemnify the holder of the Mortgage Loans serviced thereunder against
losses as a result of defaults on the Mortgage Loans at any time during the term
of such Mortgage Loans, without proof of fraud or misrepresentation, (c) for
which the Servicing Contracts are not owned by such Person free and clear of all
Liens (other than in favor of the Lender), or (d) which are serviced by the
Company for others under subservicing arrangements.
1
<PAGE>
"Adjusted Tangible Net Worth" means with respect to any Person at any date,
---------------------------
the Tangible Net Worth of such Person at such date, excluding capitalized excess
servicing fees and capitalized servicing rights, plus one percent (1%) of the
----
Adjusted Servicing Portfolio, and plus deferred taxes arising from capitalized
----
excess servicing fees.
"Advance" means a disbursement by the Lender pursuant to Article 2 of this
-------
Agreement. For the purposes hereof, the term "Advances" shall mean Warehousing
Advances, Wet Settlement Advances, Working Capital Advances and readvances of
funds previously advanced to the Company and repaid to the Lender.
"Advance Balance" means, with respect to any Warehousing Advance (and the
---------------
related Pledged Mortgage(s)), the original amount of such Warehousing Advance
minus all principal payments and prepayments thereof.
"Advance Request" means a Warehousing Advance Request or a Working Capital
---------------
Advance Request.
"Affiliate" has the meaning set forth in Rule 12b-2 of the General Rules
---------
and Regulations under the Exchange Act.
"Agreement" means this Warehousing Credit and Security Agreement (Single
---------
Family Mortgage Loans), either as originally executed or as it may from time to
time be supplemented, modified or amended.
"Appraisal" means a certificate of independent certified public accountants
---------
or independent financial consultants selected by the Company and reasonably
satisfactory to the Lender as to the Appraised Value of the Servicing Contracts
included in the Servicing Collateral, which shall evaluate such Servicing
Contracts based upon reasonably determined categories of the Mortgage Loans
contained therein and give effect to any subservicing agreement to which any
such Mortgage Loan is or will be subject, which certificate shall be in form,
substance and detail reasonably satisfactory to the Lender.
"Appraised Value" means, at the date of any Appraisal, with respect to the
---------------
Servicing Contracts included in the Servicing Collateral, the fair market value
of the Company's right to
2
<PAGE>
service Mortgage Loans pursuant to such Servicing Contracts, calculated as a
percentage of the unpaid principal amount of each category of Mortgage Loans
serviced pursuant thereto.
"Approved Custodian" means a pool custodian or other Person which is deemed
------------------
acceptable to the Lender from time to time in its sole discretion to hold a
Mortgage Loan for inclusion in a Mortgage Pool or to hold a Mortgage Loan as
agent for an Investor who has issued a Purchase Commitment for such Mortgage
Loan.
"Bailee Pledge Agreement" has the meaning set forth in Section 2.2(b)
-----------------------
hereof.
"Business Day" means any day excluding Saturday or Sunday and excluding any
------------
day on which national banking associations are closed for business.
"Cash Collateral Account" means a demand deposit account maintained at the
-----------------------
Funding Bank in the name of the Lender and designated for receipt of the
proceeds of the sale or other disposition of the Collateral.
"Closing Date" means January 19, 1996.
------------
"Collateral" has the meaning set forth in Section 3.1 hereof.
----------
"Collateral Documents" has the meaning set forth in Section 2.2(a) hereof.
--------------------
"Collateral Value" means (a) with respect to any Mortgage Loan as of the
----------------
date of determination, the lesser of (i) the amount of any Advance made against
such Mortgage Loan under Section 2.1(c) hereof; or (ii) the Fair Market Value of
such Mortgage Loan; or (b) in the event Pledged Mortgages have been exchanged
for Pledged Securities, the aggregate Fair Market Value of the Mortgage Loans
backing such Pledged Securities; or (c) with respect to cash, the amount of such
cash.
"Commitment" has the meaning set forth in Section 2.1(a) hereof.
----------
3
<PAGE>
"Commitment Amount" means Twenty-One Million One Hundred Thousand Dollars
-----------------
($21,100,000).
"Commitment Fee" means the Warehousing Commitment Fee or the Working
--------------
Capital Commitment Fee.
"Committed Purchase Price" means for a Mortgage Loan the product of the
------------------------
Mortgage Note Amount multiplied by (a) the price (expressed as a percentage) as
set forth in or calculated in accordance with the parameters set forth in a
Purchase Commitment for such Mortgage Loan or for a pool of Mortgage Loans in
which the Company intends to include such Mortgage Loan, or (b) in the event
such Mortgage Loan is to be used to back a Mortgage-backed Security for which a
Purchase Commitment has been issued to the Company, the price (expressed as a
percentage) as set forth in a Purchase Commitment for such Mortgage-backed
Security.
"Company" has the meaning set forth in the first paragraph of this
-------
Agreement.
"Conforming Mortgage Loan" means a First Mortgage Loan which is either (a)
------------------------
an FHA insured (other than a HUD 203(K) Mortgage Loan or Title I Mortgage Loan)
or VA guaranteed Mortgage Loan or (b) a Conventional Mortgage Loan which is
underwritten substantially in accordance with FNMA or FHLMC underwriting
standards and the principal amount of which is less than or equal to the maximum
amount eligible for purchase by FNMA or FHLMC.
"Conventional Mortgage Loan" means a First Mortgage Loan, other than an FHA
--------------------------
insured or VA guaranteed Mortgage Loan.
"Debt" means, with respect to any Person, at any date (a) all indebtedness
----
or other obligations of such Person which, in accordance with GAAP, would be
included in determining total liabilities as shown on the liabilities side of a
balance sheet of such Person at such date; and (b) all indebtedness or other
obligations of such Person for borrowed money or for the deferred purchase price
of property or services; provided that for purposes of this Agreement, there
shall be excluded from Debt at any date loan loss reserves, Subordinated Debt
not due within one year of such date, and deferred taxes arising from
capitalized excess servicing fees.
4
<PAGE>
"Default" means the occurrence of any event or existence of any condition
-------
which, but for the giving of Notice, the lapse of time, or both, would
constitute an Event of Default.
"Depository Benefit" shall mean the compensation received by the Lender,
------------------
directly or indirectly, as a result of the Company's maintenance of Eligible
Balances with a Designated Bank.
"Designated Bank" means any bank(s) designated from time to time by the
---------------
Lender to be a Designated Bank with whom the Lender has an agreement under which
the Lender can receive a Depository Benefit.
"Eligible Balances" means all funds of or maintained by the Company and its
-----------------
Subsidiaries in accounts at a Designated Bank, less balances to support fees,
interest or other amounts that would otherwise be payable to the Designated
Bank, reduction in interest payable under the RFC Conduit Credit Agreement or
other loan agreements to which the Company and the Lender are parties, float,
reserve requirements, Federal Deposit Insurance Corporation insurance premiums
and such other reductions as may be imposed by governmental authorities from
time to time.
"Eligible Mortgage Pool" means a Mortgage Pool for which (a) an Approved
----------------------
Custodian has issued its initial certification (on the basis of which a Pledged
Security is to be issued), (b) there exists a Purchase Commitment covering such
Pledged Security, and (c) such Pledged Security will be delivered to the Lender.
"ERISA" means the Employee Retirement Income Security Act of 1974 and all
-----
rules and regulations promulgated thereunder, as amended from time to time and
any successor statute.
"Event of Default" means any of the conditions or events set forth in
----------------
Section 8.1 hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended from
------------
time to time, and any successor statute.
"Fair Market Value" means at any date with respect to any Mortgage Loan
-----------------
covered by a valid Purchase Commitment, the Committed Purchase Price, or in the
absence of a valid Purchase Commitment for a Mortgage Loan or the related
Mortgage-backed
5
<PAGE>
Security (if such Mortgage Loan is to be used to back a Mortgage-backed
Security), (a) with respect to Conforming Mortgage Loans and Jumbo Mortgage
Loans, the market price (expressed as a percentage of the outstanding principal
balance) for thirty (30) day mandatory future delivery of such Mortgage Loan or
Mortgage-backed Security published by Knight-Ridder, Inc. on its MoneyCenter
system or, if not so published, the average bid price (expressed as a percentage
of the outstanding principal balance) quoted in writing to the Lender as of the
computation date by any two nationally recognized dealers selected by the Lender
who at the time are making a market in similar Mortgage Loans or Mortgage-backed
Securities, multiplied, in the case of Mortgage Loans, by the outstanding
principal balance thereof and, in the case of Mortgage-backed Securities, by the
product of the pool factor of such Mortgage-backed Security times the face
amount of such Mortgage-backed Security, and (b) with respect to Nonconforming
Mortgage Loans or the related Mortgage-backed Security (if such Nonconforming
Mortgage Loan is to be used to back a Mortgage-backed Security), the market
price for such Nonconforming Mortgage Loan or Mortgage-backed Security
determined by the Lender based on market data for similar Nonconforming Mortgage
Loans or Mortgage-backed Securities and such other criteria as the Lender
reasonably deems appropriate.
"FHA" means the Federal Housing Administration and any successor thereto.
---
"FHLMC" means the Federal Home Loan Mortgage Corporation and any successor
-----
thereto.
"FICA" means the Federal Insurance Contributions Act.
----
"FIRREA" means the Financial Institutions Reform, Recovery and Enforcement
------
Act of 1989, as amended from time to time, and the regulations promulgated and
rulings issued thereunder.
"First Mortgage" means a Mortgage which constitutes a first Lien on the
--------------
property covered thereby.
"First Mortgage Loan" means a Mortgage Loan secured by a First Mortgage.
-------------------
6
<PAGE>
"FNMA" means the Federal National Mortgage Association and any successor
----
thereto.
"Funding Bank" means The First National Bank of Chicago or any other bank
------------
designated from time to time by the Lender.
"Funding Bank Agreement" means the letter agreement substantially in the
----------------------
form of Exhibit K hereto.
---------
"GAAP" means generally accepted accounting principles set forth in the
----
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board, which are applicable to the
circumstances as of the date of determination.
"GNMA" means the Government National Mortgage Association and any successor
----
thereto.
"Home Equity Loan" means an open-ended revolving line of credit that is a
----------------
Mortgage Loan secured by a Mortgage.
"HUD" means the Department of Housing and Urban Development and any
---
successor thereto.
"Indemnified Liabilities" has the meaning set forth in Article 10 hereof.
-----------------------
"Internal Revenue Code" means the Internal Revenue Code of 1986, or any
---------------------
subsequent federal income tax law or laws, as any of the foregoing have been or
may from time to time be amended.
"Investor" means FNMA, FHLMC or a financially responsible private
--------
institution which is deemed acceptable by the Lender from time to time in its
reasonable discretion.
"Jumbo Mortgage Loan" means a Conventional Mortgage Loan which is
-------------------
underwritten substantially in accordance with FNMA or FHLMC underwriting
standards, but the principal amount of which is in excess of the maximum amount
eligible for purchase by FNMA or FHLMC, and which meets all eligibility
requirements for purchase by an Investor.
7
<PAGE>
"Lender" has the meaning set forth in the first paragraph of this
------
Agreement.
"LIBOR" means, for each calendar week, the rate of interest per annum which
-----
is equal to the arithmetic mean of the U.S. Dollar London Interbank Offered
Rates for one (1) month periods as of 11:00 a.m. London time on the first
Business Day of each week on which the London Interbank market is open, as
published by Knight-Ridder, Inc. on its MoneyCenter system. LIBOR shall be
rounded, if necessary, to the next higher one sixteenth of one percent (1/16%).
If such U.S. dollar LIBOR rates are not so offered or published for any period,
then during such period LIBOR shall mean the London Interbank Offered Rate for
one (1) month periods published on the first Business Day of each week on which
the London Interbank market is open, in the Wall Street Journal in its regular
column entitled "Money Rates."
-----------
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
----
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof, and any agreement to give
any security interest).
"Liquid Assets" means, with respect to any Person at any date, the
-------------
following unrestricted and unencumbered assets owned by such Person on such
date: cash, funds on deposit in any bank located in the United States,
investment grade commercial paper, money market funds, marketable securities and
the excess, if any, of Mortgage Loans and Mortgage-backed Securities held for
sale (valued in accordance with GAAP) over the outstanding aggregate principal
amount of notes or other debt instruments against which such Mortgage Loans or
Mortgage-backed Securities are pledged as Collateral.
"Loan Documents" means this Agreement, the Note, any agreement of the
--------------
Company relating to Subordinated Debt, and each other document, instrument or
agreement executed by the Company in connection herewith or therewith, as any of
the same may be amended, restated, renewed or replaced from time to time.
"Margin Stock" has the meaning assigned to that term in Regulations G and U
------------
of the Board of Governors of the Federal Reserve System as in effect from time
to time.
8
<PAGE>
"Maturity Date" shall mean the earlier of: (a) the close of business on
-------------
July 31, 1996, as such date may be extended from time to time in writing by the
Lender, in its sole discretion, on which date the Commitment shall expire of its
own term, and without the necessity of action by the Lender, and (b) the date
the obligation of the Lender to make further Advances hereunder is terminated
pursuant to Section 8.1 below.
"Miscellaneous Charges" has the meaning set forth in Section 2.10 hereof.
---------------------
"Mortgage" means a first mortgage or first deed of trust on improved real
--------
property.
"Mortgage-backed Securities" means GNMA, FNMA or FHLMC securities that are
--------------------------
backed by Mortgage Loans, and other securities that are backed by Mortgage Loans
and that Lender, in the reasonable exercise of its discretion, determines are
satisfactory from a credit and liquidity standpoint.
"Mortgage Loan" means any loan evidenced by a Mortgage Note and secured by
-------------
a Mortgage.
"Mortgage Note" means a promissory note secured by a Mortgage.
-------------
"Mortgage Note Amount" means, as of the date of determination, the then
--------------------
outstanding unpaid principal amount of a Mortgage Note.
"Mortgage Pool" means a pool of one or more Pledged Mortgages on the basis
-------------
of which there is to be issued a Mortgage-backed Security.
"Multiemployer Plan" means a "multiemployer plan" as defined in Section
------------------
4001(a)(3) of ERISA which is maintained for employees of the Company or a
Subsidiary of the Company.
"Nonconforming Mortgage Loan" means a Conventional Mortgage Loan which is
---------------------------
not a Conforming Mortgage Loan or a Jumbo Mortgage Loan, and which is
underwritten and approved for purchase by an Investor prior to funding if its
original principal amount exceeds Six Hundred Thousand Dollars ($600,000).
9
<PAGE>
"Note" has the meaning set forth in Section 2.3 hereof.
----
"Notices" has the meaning set forth in Article 9 hereof.
-------
"Obligations" means any and all indebtedness, obligations and liabilities
-----------
of the Company to the Lender (whether now existing or hereafter arising,
voluntary or involuntary, whether or not jointly owed with others, direct or
indirect, absolute or contingent, liquidated or unliquidated, and whether or not
from time to time decreased or extinguished and later increased, created or
incurred), arising out of or related to the Loan Documents.
"Officer's Certificate" means a certificate executed on behalf of the
---------------------
Company by its chief financial officer or its treasurer or by such other officer
as may be designated herein and substantially in the form of Exhibit I-SF
------------
attached hereto.
"Operating Account" means a demand deposit account maintained at the
-----------------
Funding Bank in the name of the Company and designated for funding the discount
portion of each Advance and for returning any excess payment from an Investor
for a Pledged Mortgage or Pledged Security.
"Participant" has the meaning set forth in Section 12.5 hereof.
-----------
"Person" means and includes natural persons, corporations, limited
------
partnerships, general partnerships, joint stock companies, joint ventures,
associations, companies, trusts, banks, trust companies, land trusts, business
trusts or other organizations, whether or not legal entities, and governments
and agencies and political subdivisions thereof.
"Plans" has the meaning set forth in Section 5.12 hereof.
-----
"Pledged Mortgages" has the meaning set forth in Section 3.1(a) hereof.
-----------------
"Pledged Securities" has the meaning set forth in Section 3.1(b) hereof.
------------------
10
<PAGE>
"Purchase Commitment" means a written commitment, in form and substance
-------------------
reasonably satisfactory to the Lender, issued in favor of the Company by an
Investor pursuant to which that Investor commits to purchase Mortgage Loans or
Mortgage-backed Securities from the Company.
"Receivables" has the meaning set forth in Section 3.1(g) hereof.
-----------
"Received Period" means the period of time from the date an Advance made
---------------
against a Pledged Mortgage ceases to be a Wet Settlement Advance until the date
the Advance against such Pledged Mortgage is paid in full.
"Received Rate" means a floating rate of interest equal to two percent
-------------
(2.00%) per annum over LIBOR. The Received Rate shall be adjusted on and as of
the effective date of each weekly change in LIBOR. The Lender's determination
of the Received Rate as of any date of determination shall be conclusive and
binding, absent manifest error.
"Release Amount" has the meaning set forth in Section 3.2(g) hereof.
--------------
"RFC" means Residential Funding Corporation, a Delaware corporation, and
---
any successor thereto.
"RFC Conduit Credit Agreement" means that certain First Amended and
----------------------------
Restated Warehousing Credit and Security Agreement dated as of March 7, 1995,
among the Company, B First Mortgage Company Limited Partnership and the Lender,
as the same has been and may from time to time hereafter be supplemented,
modified restated or otherwise amended.
"Second Mortgage Loan" means a closed-end Mortgage Loan secured by a Second
--------------------
Mortgage.
"Servicing Collateral" means the Collateral described in Sections 3.1(d)
--------------------
(subject to the proviso thereof), 3.1(e) and 3.1(f) hereof, and all Collateral
described in Sections 3.1(h) and 3.1(i) and 3.1(j) hereof that constitutes
proceeds of or is related to such Collateral.
11
<PAGE>
"Servicing Collateral Value" means as of the date of determination, the
--------------------------
lesser of: (a) seventy percent (70%) of the most recent Appraised Value of the
Servicing Contracts included in the Servicing Collateral, or (b) one percent
(1.00%) of the outstanding principal balance of the Mortgage Loans serviced
pursuant to the Servicing Contracts included in the Servicing Collateral;
provided, that for purposes of calculating the Servicing Collateral Value, the
- --------
following Mortgage Loans shall be excluded: (i) Mortgage Loans excluded in
calculating the Adjusted Servicing Portfolio (ii) Mortgage Loans in respect of
which the Company has commenced foreclosure proceedings, and (iii) Mortgage
Loans in respect of which any obligor is the subject of a bankruptcy proceeding.
"Servicing Contract" means, with respect to any Person, the arrangement,
------------------
whether or not in writing, pursuant to which such Person has the right to
service Mortgage Loans.
"Servicing Portfolio" means, as to any Person, the unpaid principal balance
-------------------
of Mortgage Loans whose Servicing Contracts are owned by such Person.
"Single-family Mortgage Loan" means a Mortgage Loan secured by a Mortgage
---------------------------
covering improved real property containing one to four family residences.
"Statement Date" means the date of the most recent financial statements of
--------------
the Company (and, if applicable, its Subsidiaries, on a consolidated basis)
delivered to the Lender under the terms of this Agreement.
"Subordinated Debt" means all indebtedness of the Company, for borrowed
-----------------
money, which is, by its terms (which terms shall have been approved by the
Lender and which shall be conclusively deemed to have been approved by the
Lender if a Subordination of Debt Agreement in the form of Exhibit F hereto has
---------
been executed and delivered with respect to such indebtedness), effectively
subordinated in right of payment to all other present and future Obligations,
solely for purposes of Section 7.4 hereof, and all indebtedness of the Company
which is required to be subordinated by Section 4.1(b) or Section 6.10 hereof.
12
<PAGE>
"Subsidiary" means any corporation, association or other business entity in
----------
which more than fifty percent (50%) of the total voting power or shares of stock
entitled to vote in the election of directors, managers or trustees thereof is
at the time owned or controlled, directly or indirectly, by any Person or one or
more of the other Subsidiaries of that Person or a combination thereof.
"Tangible Net Worth" means with respect to any Person at any date, the
------------------
excess of the total assets over total liabilities of such Person on such date,
each to be determined in accordance with GAAP consistent with those applied in
the preparation of the financial statements referred to in Section 4.1(a)(5)
hereof, plus loan loss reserves and that portion of Subordinated Debt not due
within one year of such date, provided that, for purposes of this Agreement,
there shall be excluded from total assets advances or loans to shareholders,
officers or Affiliates, investments in Affiliates, assets pledged to secure any
liabilities not included in the Debt of such Person, intangible assets, those
other assets which would be deemed by HUD to be non-acceptable in calculating
adjusted net worth in accordance with its requirements in effect as of such
date, as such requirements appear in the "Audit Guide for Audit of Approved Non-
Supervised Mortgagees" and other assets deemed unacceptable by the Lender in its
reasonable discretion.
"Trust Receipt" means a trust receipt in a form approved by and pursuant to
--------------
which the Lender may deliver any document relating to the Collateral to the
Company for correction or completion.
"VA" means the U.S. Department of Veterans Affairs and any successor
--
thereto.
"Warehousing Advance" means an Advance made against a Conforming Mortgage
-------------------
Loan, a Jumbo Mortgage Loan or a Nonconforming Mortgage Loan that is subject to
a Purchase Commitment in accordance with the terms of this Agreement.
"Warehousing Commitment Fee" has the meaning set forth in Section 2.8
--------------------------
hereof.
13
<PAGE>
"Warehousing Fee" has the meaning set forth in Section 2.9 hereof.
---------------
"Warehousing Promissory Note" means the promissory note evidencing the
---------------------------
Company's Obligations with respect to Warehousing Advances in the form of
Exhibit A-1 attached hereto.
- -----------
"Wet Settlement Advance" means an Advance pursuant to Section 2.2(b) of
----------------------
this Agreement, in respect of the closing or settlement of a Mortgage Loan,
based upon delivery to the Lender of the Bailee Pledge Agreement, pending
subsequent delivery of the Collateral Documents as provided in such Section.
After delivery to Lender of the Collateral Documents in respect of a Wet
Settlement Advance and review and approval thereof by the Lender, such Advance
shall no longer be classified as a Wet Settlement Advance.
"Wet Settlement Period" means the period of time from the date a Wet
---------------------
Settlement Advance is made against a Pledged Mortgage until the earlier of (a)
the date the Collateral Documents for such Pledged Mortgage, as set forth in
Exhibit D-SF hereto, have been delivered to and examined by the Lender, or (b)
- ------------
the date the Wet Settlement Advance made against such Pledged Mortgage is paid
in full.
"Wet Settlement Rate" means a floating rate of interest which is equal to
-------------------
two and one-quarter percent (2.25%) per annum over LIBOR. The Wet Settlement
Rate shall be adjusted on and as of the effective date of each weekly change in
LIBOR. The Lender's determination of the Wet Settlement Rate as of any date of
determination shall be conclusive and binding, absent manifest error.
"Working Capital Advance" means a disbursement by the Lender under the
-----------------------
Working Capital Commitment pursuant to Section 2.3 of this Agreement.
"Working Capital Advance Request" has the meaning set forth in Section
-------------------------------
2.2(b) hereof.
"Working Capital Rate" means a floating rate of interest which is equal to
--------------------
two and three-quarters percent (2.75%) per annum over LIBOR. The Working
Capital Rate shall be adjusted on
14
<PAGE>
and as of the effective date of each weekly change in LIBOR. The Lender's
determination of the Working Capital Rate as of any date of determination shall
be conclusive and binding, absent manifest error.
"Working Capital Sublimit" has the meaning set forth in Section 2.1(b)(4)
------------------------
hereof.
1.2 Other Definitional Provisions.
-----------------------------
1.2(a) Accounting terms not otherwise defined herein shall have the
meanings given the terms under GAAP.
1.2(b) Defined terms may be used in the singular or the plural, as
the context requires.
1.2(c) All references to time of day shall mean the then applicable
time in Chicago, Illinois, unless expressly provided to the contrary.
2. THE CREDIT.
2.1 The Warehousing Commitment.
--------------------------
2.1(a) Subject to the terms and conditions of this Agreement and
provided no (i) Event of Default or (ii) Default that the Lender, in the
reasonable exercise of its discretion, determines to be material has
occurred and is continuing, the Lender agrees from time to time during the
period from the Closing Date, to, but not including, the Maturity Date, to
make Advances to the Company, provided the total aggregate principal amount
outstanding at any one time of all such Advances shall not exceed the
Commitment Amount. The obligation of the Lender to make Advances hereunder
up to the Commitment Amount, is hereinafter referred to as the
"Commitment." Within the Commitment, the Company may borrow, repay and
reborrow. All Advances under this Agreement shall constitute a single
indebtedness, and all of the Collateral shall be security for the
Promissory Notes and for the performance of all the Obligations.
2.1(b) Warehousing Advances shall be used by the Company solely for
the purpose of funding the acquisition or
15
<PAGE>
origination of Mortgage Loans and shall be made at the request of the
Company, in the manner hereinafter provided in Section 2.2 hereof, against
the pledge of such Mortgage Loans as Collateral therefor. Working Capital
Advances shall be used by the Company solely for short term working capital
purposes. The following limitations on the Advances shall be applicable:
(1) No Warehousing Advance shall be made against a Mortgage Loan
other than a Single Family Mortgage Loan that is a Nonconforming
Mortgage Loan, a Conforming Mortgage Loan or a Jumbo Mortgage Loan
covered by a Purchase Commitment.
(2) The aggregate amount of Wet Settlement Advances outstanding
at any one time shall not exceed Six Million Dollars ($6,000,000).
(3) No Warehousing Advance shall be made against any Mortgage
Loan which was closed more than ninety (90) days prior to the date of
the requested Advance, except with the Lender's prior written consent.
(4) The aggregate amount of Working Capital Advances outstanding
at any one time shall not exceed One Million One Hundred Thousand
Dollars ($1,100,000) (the "Working Capital Sublimit").
2.1(c) No Warehousing Advance shall exceed the following amount
applicable to the type of Collateral at the time it is pledged:
(1) For a Nonconforming Mortgage Loan pledged hereunder, the
lesser of (i) the Mortgage Note Amount or (ii) ninety-eight percent
(98%) of the Committed Purchase Price.
16
<PAGE>
2.2 Procedures for Obtaining Advances.
---------------------------------
2.2(a) The Company may obtain an Advance hereunder, subject to the
satisfaction of the conditions set forth in Sections 4.1 and 4.2 hereof,
upon compliance with the procedures set forth in this Section 2.2 and in
Exhibit D-SF with respect to Warehousing Advances, attached hereto and made
------------
a part hereof including the delivery of all documents listed in Exhibit D-
---------
SF (the "Collateral Documents") to the Lender within the time frames
--
provided for in such Exhibit. Requests for Advances shall be initiated by
the Company by delivering to the Lender, no later than (i) in the case of a
request for a Wet Settlement Advance, 10:30 a.m. (Pacific time) on the
Business Day the Company desires to borrow hereunder, and (ii) in the case
of any other Advance, one (1) Business Day prior to any Business Day that
the Company desires to borrow hereunder, a completed and signed request for
an Advance on the then current form approved by the Lender. The current
forms in use by the Lender are Exhibit C-SF (a "Warehousing Advance
------------
Request") for Warehousing Advances and Exhibit C-WC (a "Working Capital
------------
Advance Request") for Working Capital Advances, each of which is attached
hereto and made a part hereof. The Lender shall have the right, on not
less than three (3) Business Days' prior Notice to the Company, to modify
any of said Exhibits to conform to current legal requirements or Lender
practices, and, as so modified, said Exhibits shall be deemed a part
hereof.
2.2(b) In the case of a Wet Settlement Advances, the Company shall
follow the procedures set forth in Section 2.2(a) hereof and, at or prior
to the Lender's making of such Wet Settlement Advance, shall deliver to the
Lender the documents set forth in Exhibit D-SF hereto as documents that are
------------
required to be provided to the Lender at or prior to the time of a Wet
Settlement Advance, together with a completed and executed Bailee Pledge
Agreement in the form of Exhibit M hereto. In the case of a Mortgage Loan
---------
financed through a Wet Settlement Advance, the Company shall cause all
Collateral Documents that are required to be delivered to the Lender within
seven (7) Business Days after the date of
17
<PAGE>
the Wet Settlement Advance relating thereto to be so delivered.
2.2(c) Before funding, the Lender shall have a reasonable time
(consistent with the time frames provided for in Section 2.2(a) and Exhibit
-------
D-SF under ordinary circumstances) to examine such Advance Request and the
----
Collateral Documents to be delivered prior to such requested Advance, as
set forth in the applicable Exhibit hereto, and may reject such of them as
do not meet the requirements of this Agreement or of the related Purchase
Commitment.
2.2(d) The Company shall hold in trust for the Lender, and, except
as otherwise provided below, the Company shall deliver to the Lender
promptly upon request, or within one hundred twenty (120) days from the
date an Advance was made against a Pledged Mortgage, if the Pledged
Mortgage is not being held by an Investor for purchase or has not been
redeemed from pledge, the following: (1) the originals of the Collateral
Documents for which copies are required to be delivered to the Lender
pursuant to Exhibit D-SF (if being understood that delivery of such
------------
documents to the Lender shall only be required to the extent such documents
have been made available by the applicable public recording office at the
time of such request or within such 120-day period), (2) the original
lender's ALTA Policy of Title Insurance or an equivalent thereto (if being
understood that delivery of such documents to the Lender shall only be
required to the extent such policy or the equivalent has been delivered to
the Company at the time of such request or within such 120-day period), and
(3) any other documents relating to a Pledged Mortgage which the Lender may
reasonably request, including, without limitation, documentation evidencing
the FHA Commitment to Insure or the VA Guaranty of any Pledged Mortgage
which is either FHA insured or VA guaranteed, the appraisal, Private
Mortgage Insurance Certificate, if applicable, the Regulation Z Statement,
certificates or other evidence of casualty or hazard insurance, credit
information on the maker of each such Mortgage Note, a copy of a HUD-1 or
corresponding purchase advice and other documents of all kinds which are
customarily desired for inspection or transfer incidental to
18
<PAGE>
the purchase of any Mortgage Note by an Investor and any additional
documents which are customarily executed by the seller of a Mortgage Note
to an Investor.
2.2(e) To make a Warehousing Advance, the Lender shall cause the
Funding Bank to credit an account of the Company with the Funding Bank,
which account shall be under the exclusive control of the Lender, and shall
cause the Funding Bank to disburse the amount of such Warehousing Advance
and any other amounts required to fund the related Mortgage Loan(s) as
provided under this Agreement and Exhibit D-SF, upon compliance by the
------------
Company with the terms of this Agreement. To make a Working Capital
Advance, the Lender shall cause the Funding Bank to credit the Company's
account with the Funding Bank upon compliance by the Company with the terms
of this Agreement.
2.2(f) If, pursuant to the authorization given by the Company in
the Funding Bank Agreement, for the purpose of financing a Mortgage Loan
against which the Lender has made a Warehousing Advance in accordance with
a Request for Advance (i) the Lender debits the Company's Operating Account
at the Funding Bank to the extent necessary to cover a wire to be initiated
by the Lender, or (ii) the Lender directs the Funding Bank to honor a check
drawn by the Company on its Operating Account or other check disbursement
account at the Funding Bank, and such debit or direction results in an
overdraft, the Lender may make an additional Warehousing Advance to fund
such overdraft.
2.3 Notes. The Company's Obligations in respect of Warehousing Advances
-----
shall be evidenced by a Warehousing Promissory Note of the Company substantially
in the form of Exhibit A-1 attached hereto, and the Company's Obligations in
-----------
respect of Working Capital Advances shall be evidenced by a Working Capital
Promissory Note of the Company substantially in the form of Exhibit A-2 attached
-----------
hereto, each note dated as of the date hereof (Warehousing Promissory Note and
Working Capital Promissory Note are collectively referred to as the "Notes").
The terms "Warehousing Promissory Note", "Working Capital Promissory Note",
"Note" or "Notes" shall include all extensions, renewals and modifications of
the Notes and all substitutions
19
<PAGE>
therefor. All terms and provisions of the Notes are hereby incorporated herein.
2.4 Interest.
--------
2.4(a) Prior to the occurrence of an Event of Default, (i) the
unpaid amount of each Warehousing Advance shall bear interest during its
Wet Settlement Period at the Wet Settlement Rate, and (ii) the unpaid
amount of each Warehousing Advance shall bear interest during its Received
Period at the Received Rate.
2.4(b) Prior to the occurrence of an Event of Default, the unpaid
amount of each Working Capital Advance shall bear interest, from the date
of such Advance until paid in full, at the Working Capital Rate.
2.4(c) The Company is entitled to receive a benefit in the form of
an "Earnings Credit" on the portion of the Eligible Balances maintained in
time deposit accounts with a Designated Bank, and the Company is entitled
to receive a benefit in the form of an "Earnings Allowance" on the portion
of the Eligible Balances maintained in demand deposit accounts with a
Designated Bank. Any Earnings Allowance shall be used first and any
Earnings Credit shall be used second as a credit against accrued
Miscellaneous Charges and fees, including, but not limited to Commitment
Fees and Warehousing Fees, and may be used, at the Lender's option, to
reduce accrued interest. Any Earnings Allowance not used during the month
in which the benefit was received shall be accumulated for use and must be
used during the calendar year in which the benefit was received. Any
Earnings Credit not used during the month in which the benefit was received
shall be used to provide a cash benefit to the Company. The Lender's
determination of the Earnings Credit and the Earnings Allowance for any
month shall be determined by the Lender in its sole discretion and shall be
conclusive and binding absent manifest error. In no event shall the benefit
received by the Company exceed the Depository Benefit.
Either party hereto may terminate the benefits provided for in this
Section effective immediately upon Notice to the
20
<PAGE>
other party, if the terminating party shall have determined (which
determination shall be conclusive and binding absent manifest error) at any
time that any applicable law, rule, regulation, order or decree or any
interpretation or administration thereof by any governmental authority
charged with the interpretation or administration thereof, or compliance by
such party with any request or directive (whether or not having the force
of law) of any such authority, shall make it unlawful or impossible for
such party to continue to offer or receive the benefits provided for in
this Section.
2.4(d) Interest shall be computed on the basis of a 360-day year
and applied to the actual number of days elapsed in each interest
calculation period and shall be payable monthly in arrears, on the tenth
day of each month for the preceding month, commencing with the first month
following the Closing Date and on the Maturity Date. Except with respect to
interest due on the Maturity Date, the Lender shall provide the Company
with a statement of interest due no later than five (5) days before the
date such interest is due.
2.4(e) If, for any reason, no interest is due on an Advance, the
Company agrees to pay to the Lender an administrative fee equal to one day
of interest on such Advance at the rate applicable to such Advances under
the applicable section hereof, as in effect on the date of such Advance.
Administrative and other fees shall be due and payable in the same manner
as interest is due and payable hereunder.
2.4(f) Upon and after the occurrence and during the continuation of
an Event of Default hereunder, the Lender may give Notice to the Company
that the unpaid amount of each Advance shall bear interest, until paid in
full, at a rate of interest (the "Default Rate") equal to four percent (4%)
per annum over the applicable rate provided in the applicable subsection of
this Section 2.4 or, if no rate is applicable, the highest rate then
applicable to any outstanding Advance pursuant to Section 2.4(a) or Section
2.4(b) above.
21
<PAGE>
2.5 Principal Payments.
------------------
2.5(a) The outstanding principal amount of all Advances shall be
payable in full on the Maturity Date.
2.5(b) The Company shall have the right to prepay the outstanding
Advances in whole or in part, from time to time, without premium or
penalty.
2.5(c) All payments of outstanding Advances from the proceeds of
the sale or other disposition of Pledged Mortgages and Pledged Securities
shall be paid directly by the Investor to the Cash Collateral Account to be
applied against the Obligations.
2.5(d) The Company shall be obligated to pay to the Lender, without
the necessity of prior demand or notice from the Lender, and the Company
authorizes the Lender to cause the Funding Bank to charge the Company's
account for, the amount of any outstanding Warehousing Advance against a
specific Pledged Mortgage, upon the earliest occurrence of any of the
following events:
(1) One hundred eighty (180) days elapse from the date of the
initial Warehousing Advance made by the Lender against such Pledged
Mortgage, whether or not such Pledged Mortgage is included in an
Eligible Mortgage Pool.
(2) Sixty (60) days elapse from the date the Pledged Mortgage
was delivered to an Investor for examination and purchase, without the
purchase being made, or upon rejection of the Pledged Mortgage as
unsatisfactory by an Investor.
(3) One (1) Business Day elapses from the date a Wet Settlement
Advance was made and the Pledged Mortgage which was to have been
funded by such Wet Settlement Advance is not closed and funded.
(4) Seven (7) Business Days elapse from the date a Wet
Settlement Advance was made without receipt by the Lender of all
Collateral Documents relating to such
22
<PAGE>
Pledged Mortgage required to be delivered to the Lender within such
seven (7) Business Day period pursuant to Exhibit D-SF hereto, or such
------------
Collateral Documents, upon examination by the Lender, are found not to
be in compliance with the requirements of this Agreement or the
related Purchase Commitment.
(5) Ten (10) Business Days elapse from the date a Collateral
Document was delivered to the Company for correction or completion
under a Trust Receipt, without being returned to the Lender, and one
(1) Business Day elapses after the Lender's demand in writing to the
Company for payment of such Advance.
(6) On the date on which a Pledged Mortgage is determined to
have been originated based on untrue, incomplete or inaccurate
information that the Lender determines, in the reasonable exercise of
its judgement, to be material, whether or not the Company had
knowledge of such misrepresentation or incorrect information, or the
Pledged Mortgage is defaulted and remains in default for a period of
sixty (60) days or more.
(7) For any Pledged Mortgage, the Company fails to deliver to
the Lender all documents required to be delivered under Section 2.2(d)
hereof within the time frame specified in such Section, or such items,
upon examination by the Lender, are found not to be in compliance with
the requirements of this Agreement or the related Purchase Commitment.
(8) Three (3) Business Days after the mandatory delivery date of
the related Purchase Commitment and the specific Pledged Mortgage was
not delivered under the Purchase Commitment prior to such mandatory
delivery date, or the Purchase Commitment is terminated; unless in
each case, such Pledged Mortgage is eligible for delivery to an
Investor under a comparable Purchase Commitment acceptable to the
Lender.
23
<PAGE>
(9) Upon sale, maturity or other disposition of the Pledged
Mortgage.
(10) If the Pledged Mortgage is included in a Mortgage Pool,
then, if the Mortgage Pool is an Eligible Mortgage Pool, upon sale of
the Mortgage-backed Security, or if the Mortgage Pool is not an
Eligible Mortgage Pool, within two (2) Business Days after delivery of
the Pledged Mortgages to the pool custodian.
2.5(e) The outstanding amount of any Advance made pursuant to
Section 2.2(f) shall be payable in full within one (1) Business Day after
the date of such Advance.
2.5(f) In addition to the payments required pursuant to Section
2.7(d), the Company shall be obligated to pay to the Lender, without the
necessity of prior demand or notice from the Lender, the amount of any
prepayment in whole or in part of a Pledged Mortgage while an Advance is
outstanding against such Pledged Mortgage, within three (3) Business Days
after such prepayment, and the Company authorizes the Lender to cause the
Funding Bank to charge the Company's account for the amount of such
prepayment, to be applied to such Advance, if such prepayment is not made
within such three (3) Business Day period.
2.5(g) The Company shall give Notice to the Lender (telephonically,
to be followed by written notice) of the Pledged Mortgages or Pledged
Securities for which proceeds have been received. Upon receipt of such
Notice the Advances against such Pledged Mortgages or Pledged Securities
shall be repaid and such Pledged Mortgages or Pledged Securities shall be
considered to have been redeemed from pledge, whereupon the Lender shall
execute any instruments or documents prepared by the Company and presented
to the Lender for execution in order to effect the release of the related
Pledged Mortgage or Pledged Security from the Lender's Lien, as reasonably
requested by the Company, and shall deliver such executed instruments or
documents to the Company or its designee. The Lender is entitled to rely
upon the Company's affirmation that deposits in the Cash Collateral Account
24
<PAGE>
represent payment from Investors for the purchase of Pledged Mortgages or
Pledged Securities as specified by the Company. In the event that the
payment from an Investor for the purchase of Pledged Mortgages or Pledged
Securities is less than the outstanding Advances against such Pledged
Mortgages or the Mortgage Loans backing Pledged Securities, the Lender is
authorized to cause the Funding Bank to charge the Company's account for an
amount equal to such deficiency. Provided no Event of Default exists, the
Lender shall return any excess payment from an Investor for Pledged
Mortgages or Pledged Securities to the Company.
2.6 Expiration of Commitment. The Commitment shall expire on the Maturity
------------------------
Date.
2.7 Method of Making Payments.
-------------------------
2.7(a) Except as otherwise specifically provided herein, all
payments hereunder shall be made to the Lender not later than the close of
business on the date when due unless such date is a non-Business Day, in
which case, such payment shall be due on the first Business Day thereafter,
and shall be made in lawful money of the United States of America in
immediately available funds transferred via wire to accounts designated by
the Lender in writing to the Company from time to time.
2.7(b) Upon an Event of Default, and without the necessity of prior
demand or notice from the Lender, the Company authorizes the Lender to
cause the Funding Bank to charge the Company's account for any Obligations
due and owing the Lender.
2.8 Commitment Fees. The Company agrees to pay to the Lender a Commitment
---------------
Fee in the amount of one-quarter percent (1/4%) per annum of the Commitment
Amount, which Commitment Fee may be paid quarterly in advance and shall be
computed on the basis of a 365-day year and applied to the actual number of days
elapsed in such calendar quarter. On the Closing Date, the Company shall pay the
prorated portion of the quarterly Commitment Fee due from the Closing Date to
the last day of the current calendar quarter. Thereafter, the Company shall make
quarterly payments of the Commitment Fee on the first (1st) day
25
<PAGE>
of each calendar quarter. If the Maturity Date is other than the last day of a
calendar quarter, the Company shall pay the prorated portion of the quarterly
Commitment Fee due from the beginning of the then current calendar quarter to
and including the Maturity Date. For the purposes hereof, calendar quarters
shall be defined as the three (3) month periods beginning on each April 1, July
1, October 1 and January 1. The Company shall not be entitled to a reduction in
the amount of the Commitment Fee in the event the Commitment Amount is reduced
or in the event that the Commitment is terminated at the request of the Company
or as a result of an Event of Default. If the Commitment terminates at the
request of the Company or as a result of an Event of Default, the unpaid balance
of the Commitment Fee shall be due and payable in full on the date of such
termination.
2.9 Warehousing Fees. The Company agrees, at the time of each Advance, to
----------------
pay to the Lender a Warehousing Fee in the amount of Twenty-Five Dollars
($25.00) for each Mortgage Loan pledged as Collateral for such Advance.
Warehousing Fees are due when incurred, but shall not be delinquent if paid
within fifteen (15) days after receipt of an invoice or an account analysis
statement from the Lender.
2.10 Miscellaneous Charges. The Company agrees to reimburse the Lender for
---------------------
miscellaneous charges and expenses (collectively, "Miscellaneous Charges")
incurred by or on behalf of the Lender in connection with the handling and
administration of Advances, and to reimburse the Lender for Miscellaneous
Charges incurred by or on behalf of the Lender in connection with the handling
and administration of the Collateral. For the purposes hereof, Miscellaneous
Charges shall include, but not be limited to, charges for wire transfers,
charges for security delivery fees, charges for overnight delivery of Collateral
to Investors, Funding Bank's service charges and Designated Bank's service
charges. Miscellaneous Charges are due when incurred, but shall not be
delinquent if paid within fifteen (15) days after receipt of an invoice or an
account analysis statement from the Lender.
2.11 Interest Limitation. All agreements between the Company and the
-------------------
Lender are hereby expressly limited so that in no contingency or event
whatsoever, whether by reason of acceleration of maturity of this Agreement or
the Note or
26
<PAGE>
otherwise, shall the amount paid or agreed to be paid to the Lender for the use,
forbearance, loaning or retention of the Advances secured by this Agreement
exceed the maximum permissible under applicable law. If from any circumstances
whatsoever, fulfillment of any provisions hereof or of the Note, or any other
document securing this Agreement at any time given shall involve transcending
the limit of validity prescribed by law, then, the obligation to be fulfilled
shall automatically be reduced to the limit of such validity, and if from any
circumstances the Lender should ever receive as interest an amount which would
exceed the highest lawful rate of interest, such amount which would be in excess
of interest shall be applied to the reduction of the principal balance secured
by the Note and not to the payment of interest thereunder. This provision shall
control every other provision of all agreements between the Company and Lender
and shall also be binding upon and available to any subsequent holder of the
Note.
2.12 Increased Costs; Capital Requirements. In the event any applicable
-------------------------------------
law, order, regulation or directive issued by any governmental or monetary
authority, or any change therein or in the governmental or judicial
interpretation or application thereof, or compliance by the Lender with any
request or directive (whether or not having the force of law) by any
governmental or monetary authority:
2.12(a) Does or shall subject the Lender to any tax of any kind
whatsoever with respect to this Agreement or any Advances made hereunder,
or change the basis of taxation on payments to the Lender of principal,
fees, interest or any other amount payable hereunder (except for change in
the rate of tax on the overall gross or net income of the Lender by the
jurisdictions in which the Lender's principal office is located);
2.12(b) Does or shall impose, modify or hold applicable any reserve,
capital requirement, special deposit, compulsory loan or similar
requirement against assets held by, or deposits or other liabilities in or
for the account of, advances or loans by, or other credit extended by, or
any other acquisition of funds by, any office of the Lender which
27
<PAGE>
are not otherwise included in the determination of the interest rate as
calculated hereunder;
and the result of any of the foregoing is to increase the cost to the
Lender of making, renewing or maintaining any Advance or to reduce any
amount receivable in respect thereof or to reduce the rate of return on the
capital of the Lender or any Person controlling the Lender as it relates to
credit facilities in the nature of that evidenced by this Agreement, then,
in any such case, the Company shall promptly pay any additional amounts
necessary to compensate the Lender for such additional cost or reduced
amounts receivable or reduced rate of return as determined by the Lender
with respect to this Agreement or Advances made hereunder. If the Lender
becomes entitled to claim any additional amounts pursuant to this Section,
it shall notify the Company of the event by reason of which it has become
so entitled and the Company shall pay such amount within fifteen (15) days
thereafter. A certificate as to any additional amount payable pursuant to
the foregoing sentence containing the calculation thereof in reasonable
detail submitted by the Lender to the Company shall be conclusive in the
absence of manifest error. The obligations of the Company under this
Section shall survive the payment of all other Obligations and the
termination of this Agreement.
3. COLLATERAL.
3.1 Grant of Security Interest. As security for the payment of the Notes
--------------------------
and for the performance of all of the Company's Obligations, the Company hereby
grants a security interest to the Lender in the following described property
(the "Collateral"):
3.1(a) All Mortgage Loans, including all Mortgage Notes and
Mortgages evidencing such Mortgage Loans, which from time to time are
delivered or caused to be delivered to the Lender (including delivery to a
third party on behalf of the Lender), come into the possession, custody or
control of the Lender for the purpose of assignment or pledge or in respect
of which an Advance has been made by the Lender hereunder, including
without limitation all Mortgage Loans
28
<PAGE>
in respect of which Wet Settlement Advances have been made by the Lender,
but not including any Mortgage Loan with respect to which the Release
Amount has been paid in full (the "Pledged Mortgages").
3.1(b) All Mortgage-backed Securities which are from time to time
created in whole or in part on the basis of the Pledged Mortgages or are
delivered or caused to be delivered to, or are otherwise in the possession
of the Lender or its agent, bailee or custodian as assignee, or pledged to
the Lender, or for such purpose are registered by book-entry in the name of
the Lender (including delivery to or registration in the name of a third
party on behalf of the Lender) hereunder or in respect of which from time
to time an Advance has been made by the Lender hereunder, but not including
any Pledged Security with respect to which the Release Amount has been paid
in full (the "Pledged Securities").
3.1(c) All private mortgage insurance and all commitments issued by
the FHA or VA to insure or guarantee any Mortgage Loans included in the
Pledged Mortgages; all Purchase Commitments held by the Company covering
the Pledged Mortgages or the Pledged Securities and all proceeds resulting
from the sale thereof to Investors pursuant thereto; and all personal
property, contract rights, servicing and servicing fees and income or other
proceeds, amounts and payments payable to the Company as compensation or
reimbursement, accounts and general intangibles of whatsoever kind relating
to the Pledged Mortgages, the Pledged Securities, said FHA commitments or
VA commitments and the Purchase Commitments, and all other documents or
instruments relating to the Pledged Mortgages and the Pledged Securities,
including, without limitation, any interest of the Company in any fire,
casualty or hazard insurance policies and any awards made by any public
body or decreed by any court of competent jurisdiction for a taking or for
degradation of value in any eminent domain proceeding as the same relate to
the Pledged Mortgages.
3.1(d) All Servicing Contracts of the Company listed on Exhibit E-2
hereto; provided, however, that such assignment and security interest shall
-------- -------
not take effect until
29
<PAGE>
the date on which an Acknowledgment Agreement covering such Servicing
Contracts has been executed and delivered by the Company, the Lender and
FNMA.
3.1(e) All rights of the Company to receive payments under or by
virtue of the Servicing Contracts described in Section 3.1(d) (without
giving effect to the proviso at the end thereof) and the Acknowledgment
Agreements, whether as servicing fees, servicing income, damages, amounts
payable upon the cancellation or termination of any such Servicing
Contract, interests on the foregoing, or otherwise.
3.1(f) Any agreement pursuant to which any Servicing Contract
described in Section 3.1(d) (without giving effect to the proviso at the
end thereof) was acquired or is sold by the Company, and all documents and
instruments executed or delivered in connection with any such acquisition
or sale.
3.1(g) All accounts or general intangibles owned by the Company
("Receivables") for the payment of money against (i) VA under a VA guaranty
of, FHA or a private mortgage insurer under an FHA or private insurer's
mortgage insurance policy insuring payment of, or any other Person under
any other agreement (including a Servicing Contract) relating to, all or
part of a defaulted Mortgage Loan repurchased by the Company from an
investor or out of a pool of Mortgage Loans serviced by the Company, (ii)
obligors and their accounts, FNMA, FHLMC, GNMA or any other investor under
a Servicing Contract covering, or out of the proceeds of any sale of or
foreclosure sale in respect of, any Mortgage Loan (A) repurchased by the
Company out of a pool of Mortgage Loans serviced by the Company, or (B)
being serviced by the Company, in either case, for the reimbursement of
real estate taxes or assessments, or casualty or liability insurance
premiums, paid by the Company in connection with Mortgage Loans, and (iii)
obligors and their accounts, or FNMA, FHLMC, GNMA or any other investor
under or in respect of any Mortgage Loans serviced by the Company for
repayment of advances made by the Company to cover shortages in principal
and interest payments.
30
<PAGE>
3.1(h) All right, title and interest of the Company in and to all
escrow accounts, documents, instruments, files, surveys, certificates,
correspondence, appraisals, computer programs, tapes, discs, cards,
accounting records (including all information, records, tapes, data,
programs, discs and cards necessary or helpful in the administration or
servicing of the Collateral) and other information and data of the Company
relating to the Collateral.
3.1(i) All now existing or hereafter acquired cash delivered to or
otherwise in the possession of the Lender or its agent, bailee or custodian
or designated on the books and records of the Company as assigned and
pledged to the Lender.
3.1(j) All cash and non-cash proceeds of the Collateral, including
all dividends, distributions and other rights in connection with, and all
additions to, modifications of and replacements for, the Collateral, and
all products and proceeds of the Collateral, together with whatever is
receivable or received when the Collateral or proceeds thereof are sold,
collected, exchanged or otherwise disposed of, whether such disposition is
voluntary or involuntary, including, without limitation, all rights to
payment with respect to any cause of action affecting or relating to the
Collateral or proceeds thereof.
3.2 Release of Security Interest in Collateral.
------------------------------------------
3.2(a) Pledged Mortgages shall be released from the Lender's security
interest only against payment to the Lender of the Release Amount in
connection with such Pledged Mortgages.
3.2(b) If Pledged Mortgages are to be transferred to a pool custodian
or to FHLMC or FNMA for inclusion in a Mortgage Pool, the Lender's security
interest in such Pledged Mortgages shall be released only against payment
to the Lender of the Release Amount in connection with such Pledged
Mortgages. If the Lender's security interest in the Pledged Mortgages
comprising the Mortgage Pool is not released prior to the issuance of the
Mortgage-backed Security, then the Mortgage-backed Security, when issued,
shall be a Pledged Security. The Lender's security interest shall continue
in
31
<PAGE>
such Pledged Mortgages and the Pledged Security. The Lender shall be
entitled to possession of such Pledged Security in the manner provided
below.
3.2(c) If Pledged Mortgages are transferred to an Approved Custodian
and included in an Eligible Mortgage Pool, the Lender's security interest
in the Pledged Mortgages comprising the Eligible Mortgage Pool shall be
released upon the issuance of the related Mortgage-backed Security, which
shall be a Pledged Security. The Lender's security interest in such
Pledged Security shall be released only against payment to the Lender of
the Release Amount in connection with the Pledged Mortgages backing such
Pledged Security. The Lender shall be entitled to possession of such
Pledged Security in the manner provided below.
3.2(d) The Lender shall have the exclusive right to the possession of
the Pledged Securities or, if the Pledged Securities are not to be issued
in certificated form or are to be issued in certificated form and
registered exclusively in the name of, and held by, a clearing agency or
its nominee, shall have the right to have the book entries for the Pledged
Securities issued in the Lender's name or the name or names of its
designees, and the Lender shall have the right to cause delivery of the
Pledged Securities to be made to the Investor or the book entries
registered in the name of the Investor or the Investor's designee only
against payment of the Release Amount for the underlying Mortgage Loans.
The Company acknowledges that the Lender may enter into one or more
standing arrangements with other financial institutions for the issuance of
Pledged Securities in book entry form in the name of such other financial
institutions, as agent or financial intermediary for the Lender, and the
Company agrees upon request of the Lender, to execute and deliver to such
other financial institutions the Company's written concurrence in any such
standing arrangements.
3.2(e) Prior to the occurrence of an Event of Default, the Company
may redeem a Pledged Mortgage or Pledged Security from the Lender's
security interest by notifying the Lender of its intention to redeem such
Pledged Mortgage or Pledged Security from pledge and either (a) paying, or
32
<PAGE>
causing an Investor to pay, to the Lender, for application to prepayment of
the principal balance of the Note, the Release Amount in connection with
such Pledged Mortgage or Pledged Security, or (b) delivering substitute
Collateral which, in addition to being acceptable to the Lender in its sole
discretion will, when included with the Collateral, result in a Collateral
Value of all Collateral held by the Lender which is at least equal to the
aggregate outstanding Advances.
3.2(f) Following the occurrence of a Default or Event of Default, the
Lender may, with no liability to the Company or any Person, continue to
release its security interest in any Pledged Mortgage or Pledged Security
against payment of the Release Amount in connection with such Pledged
Mortgage or Pledged Security.
3.2(g) The Release Amount in connection with any Pledged Mortgage
shall be (i) prior to the occurrence of an Event of Default, the Advance
Balance of the Advances made against such Pledged Mortgage, and (ii) from
and after the occurrence and during the continuance of an Event of Default,
the Committed Purchase Price of such Pledged Mortgage or, if there is no
Purchase Commitment therefor, the amount paid to the Lender in a
commercially reasonable disposition thereof.
3.3 Delivery of Additional Collateral or Mandatory Prepayment. At any
---------------------------------------------------------
time that the aggregate Collateral Value of the Pledged Mortgages and Pledged
Securities then pledged hereunder is less than the aggregate Advance Balance of
the Warehousing Advances then outstanding hereunder, the Lender may request, and
the Company shall within two (2) Business Days after Notice by the Lender (a)
deliver to the Lender for pledge hereunder additional Mortgage Loans and/or
cash, with a Collateral Value sufficient to cover the difference between the
Collateral Value of the Pledged Mortgages and Pledged Securities pledged and the
aggregate Advance Balance of Warehousing Advances outstanding hereunder, and/or
(b) repay the Warehousing Advances in an amount sufficient to reduce the
aggregate balance thereof outstanding to or below the Collateral Value of the
Pledged Mortgages and Pledged Securities pledged hereunder.
3.4 Release of Collateral.
---------------------
33
<PAGE>
3.4(a) The Lender may deliver documents relating to the Pledged
Mortgages to the Company for correction or completion pursuant to a Trust
Receipt.
3.4(b) Prior to the occurrence of a Default or Event of Default, upon
delivery by the Company to the Lender of shipping instructions pursuant to
Exhibit D-SF, the Lender will transmit Pledged Mortgages or Pledged
------------
Securities and all related loan documents or pool documents to the
applicable Investor, Approved Custodian or other party.
3.4(c) Upon payment to the Lender of the Release Amount for Pledged
Mortgage, all Warehousing Advances made by the Lender against such Pledged
Mortgage shall be deemed repaid in full, the Lender shall release the
Collateral Documents and any other documents in its possession with respect
to such Pledged Mortgage to the Company or its designee, and the Lender
shall execute any instruments or other documents prepared by the Company
and presented to the Lender for execution in order to effect the release of
the related Pledged Mortgage from the Lender's Lien, as reasonably
requested by the Company, and shall deliver such executed instruments or
documents effecting release to the Company or its designee. The Company
may pay the Release Amount for a Pledged Mortgage at any time.
3.5 Collection and Servicing Rights. So long as no Event of Default shall
-------------------------------
have occurred and be continuing, the Company shall be entitled to service and
receive and collect directly all sums payable to the Company in respect of the
Collateral other than proceeds of any Purchase Commitment or proceeds of the
sale of any Collateral. Following the occurrence of any Event of Default, the
Lender or its designee shall thereafter be entitled to service and receive and
collect all sums payable to the Company in respect of the Collateral, and in
such case (a) the Lender or its designee in its discretion may, in its own name,
in the name of the Company or otherwise, demand, sue for, collect or receive any
money or property at any time payable or receivable on account of or in exchange
for any of the Collateral, but shall be under no obligation to do so, (b) the
Company shall, if the Lender so requests, hold in trust for the benefit of the
Lender and forthwith pay to the Lender at its office designated by
34
<PAGE>
Notice hereunder, all amounts thereafter received by the Company upon or in
respect of any of the Collateral, advising the Lender as to the source of such
funds, and (c) all amounts so received and collected by the Lender shall be held
by it as part of the Collateral.
3.6 Return of Collateral at End of Commitment. If (a) the Commitment
-----------------------------------------
shall have expired or been terminated, and (b) no Advance Balance, interest or
other Obligations shall be outstanding and unpaid, the Lender shall deliver or
release its security interest and shall deliver all Collateral in its possession
to the Company or its designee at the Company's expense, and shall execute and
deliver instruments effecting release of such Collateral as described in Section
3.4(c) hereof. The receipt of the Company or its designee for any Collateral
released or delivered to the Company or its designee pursuant to any provision
of this Agreement shall be a complete and full acquittance for the Collateral so
returned, and the Lender shall thereafter be discharged from any liability or
responsibility therefor.
4. CONDITIONS PRECEDENT.
4.1 Initial Advance. The obligation of the Lender to make the initial
---------------
Advance under this Agreement is subject to the satisfaction, in the sole
discretion of the Lender, on or before the date thereof of the following
conditions precedent:
4.1(a) The Lender shall have received the following, all of which
must be satisfactory in form and content to the Lender, in its sole
discretion:()
(1) The Notes and this Agreement duly executed by the Company.
(2) The Company's articles of incorporation as certified by the
Secretary of State of Colorado, bylaws certified by the corporate
secretary of the Company, or a Certificate of the Company stating that
there has been no change in either the articles of incorporation or
bylaws since those delivered in connection with the RFC Conduit Credit
Agreement and certificates of good
35
<PAGE>
standing dated no less recently than ninety (90) days prior to the
date of this Agreement.
(3) A resolution of the board of directors of the Company,
certified as of the date of this Agreement by its corporate secretary,
authorizing the execution, delivery and performance of this Agreement
and the other Loan Documents, and all other instruments or documents
to be delivered by the Company pursuant to this Agreement.
(4) A certificate of the Company's corporate secretary as to the
incumbency and authenticity of the signatures of the officers of the
Company executing this Agreement and the other Loan Documents and each
Advance Request and all other instruments or documents to be delivered
pursuant hereto (the Lender being entitled to rely thereon until a new
such certificate has been furnished to the Lender).
(5) Financial statements of the Company (and, if applicable, its
Subsidiaries, on a consolidated basis) containing a balance sheet as
of December 31, 1994, and related statements of income, changes in
stockholders' equity and cash flows for the period ended on such date,
all prepared in accordance with GAAP applied on a basis consistent
with prior periods and audited by independent certified public
accountants of recognized standing acceptable to the Lender.
(6) Financial statements of the Company (and, if applicable, its
Subsidiaries, on a consolidated basis) containing a balance sheet as
of October 31, 1995, related statements of income and changes in
stockholders' equity for the period ended on such date prepared in
accordance with GAAP applied on a basis consistent with the Company's
most recent audited financial statements.
(7) A favorable written opinion of counsel to the Company, dated
as of the date of this Agreement substantially in the form of Exhibit
-------
H attached hereto, addressed to the Lender.
-
36
<PAGE>
(8) A Uniform Commercial Code, tax lien and judgment search of
the appropriate public records for the Company, which search shall not
have disclosed the existence of any prior Lien on the Collateral other
than in favor of the Lender or as permitted hereunder.
(9) Copies of the certificates, documents or other written
instruments which evidence the Company's eligibility described in
Section 5.13 hereof, all in form and substance satisfactory to the
Lender.
(10) Copies of the Company's errors and omissions insurance
policy or mortgage impairment insurance policy and blanket bond
coverage policy, or certificates in lieu of policies, all in form and
content satisfactory to the Lender, showing compliance by the Company
as of the date of this Agreement with the related provisions of
Section 6.8 hereof.
(11) Executed financing statements in recordable form covering
the Collateral and ready for filing in all jurisdictions required by
the Lender.
(12) Receipt by the Lender of any fees due on the date hereof,
including, but not limited to, Commitment Fees and document production
fees.
(13) Evidence that all accounts necessary into which Advances
will be funded have been established at the Funding Bank and receipt
of a fully executed Funding Bank Agreement.
(14) A copy of an Acknowledgment Agreement from FNMA in form and
substance satisfactory to the Lender, acknowledging the validity of
the Lender's security interest in the Servicing Contracts included in
the Servicing Collateral, duly executed by the Company and FNMA.
4.1(b) All directors, officers and shareholders of the Company,
all Affiliates of the Company or of any Subsidiary of the Company, to
whom or to any of whom the Company shall be indebted as of the date of
this
37
<PAGE>
Agreement, which indebtedness has a term of more than one (1) year or
is in excess of One Hundred Thousand Dollars ($100,000) shall have
subordinated such indebtedness to the Obligations, by executing a
Subordination of Debt Agreement, in the form of Exhibit F hereto; and
---------
the Lender shall have received an executed copy of any such
Subordination of Debt Agreement, certified by the corporate secretary
of the Company to be true and complete and in full force and effect as
of the date of the Advance.
4.2 Each Advance. The obligation of the Lender to make the initial and
------------
each subsequent Advance under this Agreement is subject to the satisfaction, in
the reasonable discretion of the Lender, as of the date of each such Advance, of
the following additional conditions precedent:
4.2(a) The Company shall have delivered to the Lender the Advance
Request, and documents required to be delivered to the Lender at the time
of such Advance pursuant to Section 2.2 hereof, and shall have satisfied
the procedures set forth in, Section 2.2 hereof and the applicable Exhibits
hereto described in that Section, according to the type of the requested
Advance. All items delivered to the Lender shall be satisfactory to the
Lender in form and content, and the Lender may reject such of them as do
not meet the requirements of this Agreement or of the related Purchase
Commitment.
4.2(b) The Lender shall have received evidence satisfactory to it as
to the making and/or continuation of any book entry or the due filing and
recording in all appropriate offices of all financing statements and other
instruments as may be necessary to perfect the security interest of the
Lender in the Collateral under the Uniform Commercial Code of Minnesota or
other applicable law.
4.2(c) The representations and warranties of the Company contained in
Article 5 hereof shall be accurate and complete in all material respects as
if made on and as of the date of each Advance.
38
<PAGE>
4.2(d) The Company shall have performed all agreements to be
performed by it hereunder, and after giving effect to the requested
Advance, there shall exist no (i) Event of Default or (ii) Default that the
Lender, in the reasonable exercise of its discretion, determines to be
material, hereunder.
4.2(e) The Company shall not have incurred any material liabilities,
direct or contingent, other than in the ordinary course of its business or
any liabilities to the Lender under this Agreement, since the most recent
Statement Date.
4.2(f) The Lender shall have received from counsel for the Company,
if requested by the Lender in its sole discretion, an updated opinion, in
form and substance satisfactory to the Lender, addressed to the Lender and
dated as of the date of such Advance, covering such of the matters as the
Lender may reasonably request.
Delivery of an Advance Request by the Company shall be deemed a
representation by the Company that all conditions set forth in this Section
4.2 shall have been satisfied as of the date of such Advance.
5. REPRESENTATIONS AND WARRANTIES.
The Company hereby represents and warrants to the Lender, as of the date of
this Agreement and as of the date of each Advance Request and the making of each
Advance, that:
5.1 Organization; Good Standing; Subsidiaries. The Company and each
-----------------------------------------
Subsidiary of the Company is a corporation duly organized, validly existing and
in good standing under the laws of the jurisdiction of its incorporation, has
the full legal power and authority to own its property and to carry on its
business as currently conducted and is duly qualified as a foreign corporation
to do business and is in good standing in each jurisdiction in which the
transaction of its business makes such qualification necessary, except in
jurisdictions, if any, where a failure to be in good standing has no material
adverse effect on the business, operations, assets or financial condition of the
Company or any such Subsidiary. For the purposes hereof,
39
<PAGE>
good standing shall include qualification for any and all licenses and payment
of any and all taxes required in the jurisdiction of its incorporation and in
each jurisdiction in which the Company transacts business. The Company has no
Subsidiaries except as set forth on Exhibit G hereto. Exhibit G sets forth with
--------- ---------
respect to each such Subsidiary, its name, address, place of incorporation, each
state in which it is qualified as a foreign corporation, and the percentage
ownership of its capital stock by the Company.
5.2 Authorization and Enforceability. The Company has the power and
--------------------------------
authority to execute, deliver and perform this Agreement, the Notes and all
other Loan Documents to which the Company is party and to make the borrowings
hereunder. The execution, delivery and performance by the Company of this
Agreement, the Notes and all other Loan Documents to which the Company is party
and the making of the borrowings hereunder and thereunder, have been duly and
validly authorized by all necessary corporate action on the part of the Company
(none of which actions has been modified or rescinded, and all of which actions
are in full force and effect) and do not and will not conflict with or violate
any provision of law, of any judgments binding upon the Company, or of the
articles of incorporation or by-laws of the Company, conflict with or result in
a breach of or constitute a default or require any consent under, or result in
the creation of any Lien upon any property or assets of the Company other than
the Lien on the Collateral granted hereunder, or result in or require the
acceleration of any indebtedness of the Company pursuant to any agreement,
instrument or indenture to which the Company is a party or by which the Company
or its property may be bound or affected. This Agreement, the Notes and all
other Loan Documents contemplated hereby or thereby constitute legal, valid, and
binding obligations of the Company, enforceable in accordance with their
respective terms, except as limited by bankruptcy, insolvency and other similar
laws affecting the enforcement of creditors' rights, and by general principles
of equity, whether considered in a proceeding at law or in equity.
5.3 Approvals. The execution and delivery of this Agreement, the Notes
---------
and all other Loan Documents and the performance of the Company's obligations
hereunder and thereunder
40
<PAGE>
and the validity and enforceability hereof and thereof do not require any
license, consent, approval or other action of any state or federal agency or
governmental or regulatory authority other than those which have been obtained
and remain in full force and effect.
5.4 Financial Condition. The balance sheet of the Company (and, if
-------------------
applicable, its Subsidiaries, on a consolidated basis) as at the Statement Date,
and the related statements of income and changes in stockholders' equity for the
fiscal period ended on the Statement Date, heretofore furnished to the Lender,
fairly present the financial condition of the Company (and its Subsidiaries) as
at the Statement Date and the results of its operations for the fiscal period
ended on the Statement Date. The Company had, on the Statement Date, no known
material liabilities, direct or indirect, fixed or contingent, matured or
unmatured, or liabilities for taxes, long-term leases or unusual forward or
long-term commitments not disclosed by, or reserved against in, said balance
sheet and related statements, and at the present time there are no material
unrealized or anticipated losses from any loans, advances or other commitments
of the Company except as heretofore disclosed to the Lender in writing. Said
financial statements were prepared in accordance with GAAP applied on a
consistent basis throughout the periods involved. Since the Statement Date,
there has been no material adverse change in the business, operations, assets or
financial condition of the Company (and its Subsidiaries), nor is the Company
aware of any state of facts which (with or without notice or lapse of time or
both) would or could result in any such material adverse change.
5.5 Litigation. Except as set forth in Exhibit N hereto, there are no
---------- ---------
actions, claims, suits or proceedings pending or, to the knowledge of the
Company, threatened or reasonably anticipated against or affecting the Company
or any Subsidiary of the Company in any court or before any arbitrator or before
any government commission, board, bureau or other administrative agency which,
if adversely determined, may reasonably be expected to result in any material
and adverse change in the business, operations, assets or financial condition of
the Company as a whole, or which would affect the validity or enforceability of
this Agreement, the Notes or any other Loan Document.
41
<PAGE>
5.6 Compliance with Laws. Neither the Company nor any Subsidiary of the
--------------------
Company is in violation of any provision of any law, or of any judgment, award,
rule, regulation, order, decree, writ or injunction of any court or public
regulatory body or authority which might have a material adverse effect on the
business, operations, assets or financial condition of the Company as a whole or
which would affect the validity or enforceability of this Agreement, the Notes
or any other Loan Document.
5.7 Regulations G and U. The Company 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, and no part of the proceeds of
any Advances made hereunder will be used to purchase or carry any Margin Stock
or to extend credit to others for the purpose of purchasing or carrying any
Margin Stock.
5.8 Investment Company Act. The Company is not an "investment company" or
----------------------
controlled by an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
5.9 Payment of Taxes. The Company and each of its Subsidiaries has filed
----------------
or caused to be filed all federal, state and local income, excise, property and
other tax returns with respect to the operations of the Company and its
Subsidiaries which are required to be filed, all such returns are true and
correct, and the Company and each of its Subsidiaries has paid or caused to be
paid all taxes as shown on such returns or on any assessment, to the extent that
such taxes have become due, including, but not limited to, all FICA payments and
withholding taxes, if appropriate. The amounts reserved, as a liability for
income and other taxes payable, in the financial statements described in Section
5.4 hereof are sufficient for payment of all unpaid federal, state and local
income, excise, property and other taxes, whether or not disputed, of the
Company and its Subsidiaries accrued for or applicable to the period and on the
dates of such financial statements and all years and periods prior thereto and
for which the Company and its Subsidiaries may be liable in its own right or as
transferee of the assets of, or as successor to, any other Person.
42
<PAGE>
5.10 Agreements. Neither the Company nor any Subsidiary of the Company is
----------
a party to any agreement, instrument or indenture or subject to any restriction
materially and adversely affecting its business, operations, assets or financial
condition, except as disclosed in the financial statements described in Section
5.4 hereof. Neither the Company nor any Subsidiary of the Company is in default
in the performance, observance or fulfillment of any of the obligations,
covenants or conditions contained in any agreement, instrument, or indenture
which default could have a material adverse effect on the business, operations,
properties or financial condition of the Company as a whole. No holder of any
indebtedness of the Company or of any of its Subsidiaries has given notice of
any asserted default thereunder, and no liquidation or dissolution of the
Company or of any of its Subsidiaries and no receivership, insolvency,
bankruptcy, reorganization or other similar proceedings relative to the Company
or of any of its Subsidiaries or any of its properties is pending, or to the
knowledge of the Company, threatened.
5.11 Title to Properties. The Company and each Subsidiary of the Company
-------------------
has good, valid, insurable (in the case of real property) and marketable title
to all of its properties and assets (whether real or personal, tangible or
intangible) reflected on the financial statements described in Section 5.4
hereof, except for such properties and assets as have been disposed of since the
date of such financial statements as no longer used or useful in the conduct of
its business or as have been disposed of in the ordinary course of business, and
all such properties and assets are free and clear of all Liens except as
disclosed in such financial statements.
5.12 ERISA. All plans ("Plans") of a type described in Section 3(3) of
-----
ERISA in respect of which the Company or any Subsidiary of the Company is an
"Employer," as defined in Section 3(5) of ERISA, are in substantial compliance
with ERISA, and none of such Plans is insolvent or in reorganization, has an
accumulated or waived funding deficiency within the meaning of Section 412 of
the Internal Revenue Code, and neither the Company nor any Subsidiary of the
Company has incurred any material liability (including any material contingent
liability) to or on account of any such Plan pursuant to Sections 4062, 4063,
4064, 4201 or 4204 of ERISA; and no proceedings have been instituted to
43
<PAGE>
terminate any such Plan, and no condition exists which presents a material risk
to the Company or a Subsidiary of the Company of incurring a liability to or on
account of any such Plan pursuant to any of the foregoing Sections of ERISA. No
Plan or trust forming a part thereof has been terminated since September 1,
1974.
5.13 Eligibility. The Company is approved and qualified and in good
-----------
standing as a lender or seller/servicer, as set forth below, and meets all
requirements applicable to its status as such:
5.13(a) GNMA approved seller/servicer of Mortgage Loans and issuer of
Mortgage-backed Securities guaranteed by GNMA.
5.13(b) FNMA approved seller/servicer of Mortgage Loans, eligible to
originate, purchase, hold, sell, and service Mortgage Loans to be sold to
FNMA.
5.13(c) FHLMC approved seller/servicer of Mortgage Loans, eligible to
originate, purchase, hold, sell and service Mortgage Loans to be sold to
FHLMC.
5.13(d) Lender in good standing under the VA loan guarantee program
eligible to originate, purchase, hold, sell and service VA-guaranteed
Mortgage Loans.
5.13(e) HUD approved mortgagee, eligible to originate, purchase,
hold, sell and service FHA fully insured Mortgage Loans.
5.14 Place of Business. The principal place of business of the Company is
-----------------
7600 East Orchard Road, Suite 330S, Englewood, CO 80111-4943.
5.15 Special Representations Concerning Collateral. The Company hereby
---------------------------------------------
represents and warrants to the Lender, as of the date of this Agreement and as
of the date of each Advance Request and the making of each Advance, that:
5.15(a) The Company is the legal and equitable owner and holder, free
and clear of all Liens (other than Liens
44
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granted hereunder), of the Pledged Mortgages and the Pledged Securities.
All Pledged Mortgages, Pledged Securities and Purchase Commitments have
been duly authorized and validly issued to or filed by the Company, and all
of the foregoing items of Collateral comply with all of the requirements of
this Agreement, and have been and will continue to be validly pledged or
assigned to the Lender, subject to no other Liens.
5.15(b) The Company has, and will continue to have, the full right,
power and authority to pledge the Collateral pledged and to be pledged by
it hereunder.
5.15(c) Any Mortgage Loan and any related document included in the
Pledged Mortgages (1) has been duly executed and delivered by the parties
thereto at a closing held not more than ninety (90) days prior to the date
of the Advance Request for such Mortgage Loan, (2) has been made in
compliance with all requirements of the Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, the federal Truth-In-Lending Act and all
other applicable laws and regulations, (3) is and will continue to be valid
and enforceable in accordance with its terms, except as limited by
bankruptcy, insolvency and other similar laws affecting the enforcement of
creditors' rights, and by general principles of equity, whether considered
in a proceeding at law or in equity, without defense or offset, (4) has not
been modified or amended except in writing, which writing is part of the
Collateral Documents, nor any requirements thereof waived, (5) has been
evaluated or appraised in accordance with Title XI of FIRREA, and (6)
complies and will continue to comply with the terms of this Agreement and,
if applicable, with the related Purchase Commitment held by the Company.
Each Mortgage Loan has been fully advanced in the face amount thereof and
each Mortgage is a first Lien on the premises described therein, and there
has been or will be issued a title insurance policy, in American Land Title
Association form or equivalent thereof, from a recognized title insurance
company, insuring the priority of the Lien of the Mortgage and meeting the
usual requirements of Investors purchasing such Mortgage Loans; provided,
that an attorney's certificate of title shall suffice in the case of any
45
<PAGE>
Mortgage Loan secured by a Mortgage on property located in the State of
Iowa.
5.15(d) No default has occurred and is continuing for more than sixty
(60) days under any Mortgage Loan included in the Pledged Mortgages without
the Advance against such Pledged Mortgage having been repaid in accordance
with Section 2.5(d)(6) hereof, provided, however, that with respect to
Pledged Mortgages which have already been pledged as Collateral hereunder,
if any default has occurred, the Company will promptly notify the Lender.
5.15(e) The Company has complied and will continue to comply with all
laws, rules and regulations in respect of the FHA insurance or VA guaranty
of each Mortgage Loan included in the Pledged Mortgages designated by the
Company as an FHA insured or VA guaranteed Mortgage Loan, and such
insurance or guarantee is and will continue to be in full force and
effect. All such FHA insured and VA guaranteed Mortgage Loans comply and
will continue to comply in all respects with all applicable requirements
for purchase under the FNMA standard form of selling contract for FHA
insured and VA guaranteed loans and any supplement thereto then in effect.
5.15(f) All fire and casualty policies covering the premises
encumbered by each Mortgage included in the Pledged Mortgages (1) name and
will continue to name the originator of such Pledged Mortgage and its
successors and assigns as the insured under a standard mortgagee clause,
(2) are and will continue to be in full force and effect, and (3) afford
and will continue to afford insurance against fire and such other risks as
are usually insured against in the broad form of extended coverage
insurance from time to time available.
5.15(g) Pledged Mortgages secured by premises located in a special
flood hazard area designated as such by the Director of the Federal
Emergency Management Agency are and shall continue to be covered by special
flood insurance under the National Flood Insurance Program.
5.15(h) Each Pledged Mortgage, against which an Advance is made on
the basis of a Purchase Commitment, meets all requirements of such Purchase
Commitment. The Company
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shall assure that Pledged Mortgages which are intended to be used in the
formation of Mortgage-backed Securities shall comply or, prior to the
formation of any such Mortgage-backed Security, shall comply with the
requirements of the governmental instrumentality, department or agency
guaranteeing such Mortgage-backed Security.
5.15(i) For Pledged Mortgages which will be used to back GNMA
Mortgage-backed Securities, the Company has received from GNMA a
Confirmation Notice or Confirmation Notices for Request Additional
Commitment Authority and for Request Pool Numbers, and there remains
available thereunder a commitment on the part of GNMA sufficient to permit
the issuance of GNMA Mortgage-backed Securities in an amount at least equal
to the amount of such Pledged Mortgages designated by the Company as the
Mortgage Loans to be used to back such GNMA Mortgage-backed Securities;
each such Confirmation Notice is in full force and effect; each of such
Pledged Mortgages has been assigned by the Company to one of such Pool
Numbers and a portion of the available GNMA Commitment has been allocated
thereto by the Company, in an amount at least equal to such Pledged
Mortgages; and each such assignment and allocation has been reflected in
the books and records of the Company.
5.16 Servicing. Attached hereto as Exhibit E-1 is a true and complete list
---------
of the Company's Servicing Portfolio. All of the Company's Servicing Contracts
are in full force and effect and, except as otherwise indicated, are
unencumbered by Liens. No default exists under any such Servicing Contract that
would permit any other party to such Servicing Contract presently, as a result
of the default, to terminate the same.
5.17 Special Representations Concerning Pledged Servicing Contracts.
--------------------------------------------------------------
Attached hereto as Exhibit E-2 is a true and complete list of the Company's FNMA
-----------
Servicing Contracts included in the Servicing Collateral as of the Closing Date.
The Company hereby represents and warrants to the Lender, as of the date of this
Agreement and as of the date of Advance Request and the making of each Advance,
that:
47
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5.17(a) The Company is the legal and equitable owner and holder,
free and clear of all Liens (other than Liens granted hereunder), of the
Servicing Contracts pledged hereunder and such Servicing Contracts will be
validly pledged or assigned to the Lender, subject to no other Liens.
5.17(b) Subject to the limitations set forth in Section 3.1(d), the
Company has, and will continue to have, the full right, power and authority
to pledge the Servicing Contracts pledged and to be pledged by it
hereunder.
5.17(c) All of the servicing rights under the Servicing Contracts
pledged hereunder in which a security interest is granted hereby constitute
direct servicing rights.
5.17(d) Each Servicing Contract pledged hereunder is in full force
and effect, each Servicing Contract pledged hereunder is legal, valid and
enforceable in accordance with its terms (subject to bankruptcy, insolvency
and other similar laws affecting creditors' rights and to general
principles of equity, whether considered in a proceeding at law or in
equity) and no default exists under any such Servicing Contract that would
permit any other party to such Servicing Contract to presently, as a result
of the default, terminate the same.
5.17(e) Each right to the payment of money under the Servicing
Contracts pledged hereunder is genuine and enforceable in accordance with
its terms against the parties obligated to pay the same ("Obligor"), except
as limited by bankruptcy, insolvency, moratorium or other similar laws
affecting the enforcement of creditors' rights generally and by general
principles of equity, whether considered in a proceeding at law or in
equity. The terms of such rights to payment have not been modified or
waived in any material respect or to any material extent from the from the
terms thereof that existed on the date of this Agreement, except with the
prior written consent of the Lender.
5.17(f) To the best of the Company's knowledge, the amount
represented by the Company to the Lender as owing by
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<PAGE>
an Obligor under each Mortgage Loan being serviced under a Servicing
Contract pledged hereunder is the correct amount actually and
unconditionally owing by such Obligor.
5.17(g) To the best of the Company's knowledge, no Obligor has any
defense, set off, claim or counterclaim against the Company which can be
asserted against the Lender, whether in any proceeding to enforce the
Lender's rights in the related Mortgage Loan or otherwise.
5.17(h) The Company has not sold, assigned or otherwise transferred
any rights associated with the Mortgage Loans being serviced under a
Servicing Contract pledged hereunder, including, without limitation, any
rights to place escrow deposits with respect thereto.
5.17(i) No consent of any Obligor or any other Person is required
for the grant of the security interest provided herein by the Company in
any of the Servicing Collateral including, without limitation, the
Servicing Contracts pledged hereunder, or any computer software being
utilized by the Company pursuant to license, lease or otherwise, other than
consents which have been obtained, nor will any consent need to be obtained
upon the occurrence of an Event of Default for the Lender to exercise its
rights with respect to any of the Servicing Collateral except as set forth
in the Acknowledgment Agreements.
5.17(j) Each Mortgage Loan being serviced under a Servicing Contract
pledged hereunder that is owned by FNMA or FHLMC or is included in a FNMA
or FHLMC pool is covered by an Acknowledgment Agreement with such agency in
form and substance satisfactory to the Lender.
5.17(k) It is expressly understood that the sole remedy of the
Lender for a breach of any of the representations and warranties set forth
in this Section 5.17 with respect to any particular Servicing Contract
included in the Servicing Collateral shall be to exclude the Mortgage Loans
covered by such Servicing Contract in determining the Servicing Collateral
Value.
49
<PAGE>
6. AFFIRMATIVE COVENANTS.
The Company hereby covenants and agrees that, so long as the Commitment is
outstanding or there remain any Obligations to be paid or performed under this
Agreement or under any other Loan Document, the Company shall:
6.1 Payment of Notes. Punctually pay or cause to be paid all Obligations
----------------
payable hereunder and under the Notes in accordance with the terms hereof and
thereof.
6.2 Financial Statements and Other Reports. Deliver to the Lender:
--------------------------------------
6.2(a) As soon as available and in any event within twenty (20)
days after the end of each calendar month, statements of income and changes
in stockholders' equity of the Company (and, if applicable, its
Subsidiaries, on a consolidated basis) for the immediately preceding month
and for the period from the beginning of the then-current fiscal year to
the end of such calendar month, and the related balance sheet as at the end
of such calendar month, all in reasonable detail and certified as to the
fairness of presentation by the chief financial officer of the Company,
subject, however, to year-end audit adjustments.
6.2(b) As soon as available and in any event within ninety (90)
days after the close of each fiscal year of the Company, statements of
income, changes in stockholders' equity and cash flow of the Company (and,
if applicable, its Subsidiaries, on a consolidated basis) for such year,
and the related balance sheet as at the end of such year (setting forth in
comparative form the corresponding figures for the preceding fiscal year),
all in reasonable detail and accompanied by an opinion in form and
substance satisfactory to the Lender and prepared by an accounting firm
reasonably satisfactory to the Lender, or other independent certified
public accountants of recognized standing selected by the Company and
acceptable to the Lender, as to said financial statements and a certificate
signed by the chief financial officer of the Company stating that said
financial statements fairly present the financial condition and results of
operations of the Company (and, if applicable, its
50
<PAGE>
Subsidiaries, on a consolidated basis) as at the end of, and for, such
year.
6.2(c) Together with each delivery of financial statements required
in this Section 6.2, an Officer's Certificate substantially in the form of
Exhibit I-SF hereto: (1) setting forth in reasonable detail all
------------
calculations necessary to show that the Company is in compliance with the
requirements of Sections 6.14, 7.6, 7.7 and 7.8 hereof as of the end of
such month or year (or, if the Company is not in compliance, showing the
extent of non-compliance and specifying the period of non-compliance and
what actions the Company has taken, is taking or proposes to take with
respect thereto); (2) certifying that the Company was, as of the end of the
period, in compliance and in good standing with applicable HUD, GNMA, or
Investor net worth requirements; and (3) stating that the signers have
reviewed the terms of this Agreement and have made, or caused to be made
under their supervision, a review in reasonable detail of the transactions
and conditions of the Company (and, if applicable, its Subsidiaries) during
the accounting period covered by such financial statements and that such
review has not disclosed the existence during or at the end of such
accounting period, and that the signers do not have knowledge of the
existence as of the date of the Officer's Certificate, of any Default or
Event of Default, or if any Default or Event of Default existed or exists,
specifying the nature and period of the existence thereof and what action
the Company has taken, is taking and proposes to take with respect thereto.
6.2(d) Weekly or more frequently as the Lender may from time to
time request, a commitment summary and pipeline report substantially in the
form of Exhibit L (the "Commitment Summary Report") dated as of the close
---------
of business on the last Business Day of each week and provided to the
Lender by facsimile by 10:00 a.m. on the next succeeding Business Day of
the following week, and the signed original thereof shall be sent to the
Lender by first class mail on such next succeeding Business Day.
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<PAGE>
6.2(e) As soon as available and in any event within twenty (20)
days after the end of each calendar month, a consolidated report (the
"Servicing Portfolio Report") as of the end of the calendar month
detailing, as to all Mortgage Loans the servicing rights to which are owned
by the Company (specified by investor type, recourse and non-recourse)
regardless of whether such Mortgage Loans are Pledged Mortgages and which
report shall indicate Mortgage Loans which (A) are current and in good
standing, (B) are more than 30, 60 or 90 days past due, respectively, (C)
are, for Mortgage Loans serviced with recourse, more than three hundred
sixty (360) days past due, (D) are the subject of pending bankruptcy or
foreclosure proceedings, or (E) have been converted (through foreclosure or
other proceedings in lieu thereof) by the Company into real estate owned by
the Company.
6.2(f) Reports in respect of the Pledged Mortgages, the Pledged
Securities and the Servicing Collateral, in such detail and at such times
as the Lender in its discretion may reasonably request at any time or from
time to time.
6.2(g) Copies of all regular or periodic financial and other
reports, if any, which the Company shall file with the Securities and
Exchange Commission or any governmental agency successor thereto, copies of
any audits completed by GNMA, FNMA or FHLMC and copies of the Mortgage
Bankers' Financial Reporting Forms (FHLMC Form 1055/FNMA Form 1002) which
the Company shall have filed with FNMA or FHLMC.
6.2(h) From time to time, with reasonable promptness, such further
information regarding the business, operations, properties or financial
condition of the Company as the Lender may reasonably request.
6.2(i) Annually, or more frequently as the Lender may from time to
time reasonably request, an Appraisal.
6.3 Maintenance of Existence; Conduct of Business. Preserve and maintain
---------------------------------------------
its corporate existence in good standing and all of its rights, privileges,
licenses and franchises necessary or desirable in the normal conduct of its
business, including, without limitation, its eligibility as lender,
52
<PAGE>
seller/servicer and issuer described under Section 5.13 hereof; conduct its
business in an orderly and efficient manner; maintain a net worth of acceptable
assets as required by FHA, GNMA, FNMA or FHLMC at any and all times for
maintaining the Company's status as a FHA, FNMA or FHLMC approved mortgagee or
GNMA issuer; and make no change in the nature or character of its business or
engage in any non-Mortgage related business in which it was not engaged on the
date of this Agreement that would materially impair its ability to perform under
this Agreement without the prior written consent of the Lender.
6.4 Compliance with Applicable Laws. Comply with the requirements of all
-------------------------------
applicable laws, rules, regulations and orders of any governmental authority, a
breach of which could materially adversely affect its business, operations,
assets, or financial condition, except where contested in good faith and by
appropriate proceedings.
6.5 Inspection of Properties and Books. Permit authorized representatives
----------------------------------
of the Lender or any Participant to discuss the business, operations, assets and
financial condition of the Company and its Subsidiaries with its officers and
employees and to examine its books of account and make copies or extracts
thereof, all at such reasonable times as the Lender or any Participant may
request. The Company will provide its accountants with a copy of this Agreement
promptly after the execution hereof and will instruct its accountants to answer
candidly any and all questions that the officers of the Lender or any
Participant or any authorized representatives of the Lender or any Participant
may address to them in reference to the financial condition or affairs of the
Company and its Subsidiaries. The Company may have its representatives in
attendance at any meetings between the officers or other representatives of the
Lender or any Participant and the Company's accountants held in accordance with
this authorization. The Lender will provide the Company with Notice before
contacting the Company's accountants for any purpose hereunder.
6.6 Notice. Give prompt written notice to the Lender, upon the Company's
------
discovery thereof, of (a) any action, suit or proceeding instituted by or
against the Company or any of its Subsidiaries in any federal or state court or
before any
53
<PAGE>
commission or other regulatory body (federal, state or local, domestic or
foreign) which action, suit or proceeding has at issue in excess of One Hundred
Thousand Dollars ($100,000), or any such proceedings threatened against the
Company or any of its Subsidiaries in a writing containing the details thereof,
(b) the filing, recording or assessment of any federal, state or local tax Lien
against the Company, or any of its assets or any of its Subsidiaries, (c) the
occurrence of any Event of Default hereunder or the occurrence of any Default or
other breach of a representation or warranty and continuation thereof for five
(5) days, (d) the suspension, revocation or termination of the Company's
eligibility, in any respect, as approved lender, seller/servicer or issuer as
described under Section 5.13 hereof, (e) the transfer, loss or termination of
any Servicing Contract for Mortgage Loans with an aggregate unpaid principal
balance of $10,000,000 or more to which the Company is a party, or which is held
for the benefit of the Company, and the reason for such transfer, loss or
termination, if known to the Company, and (f) any other action, event or
condition of any nature which may lead to or result in a material adverse effect
upon the business, operations, assets, or financial condition of the Company and
its Subsidiaries or which constitutes an event of default under any other
agreement, instrument or indenture to which the Company or any of its
Subsidiaries is a party or to which the Company or any of its Subsidiaries, its
properties, or assets may be subject as a result of which any other party
thereto is presently entitled to exercise remedies against the Company in
accordance with the terms of such agreement.
6.7 Payment of Debt, Taxes, etc. Pay and perform all obligations and
---------------------------
indebtedness of the Company, and cause to be paid and performed all obligations
and indebtedness of its Subsidiaries, promptly and in accordance with the terms
thereof and pay and discharge or cause to be paid and discharged promptly all
taxes, assessments and governmental charges or levies imposed upon the Company
or its Subsidiaries or upon their respective income, receipts or properties
before the same shall become past due, as well as all lawful claims for labor,
materials and supplies or otherwise which, if unpaid, might become a Lien or
charge upon such properties or any part thereof; provided, however, that the
Company and its Subsidiaries shall not be required to pay taxes, assessments or
governmental charges or
54
<PAGE>
levies or claims for labor, materials or supplies for which the Company or its
Subsidiaries shall have obtained an adequate bond or adequate insurance or which
are being contested in good faith and by proper proceedings which are being
reasonably and diligently pursued and for which proper reserves have been
created.
6.8 Insurance. Maintain (a) errors and omissions insurance or mortgage
---------
impairment insurance and blanket bond coverage, with such companies and in such
amounts as satisfy prevailing FNMA, FHLMC and GNMA requirements applicable to a
qualified mortgage originating institution, and (b) liability insurance and fire
and other hazard insurance on its properties, with responsible insurance
companies approved by the Lender (which approval shall be presumed to exist in
the absence of written notice to the contrary, and which approval may not be
unreasonably withheld), in such amounts and against such risks as is customarily
carried by similar businesses operating in the same vicinity; and (c) within
thirty (30) days after Notice from the Lender, obtain such additional insurance
as the Lender shall reasonably require, all at the sole expense of the Company.
Copies of such policies shall be furnished to the Lender without charge upon
request of the Lender.
6.9 Closing Instructions. Indemnify and hold the Lender harmless from and
--------------------
against any loss, including reasonable attorneys' fees and costs, attributable
to the failure of a title insurance company, agent or approved attorney to
comply with the disbursement or instruction letter or letters of the Company
relating to any Mortgage Loan.
6.10 Subordination of Certain Indebtedness. Cause any indebtedness of the
-------------------------------------
Company, incurred after the date of this Agreement, to any shareholder, director
or officer of the Company, or to any Affiliate of the Company or of any
Subsidiary of the Company, which indebtedness has a term of more than one (1)
year or is in excess of One Hundred Thousand Dollars ($100,000) to be
subordinated to all Obligations by the execution of a Subordination of Debt
Agreement in the form of Exhibit F hereto and deliver to the Lender an executed
---------
copy of said Agreement, certified by the corporate secretary of the Company to
be true and complete and in full force and effect.
55
<PAGE>
6.11 Other Loan Obligations. Perform all material obligations under the
----------------------
terms of each loan agreement, note, mortgage, security agreement or debt
instrument having an original principal balance of $1,000,000 or more by which
the Company is bound or to which any of its property is subject, and promptly
notify the Lender in writing of a declared default (such that any other party
thereto is presently entitled to accelerate the Company's indebtedness
thereunder) under or the termination, cancellation, reduction or nonrenewal of
any of its other lines of credit or agreements with any other lender. Exhibit J
---------
hereto is a true and complete list of all such lines of credit or agreements as
of the date hereof for the Company and the Company hereby agrees to give the
Lender at least thirty (30) days Notice before entering into any additional
lines of credit or agreements having an original principal balance of $1,000,000
or more.
6.12 Use of Proceeds of Advances. Use the proceeds of each Advance solely
---------------------------
for the purpose set forth in Section 2.1(b) or Section 2.3(b) for Advances of
that type.
6.13 Special Affirmative Covenants Concerning Collateral. The Company
---------------------------------------------------
shall:
6.13(a) Warrant and defend the right, title and interest of the
Lender in and to the Collateral against the claims and demands of all
Persons whomsoever, except to the extent such claim arose as a result of
the Lender's failure to use reasonable care in the custody and preservation
of Collateral Documents in its possession.
6.13(b) Service or cause to be serviced all Mortgage Loans in
accordance with standards customary in the industry and in accordance with
all material provisions of the applicable Servicing Contract and, in the
case of Conforming Mortgage Loans, the standard requirements of the issuers
of 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. The
Company shall service or cause to be serviced all Mortgage Loans backing
Pledged Securities in accordance with applicable governmental requirements
and requirements of issuers of Purchase
56
<PAGE>
Commitments covering the same. The Company shall hold all escrow funds
collected in respect of Pledged Mortgages and Mortgage Loans backing
Pledged Securities in trust, without commingling the same with non-
custodial funds, and apply the same for the purposes for which such funds
were collected.
6.13(c) Execute and deliver to the Lender such Uniform Commercial
Code financing statements with respect to the Collateral as the Lender may
reasonably request. The Company shall also execute and deliver to the
Lender such further instruments of sale, pledge or assignment or transfer,
and such powers of attorney, as reasonably required by the Lender, and
shall do and perform all matters and things necessary or desirable to be
done or observed, for the purpose of effectively creating, maintaining and
preserving the security and benefits intended to be afforded the Lender
under this Agreement. The Lender shall have all the rights and remedies of
a secured party under the Uniform Commercial Code of Minnesota, or any
other applicable law, in addition to all rights provided for herein.
6.13(d) Notify the Lender within three (3) Business Days of any
event that would presently permit the termination of, or of the termination
of, any Purchase Commitment relating to any Pledged Mortgage, Eligible
Mortgage Pool or Pledged Security.
6.13(e) Promptly comply in all material respects with the terms and
conditions of all Purchase Commitments, and all extensions, renewals and
modifications or substitutions thereof or thereto. The Company will cause
to be delivered to the Investor the Pledged Mortgages and Pledged
Securities to be sold under each Purchase Commitment not later than the
mandatory delivery date thereof.
6.13(f) Maintain, at its principal office or in a regional office
approved by the Lender, or in the office of a computer service bureau
engaged by the Company and approved by the Lender, and, upon request, make
available to the Lender the originals, or copies in any case where the
originals have been delivered to the Lender or to an Investor, of its
Mortgage Notes and Mortgages included in
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Pledged Mortgages, Mortgage-backed Securities delivered to the Lender as
Pledged Securities, Purchase Commitments, and all related Mortgage Loan
documents and instruments, and all files, surveys, certificates,
correspondence, appraisals, computer programs, tapes, discs, cards,
accounting records and other information and data relating to the
Collateral.
6.14 Servicing Collateral Value. Maintain the Servicing Collateral Value
--------------------------
at not less than One Million One Hundred Thousand Dollars ($1,100,000) or, if
the Servicing Collateral Value is less than One Million One Hundred Thousand
Dollars ($1,100,000), maintain at all times the sum of (a) the Servicing
Collateral Value plus (b) the aggregate Collateral Value of the Pledged
Mortgages and the Pledged Securities then pledged hereunder at not less than the
aggregate Advance Balance of all Advances then outstanding hereunder.
7. NEGATIVE COVENANTS.
The Company hereby covenants and agrees that, so long as the Commitment is
outstanding or there remain any Obligations to be paid or performed, the Company
shall not, either directly or indirectly, without the prior written consent of
the Lender:
7.1 Contingent Liabilities. Assume, guarantee, endorse, or otherwise
----------------------
become contingently liable for the obligation of any Person except by
endorsement of negotiable instruments for deposit or collection in the ordinary
course of business.
7.2 Sale or Pledge of Servicing Contracts. Sell, pledge or grant a
-------------------------------------
security interest in any existing or future Servicing Contracts of the Company
other than to the Lender, except as otherwise expressly permitted in this
Agreement, or omit to take any action required to keep all such Servicing
Contracts in full force and effect; provided, however, that (a) the Company may
at any time sell Pledged Mortgages or other Mortgage Loans on a servicing-
released basis, provided that, in the case of Pledged Mortgages, the Release
Amount with respect to each Pledged Mortgage is paid to the Lender, and (b) if
no Default or Event of Default has occurred and is continuing under Section
8.1(a) or 8.1(c)(ii) hereof, Servicing Contracts not included in the Servicing
Collateral may be sold and pledged.
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7.3 Merger; Sale of Assets; Acquisitions. Liquidate, dissolve,
------------------------------------
consolidate or merge or sell any substantial part of its non-Mortgage related
assets, or acquire any substantial part of the non-Mortgage related assets of
another, if such acquisition or sale would have a material adverse effect on the
financial condition of the Company.
7.4 Deferral of Subordinated Debt. Pay or modify any Subordinated Debt
-----------------------------
otherwise than in compliance with the applicable Subordination of Debt Agreement
in substantially the form of Exhibit F hereto.
---------
7.5 Loss of Eligibility. Lose all or any part of its status as an
-------------------
eligible lender, seller/servicer and issuer as described under Section 5.13
hereof.
7.6 Debt to Adjusted Tangible Net Worth Ratio. Permit the ratio of Debt
-----------------------------------------
to Adjusted Tangible Net Worth of the Company (and its Subsidiaries, on a
consolidated basis) at any time to exceed 20 to 1.
7.7 Minimum Adjusted Tangible Net Worth. Permit Adjusted Tangible Net
-----------------------------------
Worth of the Company (and its Subsidiaries, on a consolidated basis) at any time
to be less than Five Million Dollars ($5,000,000).
7.8 Liquidity. Permit the Liquid Assets of the Company (and its
---------
Subsidiaries, on a consolidated basis) at any time to be less than One Million
Dollars ($1,000,000).
7.9 Acquisition of Recourse Servicing Contracts. Acquire Servicing
-------------------------------------------
Contracts under which the Company is obligated to repurchase delinquent Mortgage
Loans serviced thereunder or indemnify the holder of the Mortgage Loans as a
result of defaults on the Mortgage Loans serviced thereunder against losses
associated with delinquent Mortgage Loans serviced thereunder without proof of
fraud or misrepresentation.
7.10 Special Negative Covenants Concerning Collateral.
------------------------------------------------
7.10(a) The Company shall not amend or modify, or waive any of the
terms and conditions of, or settle or compromise any claim in respect of,
any Pledged Mortgages or
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Pledged Securities except in a non-material manner in the ordinary course
of business.
7.10(b) The Company shall not sell, assign, transfer or otherwise
dispose of, or grant any option with respect to, or pledge or otherwise
encumber (except pursuant to this Agreement or as permitted herein) any of
the Collateral or any interest therein.
7.10(c) The Company shall not make any compromise, adjustment
or settlement in respect of any of the Collateral or accept payment
other than in cash in payment or liquidation of the Collateral except
in a non-material manner in the ordinary course of business.
8. DEFAULTS; REMEDIES.
8.1 Events of Default. The occurrence of any of the following conditions
-----------------
or events shall be an event of default ("Event of Default"):
8.1(a) Failure by the Company to pay the principal of any
Advance Balance when due, whether at stated maturity, by acceleration,
or otherwise; or failure by the Company to pay any installment of
interest on any Advance or any other amount due under this Agreement
within ten (10) days after the due date; or failure to pay, within any
applicable grace period, the principal or interest on any other
indebtedness of the Company due the Lender coupled with, in each case,
the continuance of such failure for one Business Day after Notice of
such failure shall have been delivered to the Company by the Lender;
or
8.1(b) Failure of the Company or any of its Subsidiaries to
pay, or any default in the payment of any principal or interest on,
any other indebtedness or in the payment of any contingent obligation
within any period of grace provided in connection with such
indebtedness; breach or default with respect to any other material
term of any other indebtedness or of any loan agreement, mortgage,
indenture or other agreement
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relating thereto, and the passage of any applicable time period or
cure period, if the effect of such failure, breach or default and the
passage of such time or cure period is to cause, or to permit the
holder or holders thereof (or a trustee on behalf of such holder or
holders) to cause, indebtedness of the Company or its Subsidiaries in
the aggregate amount of One Hundred Thousand Dollars ($100,000) or
more to become or be declared due prior to its stated maturity; or
8.1(c) Failure of the Company to perform or comply with any
term or condition applicable to it contained in (i) Sections 6.3,
6.12, 6.13(b) or (d), 7.1, 7.2, 7.3, 7.4, 7.5, 7.9 or 7.10 of this
Agreement, or (ii) Section 7.6, 7.7 or 7.8 of this Agreement if such
failure has not been cured to the reasonable satisfaction of the
Lender before the date on which the financial statements indicating
the existence of such failure to comply are required to be delivered
to the Lender pursuant to Section 6.2(a) hereof; or
8.1(d) Any of the Company's representations or warranties made
or deemed made herein or in any other Loan Document, or in any
statement or certificate at any time given by the Company in writing
pursuant hereto or thereto shall be inaccurate or incomplete in any
material respect on the date as of which made or deemed made;
provided, however, that such event shall not constitute an Event of
Default hereunder with respect to a breach of a representation or
warranty made under Section 5.15 above if the Company delivers to the
Lender the Release Amount for each Mortgage Loan affected by such
breach within five Business Days after the earliest of (i) receipt by
the Company of Notice from the Lender of such breach, (ii) receipt by
the Lender of Notice from the Company of such breach, or (iii) the
date the Company should have notified the Lender of such breach
pursuant to Section 6.6(c) hereof; and, provided, further, that the
sole remedy applicable in the case of a breach of a representation or
warranty contained in Section 5.17 above as to any Servicing Contract
included in the Servicing Collateral
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shall be the exclusion of the Mortgage Loans covered by such Servicing
Contract in calculating the Servicing Collateral Value; or
8.1(e) The Company shall default in the performance of or
compliance with any term contained in this Agreement or any other Loan
Document other than those referred to above in Subsections 8.1(a),
8.1(c) or 8.1(d) and such default shall not have been remedied or
waived within thirty (30) days after the earliest of (i) receipt by
the Company of Notice from the Lender of such default, (ii) receipt by
the Lender of Notice from the Company of such default, or (iii) the
date the Company should have notified the Lender of such default
pursuant to Section 6.6(c); or
8.1(f) (1) A court having jurisdiction shall enter a decree or
order for relief in respect of the Company, any Subsidiary of the
Company in an involuntary case under any applicable bankruptcy,
insolvency or other similar law in respect of the Company, any
Subsidiary of the Company now or hereafter in effect, which decree or
order is not stayed; the Company, any Subsidiary of the Company shall
consent to the entry of any such decree or order; or a filing of a
voluntary case under any applicable bankruptcy, insolvency or other
similar law in respect of the Company, any Subsidiary of the Company
has occurred; or any other similar relief shall be granted under any
applicable federal or state law; or (2) the filing of an involuntary
case in respect of the Company, any Subsidiary of the Company under
any applicable bankruptcy, insolvency or other similar law; or a
decree or order of a court having jurisdiction for the appointment of
a receiver, liquidator, sequestrator, trustee, custodian or other
officer having similar powers over the Company, any Subsidiary of the
Company, or over all or a substantial part of their respective
property, shall have been entered; or the involuntary appointment of
an interim or permanent receiver, trustee or other custodian of the
Company, any Subsidiary of the Company for all or a substantial part
of their respective property; or the issuance of a
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warrant of attachment, execution or similar process against any
substantial part of the property of the Company, any Subsidiary of the
Company, and the continuance of any such events in Subsection (2)
above for sixty (60) days unless stayed, dismissed, bonded off or
discharged; or
8.1(g) The Company, any Subsidiary of the Company shall
consent to the appointment of or taking possession by a receiver,
trustee or other custodian for all or a substantial part of its
property; the making by the Company, any Subsidiary of the Company of
any assignment for the benefit of creditors; or the inability or
failure of the Company, any Subsidiary of the Company, or the
admission by the Company, any Subsidiary of the Company in writing of
its inability, to pay its debts as such debts become due; or
8.1(h) Failure of the Company to perform any contractual
obligations which it may have to repurchase Mortgage Loans, if such
obligations in the aggregate exceed One Million Dollars ($1,000,000);
or
8.1(i) Any money judgment, writ or warrant of attachment, or
similar process involving in any case an amount in excess of Two
Hundred Fifty Thousand Dollars ($250,000) shall be entered or filed
against the Company or any of its Subsidiaries or any of their
respective assets and shall remain undischarged, unvacated, unbonded
or unstayed for a period of thirty (30) days or in any event later
than five (5) days prior to the date of any proposed sale thereunder;
or
8.1(j) Any order, judgment or decree shall be entered against
the Company decreeing the dissolution or split up of the Company and
such order shall remain undischarged or unstayed for a period in
excess of twenty (20) days; or
8.1(k) Any Plan maintained by the Company or any of its
Subsidiaries shall be terminated within the meaning of Title IV of
ERISA or a trustee shall be appointed by an appropriate United States
district
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court to administer any Plan, or the Pension Benefit Guaranty
Corporation (or any successor thereto) shall institute proceedings to
terminate any Plan or to appoint a trustee to administer any Plan if
as of the date thereof the Company's liability or any such
Subsidiary's liability (after giving effect to the tax consequences
thereof) to the Pension Benefit Guaranty Corporation (or any successor
thereto) for unfunded guaranteed vested benefits under the Plan
exceeds the then current value of assets accumulated in such Plan by
more than Two Hundred Fifty Thousand Dollars ($250,000) (or in the
case of a termination involving the Company or any of its Subsidiaries
as a "substantial employer" (as defined in Section 4001(a)(2) of
ERISA) the withdrawing employer's proportionate share of such excess
shall exceed such amount); or
8.1(l) The Company or any of its Subsidiaries as employer under
a Multiemployer Plan shall have made a complete or partial withdrawal
from such Multiemployer Plan and the plan sponsor of such
Multiemployer Plan shall have notified such withdrawing employer that
such employer has incurred a withdrawal liability in an annual amount
exceeding Two Hundred Fifty Thousand Dollars ($250,000); or
8.1(m) The Company shall purport to disavow its obligations
hereunder or shall contest the validity or enforceability hereof; or
the Lender's security interest in any portion of the Collateral shall
become unenforceable or otherwise impaired; provided that, subject to
the Lender's approval, no Event of Default shall occur as a result of
such impairment if all Advances made against any such Collateral shall
be paid in full within ten (10) days of the date of the Company's
receipt of Notice from Lender of such impairment; or
8.1(n) Steven Chotin (or a trust or other entity of which Steven
Chotin owns the majority of the voting rights) shall cease owning,
directly or
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indirectly, ninety percent (90%) or more of the capital stock of the
Company; or
8.1(o) There shall be a material adverse change in the financial
condition, business or operations of the Company that would materially
impair the Company's ability to perform its Obligations hereunder.
8.2 Remedies.
--------
8.2(a) Upon the occurrence of any Event of Default described in
Sections 8.1(f) or 8.1(g), the Commitment shall be terminated and the
unpaid principal amount of and accrued interest on the Notes and all other
Obligations shall automatically become due and payable, without
presentment, demand or other requirements of any kind, all of which are
hereby expressly waived by the Company.
8.2(b) Upon the occurrence of any Event of Default, other than those
described in Sections 8.1(f) and 8.1(g), the Lender may, by Notice to the
Company, terminate the Commitment and/or declare all Obligations to be
immediately due and payable, whereupon the same shall forthwith become due
and payable, together with all accrued interest thereon, and the obligation
of the Lender to make any Advances shall thereupon terminate.
8.2(c) Upon the occurrence of any Event of Default, the Lender may
also do any of the following:
(1) Foreclose upon or otherwise enforce its security interest in
and Lien on the Collateral to secure all payments and performance of
the Obligations in any manner permitted by law or provided for
hereunder.
(2) Notify all obligors in respect of Collateral that the
Collateral has been assigned to the Lender and that all payments
thereon are to be made directly to the Lender or such other party as
may be designated by the Lender; settle, compromise, or release, in
whole or in part, any amounts owing on the Collateral, any such
obligor or any Investor or any portion of the
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Collateral, on terms acceptable to the Lender; enforce payment and
prosecute any action or proceeding with respect to any and all
Collateral; and where any such Collateral is in default, foreclose on
and enforce security interests in such Collateral by any available
judicial procedure or without judicial process and sell property
acquired as a result of any such foreclosure.
(3) Act, or contract with a third party to act, as servicer or
subservicer of each item of Collateral requiring servicing and perform
all obligations required in connection with Servicing Contracts and
Purchase Commitments, such third party's fees to be paid by the
Company.
(4) Require the Company to assemble the Collateral and/or books
and records relating thereto and make such available to the Lender at
a place to be designated by the Lender.
(5) Enter onto property where any Collateral or books and
records relating thereto are located and take possession thereof with
or without judicial process.
(6) Prior to the disposition of the Collateral, prepare it for
disposition in any manner and to the extent the Lender deems
appropriate.
(7) Exercise all rights and remedies of a secured creditor under
the Uniform Commercial Code of Minnesota or other applicable law,
including, but not limited to, selling or otherwise disposing of the
Collateral, or any part thereof, at one or more public or private
sales, whether or not such Collateral is present at the place of sale,
for cash or credit or future delivery, on such terms and in such
manner as the Lender may determine, including, without limitation,
sale pursuant to any applicable Purchase Commitment. If notice is
required under such applicable law, the Lender will give the Company
not less than ten (10) days' notice of any such public sale or of the
date after which any private sale may be held. The Company agrees
that ten (10) days' notice shall be reasonable notice. The
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<PAGE>
Lender may, without notice or publication, adjourn any public or
private sale or cause the same to be adjourned from time to time by
announcement at the time and place fixed for the sale, and such sale
may be made at any time or place to which the same may be so
adjourned. In case of any sale of all or any part of the Collateral on
credit or for future delivery, the Collateral so sold may be retained
by the Lender until the selling price is paid by the purchaser
thereof, but the Lender shall not incur any liability in case of the
failure of such purchaser to take up and pay for the Collateral so
sold and, in case of any such failure, such Collateral may again be
sold upon like notice. The Lender may, however, instead of exercising
the power of sale herein conferred upon it, proceed by a suit or suits
at law or in equity to collect all amounts due upon the Collateral or
to foreclose the pledge of and sell the Collateral or any portion
thereof under a judgment or decree of a court or courts of competent
jurisdiction, or both.
(8) Proceed against the Company on the Notes; provided, that the
Lender shall use its best efforts to sell the Pledged Mortgages and
Pledged Securities, to the extent the same are readily salable within
a reasonable period, in a commercially reasonable manner before
proceeding against the Company on the Notes.
8.2(d) The Lender shall incur no liability as a result of the sale
or other disposition of the Collateral, or any part thereof, at any public
or private sale or disposition in a commercially reasonable manner. The
Company hereby waives (to the extent permitted by law) any claims it may
have against the Lender arising by reason of the fact that the price at
which the Collateral may have been sold at such private sale was less than
the price which might have been obtained at a public sale or was less than
the aggregate amount of the outstanding Advances and the unpaid interest
accrued thereon, even if the Lender accepts the first offer received and
does not offer the Collateral to more than one offeree, as long as such
sale was conducted in a commercially reasonable manner. Any sale of
Collateral
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pursuant to the terms of a Purchase Commitment shall be deemed to have been
made in a commercially reasonable manner.
8.2(e) The Company acknowledges that Mortgage Loans and Mortgage-
backed Securities are collateral of a type which is customarily sold on a
recognized market. The Company waives any right it may have to prior notice
of the sale of any Pledged Mortgage or Pledged Security, and agrees that
the Lender may purchase any Mortgage Loans or Mortgage-backed Securities at
a private sale of such Collateral.
8.2(f) The Company specifically waives and releases (to the extent
permitted by law) any equity or right of redemption, all rights of
redemption, stay or appraisal which the Company has or may have under any
rule of law or statute now existing or hereafter adopted, and any right to
require the Lender to (1) proceed against any Person, (2) proceed against
or exhaust any of the Collateral or pursue its rights and remedies as
against the Collateral in any particular order, or (3) pursue any other
remedy in its power. The Lender shall not be required to take any steps
necessary to preserve any rights of the Company against holders of
mortgages prior in lien to the Lien of any Mortgage included in the
Collateral or to preserve rights against prior parties.
8.2(g) The Lender may, but shall not be obligated to, advance any
sums or do any act or thing necessary to uphold and enforce the Lien and
priority of, or the security intended to be afforded by, any Mortgage
included in the Collateral, including, without limitation, payment of
delinquent taxes or assessments and insurance premiums. All advances,
charges, costs and expenses, including reasonable attorneys' fees and
disbursements, incurred or paid by the Lender in exercising any right,
power or remedy conferred by this Agreement, or in the enforcement hereof,
together with interest thereon, at the Default Rate, from the time of
payment until repaid, shall become a part of the principal balance
outstanding hereunder and under the Notes.
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8.2(h) No failure on the part of the Lender to exercise, and no delay
in exercising, any right, power or remedy provided hereunder, at law or in
equity shall operate as a waiver thereof; nor shall any single or partial
exercise by the Lender of any right, power or remedy provided hereunder, at
law or in equity preclude any other or further exercise thereof or the
exercise of any other right, power or remedy. Without intending to limit
the foregoing, all defenses based on the statute of limitations are hereby
waived by the Company to the extent permitted by law. The remedies herein
provided are cumulative and are not exclusive of any remedies provided at
law or in equity.
8.2(i) The Company acknowledges that the Company and the Lender have
entered into, and may from time to time hereafter enter into, agreements
("Acknowledgment Agreements") with FNMA, FHLMC or any other Investor in
order to obtain the consent of FNMA, FHLMC or any other Investor to the
assignment of and security interest granted in the Servicing Contracts
pursuant to Section 3 hereof, as the same may be amended from time to time.
The Company further acknowledges that the Acknowledgment Agreements may
contain certain provisions concerning the enforcement by the Lender of the
security interest of the Secured Parties in the Servicing Contracts subject
thereto. The Company agrees that the disposition of its rights in any
Servicing Contract pursuant to the terms of the applicable Acknowledgment
Agreement shall be deemed commercially reasonable within the meaning of
Section 9-504(3) of the Uniform Commercial Code of Minnesota. The Company
hereby waives any claims it might otherwise have against the Lender as a
result of the Lender's compliance with the terms of any Acknowledgment
Agreement.
8.3 Application of Proceeds. The proceeds of any sale, disposition or
-----------------------
other enforcement of the Lender's security interest in all or any part of the
Collateral shall be applied by the Lender:
First, to the payment of the costs and expenses of such sale or
-----
enforcement, including reasonable compensation to the Lender's agents and
counsel, and all expenses,
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liabilities and advances made or incurred by or on behalf of the Lender in
connection therewith;
Second, to the payment of interest accrued and unpaid on the Notes;
------
Third, to the payment of any other Obligations due (other than
-----
principal and interest) under the this Agreement and the Loan Documents;
Fourth, to the payment of the outstanding principal balance of the
------
Notes; and
Finally, to the payment to the Company, or to its successors or
-------
assigns, or as a court of competent jurisdiction may direct, of any surplus
then remaining from such proceeds.
If the proceeds of any such sale, disposition or other enforcement are
insufficient to cover the costs and expenses of such sale, as aforesaid,
and the payment in full of all Obligations, the Company shall remain liable
for any deficiency.
8.4 Lender Appointed Attorney-in-Fact. The Lender is hereby appointed the
---------------------------------
attorney-in-fact of the Company, with full power of substitution, for the
purpose of carrying out the provisions hereof and taking any action and
executing any instruments which the Lender may deem necessary or advisable to
accomplish the purposes hereof, which appointment as attorney-in-fact is
irrevocable and coupled with an interest. Without limiting the generality of the
foregoing, the Lender shall have the right and power to give notices of its
security interest in the Collateral to any Person, either in the name of the
Company or in its own name, to endorse all Pledged Mortgages or Pledged
Securities payable to the order of the Company, to change or cause to be changed
the book-entry registration or name of subscriber or Investor on any Pledged
Security, or to receive, endorse and collect all checks made payable to the
order of the Company representing any payment on account of the principal of or
interest on, or the proceeds of sale of, any of the Pledged Mortgages or Pledged
Securities and to give full discharge for the same.
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8.5 Right of Set-Off. If the Company shall default in the payment of the
----------------
Notes, any interest accrued thereon, or any other sums which may become payable
hereunder when due, or in the performance of any of its other obligations or
liabilities under this Agreement, the Lender shall have the right, at any time
and from time to time, without notice, to set-off and to appropriate or apply
any and all property or indebtedness of any kind at any time held or owing by
the Lender to or for the credit or the account of the Company against and on
account of the Obligations of the Company under the Notes and this Agreement,
irrespective of whether or not the Lender shall have made any demand hereunder
and whether or not said Obligations shall have matured.
9. NOTICES.
All notices, demands, consents, requests and other communications required
or permitted to be given or made hereunder (collectively, "Notices") shall,
except as otherwise expressly provided hereunder, be in writing and shall be
delivered in person or telecopied or mailed, first class or delivered by
overnight courier, return receipt requested, postage prepaid, addressed to the
respective parties hereto at their respective addresses hereinafter set forth
or, as to any such party, at such other address as may be designated by it in a
Notice to the other. All Notices shall be conclusively deemed to have been
properly given or made when duly delivered, in person or by overnight courier,
or if mailed, on the date of receipt as noted on the return receipt, or where
telecopied, if the transmitting machine has provided an electronic confirmation
of such transmission and such telecopy is followed by delivery of a hard copy,
addressed as follows:
if to the Company: National Mortgage Corporation
7600 East Orchard Road, Suite 330S
Englewood, CO 80111-4943
Attention: Craig Stulz, COO/EVP
Telecopier No.: (303) 741-8131
if to the Lender: Residential Funding Corporation
1646 North California Blvd.
Suite 400
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Walnut Creek, CA 94596
Attention: Cindy Schellenberg,
Director
Telecopier No.: (510) 935-6424
with a copy to: Residential Funding Corporation
8400 Normandale Lake Boulevard
Suite 600
Minneapolis, Minnesota 55437
Attention: Sandra L. Oakes, Esq.
Telecopier No.: (612) 832-7190
10. REIMBURSEMENT OF EXPENSES; INDEMNITY.
The Company shall: (a) pay a documentation production fee of Five Hundred
Dollars ($500) and all reasonable out-of-pocket costs and expenses of Lender,
including, without limitation, reasonable fees and disbursements of counsel, in
connection with the preparation and negotiation of this Agreement; (b) pay such
additional documentation production fees, as the Lender may require and all
reasonable out-of-pocket costs and expenses of the Lender, including, without
limitation, reasonable fees and disbursements of counsel (including allocated
costs of internal counsel), in connection with the amendment, enforcement and
administration of this Agreement, the Notes, and other Loan Documents and the
making and repayment of the Advances and the payment of interest thereon; (c)
indemnify, pay, and hold harmless the Lender and any holder of the Notes from
and against, any and all present and future stamp, documentary and other similar
taxes with respect to the foregoing matters and save the Lender and the holder
or holders of the Notes harmless from and against any and all liabilities with
respect to or resulting from any delay or omission to pay such taxes; and (d)
indemnify, pay and hold harmless the Lender and any of its officers, directors,
employees or agents and any subsequent holder of the Notes (collectively called
the "Indemnitees") from and against any and all liabilities, obligations,
losses, damages, penalties, judgments, suits, reasonable costs, reasonable
expenses and reasonable disbursements of any kind or nature whatsoever
(including without limitation, the reasonable fees and disbursements of counsel
of the Indemnitees (including reasonable allocated costs of internal counsel) in
connection with any
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investigative, administrative or judicial proceeding, whether or not such
Indemnitees shall be designated a party thereto) which may be imposed upon,
incurred by or asserted against such Indemnitees in any manner relating to or
arising out of this Agreement, the Notes, or any other Loan Document or any of
the transactions contemplated hereby or thereby (the "Indemnified Liabilities")
asserted by a third party; provided, however, that the Company shall have no
obligation hereunder with respect to Indemnified Liabilities arising from the
negligence, gross negligence, reckless disregard or willful misconduct of any
such Indemnitees. To the extent that the undertaking to indemnify, pay and hold
harmless as set forth in the preceding sentence may be unenforceable because it
is violative of any law or public policy, the Company shall contribute the
maximum portion which it is permitted to pay and satisfy under applicable law,
to the payment and satisfaction of all Indemnified Liabilities incurred by the
Indemnitees or any of them. The agreement of the Company contained in this
Subsection (d) shall survive the expiration or termination of this Agreement and
the payment in full of the Notes. Attorneys' fees and disbursements incurred in
enforcing, or on appeal from, a judgment pursuant hereto shall be recoverable
separately from and in addition to any other amount included in such judgment,
and this clause is intended to be severable from the other provisions of this
Agreement and to survive and not be merged into such judgment.
11. FINANCIAL INFORMATION.
All financial statements and reports furnished to the Lender hereunder
shall be prepared in accordance with GAAP, applied on a basis consistent with
that applied in preparing the financial statements as at the end of and for the
last fiscal year ended (except to the extent otherwise required to conform to
good accounting practice).
12. MISCELLANEOUS.
12.1 Terms Binding Upon Successors; Survival of Representations. The terms
----------------------------------------------------------
and provisions of this Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and assigns. All
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representations, warranties, covenants and agreements herein contained on the
part of the Company shall survive the making of any Advance and the execution of
the Notes, and shall be effective so long as the Commitment is outstanding
hereunder or there remain any Obligations to be paid or performed.
12.2 Assignment. This Agreement may not be assigned by the Company. This
----------
Agreement and the Notes, along with the Lender's security interest in any or all
of the Collateral, may, at any time, be transferred or assigned, in whole or in
part, by the Lender, and any assignee thereof may enforce this Agreement, the
Notes and such security interest.
12.3 Amendments. Except as otherwise provided in this Agreement, this
----------
Agreement may not be amended, modified or supplemented unless such amendment,
modification or supplement is set forth in a writing signed by the parties
hereto.
12.4 Governing Law. This Agreement and the other Loan Documents shall be
-------------
governed by the laws of the State of Minnesota, without reference to its
principles of conflicts of laws.
12.5 Participations. The Lender may at any time sell, assign or grant
--------------
participations in, or otherwise transfer to any other Person (a "Participant"),
all or part of the Obligations. Without limitation of the exclusive right of the
Lender to collect and enforce such Obligations, the Company agrees that each
disposition will give rise to a debtor-creditor relationship of the Company to
the Participant in accordance with the terms of this Agreement, and the Company
authorizes each Participant, upon the occurrence of an Event of Default, to
proceed directly by right of setoff, banker's lien, or otherwise, against any
assets of the Company which may be in the hands of such Participant in
accordance with the terms of this Agreement. The Company authorizes the Lender
to disclose to any prospective Participant and any Participant any and all
information in the Lender's possession concerning the Company, this Agreement
and the Collateral.
12.6 Relationship of the Parties. This Agreement provides for the making
---------------------------
of Advances by the Lender, in its capacity as a lender, to the Company, in its
capacity as a borrower, and for
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the payment of interest, repayment of principal by the Company to the Lender,
and for the payment of certain fees by the Company to the Lender. The
relationship between the Lender and the Company is limited to that of
creditor/secured party, on the one hand, and debtor, on the other hand. The
provisions herein for compliance with financial covenants and delivery of
financial statements are intended solely for the benefit of the Lender to
protect its interests as lender in assuring payments of interest and repayment
of principal and payment of certain fees, and nothing contained in this
Agreement shall be construed as permitting or obligating the Lender to act as a
financial or business advisor or consultant to the Company, as permitting or
obligating the Lender to control the Company or to conduct the Company's
operations, as creating any fiduciary obligation on the part of the Lender to
the Company, or as creating any joint venture, agency, or other relationship
between the parties hereto other than as explicitly and specifically stated in
this Agreement. The Company acknowledges that it has had the opportunity to
obtain the advice of experienced counsel of its own choosing in connection with
the negotiation and execution of this Agreement and to obtain the advice of such
counsel with respect to all matters contained herein. The Company further
acknowledges that it is experienced with respect to financial and credit matters
and has made its own independent decisions to apply to the Lender for credit and
to execute and deliver this Agreement.
12.7 Severability. If any provision of this Agreement shall be declared
------------
to be illegal or unenforceable in any respect, such illegal or unenforceable
provision shall be and become absolutely null and void and of no force and
effect as though such provision were not in fact set forth herein, but all other
covenants, terms, conditions and provisions hereof shall nevertheless continue
to be valid and enforceable.
12.8 Operational Reviews. From time to time upon reasonable advance
-------------------
request, the Company shall permit the Lender or its representative access to its
premises and records, for the purpose of conducting a review of the Company's
general mortgage business methods, policies, and procedures, auditing loan files
and reviewing financial and operational aspects of the Company's
75
<PAGE>
business, in such a manner that does not materially interfere with the Company's
ability to conduct its business.
12.9 Consent to Credit References. The Company hereby consents to the
----------------------------
disclosure of information regarding the Company and its credit relationships
with the Lender to Persons making credit inquiries concerning the Company to the
Lender. This consent is revocable by the Company at any time upon Notice to the
Lender as provided in Section 9 hereof.
12.10 Consent to Jurisdiction. The Company hereby agrees that any action
-----------------------
or proceeding under the Loan Documents, the Notes or any document delivered
pursuant hereto may be commenced against it in any court of competent
jurisdiction within the State of Minnesota, by service of process upon the
Company by first class registered or certified mail, return receipt requested,
addressed to the Company at its address last known to the Lender. The Company
agrees that any such suit, action or proceeding arising out of or relating to
this Agreement or any other such document may be instituted in the Hennepin
County State District Court or in the United States District Court for the
District of Minnesota at the option of the Lender; and the Company hereby waives
any objection to the jurisdiction or venue of any such court with respect to, or
the convenience of any court as a forum for, any such suit, action or
proceeding. Nothing herein shall affect the right of the Lender to accomplish
service of process in any other manner permitted by law or to commence legal
proceedings or otherwise proceed against the Company in any other jurisdiction
or court.
12.11 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original, but all such
counterparts shall together constitute but one and the same instrument.
12.12 Entire Agreement. This Agreement, the Notes and the other Loan
----------------
Documents represent the final agreement among the parties hereto and thereto
with respect to the subject matter hereof and thereof, and may not be
contradicted by evidence of prior or contemporaneous oral agreements among such
parties. There are no oral agreements among the parties with respect to the
subject matter hereof and thereof.
76
<PAGE>
12.13 WAIVER OF JURY TRIAL. THE COMPANY AND THE LENDER EACH HEREBY (a)
--------------------
COVENANTS AND AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT
BY A JURY, AND (b) WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT
ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST. THIS WAIVER OF RIGHT TO TRIAL BY
JURY IS SEPARATELY GIVEN, KNOWINGLY AND VOLUNTARILY, BY THE COMPANY AND THE
LENDER, AND THIS WAIVER IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND
EACH ISSUE AS TO WHICH THE RIGHT OF A JURY TRIAL WOULD OTHERWISE ACCRUE. THE
LENDER AND THE COMPANY IS EACH HEREBY AUTHORIZED AND REQUESTED TO SUBMIT THIS
AGREEMENT TO ANY COURT HAVING JURISDICTION OVER THE SUBJECT MATTER HEREOF AND
THE PARTIES HERETO, SO AS TO SERVE AS CONCLUSIVE EVIDENCE OF THE FOREGOING
WAIVER OF THE RIGHT TO JURY TRIAL. FURTHER, THE COMPANY AND THE LENDER EACH
HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF THE OTHER PARTY, INCLUDING
THE OTHER PARTY'S COUNSEL, HAS REPRESENTED, EXPRESSLY OR OTHERWISE, TO ANY OF
ITS REPRESENTATIVES OR AGENTS THAT THE OTHER PARTY WILL NOT SEEK TO ENFORCE THIS
WAIVER OF RIGHT TO JURY TRIAL PROVISION.
77
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
NATIONAL MORTGAGE CORPORATION,
a Colorado corporation
By:____________________________
Its:___________________________
RESIDENTIAL FUNDING CORPORATION,
a Delaware corporation
By:_____________________________
Its: Director
STATE OF _______________ )
) ss
COUNTY OF ______________ )
On _________________, 1996, before me, a Notary Public, personally appeared
________________________________, the _________________________ of NATIONAL
MORTGAGE CORPORATION, a Colorado corporation, personally known to me (or proved
to me on the basis of satisfactory evidence) to be the person whose name is
subscribed to the within instrument and acknowledged to me that he/she executed
the same in his/her authorized capacity, and that by his/her signature on the
instrument the person, or the entity upon behalf of which the person acted,
executed the instrument.
WITNESS my hand and official seal.
Notary Public
(SEAL) My Commission Expires:
78
<PAGE>
STATE OF _______________ )
) ss
COUNTY OF ______________ )
On _________________, 1996, before me, a Notary Public, personally appeared
________________________________, the Director of RESIDENTIAL FUNDING
CORPORATION, a Delaware corporation, personally known to me (or proved to me on
the basis of satisfactory evidence) to be the person whose name is subscribed to
the within instrument and acknowledged to me that he/she executed the same in
his/her authorized capacity, and that by his/her signature on the instrument the
person, or the entity upon behalf of which the person acted, executed the
instrument.
WITNESS my hand and official seal.
Notary Public
(SEAL) My Commission Expires:
79
<PAGE>
FIRST AMENDMENT TO
-------------------
WAREHOUSING CREDIT AND SECURITY AGREEMENT
-----------------------------------------
THIS FIRST AMENDMENT TO WAREHOUSING CREDIT AND SECURITY AGREEMENT (this
"Amendment") is entered into as of this 11th day of July 1996, by and between
NATIONAL MORTGAGE CORPORATION, a Colorado corporation (the "Company") and
RESIDENTIAL FUNDING CORPORATION, a Delaware corporation (the "Lender").
WHEREAS, the Company and the Lender have entered into a single family
revolving warehouse facility with a present Commitment Amount of Twenty-One
Million One Hundred Thousand Dollars ($21,100,000), to finance the origination
and acquisition of Mortgage Loans as evidenced by a Warehousing Promissory Note
in the principal sum of Twenty-One Million One Hundred Thousand Dollars
($21,100,000), dated as of January 19, 1996, a Working Capital Promissory Note
in the principal sum of One Million One Hundred Thousand Dollars ($1,100,000)
dated as of January 19, 1996 (the "Notes"), and by a Warehousing Credit and
Security Agreement dated as of January 19, 1996, as the same may have been
amended or supplemented (the "Agreement"); and
WHEREAS, the Company has requested the Lender to extend the period for
which the Commitment under the Agreement has been made, and the Lender has
agreed to such extension subject to the terms and conditions of this Amendment.
NOW, THEREFORE, for and in consideration of the foregoing and of the mutual
covenants, agreements and conditions hereinafter set forth and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. All capitalized terms used herein and not otherwise defined shall have
their respective meanings set forth in the Agreement.
2. The definition of Maturity Date in Section 1.1 of the Agreement shall
be amended by inserting the date "October 31, 1996" in place of "July 31, 1996"
wherever it appears in such definition.
-1-
<PAGE>
3. The Effective Date of this Amendment shall be 7/24/96, the date on
which the Company has complied with all the terms and conditions of this
Amendment.
4. Upon execution of this Amendment, the Company agrees to pay to the
Lender the pro rata Commitment Fee on the portion of the Commitment Amount for
the time period from August 1, 1996 to and including September 30, 1996.
5. The Company shall deliver to the Lender (a) an executed original of
this Amendment; (b) an executed Certificate of Secretary with corporate
resolutions; (c) a Two Hundred Fifty Dollar ($250) document production fee; and
(d) the Commitment Fee for the months of August and September.
6. The Company represents, warrants and agrees that (a) there exists no
Default or Event of Default under the Loan Documents, (b) the Loan Documents
continue to be the legal, valid and binding agreements and obligations of the
Company enforceable in accordance with their terms, as modified herein, (c) the
Lender is not in default under any of the Loan Documents and the Company has no
offset or defense to its performance or obligations under any of the Loan
Documents, (d) the representations contained in the Loan Documents remain true
and accurate in all respects, and (e) there has been no material adverse change
in the financial condition of the Company from the date of the Agreement to the
date of this Amendment.
7. Except as hereby expressly modified, the Agreement shall otherwise be
unchanged and shall remain in full force and effect, and the Company ratifies
and reaffirms all of its obligations thereunder.
8. This Amendment 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.
-2-
<PAGE>
IN WITNESS WHEREOF, the Company and the Lender have caused this Amendment
to be duly executed on their behalf by their duly authorized officers as of the
day and year above written.
NATIONAL MORTGAGE CORPORATION,
a Colorado corporation
By: __________________________________
Its: _________________________________
RESIDENTIAL FUNDING CORPORATION,
a Delaware corporation
By: __________________________________
Its: _________________________________
-3-
<PAGE>
STATE OF _______________ )
) ss
COUNTY OF ______________ )
On _____________________, 1996, before me, a Notary Public, personally
appeared ___________________________________, the ________________________ of
NATIONAL MORTGAGE CORPORATION, a Colorado corporation, personally known to me
(or proved to me on the basis of satisfactory evidence) to be the person whose
name is subscribed to the within instrument and acknowledged to me that he/she
executed the same in his/her authorized capacity, and that by his/her signature
on the instrument the person, or the entity upon behalf of which the person
acted, executed the instrument.
WITNESS my hand and official seal.
________________________________________
Notary Public
(SEAL) My Commission Expires:
STATE OF _______________ )
) ss
COUNTY OF ______________ )
On __________________________, 1996, before me, a Notary Public, personally
appeared ___________________________________, the Vice President of RESIDENTIAL
FUNDING CORPORATION, a Delaware corporation, personally known to me (or proved
to me on the basis of satisfactory evidence) to be the person whose name is
subscribed to the within instrument and acknowledged to me that he/she executed
the same in his/her authorized capacity, and that by his/her signature on the
instrument the person, or the entity upon behalf of which the person acted,
executed the instrument.
WITNESS my hand and official seal.
________________________________________
Notary Public
(SEAL) My Commission Expires:
-4-
<PAGE>
SECOND AMENDMENT TO
--------------------
WAREHOUSING CREDIT AND SECURITY AGREEMENT
-----------------------------------------
THIS SECOND AMENDMENT TO WAREHOUSING CREDIT AND SECURITY AGREEMENT (this
"Amendment") is entered into as of this 31st day of October 1996, by and between
NATIONAL MORTGAGE CORPORATION, a Colorado corporation (the "Company") and
RESIDENTIAL FUNDING CORPORATION, a Delaware corporation (the "Lender").
WHEREAS, the Company and the Lender have entered into a single family
revolving warehouse facility with a present Commitment Amount of Twenty-One
Million One Hundred Thousand Dollars ($21,100,000), to finance the origination
and acquisition of Mortgage Loans as evidenced by a Warehousing Promissory Note
in the principal sum of Twenty-One Million One Hundred Thousand Dollars
($21,100,000), dated as of January 19, 1996, a Working Capital Promissory Note
in the principal sum of One Million One Hundred Thousand Dollars ($1,100,000),
dated as of January 19, 1996 (the "Notes"), and by a Warehousing Credit and
Security Agreement dated as of January 19, 1996, as the same may have been
amended or supplemented (the "Agreement");
WHEREAS, the Company has requested the Lender to extend the period for
which the Commitment under the Agreement has been made, and to amend certain
other terms of the Agreement and the Lender has agreed to such extension and
amendment of the Agreement subject to the terms and conditions of this
Amendment;
NOW, THEREFORE, for and in consideration of the foregoing and of the mutual
covenants, agreements and conditions hereinafter set forth and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. All capitalized terms used herein and not otherwise defined shall have
their respective meanings set forth in the Agreement.
-1-
<PAGE>
2. The effective date ("Effective Date") of this Amendment shall be
October 31, 1996, the date on which the Company has complied with all the terms
and conditions of this Amendment.
3. Section 1.1 of the Agreement shall be amended by adding the following
definitions in the appropriate alphabetical order:
"HUD 203(K) Mortgage Loan" means an FHA insured Mortgage Loan secured by a
------------------------
First Mortgage, a portion of which will be used for the purpose of
rehabilitating and/or repairing the related single family property, and which
satisfies the definition of "rehabilitation loan" under 24 C.F.R. Section
203.50(a).
"RFC Mortgage Loan" means a Mortgage Loan covered by a Purchase Commitment
-----------------
issued by RFC.
"Title I Mortgage Loan" means an FHA co-insured Mortgage Loan secured by a
---------------------
Mortgage which is underwritten in accordance with HUD underwriting standards for
the Title I Property Improvement Program as set forth in and which is reported
for insurance under the Mortgage Insurance Program authorized and administered
under Title I of the National Housing Act of 1934, as amended and the
regulations promulgated thereunder.
4. Section 1.1 of the Agreement shall be amended to delete the
definitions of "Adjusted Tangible Net Worth", "Collateral Value," "Debt,"
"Nonconforming Mortgage Loan," and "Operating Account" in their entirety,
replacing them with the following definitions:
"Adjusted Tangible Net Worth" means with respect to any Person at any date,
---------------------------
the Tangible Net Worth of such Person at such date, excluding capitalized excess
servicing fees and capitalized servicing rights, plus one percent (1%) of the
----
Adjusted Servicing Portfolio, and plus deferred taxes arising from capitalized
----
excess servicing fees and capitalized servicing rights.
"Collateral Value" means (a) with respect to any Mortgage Loan as of the
----------------
date of determination, the lesser of (i) the amount of any Advance made against
such Mortgage Loan under Section 2.1(c); or (ii) the Fair Market Value of such
Mortgage Loan; or (b) in the event Pledged Mortgages have been exchanged for
Pledged Securities, the Fair Market Value of the Mortgage
-2-
<PAGE>
Loans backing such Pledged Securities; or (c) with respect to cash, the amount
of such cash.
"Debt" means, with respect to any Person, at any date (a) all indebtedness
----
or other obligations of such Person which, in accordance with GAAP, would be
included in determining total liabilities as shown on the liabilities side of a
balance sheet of such Person at such date; and (b) all indebtedness or other
obligations of such Person for borrowed money or for the deferred purchase price
of property or services; provided that for purposes of this Agreement, there
shall be excluded from Debt at any date loan loss reserves, Subordinated Debt
not due within one year of such date, and deferred taxes arising from
capitalized excess servicing fees and capitalized servicing rights.
"Nonconforming Mortgage Loan" means a Conventional Mortgage Loan which is
---------------------------
not a Conforming Mortgage Loan or a Jumbo Mortgage Loan, which has a credit risk
rating D or better (determined using the underwriting standards of the Company
as in effect on November 12, 1996, or as revised from time to time thereafter,
provided, that any material revision is acceptable to the Lender in its
reasonable judgment (and the Lender's failure to respond within two weeks after
the Company requests approval of any such revision shall be deemed acceptance of
such revision)), and which is underwritten and approved for purchase by an
Investor prior to funding if its original principal amount exceeds Six Hundred
Thousand Dollars ($600,000).
"Operating Account" means a demand deposit account maintained at the
-----------------
Funding Bank in the name of the Company and designated for funding that portion
of each Mortgage Loan not funded by an Advance made against such Mortgage Loan
and for returning any excess payment from an Investor for a Pledged Mortgage or
Pledged Security.
5. The definition of "Maturity Date" in Section 1.1 of the Agreement
shall be amended by inserting the date "August 31, 1997" in place of "October
31, 1996" wherever it appears in such definition.
6. Section 2.1(b) of the Agreement is hereby amended to add the following
sections immediately after Section 2.1(b)(4)
-3-
<PAGE>
(5) No Advance shall be made against a Title I Mortgage Loan or
a HUD 203(K) Mortgage Loan.
7. Section 2.4 of the Agreement shall be deleted in its entirety and the
following shall be substituted in lieu thereof:
2.4 Interest.
--------
2.4(a) Except as otherwise provided in Section 2.4(f), (i) the unpaid
amount of each Warehousing Advance shall bear interest during its Wet Settlement
Period at the Wet Settlement Rate and (ii) the unpaid amount of each Warehousing
Advance shall bear interest during its Received Period at the Received Rate.
2.4(b) Except as otherwise provided in Section 2.4(f), the unpaid amount
of each Working Capital Advance shall bear interest, from the date of such
Advance until paid in full, at the Working Capital Rate.
2.4(c) The Company shall be entitled to receive certain benefits based
on the average monthly Eligible Balances of the Company maintained at a
Designated Bank. For the purposes hereof, all Advances shall be called the
"Applicable Advances". After the end of each calendar month, the Lender will
calculate the interest due for the applicable month, by electing a portion
("Balance Funded Portion") of the Applicable Advances which is equal to the
lesser of (a) the Applicable Advances outstanding during such month or (b) the
average amount of Eligible Balances on deposit in non-interest bearing accounts
with a Designated Bank during such month. The Balance Funded Portion of the
Applicable Advances shall bear interest at balance funded rates of (a) two and
one-quarter percent (2.25%) per annum for the Balance Funded Portion of Advances
outstanding during the Wet Settlement Period and (b) two percent (2.00%) per
annum for the Balance Funded Portion of Advances outstanding during the Received
Period.
The Balance Funded Portion of the Applicable Advances outstanding for a
month shall be determined by (a) first, deducting the average amount of Advances
outstanding during the Wet Settlement Period for a month from the average amount
of Eligible Balances on deposit in non-interest bearing accounts during such
month, but only to the extent of the average amount of such Eligible Balances
and (b) second, to the extent Eligible
-4-
<PAGE>
Balances on deposit in non-interest bearing accounts remain for such month,
deducting the average amount of Advances outstanding during the Received Period
for a month from the remaining average amount of such Eligible Balances during
such month, but only to the extent of the remaining average amount of such
Eligible Balances.
If, for any month, (i) a portion of the average amount of Eligible Balances
on deposit in non-interest bearing accounts remains ("Remainder") after the
Balance Funded Portion has been deducted or (ii) the Company has Eligible
Balances on deposit in interest bearing accounts in respect of which the Lender
has received a Depository Benefit, the Lender shall provide a benefit in the
form of an "Earnings Credit" on the Eligible Balances maintained in time deposit
accounts with a Designated Bank, and the Lender shall provide a benefit in the
form of an "Earnings Allowance" on the Eligible Balances maintained in demand
deposit accounts with a Designated Bank. Any Earnings Allowance shall be used
first and any Earnings Credit shall be used second as a credit against accrued
Miscellaneous Charges and fees, including, but not limited to Commitment Fees
and Warehousing Fees, and may be used, at the Lender's option, to reduce accrued
interest. Any Earnings Allowance not used during the month in which the benefit
was received shall be accumulated for use and must be used during the calendar
year in which the benefit was received. Any Earnings Credit not used during the
month in which the benefit was received shall be used to provide a cash benefit
to the Company.
The Lender's determination of the Balance Funded Portion, the Earnings
Credit and the Earnings Allowance for any month shall be determined by the
Lender in its sole discretion and shall be conclusive and binding absent
manifest error. In no event shall the aggregate amount of the benefits received
by the Company under this Section exceed the Depository Benefit.
Either party hereto may terminate the benefits provided for in this
Section, in whole or in part, effective immediately upon Notice to the other
party, if the terminating party shall have determined (which determination shall
be conclusive and binding absent manifest error) at any time that any applicable
law, rule, regulation, order or decree or any interpretation or administration
thereof by any governmental authority charged with the interpretation or
administration thereof, or compliance by
-5-
<PAGE>
such party with any request or directive (whether or not having the force of
law) of any such authority, shall make it unlawful or impossible for such party
to continue to offer or receive all or any part of the benefits provided for in
this Section.
2.4(d) Interest shall be computed on the basis of a 360-day year and
applied to the actual number of days elapsed in each interest calculation period
and shall be payable monthly in arrears, on the tenth day of each month for the
preceding month, commencing with the first month following the Closing Date and
on the Maturity Date. Except with respect to interest due on the Maturity Date,
the Lender shall provide the Company with a statement of interest due no later
than five (5) days before the date such interest is due.
2.4(e) If, for any reason, no interest is due on an Advance, the Company
agrees to pay to the Lender an administrative fee equal to one day of interest
on such Advance at the rate applicable to such Advances under the applicable
section hereof, as in effect on the date of such Advance. Administrative and
other fees shall be due and payable in the same manner as interest is due and
payable hereunder.
2.4(f) Upon demand of the Lender and upon Notice to the Company, after
the occurrence and during the continuation of an Event of Default, the unpaid
amount of each Advance shall bear interest until paid in full at a per annum
rate of interest (the "Default Rate") equal to four percent (4%) in excess of
the rate of interest otherwise applicable to such Advance pursuant to any other
subsection of this Section 2.4 or, if no rate is applicable, the highest rate
then applicable to any outstanding Advances.
8. Section 2.10 of the Agreement shall be deleted in its entirety and the
following shall be substituted in lieu thereof:
2.10 Miscellaneous Charges. The Company agrees to reimburse the Lender for
---------------------
miscellaneous charges and expenses (collectively, "Miscellaneous Charges")
incurred by or on behalf of the Lender in connection with the handling and
administration of Advances, and to reimburse the Lender for Miscellaneous
Charges incurred by or on behalf of the Lender in connection with the handling
and administration of the Collateral. For the purposes hereof, Miscellaneous
Charges shall include, but not be limited to,
-6-
<PAGE>
charges for wire transfers, check processing charges, charges for security
delivery fees, charges for overnight delivery of Collateral to Investors,
Funding Bank's service charges and Designated Bank's service charges.
Miscellaneous Charges are due when incurred, but shall not be delinquent if paid
within fifteen (15) days after receipt of an invoice or an account analysis
statement from the Lender.
9. Section 7.8 of the Agreement shall be deleted in its entirety and the
following shall be substituted in lieu thereof:
7.8 Liquidity. Permit the Liquid Assets of the Company (and its
---------
Subsidiaries, on a consolidated basis) at any time to be less than Five Hundred
Thousand Dollars ($500,000).
10. Upon execution of this Amendment, the Company agrees to pay to the
Lender the pro rata Commitment Fee on the Commitment Amount for the time period
from the Effective Date to and including December 31, 1996.
11. Exhibits C-SF and D-SF to the Agreement are hereby deleted in their
entirety and replaced with the new Exhibits C-SF and D-SF attached to this
Amendment. All references in the Agreement to Exhibits C-SF and D-SF shall be
deemed to refer to the new Exhibits C-SF and D-SF.
12. Exhibit I-SF to the Agreement is deleted in its entirety and replaced
with the new Exhibit I-SF attached to this Amendment. All references in this
Amendment and the Agreement to Exhibit I-SF shall be deemed to refer to the new
Exhibit I-SF.
13. The Company shall deliver to the Lender (a) an executed original of
this Amendment; (b) an executed Certificate of Secretary with corporate
resolutions; (c) a current certified tax, lien and judgment search of the
appropriate public records for the Company, including a search of Uniform
Commercial Code financing statements, which search shall not have disclosed the
existence of any prior Lien on the Collateral other than in favor of the Lender
or as permitted hereunder; (d) current Certificates of Good Standing of the
Company; (e) current insurance information; (f) the Commitment Fee for the
months of November and December, 1996; and (g) a Two Hundred Fifty Dollar ($250)
document production fee.
-7-
<PAGE>
14. The Company represents, warrants and agrees that (a) there exists no
Default or Event of Default under the Loan Documents, (b) the Loan Documents
continue to be the legal, valid and binding agreements and obligations of the
Company enforceable in accordance with their terms, as modified herein, (c) the
Lender is not in default under any of the Loan Documents and the Company has no
offset or defense to its performance or obligations under any of the Loan
Documents, (d) the representations contained in the Loan Documents remain true
and accurate in all respects, and (e) there has been no material adverse change
in the financial condition of the Company from the date of the Agreement to the
date of this Amendment.
15. Except as hereby expressly modified, the Agreement shall otherwise be
unchanged and shall remain in full force and effect, and the Company ratifies
and reaffirms all of its obligations thereunder.
16. This Amendment 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.
-8-
<PAGE>
IN WITNESS WHEREOF, the Company and the Lender have caused this Amendment
to be duly executed on their behalf by their duly authorized officers as of the
day and year above written.
NATIONAL MORTGAGE CORPORATION,
a Colorado corporation
By:_____________________________________
Its: ___________________________________
RESIDENTIAL FUNDING CORPORATION,
a Delaware corporation
By:_____________________________________
Its: ___________________________________
-9-
<PAGE>
STATE OF _______________ )
) ss
COUNTY OF ______________ )
On _________________, 1996, before me, a Notary Public, personally appeared
___________________________________, the ____________________ of NATIONAL
MORTGAGE CORPORATION, a Colorado corporation, personally known to me (or proved
to me on the basis of satisfactory evidence) to be the person whose name is
subscribed to the within instrument and acknowledged to me that he/she executed
the same in his/her authorized capacity, and that by his/her signature on the
instrument the person, or the entity upon behalf of which the person acted,
executed the instrument.
WITNESS my hand and official seal.
________________________________________
Notary Public
(SEAL) My Commission Expires:
STATE OF _______________ )
) ss
COUNTY OF ______________ )
On _________________, 1996, before me, a Notary Public, personally appeared
________________________________, the Director of RESIDENTIAL FUNDING
CORPORATION, a Delaware corporation, personally known to me (or proved to me on
the basis of satisfactory evidence) to be the person whose name is subscribed to
the within instrument and acknowledged to me that he/she executed the same in
his/her authorized capacity, and that by his/her signature on the instrument the
person, or the entity upon behalf of which the person acted, executed the
instrument.
WITNESS my hand and official seal.
________________________________________
Notary Public
(SEAL) My Commission Expires:
-10-
<PAGE>
THIRD AMENDMENT TO
------------------
WAREHOUSING CREDIT AND SECURITY AGREEMENT
-----------------------------------------
THIS THIRD AMENDMENT TO WAREHOUSING CREDIT AND SECURITY AGREEMENT (this
"Amendment") is entered into as of this 11th day of April 1997, by and between
NATIONAL MORTGAGE CORPORATION, a Colorado corporation (the "Company") and
RESIDENTIAL FUNDING CORPORATION, a Delaware corporation (the "Lender").
WHEREAS, the Company and the Lender have entered into a single family
revolving warehouse facility with a present Commitment Amount of Twenty-One
Million One Hundred Thousand Dollars ($21,100,000), to finance the origination
and acquisition of Mortgage Loans as evidenced by a Warehousing Promissory Note
in the principal sum of Twenty-One Million One Hundred Thousand Dollars
($21,100,000), dated January 19, 1996, a Working Capital Promissory Note in the
principal sum of One Million One Hundred Thousand Dollars ($1,100,000), dated
January 19, 1996 (the "Notes"), and by a Warehousing Credit and Security
Agreement dated as of January 19, 1996, as the same may have been amended or
supplemented (the "Agreement"); and
WHEREAS, the Company has requested the Lender to temporarily increase the
Commitment Amount, and the Lender has agreed to such increase subject to the
terms and conditions of this Amendment.
NOW, THEREFORE, for and in consideration of the foregoing and of the mutual
covenants, agreements and conditions hereinafter set forth and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. All capitalized terms used herein and not otherwise defined shall have
their respective meanings set forth in the Agreement.
2. The effective date ("Effective Date") of this Amendment shall be
4/16/97, the date on which the Company has complied with all the terms and
conditions of this Amendment.
-1-
<PAGE>
3. Section 1.1 of the Agreement is hereby amended by adding the following
definitions:
"Commitment Amount" means Twenty-One Million One Hundred Thousand Dollars
($21,100,000). Notwithstanding the foregoing, during the period from April 14,
1997 to and including April 30, 1997, the Commitment Amount shall be temporarily
increased to Thirty Million One Hundred Thousand Dollars ($30,100,000). On the
first Business Day following the expiration of the temporary increase of the
Commitment Amount, the Company shall repay to the Lender the amount by which the
outstanding Advances exceed the Commitment Amount.
4. Upon execution of this Amendment, the Company agrees to pay to the
Lender the pro rata Commitment Fee on the increase portion of the Commitment
Amount for the time period from the Effective Date to and including April 30,
1997.
5. Exhibit A-1 to the Agreement is deleted in its entirety and Exhibit
----------- -------
A-1 attached to this Amendment is substituted in lieu thereof. The Warehousing
- ---
Promissory Note is amended and restated in its entirety as set forth in the
First Amended and Restated Warehousing Promissory Note, in the form of Exhibit
-------
A-1 attached to this Amendment. All references in this Amendment and in the
- ---
Agreement to the Warehousing Promissory Note shall be deemed to refer to the
First Amended and Restated Warehousing Promissory Note delivered in connection
with this Amendment.
6. The Company shall deliver to the Lender (a) an executed original of
this Amendment; (b) an executed original of the First Amended and Restated
Warehousing Promissory Note; (c) a Certificate of Secretary with Corporate
Resolutions; (d) the Commitment Fee on the increase portion of the Commitment
Amount; and (e) a Two Hundred Fifty Dollar ($250) document production fee.
7. The Company represents, warrants and agrees that (a) there exists no
Default or Event of Default under the Loan Documents, (b) the Loan Documents
continue to be the legal, valid and binding agreements and obligations of the
Company enforceable in accordance with their terms, as modified herein, (c) the
Lender is not in default under any of the Loan Documents and the Company has no
offset or defense to its performance or obligations under any of the Loan
Documents, (d) the
-2-
<PAGE>
representations contained in the Loan Documents remain true and accurate in all
respects, and (e) there has been no material adverse change in the financial
condition of the Company from the date of the Agreement to the date of this
Amendment.
8. Except as hereby expressly modified, the Agreement shall otherwise be
unchanged and shall remain in full force and effect, and the Company ratifies
and reaffirms all of its obligations thereunder.
9. This Amendment 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.
IN WITNESS WHEREOF, the Company and the Lender have caused this Amendment
to be duly executed on their behalf by their duly authorized officers as of the
day and year above written.
NATIONAL MORTGAGE CORPORATION,
a Colorado corporation
By:___________________________________
Its: _________________________________
RESIDENTIAL FUNDING CORPORATION,
a Delaware corporation
By:___________________________________
Its: _________________________________
-3-
<PAGE>
STATE OF _______________ )
) ss
COUNTY OF ______________ )
On __________________________, 1997, before me, a Notary Public, personally
appeared __________________________________, the ______________________ of
NATIONAL MORTGAGE CORPORATION, a Colorado corporation, personally known to me
(or proved to me on the basis of satisfactory evidence) to be the person whose
name is subscribed to the within instrument and acknowledged to me that he/she
executed the same in his/her authorized capacity, and that by his/her signature
on the instrument the person, or the entity upon behalf of which the person
acted, executed the instrument.
WITNESS my hand and official seal.
_______________________________________
Notary Public
(SEAL) My Commission Expires:
STATE OF _______________ )
) ss
COUNTY OF ______________ )
On _____________________________, 1997, before me, a Notary Public, personally
appeared __________________________________, the Director of RESIDENTIAL FUNDING
CORPORATION, a Delaware corporation, personally known to me (or proved to me on
the basis of satisfactory evidence) to be the person whose name is subscribed to
the within instrument and acknowledged to me that he/she executed the same in
his/her authorized capacity, and that by his/her signature on the instrument the
person, or the entity upon behalf of which the person acted, executed the
instrument.
WITNESS my hand and official seal.
_______________________________________
Notary Public
(SEAL) My Commission Expires:
-4-
<PAGE>
FOURTH AMENDMENT TO
-------------------
WAREHOUSING CREDIT AND SECURITY AGREEMENT
-----------------------------------------
THIS FOURTH AMENDMENT TO WAREHOUSING CREDIT AND SECURITY AGREEMENT (this
"Amendment") is entered into as of this 16th day of May 1997, by and between
NATIONAL MORTGAGE CORPORATION, a Colorado corporation (the "Company") and
RESIDENTIAL FUNDING CORPORATION, a Delaware corporation (the "Lender").
WHEREAS, the Company and the Lender have entered into a single family
revolving warehouse facility with a present Commitment Amount of Twenty-One
Million One Hundred Thousand Dollars ($21,100,000), to finance the origination
and acquisition of Mortgage Loans as evidenced by a First Amended and Restated
Warehousing Promissory Note in the principal sum of Thirty Million One Hundred
Thousand Dollars ($30,100,000), dated April 10, 1997, a Working Capital
Promissory Note in the principal sum of One Million One Hundred Thousand Dollars
($1,100,000), dated January 19, 1996 (the "Notes"), and by a Warehousing Credit
and Security Agreement dated as of January 19, 1996, as the same may have been
amended or supplemented (the "Agreement"); and
WHEREAS, the Company has requested the Lender to temporarily increase the
Commitment Amount, and the Lender has agreed to such increase subject to the
terms and conditions of this Amendment.
NOW, THEREFORE, for and in consideration of the foregoing and of the mutual
covenants, agreements and conditions hereinafter set forth and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. All capitalized terms used herein and not otherwise defined shall have
their respective meanings set forth in the Agreement.
2. The effective date ("Effective Date") of this Amendment shall be
5/16/97, the date on which the Company has complied with all the terms and
conditions of this Amendment.
-1-
<PAGE>
3. Section 1.1 of the Agreement is hereby amended to delete the definition
of "Commitment Amount" in its entirety and to substitute the following in lieu
thereof:
"Commitment Amount" means Twenty-One Million One Hundred Thousand
-----------------
Dollars ($21,100,000). Notwithstanding the foregoing, during the period
from May 16, 1997 to and including June 30, 1997, the Commitment Amount
shall be temporarily increased to Forty-One Million One Hundred Thousand
Dollars ($41,100,000). On the first Business Day following the expiration
of the temporary increase of the Commitment Amount, the Company shall
repay to the Lender the amount by which the outstanding Advances exceed
the Commitment Amount.
4. Upon execution of this Amendment, the Company agrees to pay to the
Lender the pro rata Commitment Fee on the increase portion of the Commitment
Amount for the time period from May 16, 1997, to and including June 30, 1997.
5. Exhibit A-1 to the Agreement is deleted in its entirety and Exhibit A-1
----------- -----------
attached to this Amendment is substituted in lieu thereof. The First Amended
and Restated Warehousing Promissory Note is amended and restated in its entirety
as set forth in the Second Amended and Restated Warehousing Promissory Note, in
the form of Exhibit A-1 attached to this Amendment. All references in this
-----------
Amendment and in the Agreement to the First Amended and Restated Warehousing
Promissory Note shall be deemed to refer to the Second Amended and Restated
Warehousing Promissory Note delivered in connection with this Amendment.
6. The Company shall deliver to the Lender (a) an executed original of
this Amendment; (b) an executed original of the Second Amended and Restated
Warehousing Promissory Note; (c) a Certificate of Secretary with Corporate
Resolutions; (d) the Commitment Fee on the increase portion of the Commitment
Amount; and (e) a Two Hundred Fifty Dollar ($250) document production fee.
7. The Company represents, warrants and agrees that (a) there exists no
Default or Event of Default under the Loan Documents, (b) the Loan Documents
continue to be the legal, valid
-2-
<PAGE>
and binding agreements and obligations of the Company enforceable in accordance
with their terms, as modified herein, (c) the Lender is not in default under any
of the Loan Documents and the Company has no offset or defense to its
performance or obligations under any of the Loan Documents, (d) the
representations contained in the Loan Documents remain true and accurate in all
respects, and (e) there has been no material adverse change in the financial
condition of the Company from the date of the Agreement to the date of this
Amendment.
8. Except as hereby expressly modified, the Agreement shall otherwise be
unchanged and shall remain in full force and effect, and the Company ratifies
and reaffirms all of its obligations thereunder.
9. This Amendment 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.
IN WITNESS WHEREOF, the Company and the Lender have caused this Amendment
to be duly executed on their behalf by their duly authorized officers as of the
day and year above written.
NATIONAL MORTGAGE CORPORATION,
a Colorado corporation
By:_____________________________________
Its:____________________________________
RESIDENTIAL FUNDING CORPORATION,
a Delaware corporation
By:_____________________________________
Its:____________________________________
-3-
<PAGE>
STATE OF _______________ )
) ss
COUNTY OF ______________ )
On _________________, 1997, before me, a Notary Public, personally appeared
________________________________, the _____________________ of NATIONAL MORTGAGE
CORPORATION, a Colorado corporation, personally known to me (or proved to me on
the basis of satisfactory evidence) to be the person whose name is subscribed to
the within instrument and acknowledged to me that he/she executed the same in
his/her authorized capacity, and that by his/her signature on the instrument the
person, or the entity upon behalf of which the person acted, executed the
instrument.
WITNESS my hand and official seal.
_______________________________________
Notary Public
(SEAL) My Commission Expires:
STATE OF _______________ )
) ss
COUNTY OF ______________ )
On _________________, 1997, before me, a Notary Public, personally appeared
________________________________, the Director of RESIDENTIAL FUNDING
CORPORATION, a Delaware corporation, personally known to me (or proved to me on
the basis of satisfactory evidence) to be the person whose name is subscribed to
the within instrument and acknowledged to me that he/she executed the same in
his/her authorized capacity, and that by his/her signature on the instrument the
person, or the entity upon behalf of which the person acted, executed the
instrument.
WITNESS my hand and official seal.
_____________________________________
Notary Public
(SEAL) My Commission Expires:
-4-
<PAGE>
FIFTH AMENDMENT TO
------------------
WAREHOUSING CREDIT AND SECURITY AGREEMENT
-----------------------------------------
THIS FIFTH AMENDMENT TO WAREHOUSING CREDIT AND SECURITY AGREEMENT (this
"Amendment") is entered into as of this 12th day of August 1997, by and between
NATIONAL MORTGAGE CORPORATION, a Colorado corporation (the "Company") and
RESIDENTIAL FUNDING CORPORATION, a Delaware corporation (the "Lender").
WHEREAS, the Company and the Lender have entered into a single family
revolving warehouse facility with a present Commitment Amount of Twenty-One
Million One Hundred Thousand Dollars ($21,100,000), to finance the origination
and acquisition of Mortgage Loans as evidenced by a Second Amended and Restated
Warehousing Promissory Note in the principal sum of Forty-One Million One
Hundred Thousand Dollars ($41,100,000), dated May 16, 1997, and a Working
Capital Promissory Note in the principal sum of One Million One Hundred Thousand
Dollars ($1,100,000), dated January 19, 1996 (the "Notes"), and by a Warehousing
Credit and Security Agreement dated January 19, 1996, as the same may have been
amended or supplemented (the "Agreement");
WHEREAS, the Company has requested the Lender to extend the period for
which the Commitment under the Agreement has been made and to amend certain
other terms of the Agreement, and the Lender has agreed to such extension and
amendment of the Agreement subject to the terms and conditions of this
Amendment;
NOW, THEREFORE, for and in consideration of the foregoing and of the mutual
covenants, agreements and conditions hereinafter set forth and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. All capitalized terms used herein and not otherwise defined shall have
their respective meanings set forth in the Agreement.
2. The effective date ("Effective Date") of this Amendment shall be
9/2/97, the date on which the Company has complied with all the terms and
conditions of this Amendment.
-1-
<PAGE>
3. Section 1.1 of the Agreement shall be amended by adding the following
definitions in the appropriate alphabetical order:
"Designated Bank Charges" means any fees, interest or other charges that
-----------------------
would otherwise be payable to a Designated Bank, including Federal Deposit
Insurance Corporation insurance premiums, service charges and such other charges
as may be imposed by governmental authorities from time to time.
"High LTV Mortgage Loan" means a Mortgage Loan of which the sum of the
----------------------
maximum amount available to be borrowed thereunder (whether or not borrowed), at
the time of origination plus the Mortgage Note Amounts of all other Mortgage
Loans secured by the related improved real property exceeds one hundred percent
(100%) of the appraised value of such related improved real property.
"Manufactured Home" means a structure that is built on a permanent chassis
-----------------
(steel frame) with the wheel assembly necessary for transportation in one or
more sections to a permanent site or semi-permanent site and which has been
built in compliance with the National Manufactured Housing Construction and
Safety Standards established by HUD.
"Receivables" has the meaning set forth in Section 3.1(g) hereof.
-----------
"Rejected Mortgage Loan" means a Mortgage Loan which was warehoused by the
----------------------
Lender under the terms of this Agreement and committed for purchase under a
Purchase Commitment, but which has been rejected for purchase by an Investor, or
for inclusion in a Mortgage Pool by the pool custodian.
"Repurchase Advance" means an Advance made against a Repurchased Mortgage
------------------
Loan or a Rejected Mortgage Loan. The Lender shall pre-approve each Repurchase
Advance.
"Repurchased Mortgage Loan" means a Mortgage Loan which has been
-------------------------
repurchased from an investor or a Mortgage Pool pursuant to a Servicing Contract
or sales contract, or for which the Company has paid the Release Amount to the
Lender as required under Sections 2.5(d) or 8.1(d) using the proceeds of a
Repurchase Advance, or is in the process of foreclosure.
-2-
<PAGE>
"Repurchase Rate" means a floating rate of interest equal to two and one-
---------------
quarter percent (2.25%) per annum over LIBOR. The Repurchase Rate shall be
adjusted on and as of the effective date of each weekly change in LIBOR. The
Lender's determination of the Repurchase Rate as of any date of determination
shall be conclusive and binding, absent manifest error.
"RFC Mortgage Loan" means a Mortgage Loan covered by a Purchase Commitment
-----------------
issued by RFC.
4. Section 1.1 of the Agreement shall be amended to delete the definitions
of "Conventional Mortgage Loan," "Debt," "Eligible Balances," "Fair Market
Value," "Home Equity Loan," "Maturity Date," "Mortgage," "Mortgage Note Amount,"
"Second Mortgage Loan" and "Warehousing Advance" in their entirety, replacing
them with the following definitions:
"Conventional Mortgage Loan" means a closed-end First Mortgage Loan other
--------------------------
than an FHA insured Mortgage Loan, a VA guaranteed Mortgage Loan or a High LTV
Mortgage Loan.
"Debt" means, with respect to any Person, at any date (a) all indebtedness
----
or other obligations of such Person which, in accordance with GAAP, would be
included in determining total liabilities as shown on the liabilities side of a
balance sheet of such Person at such date; and (b) all indebtedness or other
obligations of such Person for borrowed money or for the deferred purchase price
of property or services; provided that for purposes of this Agreement, there
shall be excluded from Debt at any date loan loss reserves, Subordinated Debt
not due within one year of such date, and deferred taxes arising from
capitalized excess servicing fees and capitalized servicing rights.
"Eligible Balances" means all funds of or maintained by the Company and its
-----------------
Subsidiaries in accounts at a Designated Bank, less balances to support float,
reserve requirements, and such other reductions as may be imposed by
governmental authorities from time to time.
"Fair Market Value" means at any time for a Mortgage Loan or the related
-----------------
Mortgage-backed Security (if such Mortgage Loan is to be used to back a
Mortgage-backed Security), (a) if such Mortgage Loan or the related Mortgage-
backed Security is covered by a Purchase Commitment, the Committed Purchase
Price, or (b)
-3-
<PAGE>
otherwise, the market price for such Mortgage Loan or Mortgage-backed Security,
determined by the Lender based on market data for similar Mortgage Loans or
Mortgage-backed Securities and such other criteria as the Lender deems
appropriate.
"Home Equity Loan" means an open-ended revolving line of credit that is a
----------------
Mortgage Loan secured by either a First Mortgage or a Second Mortgage, which is
not a High LTV Mortgage Loan or a Title I Mortgage Loan.
"Liquid Assets" means, with respect to any Person at any date, the
-------------
following assets owned by such Person on such date: cash, funds on deposit in
any bank located in the United States, investment grade commercial paper, money
market funds, marketable securities and the excess, if any, of Mortgage Loans
and Mortgage-backed Securities held for sale (valued in accordance with GAAP)
over the outstanding aggregate principal amount of notes or other debt
instruments against which such Mortgage Loans or Mortgage-backed Securities are
pledged as Collateral.
"Maturity Date" shall mean the earlier of: (a) the close of business on
-------------
August 31, 1998, as such date may be extended from time to time in writing by
the Lender, in its sole discretion, on which date the Commitment shall expire of
its own term, and without the necessity of action by the Lender, and (b) the
date the Advances become due and payable pursuant to Section 8.2 below.
"Mortgage" means a mortgage or deed of trust on improved real property
--------
(including, without limitation, real property to which a Manufactured Home has
been affixed in a manner such that the Lien of a mortgage or deed of trust would
attach to such Manufactured Home under applicable real property law). A
Mortgage may be a First Mortgage or a Second Mortgage.
"Mortgage Note Amount" means, as of the date of determination, the then
--------------------
outstanding unpaid principal amount of a Mortgage Note (whether or not an
additional amount is available to be drawn thereunder).
"Second Mortgage Loan" means a closed-end Mortgage Loan secured by a Second
--------------------
Mortgage, which is not a Title I Mortgage Loan or a High LTV Mortgage Loan.
-4-
<PAGE>
"Warehousing Advance" means an Advance made against a Conforming Mortgage
-------------------
Loan, a Jumbo Mortgage Loan, a Nonconforming Mortgage Loan that is subject to a
Purchase Commitment in accordance with the terms of this Agreement, a Rejected
Mortgage Loan, or a Repurchased Mortgage Loan.
5. Section 2.1(b) of the Agreement is hereby deleted in its entirety and
the following is substituted in lieu thereof:
2.1(b) Warehousing Advances other than Repurchase Advances shall be used
by the Company solely for the purpose of funding the acquisition or origination
of Mortgage Loans. Repurchase Advances shall be used by the Company solely for
the purpose of repurchasing Repurchase Mortgage Loans from an investor or
Mortgage Pool or repaying a Warehousing Advance outstanding against a Rejected
Mortgage Loan. All Warehousing Advances shall be made at the request of the
Company, in the manner hereinafter provided in Section 2.2 hereof, against the
pledge of such Mortgage Loans as Collateral therefor. Working Capital Advances
shall be used by the Company solely for short term working capital purposes. The
following limitations on the Advances shall be applicable:
(1) No Warehousing Advance shall be made against a Mortgage Loan
other than a Single Family Loan, a Conforming Mortgage Loan or a Jumbo
Mortgage Loan, and no Warehousing Advance other than a Repurchase
Advance shall be made against a Mortgage Loan that is not covered by a
Purchase Commitment.
(2) The aggregate amount of Wet Settlement Advances outstanding
at any one time shall not exceed Six Million Dollars ($6,000,000).
(3) No Warehousing Advance other than a Repurchase Advance shall
be made against any Mortgage Loan which was closed more than ninety
(90) days prior to the date of the requested Advance, except with the
Lender's prior written consent.
(4) The aggregate amount of Working Capital Advances outstanding
at any one time shall not exceed One Million One Hundred Thousand
Dollars ($1,100,000) (the "Working Capital Sublimit").
-5-
<PAGE>
(5) No Advance shall be made against a Title I Mortgage Loan, a
HUD 203(K) Mortgage Loan or a High LTV Mortgage Loan.
(6) The aggregate amount of Repurchase Advances outstanding at
any one time shall not exceed Two Million Five Hundred Thousand
Dollars ($2,500,000).
6. Section 2.1(c) of the Agreement shall be deleted in its entirety and
the following shall be substituted in lieu thereof:
2.1(c) No Warehousing Advance shall exceed the following amount
applicable to the type of Collateral at the time it is pledged:
(1) For a Conforming Mortgage Loan, a Jumbo Mortgage Loan or a
Nonconforming Mortgage Loan, pledged hereunder, other than an RFC
Mortgage Loan, the lesser of (i) ninety-eight percent (98%) of the
Committed Purchase Price or (ii) the Mortgage Note Amount.
(2) For a Repurchased Mortgage Loan pledged hereunder, ninety-
five percent (95%) of the Mortgage Note Amount.
7. Section 2.4 of the Agreement shall be deleted in its entirety and the
following shall be substituted in lieu thereof:
2.4 Interest.
--------
2.4(a) Except as otherwise provided in Section 2.4(g) hereof, (i) the
unpaid amount of each Warehousing Advance other than a Repurchase Advance shall
bear interest during the Wet Settlement Period at the Wet Settlement Rate, and
(ii) the unpaid amount of each Warehousing Advance other than a Repurchase
Advance shall bear interest during the Received Period at the Received Rate.
2.4(b) Except as otherwise provided in Section 2.4(g) hereof, the unpaid
amount of each Working Capital Advance shall bear interest, from the date of
such Advance, until paid in full, at the Working Capital Rate.
-6-
<PAGE>
2.4(c) Except as otherwise provided in Section 2.4(g) hereof, the unpaid
amount of each Repurchase Advance shall bear interest, from the date of such
Advance, until paid in full, at the Repurchase Rate.
2.4(d) The Company is entitled to receive a benefit in the form of an
"Earnings Credit" on the portion of the Eligible Balances maintained in time
deposit accounts with a Designated Bank, and the Company is entitled to receive
a benefit in the form of an "Earnings Allowance" on the portion of the Eligible
Balances maintained in demand deposit accounts with a Designated Bank. Any
Earnings Allowance shall be used first and any Earnings Credit shall be used
second as a credit against accrued Designated Bank Charges, any other
Miscellaneous Charges and fees, including, but not limited to Commitment Fees
and Warehousing Fees, and may be used, at the Lender's option, to reduce accrued
interest. Any Earnings Allowance not used during the month in which the benefit
was received shall be accumulated for use and must be used within six (6) months
of the month in which the benefit was received. Any Earnings Credit not used
during the month in which the benefit was received shall be used to provide a
cash benefit to the Company. The Lender's determination of the Earnings Credit
and the Earnings Allowance for any month shall be determined by the Lender in
its sole discretion and shall be conclusive and binding absent manifest error.
In no event shall the benefit received by the Company exceed the Depository
Benefit.
Either party hereto may terminate the benefits provided for in this Section
effective immediately upon Notice to the other party, if the terminating party
shall have determined (which determination shall be conclusive and binding
absent manifest error) at any time that any applicable law, rule, regulation,
order or decree or any interpretation or administration thereof by any
governmental authority charged with the interpretation or administration
thereof, or compliance by such party with any request or directive (whether or
not having the force of law) of any such authority, shall make it unlawful or
impossible for such party to continue to offer or receive the benefits provided
for in this Section.
2.4(e) Interest shall be computed on the basis of a 360-day year and
applied to the actual number of days elapsed in
-7-
<PAGE>
each interest calculation period and shall be payable monthly in arrears, on the
tenth day of each month for the preceding month, commencing with the first month
following the Effective Date and on the Maturity Date. Except with respect to
interest due on the Maturity Date, the Lender shall provide the Company with a
statement of interest due no later than five (5) days before the date such
interest is due.
2.4(f) If, for any reason, no interest is due on an Advance, the Company
agrees to pay to the Lender an administrative fee equal to one day of interest
on such Advance at the rate applicable to such Advances under the applicable
section hereof, as in effect on the date of such Advance. Administrative and
other fees shall be due and payable in the same manner as interest is due and
payable hereunder.
2.4(g) Upon Notice to the Company, after the occurrence and during the
continuation of an Event of Default, the unpaid amount of each Advance shall
bear interest until paid in full at a per annum rate of interest (the "Default
Rate") equal to four percent (4%) in excess of the rate of interest otherwise
applicable to such Advance pursuant to any other subsection of this Section 2.4
or, if no rate is applicable, the highest rate then applicable to any
outstanding Advances.
8. Section 2.5(d) of the Agreement shall be deleted in its entirety and
the following shall be substituted in lieu thereof:
2.5(d) The Company shall be obligated to pay to the Lender, without the
necessity of prior demand or notice from the Lender, and the Company authorizes
the Lender to cause the Funding Bank to charge the Company's account for, the
amount of any outstanding Warehousing Advance against a specific Pledged
Mortgage, upon the earliest occurrence of any of the following events:
(1) For a Pledged Mortgage with respect to which a longer or
shorter period is not prescribed elsewhere in the Section 2.5(d), one
hundred eighty (180) days elapse from the date of the initial
Warehousing Advance made by the Lender against such Pledged Mortgage,
whether or not such Pledged Mortgage is included in an Eligible
Mortgage Pool.
-8-
<PAGE>
(2) Sixty (60) days elapse from the date the Pledged Mortgage
was delivered to an Investor for examination and purchase, without the
purchase being made, or upon rejection of the Pledged Mortgage as
unsatisfactory by an Investor.
(3) One (1) Business Day elapses from the date an Advance was
made and the Pledged Mortgage which was to have been funded by such
Advance is not closed and funded.
(4) Seven (7) Business Days elapse from the date a Wet
Settlement Advance was made without receipt by the Lender of all
Collateral Documents relating to such Pledged Mortgage required to be
delivered to the Lender within such seven (7) Business Day period
pursuant to Exhibit D-SF, or such Collateral Documents, upon
examination by the Lender, are found not to be in compliance with the
requirements of this Agreement or the related Purchase Commitment;
provided, however, if the Wet Settlement Advance was made against a
Repurchased Mortgage Loan, twenty (20) days elapse from the date of
such Advance without receipt by the Lender of all Collateral Documents
relating to such Pledged Mortgage, or such Collateral Documents, upon
examination by the Lender, are found not to be in compliance with the
requirements of this Agreement.
(5) Ten (10) Business Days elapse from the date a Collateral
Document was delivered to the Company for correction or completion
under a Trust Receipt, without being returned to the Lender, and one
(1) Business Day elapses after the Lender's demand in writing to the
Company for payment of such Advance.
(6) On the date on which a Pledged Mortgage is determined to
have been originated based on untrue, incomplete or inaccurate
information, whether or not the Company had knowledge of such
misrepresentation or incorrect information, or the Pledged Mortgage is
defaulted and remains in default for a period of sixty (60) days or
more.
-9-
<PAGE>
(7) For any Pledged Mortgage other than a Repurchased Mortgage
Loan or a Rejected Mortgage Loan, one hundred twenty (120) days elapse
from the date an Advance was made against a Pledged Mortgage without
receipt of the items required in Section 2.2(d) hereof, or such items,
upon examination by the Lender, are found not to be in compliance with
the requirements of this Agreement or the related Purchase Commitment.
(8) If the outstanding Warehousing Advances (other than
Repurchase Advances) against Pledged Mortgages of the specific
Mortgage Loan type of such Pledged Mortgage exceed the aggregate
Purchase Commitments for such Mortgage Loan type.
(9) For a Mortgage Loan, other than a Repurchased Mortgage Loan
or Rejected Mortgage Loan, three (3) Business Days after the mandatory
delivery date of the related Purchase Commitment and the specific
Pledged Mortgage was not delivered under the Purchase Commitment prior
to such mandatory delivery date, or the Purchase Commitment is
terminated; unless in each case, such Pledged Mortgage is eligible for
delivery to an Investor under a comparable Purchase Commitment
acceptable to the Lender.
(10) Upon sale, maturity or other disposition of the Pledged
Mortgage.
(11) Three hundred sixty (360) days elapse from the date of the
initial Advance made by the Lender against a Repurchased Mortgage Loan
or a Rejected Mortgage Loan.
(12) One (1) Business Day immediately preceding the date
scheduled for the foreclosure or trustee sale of the premises securing
a Rejected Mortgage Loan or Repurchased Mortgage Loan.
(13) If the Pledged Mortgage is included in a Mortgage Pool,
then, if the Mortgage Pool is an Eligible Mortgage Pool, upon sale of
the Mortgage-backed Security, or if the Mortgage Pool is not an
Eligible Mortgage Pool, within two (2) Business Days
-10-
<PAGE>
after delivery of the Pledged Mortgages to the pool custodian.
9. Section 2.5 of the Agreement is further amended to add the following
section immediately after Section 2.5(g):
2.5(h) In addition to the payments required pursuant to Section 2.5(d),
the Company shall be obligated to pay to the Lender, without the necessity of
prior demand or notice from the Lender, and the Company authorizes the Lender to
cause the Funding Bank to charge the Company's account for, the following
amounts in respect of outstanding Advances in the following circumstances:
(1) If the principal amount of any Pledged Mortgage is prepaid
in whole or in part while an Advance is outstanding against such
Pledged Mortgage, the amount of such prepayment to be applied to such
Advance.
(2) On the fifteenth day of each month occurring more than sixty
(60) days after the date of the initial Advance made by the Lender
against a Repurchased Mortgage Loan or Rejected Mortgage Loan pledged
hereunder (whether or not initially made as a Repurchase Advance), the
Company shall prepay the outstanding principal amount of such
Repurchase Advance by five percent (5%) of the Mortgage Note Amount.
10. Section 2.10 of the Agreement shall be deleted in its entirety and the
following shall be substituted in lieu thereof:
2.10 Miscellaneous Charges. The Company agrees to reimburse the Lender
---------------------
for miscellaneous charges and expenses (collectively, "Miscellaneous Charges")
incurred by or on behalf of the Lender in connection with the handling and
administration of Advances, and to reimburse the Lender for Miscellaneous
Charges incurred by or on behalf of the Lender in connection with the handling
and administration of the Collateral. For the purposes hereof, Miscellaneous
Charges shall include, but not be limited to, charges for wire transfers, check
processing charges, charges for security delivery fees, charges for overnight
delivery of Collateral to Investors, Funding Bank's service charges and
Designated Bank Charges. Miscellaneous Charges are due when
-11-
<PAGE>
incurred, but shall not be delinquent if paid within fifteen (15) days after
receipt of an invoice or an account analysis statement from the Lender.
11. Section 3.2(d) of the Agreement shall be deleted in its entirety and
the following shall be substituted in lieu thereof:
3.2(d) The Lender shall have the exclusive right to the possession of the
Pledged Securities or, if the Pledged Securities are issued in book-entry form
or issued in certificated form and delivered to a clearing corporation (as such
term is defined in the Uniform Commercial Code of Minnesota) or its nominee, the
Lender shall have the right to have the Pledged Securities registered in the
name of a securities intermediary (as such term is defined in the Uniform
Commercial Code of Minnesota) in an account containing only customer securities
for the account of the Lender, and the Lender shall have the right to cause
delivery of the Pledged Securities to be made to the Investor or the book
entries registered in the name of the Investor or the Investor's designee only
against payment therefor. The Company acknowledges that the Lender may enter
into one or more standing arrangements with other financial institutions for the
issuance of Pledged Securities in book entry form in the name of such other
financial institutions, as agent or securities intermediary for the Lender, and
the Company agrees upon request of the Lender, to execute and deliver to such
other financial institutions the Company's written concurrence in any such
standing arrangements.
12. Section 5.15(d) of the Agreement shall be deleted in its entirety and
the following shall be substituted in lieu thereof:
5.15(d) Except as set forth in the loan history of any Rejected Mortgage
Loan or Repurchased Mortgage Loan, no default has occurred and is continuing for
more than sixty (60) days under any Mortgage Loan included in the Pledged
Mortgages without the Advance against such Pledged Mortgage having been repaid
in accordance with Section 2.6(d)(6) hereof, provided, however, that with
respect to Pledged Mortgages which have already been pledged as Collateral
hereunder, if any default has occurred, the Company will promptly notify the
Lender.
-12-
<PAGE>
13. Section 5.15 of the Agreement shall be further amended to add the
following section immediately after Section 5.15(i):
5.15(j) Each Pledged Mortgage secured by real property to which a
Manufactured Home is affixed will create a valid Lien on such manufactured home
that will have priority over any other Lien on such Manufactured Home, whether
or not arising under applicable real property law.
14. Section 7.7 of the Agreement shall be deleted in its entirety and the
following shall be substituted in lieu thereof:
7.7 Minimum Adjusted Tangible Net Worth. Permit Adjusted Tangible Net
-----------------------------------
Worth of the Company (and its Subsidiaries, on a consolidated basis) at any time
to be less than Seven Million Dollars ($7,000,000).
15. Upon execution of this Amendment, the Company agrees to pay to the
Lender the pro rata Commitment Fee on the portion of the Commitment Amount for
the month of September 1997.
16. Exhibits C-REP, C-SF, D-REP and D-SF to the Agreement are hereby
deleted in their entirety and replaced with the new Exhibits C-REP, C-SF, D-REP
and D-SF attached to this Amendment. All references in the Agreement to
Exhibits C-REP, C-SF, D-REP and D-SF shall be deemed to refer to the new
Exhibits C-REP, C-SF, D-REP and D-SF.
17. Exhibit I-SF to the Agreement is deleted in its entirety and replaced
with the new Exhibit I-SF attached to this Amendment. All references in this
Amendment and the Agreement to Exhibit I-SF shall be deemed to refer to the new
Exhibit I-SF.
18. The Company shall deliver to the Lender (a) an executed original of
this Amendment; (b) an executed Certificate of Secretary with corporate
resolutions; (c) an executed Funding Bank Agreement; (d) a current certified
tax, lien and judgment search of the appropriate public records for the Company,
including a search of Uniform Commercial Code financing statements, which search
shall not have disclosed the existence of any prior Lien on the Collateral other
than in favor of the Lender or as permitted hereunder; (e) current Certificates
of Good Standing of the Company; (f) current insurance information; and (g) the
Commitment Fee for the month of September 1997.
-13-
<PAGE>
19. The Company represents, warrants and agrees that (a) there exists no
Default or Event of Default under the Loan Documents, (b) the Loan Documents
continue to be the legal, valid and binding agreements and obligations of the
Company enforceable in accordance with their terms, as modified herein, (c) the
Lender is not in default under any of the Loan Documents and the Company has no
offset or defense to its performance or obligations under any of the Loan
Documents, (d) the representations contained in the Loan Documents remain true
and accurate in all respects, and (e) there has been no material adverse change
in the financial condition of the Company from the date of the Agreement to the
date of this Amendment.
20. Except as hereby expressly modified, the Agreement shall otherwise be
unchanged and shall remain in full force and effect, and the Company ratifies
and reaffirms all of its obligations thereunder.
21. The Company and the Lender hereby acknowledge and agree that the First
Amended and Restated Warehousing Credit and Security Agreement dated as of March
7, 1995 between them has been terminated.
22. This Amendment 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.
-14-
<PAGE>
IN WITNESS WHEREOF, the Company and the Lender have caused this Amendment
to be duly executed on their behalf by their duly authorized officers as of the
day and year above written.
NATIONAL MORTGAGE CORPORATION,
a Colorado corporation
By:____________________________________
Its:___________________________________
RESIDENTIAL FUNDING CORPORATION,
a Delaware corporation
By:____________________________________
Its:___________________________________
-15-
<PAGE>
STATE OF _______________ )
) ss
COUNTY OF ______________ )
On _________________________, 1997, before me, a Notary Public, personally
appeared __________________________, the ____________________ of NATIONAL
MORTGAGE CORPORATION, a Colorado corporation, personally known to me (or proved
to me on the basis of satisfactory evidence) to be the person whose name is
subscribed to the within instrument and acknowledged to me that he/she executed
the same in his/her authorized capacity, and that by his/her signature on the
instrument the person, or the entity upon behalf of which the person acted,
executed the instrument.
WITNESS my hand and official seal.
___________________________________________
Notary Public
(SEAL) My Commission Expires:_____________________
STATE OF _______________ )
) ss
COUNTY OF ______________ )
On _________________, 1997, before me, a Notary Public, personally appeared
___________________________, the Director of RESIDENTIAL FUNDING CORPORATION, a
Delaware corporation, personally known to me (or proved to me on the basis of
satisfactory evidence) to be the person whose name is subscribed to the within
instrument and acknowledged to me that he/she executed the same in his/her
authorized capacity, and that by his/her signature on the instrument the person,
or the entity upon behalf of which the person acted, executed the instrument.
WITNESS my hand and official seal.
___________________________________________
Notary Public
(SEAL) My Commission Expires:_____________________
-16-
<PAGE>
SIXTH AMENDMENT TO
-------------------
WAREHOUSING CREDIT AND SECURITY AGREEMENT
-----------------------------------------
THIS SIXTH AMENDMENT TO WAREHOUSING CREDIT AND SECURITY AGREEMENT (this
"Amendment") is entered into as of this 30th day of January, 1998 by and among
NATIONAL MORTGAGE CORPORATION, a Colorado corporation ("National"), NATIONAL
MORTGAGE SALES CORPORATION, a Delaware corporation ("NMSC") (National and NMSC
are hereinafter referred to as the "Borrowers") and RESIDENTIAL FUNDING
CORPORATION, a Delaware corporation (the "Lender").
WHEREAS, National and the Lender have entered into a single family
revolving warehouse facility with a present Commitment Amount of Twenty-one
Million One Hundred Thousand Dollars ($21,100,000), to finance the origination
and acquisition of Mortgage Loans, as evidenced by a Second Amended and Restated
Warehousing Promissory Note in the principal sum of Forty-one Million One
Hundred Thousand Dollars ($41,100,000), dated May 16, 1997 and a Working Capital
Promissory Note in the principal sum of One Million One Hundred Thousand Dollars
($1,100,000), dated January 19, 1996 (the "Notes"), and by a Warehousing Credit
and Security Agreement dated January 19, 1996, as the same may have been amended
or supplemented (the "Agreement");
WHEREAS, National owns ninety-five percent (95%) of the issued and
outstanding capital stock of NMSC; and
WHEREAS, National has requested the Lender to add NMSC as a co-borrower
under the Agreement and to amend certain other terms of the Agreement, and the
Lender has agreed to such request subject to the terms and conditions of this
Agreement;
NOW, THEREFORE, for and in consideration of the foregoing and of the mutual
covenants, agreements and conditions hereinafter set forth and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. All capitalized terms used herein and not otherwise defined shall have
their respective meanings set forth in the Agreement
-1-
<PAGE>
2. The effective date ("Effective Date") of this Amendment shall be
January 30, 1998, the date on which the Company has complied with all the terms
and conditions of this Amendment.
3. Except as otherwise provided in this Amendment, all references in the
Agreement to "the Company" shall mean and refer to "the Borrowers," "either
Borrower" or "each Borrower," as the context may require; provided, that the
representations and warranties set forth in Section 5.4 and the covenants set
forth in Sections 6.14, 7.6, 7.7 and 7.8 shall apply to the Borrowers (and any
other consolidated Subsidiary of National) on a consolidated basis, and any
representations, warranties and covenants relating to Servicing Contracts on the
servicing of Pledged Mortgages shall apply only to National.
4. Section 1.1 of the Agreement shall be amended by adding the following
definitions in the appropriate alphabetical order:
"National" means National Mortgage Corporation, a Colorado corporation.
--------
"NMSC" means National Mortgage Sales Corporation, a Colorado corporation.
----
"NMSC Advance" means an Advance outstanding against an NMSC Mortgage Loan,
------------
from and after the date the Pledged Mortgage against which such Advance is
outstanding becomes an NMSC Mortgage Loan.
"NMSC Mortgage Loan" means a Pledged Mortgage that is transferred by
------------------
National to NMSC subject to the Lien in favor of the Lender created hereunder.
"Wire Disbursement Account" means a demand deposit account maintained at
-------------------------
the Funding Bank in the name of the Lender for the clearing of wire transfers
requested by the Company to fund the closing of Pledged Mortgages.
5. Section 2.1(a) of the Agreement shall be deleted in its entirety and
the following shall be substituted in lieu thereof:
2.1(a) Subject to the terms and conditions of this Agreement and provided
no (i) Event of Default or (ii) Default that the Lender, in the reasonable
exercise of its discretion,
-2-
<PAGE>
determines to be material, has occurred and is continuing, the Lender agrees
from time to time during the period from the Closing Date, to, but not
including, the Maturity Date, to make Advances to National, provided the total
aggregate principal amount outstanding at any one time of all Advances shall not
exceed the Commitment Amount. The obligation of the Lender to make Advances
hereunder up to the Commitment Amount, is hereinafter referred to as the
"Commitment." Within the Commitment, National may borrow, repay and reborrow.
All Advances under this Agreement shall constitute a single indebtedness, and
notwithstanding the limitation on NMSC's liability for the Obligations set forth
in Section 2.1(d) hereof, all of the Collateral shall be security for the
Promissory Notes and for the performance of all the Obligations.
6. Section 2.1(b)(1) of the Agreement is hereby amended to add the
following section immediately after Section 2.1(b)(6):
(7) The aggregate amount of Warehousing Advances outstanding at
any one time against Conforming Mortgage Loans shall not exceed twenty
percent (20%) of the Commitment Amount.
7. All references to "the Company" in Sections 2.1(b), 2.2(a), 2.2(b),
2.2(e), 2.2(f), 4.1(a) (except as incorporated into Section 18 below), 4.2(a),
5.4, 5.13, 5.16, 5.17, 6.2, 6.14, 7.5, 7.6, 7.7 and 7.8 of the Agreement shall
mean and refer to National.
8. Section 2.1 of the Agreement is further amended to add the following
subsection immediately after Section 2.1(c):
2.1(d) National shall be liable for all Obligations under this Agreement.
NMSC shall be jointly and severally liable for the principal amount of and
interest accrued on each NMSC Advance (in the case of interest, whether accrued
before or after such Advance became an NMSC Advance), all costs and expenses of
enforcement related to the collection of any NMSC Advance or the enforcement of
the Lender's Lien on any NMSC Mortgage Loan, and all other fees, costs, expenses
and other Obligations (not including Advances and interest thereon) arising
hereunder or under any Loan Document; provided, that there shall be no
--------
duplication of such fees, costs and expenses.
-3-
<PAGE>
9. Section 2.2(e) of the Agreement shall be deleted in its entirety and
the following shall be substituted in lieu thereof:
2.2(e) To make an Advance, the Lender shall cause the Funding
Bank to credit the Wire Disbursement Account upon compliance by
National with the terms of the Loan Documents. The Lender shall
determine in its sole discretion the method by which Advances and
other amounts on deposit in the Wire Disbursement Account are
disbursed by the Funding Bank to or for the account of National.
10. Section 2.3 of the Agreement shall be deleted in its entirety and the
following shall be substituted in lieu thereof:
"2.3 Note. The Obligations of National and NMSC shall be evidenced
----
by the Third Amended and Restated Promissory Note dated as of January 30,
1998 and the Working Capital Promissory Note of National dated as of
January 19, 1996 (the "Notes"). The term "Notes" shall include all
extensions, renewals and modifications of the Notes and all substitutions
therefor. All terms and provisions of the Notes are hereby incorporated
herein."
11. Section 2.5(d) of the Agreement shall be amended to add the following
subsections immediately after subsection 2.5(d)(10):
(11) Three (3) Business Days elapse from the time any
Pledged Mortgage is transferred by National to NMSC, unless the
Lender has received Notice of such transfer.
(12) For a Conforming Mortgage Loan, one hundred twenty
(120) days elapse from the date of the initial Warehousing
Advance made by the Lender against such Conforming Mortgage Loan,
whether or not such Conforming Mortgage Loan is included in an
Eligible Mortgage Pool.
12. All reference in Section 5.1 of the Agreement to the "Company" shall
mean and refer to "National," and Section 5.1 of
-4-
<PAGE>
the Agreement shall be herewith amended to add the following at the end thereof:
NMSC is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, has
the full legal power and authority to own its property and to carry on
its business as currently conducted and is duly qualified as a foreign
corporation to do business and is in good standing in each
jurisdiction in which the transaction of its business makes such
qualification necessary, except in jurisdictions, if any, where a
failure to be in good standing has no material adverse effect on the
business, operations, assets or financial condition of National or any
such Subsidiary. For the purposes hereof, good standing shall include
qualification for any and all licenses and payment of any and all
taxes required in the jurisdiction of its incorporation and in each
jurisdiction in which NMSC or its Subsidiaries transact business. NMSC
has no Subsidiaries.
13. Section 6.3 of the Agreement shall be deleted in its entirety and the
following shall be substituted in lieu thereof:
6.3 Maintenance of Existence; Conduct of Business. Preserve and maintain
---------------------------------------------
its corporate existence in good standing and all of its rights, privileges,
licenses and franchises necessary or desirable in the normal conduct of its
business, including, without limitation, in the case of National, its
eligibility as lender, seller/servicer and issuer described under Section 5.13
hereof; conduct its business in an orderly and efficient manner; in the case of
National, maintain a net worth of acceptable assets as required by FHA, GNMA,
FNMA or FHLMC at any and all times for maintaining its status as a FHA, FNMA or
FHLMC approved mortgagee or GNMA issuer; and make no change in the nature or
character of its business or engage in any non-Mortgage related business in
which it was not engaged on the date of this Agreement that would materially
impair its ability to perform under this Agreement without the prior written
consent of the Lender.
14. Section 8.1 of the Agreement shall be amended by adding the following
section immediately after Section 8.1(o):
-5-
<PAGE>
"8.1(p) National shall cease owning at least ninety-five percent (95%) of
each class of the capital stock of NMSC.
15. Exhibit A-1 to the Agreement is deleted in its entirety and Exhibit A-
----------- ---------
1 attached to this Amendment is substituted in lieu thereof. The Second Amended
- -
and Restated Warehousing Promissory Note is amended and restated in its entirety
as set forth in the Third Amended and Restated Warehousing Promissory Note in
the form of Exhibit A-1 attached to this Amendment. All references in this
-----------
Amendment and in the Agreement to the Second Amended and Restated Warehousing
Promissory Note shall be deemed to refer to the Third Amended and Restated
Warehousing Promissory Note delivered in connection with this Amendment.
16. Exhibit I-SF to the Agreement is deleted in its entirety and replaced
------------
with the new Exhibit I-SF attached to this Amendment. All references in this
------------
Amendment and the Agreement to Exhibit I-SF shall be deemed to refer to the new
------------
Exhibit I-SF.
- ------------
17. The Lender acknowledges and agrees that the ownership of each NMSC
Mortgage Loan has been transferred from National to NMSC, and agrees that, as
between National and NMSC, NMSC has assumed National's Obligations under the
Agreement with respect to Advances outstanding against the NMSC Mortgage Loans.
Notwithstanding the foregoing, no agreements between National and the Lender
shall be affected by the transfer of the NMSC Mortgage Loans and assumption of
the related liabilities, and National shall remain liable for such Obligations
as provided in the Agreement, as amended hereby.
18. The Company shall deliver to the Lender (a) an executed original of
this Amendment; (b) an executed original of the Third Amended and Restated
Warehousing Promissory Note; (c) an executed original of the First Amended and
Restated Working Capital Promissory Note; (d) an executed Certificate of
Secretary of National with corporate resolutions; (e) with respect to NMSC, each
of the items in Sections 4.1(a)(2) (without references to the RFC Conduit Credit
Agreement), (3), (4), (7), (8), (10) and (11) of the Agreement, and (f) a Two
Hundred Fifty Dollar ($250) document production fee, and all reasonable out-of-
pocket costs and expenses of Lender, including without limitation, fees and
services charges of counsel, in connection with the preparation and negotiation
of this Amendment.
-6-
<PAGE>
19. The Borrowers represent, warrant and agree that (a) there exists no
Default or Event of Default under the Loan Documents, (b) the Loan Documents
continue to be the legal, valid and binding agreements and obligations of the
Borrowers enforceable in accordance with their terms, as modified herein, (c)
the Lender is not in default under any of the Loan Documents and the Borrowers
have no offset or defense to its performance or obligations under any of the
Loan Documents, (d) the representations contained in the Loan Documents remain
true and accurate in all respects, and (e) there has been no material adverse
change in the financial condition of National from the date of the Agreement to
the date of this Amendment.
20. Except as hereby expressly modified, the Agreement shall otherwise be
unchanged and shall remain in full force and effect, and the Company ratifies
and reaffirms all of its obligations thereunder.
21. This Amendment 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.
-7-
<PAGE>
IN WITNESS WHEREOF, National, NMSC and the Lender have caused this
Amendment to be duly executed on their behalf by their duly authorized officers
as of the day and year above written.
NATIONAL MORTGAGE CORPORATION,
a Colorado corporation
By: _____________________________________________
Its: ____________________________________________
NATIONAL MORTGAGE SALES CORPORATION,
a Colorado corporation
By: _____________________________________________
Its: ____________________________________________
RESIDENTIAL FUNDING CORPORATION,
a Delaware corporation
By: _____________________________________________
Its: ____________________________________________
-8-
<PAGE>
STATE OF _______________ )
) ss
COUNTY OF ______________ )
On _______________, 1998, before me, a Notary Public, personally appeared
____________________________________, the _______________________ of NATIONAL
MORTGAGE CORPORATION, a Colorado corporation, personally known to me (or proved
to me on the basis of satisfactory evidence) to be the person whose name is
subscribed to the within instrument and acknowledged to me that he/she executed
the same in his/her authorized capacity, and that by his/her signature on the
instrument the person, or the entity upon behalf of which the person acted,
executed the instrument.
WITNESS my hand and official seal.
___________________________________________
(SEAL) Notary Public
My Commission Expires: ___________________
STATE OF _______________ )
) ss
COUNTY OF ______________ )
On ________________, 1998, before me, a Notary Public, personally appeared
________________________________________, the ________________________________
of NATIONAL MORTGAGE SALES CORPORATION, a Colorado corporation, personally known
to me (or proved to me on the basis of satisfactory evidence) to be the person
whose name is subscribed to the within instrument and acknowledged to me that
he/she executed the same in his/her authorized capacity, and that by his/her
signature on the instrument the person, or the entity upon behalf of which the
person acted, executed the instrument.
WITNESS my hand and official seal.
___________________________________________
(SEAL) Notary Public
My Commission Expires:
-9-
<PAGE>
STATE OF _______________ )
) ss
COUNTY OF ______________ )
On ___________________________, 1998, before me, a Notary Public,
personally appeared _______________________________, the Director of RESIDENTIAL
FUNDING CORPORATION, a Delaware corporation, personally known to me (or proved
to me on the basis of satisfactory evidence) to be the person whose name is
subscribed to the within instrument and acknowledged to me that he/she executed
the same in his/her authorized capacity, and that by his/her signature on the
instrument the person, or the entity upon behalf of which the person acted,
executed the instrument.
WITNESS my hand and official seal.
___________________________________________
Notary Public
(SEAL) My Commission Expires:_____________________
-10-
<PAGE>
EXHIBIT 10.4
SUBSIDIARY
SECURITY AGREEMENT
SECURITY AGREEMENT, dated as of January 30, 1998, made by National
Mortgage Sales Corporation ("NMSC" or the "Grantor"), a Colorado corporation, a
---- -------
subsidiary of National Mortgage Corporation ("NMC" or the "Borrower"), in favor
--- --------
of Greenwich Capital Financial Products, Inc. ("GCFP"), a Delaware corporation,
----
Greenwich Capital Markets, Inc. ("GCM"), a Delaware corporation, and ContiTrade
---
Services, L.L.C. ("CTS"), a Delaware limited liability company (each one, a
---
"Lender" and, collectively, the "Lenders") parties to the various Financing
------ -------
Agreements as referred to below.
RECITALS
Reference is made to the following agreements (collectively, the
"Financing Agreements"):
(i) The Amended and Restated Loan and Security Agreement, dated as
of June 30, 1997 (as amended, supplemented or otherwise modified from time
to time, the "Warehouse Agreement"), by and between the Borrower and GCFP,
-------------------
(in such capacity, the "Warehouse Lender");
----------------
(ii) The Amended and Restated Custodial Agreement, dated as of June
30, 1997 (as amended, supplemented or otherwise modified from time to time,
the "Custodial Agreement"), by and among the Borrower, Chase Bank of Texas,
-------------------
N.A. (formerly Texas Commerce Bank National Association), as custodian for
the Lender pursuant to the Warehouse Agreement (in such capacity, the
"Custodian"), and GCFP (in such capacity, the "Warehouse Lender");
--------- ----------------
(iii) The Residual and Working Capital Financing Agreement, dated as
of June 30, 1997 (as amended, supplemented or otherwise modified from time
to time, the "Residual Agreement") by and among the Borrower, CTS, as the
------------------
agent and a lender, (in such capacity, a "Residual Lender") and GCM (in
---------------
such capacity, a "Residual Lender") (collectively, the "Residual Lenders");
--------------- ----------------
(iv) The Subordinated Debt Agreement, dated as of June 30, 1997 (as
amended, supplemented or otherwise modified from time to time, the
"Subordinated Debt Agreement") by and between the Borrower and CTS (in such
---------------------------
capacity, the "Subordinated Debt Lender"); and
------------------------
(v) The Intercreditor and Subordination Agreement, dated as of June
30, 1997 (as amended, supplemented or otherwise modified from time to time,
the "Intercreditor Agreement) among the Borrower, CTS, as a lender, and
-----------------------
GCM, as a lender, (together with CTS and GCFP, the "Lenders").
-------
<PAGE>
The Borrower and the Warehouse Lender are parties to the Warehouse
Agreement, pursuant to which the Borrower has obtained financing from the
Warehouse Lender to provide interim funding for the origination and acquisition
of certain Mortgage Loans (as defined therein), which Mortgage Loans secure
Advances (as so defined).
The Borrower has created a subsidiary, NMSC, ninety-five percent of
the common stock of which is owned by the Borrower and which has entered into
the Mortgage Loan Flow Contribution and Subservicing Agreement (the
"Contribution Agreement"), dated as of January 30, 1998, between the Borrower
----------------------
and NMSC, pursuant to which the Borrower shall make a capital contribution of
certain of the Mortgage Loans it currently holds to NMSC and shall continue to
make such capital contributions from time to time of certain of the Mortgage
Loans it hereafter acquires, through origination or otherwise.
It is the intent of the Borrower and the Warehouse Lender that the
Mortgage Loans remain subject to a security interest in favor of the Warehouse
Lender and continue to be used in the calculation of the Borrowing Base (as
defined in the Warehouse Agreement), and that such Mortgage Loans constitute
Primary Warehouse Loan Collateral (as defined in the Intercreditor Agreement)
notwithstanding the transfer of such Mortgage Loans to NMSC. Further, the
Lenders agree that any recovery under this Guarantee that is not deemed Primary
Warehouse Loan Collateral shall be distributed as Primary Residual Loan
Collateral, according to the Intercreditor Agreement, and each Lender shall have
the right to demand contribution from the other Lenders to the extent permitted
under the Intercreditor Agreement.
To induce the Lenders to amend the Intercreditor Agreement, and to
induce the Warehouse Lender to amend the Warehouse Agreement and the Custodial
Agreement (as defined in the Warehouse Agreement) in each case to permit the
transfer of Mortgage Loans to NMSC subject to the terms of the Warehouse
Agreement and the Intercreditor Agreement, (i) NMSC shall execute a Security
Agreement whereby it pledges all of its interests in all Mortgage Loans to the
Warehouse Lender, (ii) NMSC shall execute a Guarantee whereby it guarantees the
borrowings of the Borrower under the Financing Agreements, as defined below and
(iii) the Borrower and the Individual Pledgor shall execute the Pledge
Agreement.
NOW, THEREFORE, in consideration of the premises recited above and to
protect the security interests granted pursuant to the Financing Agreements, the
Grantor hereby agrees with the Warehouse Lender, for the ratable benefit of the
Lenders, as follows:
1. DEFINED TERMS. (a) Unless otherwise defined herein, capitalized
-------------
terms which are defined in the Warehouse Agreement and used herein shall have
the meanings given to them in the Warehouse Agreement; the following terms which
are defined in the Uniform Commercial Code in effect in the State of New York on
the date hereof are used herein as so defined: Documents, General Intangibles,
Instruments, Inventory and Proceeds; and the following terms shall have the
following meanings:
"Collateral" shall mean the Primary Warehouse Loan Collateral, as set
----------
forth in Section 2(b) of this Security Agreement and the Borrower Collateral, as
set forth in Section 2(c) of this Security Agreement.
D-2
<PAGE>
"Security Agreement" shall mean this Security Agreement, as amended,
------------------
supplemented or otherwise modified from time to time.
(b) The words "hereof", "herein" and "hereunder" and words of similar
import when used in this Security Agreement shall refer to this Security
Agreement as a whole and not to any particular provision of this Security
Agreement, and Section, Schedule, Annex, and Exhibit references are to this
Security Agreement unless otherwise specified. The meanings given to terms
defined herein shall be equally applicable to both the singular and plural forms
of such terms.
2. GRANT OF SECURITY INTEREST.
--------------------------
(a) Pursuant to the Custodial Agreement, the Custodian shall hold the
Mortgage Loan Documents as exclusive bailee and agent for the Warehouse Lender
pursuant to the terms of the Custodial Agreement and shall deliver Trust
Receipts (as defined therein) to the Warehouse Lender each to the effect that it
has reviewed such Mortgage Loan Documents in the manner and to the extent
required by the Custodial Agreement and identifying any exceptions in such
Mortgage Loan Documents as so reviewed in Exception Reports.
(b) All of the Grantor's right, title and interest in, to and under
each of the following items of property, whether now owned or hereafter
acquired, now existing or hereafter created and wherever located, is hereinafter
referred to as the "Primary Warehouse Loan Collateral":
---------------------------------
(i) all Mortgage Loans identified on a Notice of Borrowing and
Pledge delivered by the Borrower to the Warehouse Lender and the Custodian
from time to time and thereafter transferred to the Grantor ("Grantor
-------
Pledged Mortgage Loans");
----------------------
(ii) all Mortgage Loan Documents, including without limitation all
promissory notes, and all Servicing Records, Servicing Agreements and any
other collateral pledged or otherwise relating to such Grantor Pledged
Mortgage Loans, together with all files, documents, instruments, surveys,
certificates, correspondence, appraisals, computer programs, computer
storage media, accounting records and other books and records relating
thereto;
(iii) all mortgage guaranties and insurance relating to such Grantor
Pledged Mortgage Loans (issued by governmental agencies or otherwise) and
any mortgage insurance certificate or other document evidencing such
mortgage guaranties or insurance relating to such Grantor Pledged Mortgage
Loans and all claims and payments thereunder;
(iv) all other insurance policies and insurance proceeds relating to
any Grantor Pledged Mortgage Loan or the related Mortgaged Property;
(v) all purchase or take-out commitments relating to such Grantor
Pledged Mortgage Loans;
D-3
<PAGE>
(vi) all Interest Rate Protection Agreements, if any, relating to
such Grantor Pledged Mortgage Loans;
(vii) the Trust Account, the Paydown Account and the balance from
time to time standing to the credit of the Trust Account and the Paydown
Account and all rights with respect thereto;
(viii) all Insured Closing Letters relating to any Grantor Pledged
Mortgage Loans;
(ix) all "general intangibles" as defined in the Uniform Commercial
Code relating to or constituting any and all of the foregoing; and
(x) any and all replacements, substitutions, distributions on or
proceeds of any and all of the foregoing.
(c) All of the Grantor's right, title and interest in, to and under
each of the following items of property, whether now or hereafter acquired, now
existing or hereafter created and wherever located, is hereinafter referred to
as the "Grantor Collateral":
------------------
(i) all mortgage loans, home improvement loans, home equity line of
credit loans, and other loans originated or purchased by the Grantor;
(ii) all of the Grantor's rights to service or subservice mortgage
loans, home improvement loans, home equity line of credit loans, and other
loans;
(iii) all certificates, residual or otherwise, issued to the Grantor
--------
in connection with any securitization, including, without limitation, any
securitization involving a REMIC;
(iv) all securities held by the Grantor, including, without
limitation, the securities of any subsidiary of the Grantor;
(v) all equipment in all of its forms, wherever located, including,
without limitation, all furniture, furnishings, fixtures, office supplies
and all other similar types of tangible personal property and all parts
thereof and all accessions thereto, together with all parts, fittings,
alterations, substitutions, additions, accessories, replacements and
accessions thereto (any and all such equipment, parts and accessions being
the "Equipment");
(vi) all approvals, permits, licenses, franchises, certificates that
are, by their terms or pursuant to applicable Law, assignable without the
consent of the Governmental Authority or the counterparty thereto, as the
case may be;
(vii) all contracts or agreements to which the Grantor is a party;
D-4
<PAGE>
(viii) all general intangibles relating to or constituting any of the
foregoing, including, but not limited to, good will and tax refunds;
(ix) all bank accounts now or hereafter held by the Grantor and all
funds in such accounts together with all monies (other than monies used to
pay taxes), proceeds or sums due or to become due thereon or therefrom (all
such bank accounts, the "Bank Accounts"), and all documents or instruments
(including, but not limited to, passbooks, certificates of deposits and
receipts necessary to be presented to withdraw funds or investments held in
the Bank Accounts (the "Account Documents"); and
(x) all proceeds of any and all of the foregoing Grantor Collateral
(including, without limitation, proceeds which constitute property of the
types described in any of the paragraphs of this Section 2(c) and, to the
extent not otherwise included, all payments under insurance (whether or not
a Lender is the loss payee thereof), or any indemnity, warranty or
guaranty, payable by reason of loss or damage to or otherwise with respect
to any of the foregoing Grantor Collateral;
provided, however, that "Grantor Collateral" shall not include (i) any assets as
- -------- -------
to which the Lenders have released their liens pursuant to Section 5.04 of the
Residual Agreement and the Subordinated Debt Agreement, (ii) any mortgage loans
and the related servicing rights sold, if such mortgage loans are sold
servicing-released, or securitized by the Borrower, (iii) those FNMA servicing
rights that have been pledged and those mortgage loans (together with the
related servicing rights and proceeds of such mortgage loans, including any
accounts related thereto)that have been or may be pledged to Residential Funding
Corporation under the Warehousing Credit and Security Agreement (Single-Family
Mortgage Loans), dated as of January 19, 1996, between the Borrower and
Residential Funding Corporation, as amended, (iv) any assets pledged under the
debt agreements listed on Schedule IV to the Residual Agreement or the
Subordinated Debt Agreement and (v) any equipment subject to the leases listed
on Schedule V attached to the Residual Agreement or the Subordinated Debt
Agreement.
(d) The Grantor hereby assigns, pledges and grants a security
interest in the Collateral to the Lenders to secure the following obligations
now existing or hereafter incurred:
(i) the Secured Obligations as defined in the Warehouse Agreement;
(ii) the repayment of principal and interest on any Residual Advance
(as defined in the Residual Agreement) and all other amounts owing to the
Lenders pursuant to the Residual Agreement with respect to Residual
Advances;
(iii) the repayment of principal and interest on any Working Capital
Advance (as defined in the Residual Agreement) and all other amounts owing
to the Lenders pursuant to the Residual Agreement with respect to Working
Capital Advances; and
(iv) the repayment of principal and interest on any amounts
outstanding under the Subordinated Debt Agreement and all other amounts
owing to the lender of Subordinated Debt Agreement pursuant to the
Subordinated Debt Agreement
D-5
<PAGE>
(collectively, the "Secured Obligations"). The Grantor agrees to mark its
-------------------
computer records and tapes to evidence the interests granted to the Lenders
hereunder. The Collateral granted hereunder shall be subject to the
Intercreditor Agreement for all purposes.
(e) The Primary Warehouse Loan Collateral pledged hereunder shall
be included in the description of "Collateral" in the Warehouse Agreement
pursuant to Section 4.01(b)(x) thereof.
(f) The Lenders acknowledge that ownership of the Grantor Pledged
Mortgage Loans has been transferred by the Borrower to the Guarantor pursuant to
the Contribution Agreement; provided, however, that if ownership is deemed to
have not been transferred, the Borrower has nonetheless granted a security
interest in these Mortgage Loans.
3. REPRESENTATIONS AND WARRANTIES. The Grantor hereby represents
------------------------------
and warrants that:
(a) Corporate Existence; Compliance with Law. The Grantor (a) is a
-----------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Colorado, (b) has the corporate power and authority, and has all
governmental licenses, authorizations, consents and approvals necessary, to own
and operate its property, to lease the property it operates as lessee and to
carry on its business as now being conducted, (c) is duly qualified to do
business and is in good standing under the laws of each jurisdiction in which
the nature of the business conducted by it makes such qualification necessary
and where failure so to qualify should be reasonably expected (either
individually or in the aggregate) to have a Material Adverse Effect, and (d) is
in compliance in all material respects with all Requirements of Law.
(b) Corporate Power; Authorization; Enforceable Obligations.
-------------------------------------------------------
(i) The Grantor has the corporate power and authority, and the
legal right, to make, deliver and perform this Security Agreement and each
other Loan Document to which it is a party, and to grant Liens hereunder,
and has taken all necessary corporate action to authorize the granting of
Liens on the terms and conditions of this Security Agreement and any other
Loan Document to which it is a party, and the execution, delivery and
performance of this Security Agreement and any other Loan Document.
(ii) No consent or authorization of, approval by, notice to, filing
with or other act by or in respect of, any Governmental Authority or any
other Person is required or necessary in connection with the borrowings
hereunder or with the execution, delivery, performance, validity or
enforceability of this Security Agreement or any other Loan Document to
which the Grantor is a party, except (i) for filings and recordings in
respect of the Liens created pursuant to this Security Agreement, and (ii)
as previously obtained and currently in full force and effect.
(iii) This Security Agreement has been duly and validly executed and
delivered by the Grantor and constitutes, and any Loan Document when
executed and delivered on behalf of the Grantor will constitute, a legal,
valid and binding obligation of the Grantor,
D-6
<PAGE>
enforceable against the Grantor in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles (whether
enforcement is sought by proceedings in equity or at law).
(c) Collateral; Collateral Security.
-------------------------------
(i) The Grantor has not assigned, pledged, or otherwise conveyed or
encumbered any of the Collateral to any Person other than the Warehouse
Lender, other than the security interest in favor of ContiTrade Services
L.L.C. and Greenwich Capital Markets, Inc. pursuant to the Significant
Documents, and immediately prior to or concurrently with the pledge of such
Collateral, the Grantor was the sole owner of the Collateral and had good
and marketable title thereto, free and clear of all Liens, in each case
except for the Liens of the Lenders and Liens that have been released or
are to be released simultaneously with the Liens granted in favor of the
Lenders hereunder.
(ii) The provisions of this Security Agreement are effective to
create in favor of the Lenders a valid security interest in all right,
title and interest of the Grantor in, to and under the Collateral.
(iii) Upon receipt by the Custodian of each Mortgage Note (or, in the
case of a Wet-Ink Mortgage Loan, upon notice to the related Settlement
Agent of the security interest of the Warehouse Lender in such Wet-Ink
Mortgage Loan and the funding thereof by the Warehouse Lender), and the
filing of financing statements on Form UCC-1 naming each Lender as "Secured
Party" and the Grantor as "Debtor", and describing the Collateral, in the
jurisdictions and recording offices listed on Schedule 2 attached hereto,
the security interests granted hereunder in the Collateral will constitute
fully perfected security interests under the Uniform Commercial Code in all
items of Collateral a security interest in which can be perfected by such
filing (and of first priority, except for other Liens on the Collateral
contemplated by the Significant Documents and except for those subsequent
liens which, by operation of law, take priority over a previously perfected
security interest) in all right, title and interest of the Grantor in, to
and under such Collateral.
(d) No Adverse Selection. The Grantor used no selection procedures
--------------------
that identified the Mortgage Loans as being less desirable or valuable than
other comparable Mortgage Loans owned by the Grantor.
(e) Grantor Solvent; Fraudulent Conveyance. As of the date hereof
--------------------------------------
and immediately after the contribution of any Mortgage Loan to the Grantor and
giving effect to each Advance, the fair value of the assets of the Grantor is
greater than the fair value of the liabilities (including, without limitation,
contingent liabilities if and to the extent required to be recorded as a
liability on the financial statements of the Grantor in accordance with GAAP) of
the Grantor and the Grantor is and will be solvent, is and will be able to pay
its debts as they mature and does not and will not have an unreasonably small
capital to engage in the business in which it is engaged. Grantor does not
intend to incur, or believe that it has incurred, debts beyond its ability
D-7
<PAGE>
to pay such debts as they mature, taking into account the expected probability
of the Grantor having to make payments under the Guarantee. Grantor is not
contemplating the commencement of insolvency, bankruptcy, liquidation or
consolidation proceedings or the appointment of a receiver, liquidator,
conservator, trustee or similar official in respect of Grantor or any of its
assets. Grantor is not transferring any Mortgage Loans with any intent to
hinder, delay or defraud any of its creditors.
(f) True Disclosure. The information, reports, financial statements,
---------------
exhibits and schedules furnished in writing by or on behalf of the Grantor to
the Lenders in connection with the negotiation, preparation or delivery of this
Security Agreement and the other Guarantor Documents or included herein or
therein or delivered pursuant hereto or thereto, when taken as a whole, do not
contain any untrue statement of material fact. All written information
furnished after the date hereof by or on behalf of the Grantor to the Lenders in
connection with this Security Agreement and the Guarantee and the transactions
contemplated hereby and thereby will be true, correct and accurate in every
material respect, or (in the case of projections) based on reasonable estimates,
on the date as of which such information is stated or certified. There is no
fact known to a Responsible Officer of the Grantor that, after due inquiry,
should reasonably be expected to have a Material Adverse Effect that has not
been disclosed herein, in the other Guarantor Documents or in a report,
financial statement, exhibit, schedule, disclosure letter or other writing
furnished to the Lenders for use in connection with the transactions
contemplated hereby or thereby.
(g) Licenses. No Lender will be required as a result of taking a
--------
pledge of the Mortgage Loans to be licensed, registered or approved or to obtain
permits or otherwise qualify (i) to do business in any state in which it
currently so required or (ii) under any state consumer lending, fair debt
collection or other applicable state statute or regulation.
4. COVENANTS. (a) Further Documentation. At any time and from
--------- ---------------------
time to time, upon the written request of any Lender, and at the sole expense of
the Grantor, the Grantor will promptly and duly execute and deliver, or will
promptly cause to be executed and delivered, such further instruments and
documents and take such further action as such Lender may reasonably request for
the purpose of obtaining or preserving the full benefits of this Security
Agreement and of the rights and powers herein granted, including, without
limitation, the filing of any financing or continuation statements under the
Uniform Commercial Code in effect in any jurisdiction with respect to the Liens
created hereby. The Grantor also hereby authorizes the Lenders to file any such
financing or continuation statement with respect to the Collateral without the
signature of the Grantor to the extent permitted by applicable law. A carbon,
photographic or other reproduction of this Security Agreement shall be
sufficient as a financing statement for filing in any jurisdiction.
(b) Changes in Locations, Name, etc. The Grantor shall not (i)
-------------------------------
change the location of its chief executive office/chief place of business from
that specified in Section 12 hereof or (ii) change its name, identity or
corporate structure (or the equivalent) or change the location where it
maintains its records with respect to the Collateral unless it shall have given
the Lenders at least 30 days prior written notice thereof and shall have
delivered to the Lenders all Uniform Commercial Code financing statements and
amendments thereto as the Lenders shall
D-8
<PAGE>
request and taken all other actions deemed necessary by the Lenders to continue
its perfected status in the Collateral with the same or better priority.
(c) Other Information. The Grantor shall furnish to the Lenders, as
-----------------
soon as available, copies of any and all proxy statements, financial statements
and reports which the Grantor sends to its stockholders, and copies of all
regular, periodic and special reports, and all registration statements filed
with the Securities and Exchange Commission, any Governmental Authority which
supervises the issuance of securities by the Grantor.
(d) Further Identification of Collateral. The Grantor will furnish
------------------------------------
to the Lenders from time to time statements and schedules further identifying
and describing the Collateral and such other reports in connection with the
Collateral as the Lenders may reasonably request, all in reasonable detail.
(e) Notice if Mortgage Loan is Found Defective. Upon discovery by
------------------------------------------
the Grantor of any breach of any representation or warranty listed on Schedule 1
to the Warehouse Agreement applicable to any Mortgage Loan, the Grantor shall
promptly give notice of such discovery to the Borrower, who shall then notify
the Warehouse Lender pursuant to Section 7.07 of the Warehouse Agreement.
(f) Responsibilities under the Warehouse Agreement. The Grantor
----------------------------------------------
acknowledges that, by virtue of section 7.20 of the Warehouse Agreement, as
amended, sections 7.03(a) and (b), 7.13, 7.16, 7.19, 11.15 and 11.18 of the
Warehouse Agreement shall apply, mutatis mutandi, to the Grantor to the same
extent as such apply to the Borrower, and the Grantor hereby covenants to
perform in accordance therewith.
(g) Responsibilities Under the Residual Agreement. The Grantor
---------------------------------------------
acknowledges that Section 4.01(b), (g)-(1) and (q) and Section 4.02(a)-(3), (h),
(i) (except for subclause (iv) thereof), (j), (i), (m) and (q)-(s) of the
Residual Agreement shall apply, mutatis mutandi, to the Grantor to the same
extent as such apply to the Borrower, and the Grantor hereby covenants to
perform in accordance therewith; provided, however, that the Grantor's entry
-------- -------
into and performance under the Guarantee, the Grantor's assumption of certain of
the Borrower's obligations under the Warehousing Credit and Security Agreement
(the "RFC Warehouse Agreement"), dated as of January 19, 1996, as amended,
between the Borrower and Residential Funding Corporation ("RFC"), and the
Grantor's pledge to RFC of all mortgage loans contributed to the Grantor which
are subject to the RFC Agreement, and the proceeds thereof (including accounts
in which such proceeds are held), and related servicing rights, shall in no
event be considered to violate or breach any representation, warranty, covenant,
or other term of the Residual Agreement and; provided, further, that the
-------- -------
definition of "Material Adverse Effect" in such agreement shall remain
unchanged.
(h) Responsibilities Under the Subordinated Debt Agreement. The
------------------------------------------------------
Grantor acknowledges that Section 4.01(b), (g)-(l), (n), (o) and (r) and Section
4.02(a)-(e), (h), (i) (except for subclause (iv) thereof), (j), (i), (m) and
(p)-(r) of the Subordinated Debt Agreement shall apply, mutatis mutandi, to the
Grantor to the same extent as such apply to the Borrower, and the Grantor hereby
covenants to perform in accordance therewith; provided, however, that the
D-9
<PAGE>
Grantor's entry into and performance uner the Guarantee, the Grantor's
assumption of certain of the Borrower's obligations under the RFC Warehouse
Agreement, and the Grantor's pledge to RFC of all mortgage loans contributed to
the Grantor which are subject to the RFC Warehouse Agreement, and the proceeds
thereof (including accounts in which such proceeds are held), and related
servicing rights, shall in no event be considered to violate or breach any
representation, warranty, covenant, or other term of the Subordinated Debt
Agreement and; provided, further, that the definition of "Material Adverse
Effect" in such agreement shall remain unchanged.
5. APPOINTMENT AS ATTORNEY-IN-FACT OF WAREHOUSE LENDER AND CTS.
-----------------------------------------------------------
(a) The Grantor hereby irrevocably constitutes and appoints the Warehouse Lender
with regard to the Primary Warehouse Loan Collateral and CTS with regard to the
Grantor Collateral (not including any Grantor Collateral included in the Primary
Warehouse Loan Collateral, the "Non-Warehouse Grantor Collateral") and any
--------------------------------
officer or agent thereof, with full power of substitution, as its true and
lawful attorney-in-fact with full irrevocable power and authority in the place
and stead of the Grantor and in the name of the Grantor or in its own name, from
time to time in such Lender's discretion, for the purpose of carrying out the
terms of this Security Agreement, to take any and all appropriate action and to
execute any and all documents and instruments which may be necessary or
desirable to accomplish the purposes of this Security Agreement, and, without
limiting the generality of the foregoing, the Grantor hereby gives the Warehouse
Lender with respect to the Primary Warehouse Loan Collateral and CTS with
respect to Non-Warehouse Grantor Collateral the power and right, on behalf of
the Grantor, without assent by, but with notice to, the Grantor, if an Event of
Default shall have occurred and be continuing, to do the following:
(i) in the name of the Grantor or its own name, or otherwise, to
take possession of and endorse and collect any checks, drafts, notes,
acceptances or other instruments for the payment of moneys due under any
mortgage insurance with respect to Pledged Mortgage Loans or with respect
to any other Collateral and to file any claim or to take any other action
or proceeding in any court of law or equity or otherwise deemed appropriate
by the Warehouse Lender with respect to the Primary Warehouse Loan
Collateral and CTS with respect to Non-Warehouse Grantor Collateral for the
purpose of collecting any and all such moneys due under any such mortgage
insurance or with respect to any other Collateral whenever payable;
(ii) to pay or discharge taxes and Liens levied or placed on or
threatened against the Collateral; and
(iii) (A) to direct any party liable for any payment under any
Collateral to make payment of any and all moneys due or to become due
thereunder directly to the Warehouse Lender with respect to the Primary
Warehouse Loan Collateral and CTS with respect to Non-Warehouse Grantor
Collateral or as such Lender shall direct; (B) to ask or demand for,
collect, receive payment of and receipt for, any and all moneys, claims and
other amounts due or to become due at any time in respect of or arising out
of any Collateral; (C) to sign and endorse any invoices, assignments,
verifications, notices and other documents in connection with any of the
Collateral; (D) to commence and prosecute any suits, actions or proceedings
at law or in equity in any court of competent jurisdiction
D-10
<PAGE>
to collect the Collateral or any thereof and to enforce any other right in
respect of any Collateral; (E) to defend any suit, action or proceeding
brought against the Grantor with respect to any Collateral; (F) to settle,
compromise or adjust any suit, action or proceeding described in clause (E)
above and, in connection therewith, to give such discharges or releases as
such Lender may deem appropriate; and (G) generally, to sell, transfer,
pledge and make any agreement with respect to or otherwise deal with any of
the Collateral as fully and completely as though such Lender were the
absolute owner thereof for all purposes, and to do, at such Lender's option
and the Grantor's expense, at any time, and from time to time, all acts and
things which such Lender deems necessary to protect, preserve or realize
upon the Collateral and such Lender's Liens thereon and to effect the
intent of this Security Agreement, all as fully and effectively as the
Grantor might do.
(b) The Grantor hereby ratifies all that said attorneys shall
lawfully do or cause to be done by virtue hereof. This power of attorney is a
power coupled with an interest and shall be irrevocable.
(c) The Grantor also authorizes the Warehouse Lender and CTS, at any
time and from time to time, to execute, in connection with any sale provided for
in Section 4.07 of the Warehouse Agreement and Section 7.02(d) of the Residual
Agreement, respectively, any endorsements, assignments or other instruments of
conveyance or transfer with respect to the Collateral.
(d) The powers conferred on the Lenders are solely to protect the
Lenders interests in the Collateral and shall not impose any duty upon the
Lenders to exercise any such powers. The Lenders shall be accountable only for
amounts that it actually receives as a result of the exercise of such powers,
and none of the Lenders nor any of their respective officers, directors, or
employees shall be responsible to the Grantor for any act or failure to act
hereunder, except for its own gross negligence or willful misconduct.
6. PERFORMANCE BY THE LENDERS OF BORROWER'S OR GRANTOR'S
-----------------------------------------------------
OBLIGATIONS. If either the Borrower or the Grantor fails to perform or comply
- -----------
with any of its agreements contained in the Loan Documents or the Guarantor
Documents and the Warehouse Lender (with respect to the Warehouse Agreement) or
CTS (with respect to the Residual Agreement) may itself perform or comply, or
otherwise cause performance or compliance, with such agreement, the reasonable
expenses of such Lender incurred in connection with such performance or
compliance, together with interest thereon at a rate per annum equal to the
Post-Default Rate, shall be payable by the Grantor to such Lender on demand and
shall constitute Secured Obligations.
7. PROCEEDS. If an Event of Default shall occur and be continuing,
--------
(a) all proceeds of Collateral received by the Grantor consisting of cash,
checks and other near-cash items shall be held by the Grantor in trust for the
Lenders, segregated from other funds of the Grantor, and shall forthwith upon
receipt by the Grantor be turned over to the Lenders in the exact form received
by the Grantor (duly endorsed by the Grantor to the Lenders, if required) and
(b) any and all such proceeds received by the Lenders (whether from the Grantor
or otherwise)
D-11
<PAGE>
may, in the sole discretion of the Lenders, be held by the Lenders as collateral
security for, and/or then or at any time thereafter may be applied by the
Lenders against, the Secured Obligations (whether matured or unmatured), such
application to be in such order as the Lenders shall elect, subject to the
Intercreditor Agreement. All distributions and actions with respect to the
Collateral under this Security Agreement shall be undertaken by the Lenders as
set forth in the Warehouse Agreement and the Residual Agreement, subject to the
terms of the Intercreditor Agreement regarding "Primary Warehouse Loan
Collateral" and "Primary Residual Loan Collateral." Any balance of such proceeds
remaining after the Secured Obligations shall have been paid in full and this
Security Agreement shall have been terminated shall be paid over to the Grantor
or to whomsoever may be lawfully entitled to receive the same pursuant to the
Intercreditor Agreement. For purposes hereof, proceeds shall include, but not be
limited to, all principal and interest payments, all prepayments and payoffs,
insurance claims, condemnation awards, sale proceeds, real estate owned rents
and any other income and all other amounts received with respect to the
Collateral.
8. REMEDIES. (a) If an Event of Default shall occur and be
--------
continuing, the Lenders may exercise, in addition to all other rights and
remedies granted to it in this Security Agreement and in any other instrument or
agreement securing, evidencing or relating to the Secured Obligations, all
rights and remedies of a secured party under the Uniform Commercial Code.
Without limiting the generality of the foregoing, the Lenders without demand of
performance or other demand, presentment, protest, advertisement or notice of
any kind (except any notice required by law referred to below) to or upon the
Grantor or any other Person (each and all of which demands, presentments,
protests, advertisements and notices are hereby waived), may in such
circumstances forthwith collect, receive, appropriate and realize upon the
Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give
option or options to purchase, or otherwise dispose of and deliver the
Collateral or any part thereof (or contract to do any of the foregoing), in one
or more parcels or as an entirety at public or private sale or sales, at any
exchange, broker's board or office of such Lender or elsewhere upon such terms
and conditions as it may deem advisable and at such prices as it may deem best,
for cash or on credit or for future delivery without assumption of any credit
risk. The Lenders shall have the right upon any such public sale or sales, and,
to the extent permitted by law, upon any such private sale or sales, to purchase
the whole or any part of the Collateral so sold, free of any right or equity of
redemption in the Grantor, which right or equity is hereby waived or released.
The Grantor further agrees, at any Lenders' request, to assemble the Collateral
and make it available to such Lender at places which such Lender shall
reasonably select, whether at the Grantor's premises or elsewhere. Such Lender
shall apply the net proceeds of any such collection, recovery, receipt,
appropriation, realization or sale, after deducting all reasonable costs and
expenses of every kind incurred therein or incidental to the care or safekeeping
of any of the Collateral or in any way relating to the Collateral or the rights
of the Lenders hereunder, including without limitation reasonable attorneys'
fees and disbursements, to the payment in whole or in part of the Secured
Obligations, in such order as Lenders may elect, subject to the Intercreditor
Agreement, and only after such application and after the payment by Lenders of
any other amount required or permitted by any provision of law, including
without limitation Section 9-504(1)(c) of the Uniform Commercial Code, need the
Lenders account for the surplus, if any, to the Grantor. To the extent
permitted by applicable law, the Grantor waives all claims, damages and demands
it
D-12
<PAGE>
may acquire against the Lenders arising out of the exercise by the Lenders of
any of its rights hereunder, other than those claims, damages and demands
arising from the gross negligence or willful misconduct of the Lenders. If any
notice of a proposed sale or other disposition of Collateral shall be required
by law, such notice shall be deemed reasonable and proper if given at least 10
days before such sale or other disposition. The Grantor shall remain liable for
any deficiency (plus accrued interest thereon as contemplated pursuant to
Section 2.05(b) hereof) if the proceeds of any sale or other disposition of the
Collateral are insufficient to pay the Secured Obligations and the fees and
disbursements of any attorneys employed by the Lenders to collect such
deficiency.
(c) If the Grantor shall default in the payment of any other amount
payable by it hereunder or under any other Guarantor Document, and such default
shall have continued unremedied for three Business Days after receipt of notice
from the Lender of such default, such default shall be an Event of Default.
9. LIMITATION ON DUTIES REGARDING PRESENTATION OF COLLATERAL. The
---------------------------------------------------------
Lenders' duty with respect to the custody, safekeeping and physical preservation
of the Collateral in its possession, under Section 9-207 of the Uniform
Commercial Code or otherwise, shall be to deal with it in the same manner as
such Lender deals with similar property for its own account. None of the
Lenders nor any of their respective directors, officers or employees shall be
liable for failure to demand, collect or realize upon all or any part of the
Collateral or for any delay in doing so or shall be under any obligation to sell
or otherwise dispose of any Collateral upon the request of the Grantor or
otherwise.
10. POWERS COUPLED WITH AN INTEREST. All authorizations and agencies
-------------------------------
herein contained with respect to the Collateral are irrevocable and powers
coupled with an interest.
11. RELEASE OF SECURITY INTEREST. (a) Upon termination of this
----------------------------
Warehouse Agreement and repayment to the Lenders of all Secured Obligations and
the performance of all obligations under the Loan Documents and under the
Guarantor Documents, the Lenders shall release its security interest in any
remaining Collateral; provided that if any payment, or any part thereof, of any
--------
of the Secured Obligations is rescinded or must otherwise be restored or
returned by the Lenders upon the insolvency, bankruptcy, dissolution,
liquidation or reorganization of the Borrower or the Grantor, or upon or as a
result of the appointment of a receiver, intervenor or conservator of, or a
trustee or similar officer for, the Borrower or the Grantor or any substantial
part of the Borrower's or the Grantor's Property, or otherwise, this Security
Agreement, all rights hereunder and the Liens created hereby shall continue to
be effective, or be reinstated, as though such payments had not been made.
D-13
<PAGE>
(b) So long as no Event of Default has occurred and is continuing,
upon the repayment in full in immediately available funds of the Advance Balance
with respect to a Pledged Mortgage Loan, together with accrued and unpaid
interest in respect thereof, such Pledged Mortgage Loan and related Primary
Warehouse Loan Collateral shall be automatically released from the Lien of this
Security Agreement, and the Warehouse Lender shall cause the Custodian to
release the related Mortgage File and any other documents held by the Custodian
or the Warehouse Lender with respect to such Mortgage Loan to the Grantor or the
Grantor's designee. In addition, the Warehouse Lender shall execute and deliver
such instruments or other documents reasonably requested by the Grantor that are
prepared by the Grantor in order to effect the release of such Pledged Mortgage
Loan from the Lien of the Warehouse Lender.
12. CHIEF EXECUTIVE OFFICE. The Grantor's chief executive office on
----------------------
the Effective Date is located at 7600 East Orchard Road, Suite 330-S, Englewood,
CO 80111.
13. LOCATION OF BOOKS AND RECORDS. The location where the Grantor
-----------------------------
keeps its books and records, including all computer tapes and records relating
to the collateral is its chief executive office.
14. PAYMENT OF OBLIGATIONS. The Grantor will pay promptly when due
----------------------
all taxes, assessments and governmental charges or levies imposed upon the
Collateral or in respect of its income or profits therefrom, as well as all
claims of any kind (including, without limitation, claims for labor, materials
and supplies) against or with respect to the Collateral, except that no such
charge need be paid if (i) the validity thereof is being contested in good faith
by appropriate proceedings, (ii) such proceedings do not involve any material
danger of the sale, forfeiture or loss of any of the Collateral or any interest
therein and (iii) such charge is adequately reserved against on the Grantor's
books in accordance with GAAP.
15. AUTHORITY OF THE LENDERS. The Grantor acknowledges that the
------------------------
rights and responsibilities of the Lenders under this Security Agreement with
respect to any action taken by the Lenders or the exercise or non-exercise by
the Lenders of any option, voting right, request, judgment or other right or
remedy provided for herein or resulting or arising out of this Security
Agreement shall, as between the Lenders, be governed by the Intercreditor
Agreement and by such other agreements with respect thereto as may exist from
time to time among them, but, as between the Warehouse Lender and the Grantor or
between CTS and the Grantor, such Lender shall be conclusively presumed to be
acting as agent for the Lenders with full and valid authority so to act or
refrain from acting, and the Grantor shall be under no obligation, or
entitlement, to make any inquiry respecting such authority.
16. SEVERABILITY. Any provision of this Security Agreement which is
------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
17. HYPOTHECATION OR PLEDGE OF ADVANCES. The Lenders shall have free
-----------------------------------
and unrestricted use of all Collateral and nothing in this Security Agreement
shall preclude the
D-14
<PAGE>
Lenders from engaging in repurchase transactions with the Collateral or
otherwise pledging, repledging, transferring, hypothecating or rehypothecating
the Collateral. Nothing contained in this Security Agreement shall obligate the
Lenders to segregate any Collateral delivered to the Lenders by the Grantor.
18. PARAGRAPH HEADINGS. The paragraph headings used in this Security
------------------
Agreement are for convenience of reference only and are not to affect the
construction hereof or be taken into consideration in the interpretation hereof.
19. NO WAIVER; CUMULATIVE REMEDIES. None of the Lenders shall by any
------------------------------
act (except by a written instrument pursuant to Section 18 hereof), delay,
indulgence, omission or otherwise be deemed to have waived any right or remedy
hereunder or to have acquiesced in any Default or Event of Default or in any
breach of any of the terms and conditions hereof. No failure to exercise, nor
any delay in exercising, on the part of any Lender, any right, power or
privilege hereunder shall operate as a waiver thereof. No single or partial
exercise of any right, power or privilege hereunder shall preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
A waiver by any Lender of any right or remedy hereunder on any one occasion
shall not be construed as a bar to any right or remedy which such Lender would
otherwise have on any future occasion. The rights and remedies herein provided
are cumulative, may be exercised singly or concurrently and are not exclusive of
any rights or remedies provided by law.
20. WAIVERS AND AMENDMENTS; SUCCESSORS AND ASSIGNS; GOVERNING LAW.
-------------------------------------------------------------
None of the terms or provisions of this Security Agreement may be waived,
amended, supplemented or otherwise modified except by a written instrument
executed by the Grantor and the Lenders, provided that any provision of this
Security Agreement may be waived by the Lenders in a written instrument executed
by the Lenders. This Security Agreement shall be binding upon the successors
and assigns of the Grantor and shall inure to the benefit of the Lenders and
their respective successors and assigns. This Security Agreement shall be
governed by, and construed and interpreted in accordance with, the laws of the
State of New York.
[SIGNATURE PAGE FOLLOWS]
D-15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Security
Agreement to be duly executed and delivered as of the date first above written.
NATIONAL MORTGAGE SALES CORPORATION
By:__________________________________
Name:
Title:
ACKNOWLEDGED BY:
GREENWICH CAPITAL FINANCIAL
PRODUCTS, INC.
By:_____________________________
Name:
Title:
GREENWICH CAPITAL MARKETS, INC.
By:_____________________________
Name:
Title:
CONTITRADE SERVICES, L.L.C.
By:_____________________________
Name:
Title:
CONTITRADE SERVICES, L.L.C.
By:_____________________________
Name:
Title:
D-16
<PAGE>
EXHIBIT 10.5
SUBSIDIARY GUARANTEE
GUARANTEE, dated as of January 30, 1998, made by National Mortgage
Sales Corporation, a Colorado corporation (the "Guarantor"), a subsidiary of
---------
National Mortgage Corporation ("NMC" or the "Borrower") (formerly Mortgage
--- --------
Servicing Acquisition Corporation) in favor of Greenwich Capital Financial
Products, Inc. ("GCFP"), a Delaware corporation, Greenwich Capital Markets, Inc.
----
("GCM"), a Delaware corporation, and ContiTrade Services, L.L.C. ("CTS"), a
--- ---
Delaware limited liability company (each one, a "Lender" and, collectively, the
"Lenders") parties to the various Financing Agreements as referred to below.
-------
RECITALS
Reference is hereby made to the following agreement:
(i) The Amended and Restated Loan and Security Agreement, dated as
of June 30, 1997 (as amended, supplemented or otherwise modified from time
to time, the "Warehouse Agreement"), by and among the Borrower and GCFP,
-------------------
(in such capacity, the "Warehouse Lender");
----------------
(ii) The Amended and Restated Custodial Agreement, dated as of June
30 1997 (as amended, supplemented or otherwise modified from time to time,
the "Custodial Agreement"), by and among the Borrower, Chase Bank of Texas,
-------------------
N.A. (formerly Texas Commerce Bank National Association), as custodian for
the Lender pursuant to the Warehouse Agreement (in such capacity, the
"Custodian"), and GCFP (in such capacity, the "Warehouse Lender");
--------- ----------------
(iii) The Residual and Working Capital Financing Agreement, dated as
of June 30, 1997 (as amended, supplemented or otherwise modified from time
to time, the "Residual Agreement") by and among the Borrower, CTS, as the
------------------
agent and a lender, (in such capacity, a "Residual Lender") and GCM (in
---------------
such capacity, a "Residual Lender") (collectively, the "Residual Lenders");
--------------- ----------------
(iv) The Subordinated Debt Agreement, dated as of June 30, 1997 (as
amended, supplemented or otherwise modified from time to time, the
"Subordinated Debt Agreement") by and between the Borrower and CTS (in such
---------------------------
capacity, the "Subordinated Debt Lender");
------------------------
(vi) The Intercreditor and Subordination Agreement, dated as of June
30, 1997 (as amended, supplemented or otherwise modified from time to time,
the "Intercreditor Agreement) among the Borrower, CTS, as a lender, and
-----------------------
GCM, as a lender, (together with GCFP, the "Lenders").
-------
The Borrower and the Warehouse Lender are parties to the Warehouse
Agreement, pursuant to which the Borrower has obtained financing from the
Warehouse Lender
<PAGE>
to provide interim funding for the origination and acquisition of certain
Mortgage Loans (as defined therein), which Mortgage Loans secure Advances (as so
defined).
The Borrower has created a non-REIT subsidiary, National Mortgage
Sales Corporation, a Colorado corporation, ("NMSC"), ninety-five percent of the
----
common stock of which is owned by the Borrower and which has entered into the
Mortgage Loan Flow Contribution and Subservicing Agreement (the "Contribution
------------
Agreement"), dated as of January 30, 1998, between the Borrower and NMSC,
- ---------
pursuant to which the Borrower shall make a capital contribution of certain of
the Mortgage Loans it currently holds to NMSC and shall continue to make such
capital contributions from time to time of certain of the Mortgage Loans it
hereafter acquires, through origination or otherwise.
It is the intent of the Borrower and the Warehouse Lender that the
Mortgage Loans remain subject to a security interest in favor of the Warehouse
Lender and continue to be used in the calculation of the Borrowing Base (as
defined in the Warehouse Agreement), and that such Mortgage Loans constitute
Primary Warehouse Loan Collateral (as defined in the Intercreditor Agreement)
notwithstanding the transfer of such Mortgage Loans to NMSC. Further, the
Lenders agree that any recovery under this Guarantee that is not deemed Primary
Warehouse Loan Collateral shall be distributed as Primary Residual Loan
Collateral, according to the Intercreditor Agreement, and each Lender shall have
the right to demand contribution from the other Lenders to the extent permitted
under the Intercreditor Agreement.
To induce the several Lenders to amend the Intercreditor Agreement,
and to induce the Warehouse Lender to amend the Warehouse Agreement and the
Custodial Agreement, (i) the Guarantor shall execute a Security Agreement
whereby it pledges all of its interests in all Mortgage Loans to the Warehouse
Lender, (ii) the Guarantor shall this Guarantee whereby it guarantees the
borrowings of the Borrower under the Financing Agreements and (iii) the Pledgors
(as defined in the Pledge Agreement) shall execute the Pledge Agreement whereby
they pledge all of their respective interests in the stock of the Borrower.
NOW, THEREFORE, in consideration of the premises and to guarantee the
obligations of the Borrower granted pursuant to the Financing Agreements, the
Guarantor hereby agrees with the Warehouse Lender, for the ratable benefit of
the Lenders, as follows:
1. DEFINED TERMS. (a) Unless otherwise defined herein, terms
-------------
defined in the Warehouse Agreement and used herein shall have the meanings given
to them in the Warehouse Agreement.
(b) The words "hereof," "herein" and "hereunder" and words of similar
import when used in this Guarantee shall refer to this Guarantee as a whole and
not to any particular provision of this Guarantee, and section and paragraph
references are to this Guarantee unless otherwise specified.
(c) The meanings given to terms defined herein shall be equally applicable
to both the singular and plural forms of such terms.
(d) The following terms shall have the following meanings:
2
<PAGE>
"`Notes' shall mean the Notes as defined in the Warehouse Agreement,
-----
the Secured Notes as defined in the Residual Agreement and the Secured Notes as
defined in the Subordinated Debt Agreement (each one, a "Note").
----
`Obligations' shall mean the following obligations now existing or
-----------
hereafter acquired:
(i) the Secured Obligations as defined in the Warehouse Agreement;
(ii) the repayment of principal and interest on any Residual Advance
(as defined in the Residual Agreement) and all other amounts owing to the
Lenders pursuant to the Residual Agreement with respect to Residual
Advances;
(iii) the repayment of principal and interest on any Working Capital
Advance (as defined in the Residual Agreement) and all other amounts owing
to the Lenders pursuant to the Residual Agreement with respect to Working
Capital Advances; and
(iv) the repayment of principal and interest on any amounts
outstanding under the Subordinated Debt Agreement and all other amounts
owing to the lender of Subordinated Debt Agreement pursuant to the
Subordinated Debt Agreement.
2. GUARANTEE. (a) Subject to the provisions of Section 2(b), the
---------
Guarantor hereby, absolutely, unconditionally and irrevocably, guarantees to the
Lenders, for the ratable benefit of such Lenders and their respective
successors, indorsees, transferees and assigns, the prompt and complete payment
and performance by the Borrower when due (whether at the stated maturity, by
acceleration or otherwise) of the Obligations. This is a guaranty of payment
and not of collection.
(b) Anything herein or in any other Guarantor Document to the contrary
notwithstanding, the maximum liability of the Guarantor hereunder and under the
other Guarantor Documents shall in no event exceed the amount which can be
guaranteed by the Guarantor under applicable federal and state laws relating to
the insolvency of debtors.
(c) The Guarantor further agrees to pay on demand any and all expenses
(including, without limitation, all fees and disbursements of counsel) which may
be paid or incurred by any Lender in enforcing any rights with respect to, or
collecting, any or all of the Obligations and/or enforcing any rights with
respect to, or collecting against, the Guarantor under this Guarantee. This
Guarantee shall remain in full force and effect until the Obligations are paid
in full, notwithstanding that from time to time prior thereto the Borrower may
be free from any Obligations.
(d) The Guarantor agrees that the Obligations may at any time and from
time to time exceed the amount of the liability of the Guarantor hereunder
without impairing this Guarantee or affecting the rights and remedies of any
Lender hereunder.
(e) No payment or payments made by the Borrower, the Guarantor or any
other Person or received or collected by any Lender from the Borrower, the
Guarantor, or any
3
<PAGE>
other Person by virtue of any action or proceeding or any set-off or
appropriation or application at any time or from time to time in reduction of or
in payment of the Obligations shall be deemed to modify, reduce, release or
otherwise affect the liability of the Guarantor hereunder which shall,
notwithstanding any such payment or payments other than payments made by the
Guarantor in respect of the Obligations or payments received or collected from
the Guarantor in respect of the Obligations, remain liable for the Obligations
up to the maximum liability of the Guarantor hereunder until the Obligations are
paid in full.
(f) The Guarantor agrees that whenever, at any time, or from time to
time, it shall make any payment to any Lender on account of its liability
hereunder, it will notify the Lenders in writing that such payment is made under
this Guarantee for such purpose.
3. RIGHT OF SET-OFF. Upon the occurrence of any Event of Default,
----------------
the Guarantor hereby irrevocably authorizes each Lender at any time and from
time to time without notice to the Guarantor, any such notice being expressly
waived by the Guarantor, to set-off and appropriate and apply any and all
deposits (general or special, time or demand, provisional or final), in any
currency, and any other credits, indebtedness or claims, in any currency, in
each case whether direct or indirect, absolute or contingent, matured or
unmatured, at any time held or owing by such Lender to or for the credit or the
account of the Guarantor, or any part thereof in such amounts as such Lender may
elect, against and on account of the obligations and liabilities of the
Guarantor to such Lender hereunder and claims of every nature and description of
such Lender against the Guarantor, in any currency, whether arising hereunder,
under any Financing Agreement, any Note, any Secured Note, any Guarantor
Document or otherwise, as such Lender may elect, whether or not any Lender has
made any demand for payment and although such obligations, liabilities and
claims may be contingent or unmatured. Each Lender shall notify the Guarantor
promptly of any such set-off and the application made by such Lender , provided
--------
that the failure to give such notice shall not affect the validity of such set-
off and application. The rights of each Lender under this Section are in
addition to other rights and remedies (including, without limitation, other
rights of set-off) which such Lender may have and are subject to Section 5 of
the Intercreditor Agreement.
4. NO SUBROGATION. Notwithstanding any payment or payments made by
--------------
the Guarantor hereunder or any set-off or application of funds of the Guarantor
by any Lender, the Guarantor shall not be entitled to be subrogated to any of
the rights of any Lender against the Borrower or the Guarantor or any collateral
security or guarantee or right of offset held by any Lender for the payment of
the Obligations, nor shall the Guarantor seek or be entitled to seek any
contribution or reimbursement from the Borrower in respect of payments made by
the Guarantor hereunder, until all amounts owing to the Lenders by the Borrower
on account of the Obligations are paid in full. If any amount shall be paid to
the Guarantor on account of such subrogation rights at any time when all of the
Obligations shall not have been paid in full, such amount shall be held by the
Guarantor in trust for the Lenders, segregated from other funds of the
Guarantor, and shall, forthwith upon receipt by the Guarantor, be turned over to
the Lenders in the exact form received by the Guarantor (duly indorsed by the
Guarantor to the Lenders, if required), to be applied against the Obligations,
whether matured or unmatured, in such order as the Lenders may determine.
4
<PAGE>
5. AMENDMENTS, ETC. WITH RESPECT TO THE OBLIGATIONS; WAIVER OF
-----------------------------------------------------------
RIGHTS. The Guarantor shall remain obligated hereunder notwithstanding that,
without any reservation of rights against the Guarantor and without notice to or
further assent by the Guarantor, any demand for payment of any of the
Obligations made by any Lender may be rescinded by such party and any of the
Obligations continued, and the Obligations, or the liability of any other party
upon or for any part thereof, or any collateral security or guarantee therefor
or right of offset with respect thereto, may, from time to time, in whole or in
part, be renewed, extended, amended, modified, accelerated, compromised, waived,
surrendered or released by any Lender, and the respective Financing Agreement,
the other Guarantor Documents and any other documents executed and delivered in
connection therewith may be amended, modified, supplemented or terminated, in
whole or in part, as the Lenders may deem advisable from time to time, and any
collateral security, guarantee or right of offset at any time held by any Lender
for the payment of the Obligations may be sold, exchanged, waived, surrendered
or released. No Lender shall have any obligation to protect, secure, perfect or
insure any Lien at any time held by it as security for the Obligations or for
this Guarantee or any property subject thereto. When making any demand
hereunder against the Guarantor, any Lender may, but shall be under no
obligation to, make a similar demand on the Borrower, the Guarantor or any other
guarantor, and any failure by any Lender to make any such demand or to collect
any payments from the Borrower, the Guarantor or guarantor or any release of the
Borrower, the Guarantor or guarantor shall not relieve the Guarantor in respect
of which a demand or collection is not made or the Guarantor not so released of
their several obligations or liabilities hereunder, and shall not impair or
affect the rights and remedies, express or implied, or as a matter of law, of
any Lender against the Guarantor. For the purposes hereof "demand" shall
include the commencement and continuance of any legal proceedings.
6. GUARANTEE ABSOLUTE AND UNCONDITIONAL. The Guarantor waives any
------------------------------------
and all notice of the creation, renewal, extension or accrual of any of the
Obligations and notice of or proof of reliance by any Lender upon this Guarantee
or acceptance of this Guarantee, the Obligations, and any of them, shall
conclusively be deemed to have been created, contracted or incurred, or renewed,
extended, amended or waived, in reliance upon this Guarantee; and all dealings
between the Borrower and the Guarantor, on the one hand, and among the Lenders,
on the other hand, likewise shall be conclusively presumed to have been had or
consummated in reliance upon this Guarantee. The Guarantor waives diligence,
presentment, protest, demand for payment and notice of default or nonpayment to
or upon the Borrower or the Guarantor with respect to the Obligations. The
Guarantor understands and agrees that this Guarantee shall be construed as a
continuing, absolute and unconditional guarantee of payment without regard to
(a) the validity, regularity or enforceability of any of the Financing
Agreements, any Note or any other Guarantor Document, any of the Obligations or
any other collateral security therefor or guarantee or right of offset with
respect thereto at any time or from time to time held by any Lender, (b) any
defense, set-off or counterclaim (other than a defense of payment or
performance) which may at any time be available to or be asserted by the
Borrower against any Lender, or (c) any other circumstance whatsoever (with or
without notice to or knowledge of the Borrower or the Guarantor) which
constitutes, or might be construed to constitute, an equitable or legal
discharge of the Borrower for the Obligations, or of the Guarantor under this
Guarantee, in bankruptcy or in any other instance. When pursuing its rights and
remedies hereunder against the Guarantor, any Lender may, but shall be under no
obligation to, pursue such rights and
5
<PAGE>
remedies as it may have against the Borrower or any other Person or against any
collateral security or guarantee for the Obligations or any right of offset with
respect thereto, and any failure by any Lender to pursue such other rights or
remedies or to collect any payments from the Borrower or any such other Person
or to realize upon any such collateral security or guarantee or to exercise any
such right of offset, or any release of the Borrower or any such other Person or
any such collateral security, guarantee or right of offset, shall not relieve
the Guarantor of any liability hereunder, and shall not impair or affect the
rights and remedies, whether express, implied or available as a matter of law,
of the Lenders against the Guarantor. This Guarantee shall remain in full force
and effect and be binding in accordance with and to the extent of its terms upon
the Guarantor and the successors and assigns thereof, and shall inure to the
benefit of the Lenders, and their respective successors, indorsees, transferees
and assigns, until all the Obligations and the obligations of the Guarantor
under this Guarantee shall have been satisfied by payment in full,
notwithstanding that from time to time during the term of any individual
Financing Agreement the Borrower may be free from any Obligations.
7. REINSTATEMENT. This Guarantee shall continue to be effective, or
-------------
be reinstated, as the case may be, if at any time payment, or any part thereof,
of any of the Obligations is rescinded or must otherwise be restored or returned
by any Lender upon the insolvency, bankruptcy, dissolution, liquidation or
reorganization of the Borrower or the Guarantor, or upon or as a result of the
appointment of a receiver, intervenor or conservator of, or trustee or similar
officer for, the Borrower or the Guarantor or any substantial part of its
property, or otherwise, all as though such payments had not been made.
8. PAYMENTS. The Guarantor hereby guarantees that payments hereunder
--------
will be paid to the Lenders without set-off or counterclaim in U.S. Dollars at
the office of the Warehouse Lender specified in Section 11.02 of the Warehouse
Agreement. The Warehouse Lender shall distribute such payments pursuant to the
Intercreditor Agreement.
9. REPRESENTATIONS AND WARRANTIES. The Guarantor hereby represents
------------------------------
and warrants that:
(a) it is duly organized, validly existing and in good standing under
the laws of the jurisdiction of its organization and has the corporate power and
authority and the legal right to own and operate its property, to lease the
property it operates as lessee and to conduct the business in which it is
currently engaged;
(b) it has the corporate power and authority and the legal right to
execute and deliver, and to perform its obligations under, this Guarantee and
the other Guarantor Documents to which is a party, and has taken all necessary
corporate action to authorize its execution, delivery and performance of this
Guarantee and the other Guarantor Documents to which is a party;
(c) this Guarantee and each of the other Guarantor Documents to which
the Guarantor is a party has been duly executed and delivered on behalf of the
Guarantor, and constitutes a legal, valid and binding obligation of the
Guarantor enforceable in accordance with its terms, subject to the effects of
bankruptcy, insolvency, fraudulent conveyance, reorganization,
6
<PAGE>
moratorium and other similar laws relating to or affecting creditors' rights
generally, general equitable principles (whether considered on a proceeding in
equity or at law) and an implied covenant of good faith and fair dealing;
(d) the execution, delivery and performance of this Guarantee and the
other Guarantor Documents to which the Guarantor is a party will not violate any
provision of any Requirement of Law or Contractual Obligation of the Guarantor
and will not result in or require the creation or imposition of any Lien on any
of the properties or revenues of the Guarantor pursuant to any Requirement of
Law or Contractual Obligation of the Guarantor (other than Liens created by the
Guarantor Documents in favor of the Lenders);
(e) no consent or authorization of, filing with, notice to, or other
act by or in respect of, any Governmental Authority or any other Person
(including, without limitation, any stockholder or creditor of such Guarantor)
is required in connection with the execution, delivery, performance, validity or
enforceability of this Guarantee or the other Guarantor Documents to which the
Guarantor is a party, except any such consent that has been obtained;
The Guarantor agrees that the foregoing representations and warranties shall be
deemed to have been made by the Guarantor on the date of each borrowing by the
Borrower under the Financing Agreements on and as of such date of borrowing as
though made hereunder on and as of such date.
10. COVENANTS. The Guarantor hereby covenants and agrees with the
---------
Lenders that, from and after the date of this Guarantee until the Obligations
are paid in full:
(a) Changes in Locations, Name, etc. The Guarantor shall not (i)
-------------------------------
change the location of its chief executive office/chief place of business from
that specified in Section 12 of the Security Agreement or (ii) change its name,
identity or corporate structure (or the equivalent) or change the location where
it maintains its records with respect to the Collateral unless it shall have
given the Warehouse Lender at least 30 days prior written notice thereof and
shall have delivered to the Warehouse Lender all Uniform Commercial Code
financing statements and amendments thereto as the Warehouse Lender shall
request and taken all other actions deemed necessary by the Warehouse Lender to
continue its perfected status in the Collateral with the same or better
priority.
(b) Other Information. The Guarantor shall furnish to the Warehouse
-----------------
Lender, as soon as available, copies of any and all proxy statements, financial
statements and reports which the Guarantor sends to its stockholders, and copies
of all regular, periodic and special reports, and all registration statements
filed with the Securities and Exchange Commission, any Governmental Authority
which supervises the issuance of securities by the Guarantor.
11. AUTHORITY OF THE LENDERS. The Guarantor acknowledges that the
------------------------
rights and responsibilities of the Lenders under this Guarantee with respect to
any action taken by the Lenders or the exercise or non-exercise by the Lenders
of any option, right, request, judgment or other right or remedy provided for
herein or resulting or arising out of this Guarantee shall, as among the
Lenders, be governed by the Intercreditor Agreement and by such other agreements
with respect thereto as may exist from time to time among them, but, as between
any Lender and
7
<PAGE>
the Guarantor, such Lender shall be conclusively presumed to be acting as agent
for the Lenders with full and valid authority so to act or refrain from acting,
and the Guarantor shall be under no obligation, or entitlement, to make any
inquiry respecting such authority.
12. NOTICES. All notices, requests and demands to or upon any Lender
-------
or the Guarantor to be effective shall be in writing (or by telex, fax or
similar electronic transfer confirmed in writing) and shall be deemed to have
been duly given or made (1) when delivered to the intended recipient by hand or
(2) if given by mail, when received by the intended recipient, or (3) if by
telex, fax or similar electronic transfer, when sent and receipt has been
confirmed, addressed as follows:
(a) if to the Lenders, at the addresses or transmission numbers for
notices provided in Section 11.02 of the Warehouse Agreement; Section 11.01 of
the Residual Agreement; and Section 10.01 of the Subordinated Debt Agreement.
(b) if to the Guarantor, at its address or transmission number for
notices set forth under its signature below.
Each Lender and the Guarantor may change its address and transmission
numbers for notices by notice in the manner provided in this Section.
13. SEVERABILITY. Any provision of this Guarantee which is
------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
14. INTEGRATION. This Guarantee represents the agreement of the
-----------
Guarantor with respect to the subject matter hereof and there are no promises or
representations by any Lender relative to the subject matter hereof not
reflected herein.
15. AMENDMENTS IN WRITING; NO WAIVER; CUMULATIVE REMEDIES.
-----------------------------------------------------
(a) None of the terms or provisions of this Guarantee may be waived,
amended, supplemented or otherwise modified except by a written instrument
executed by the Guarantor and the Lenders, provided that any provision of this
--------
Guarantee may be waived by the Lenders in a letter or agreement executed by the
Lender or by telex or facsimile transmission from the Lenders.
(b) No Lender shall by any act (except by a written instrument
pursuant to Section 15(a) hereof), delay, indulgence, omission or otherwise be
deemed to have waived any right or remedy hereunder or to have acquiesced in any
Default or Event of Default or in any breach of any of the terms and conditions
hereof. No failure to exercise, nor any delay in exercising, on the part of the
any Lender, any right, power or privilege hereunder shall operate as a waiver
thereof. No single or partial exercise of any right, power or privilege
hereunder shall preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. A waiver by any Lender of any right or
remedy hereunder on any one occasion shall
8
<PAGE>
not be construed as a bar to any right or remedy which the Lenders would
otherwise have on any future occasion.
(c) The rights and remedies herein provided are cumulative, may be
exercised singly or concurrently and are not exclusive of any other rights or
remedies provided by law.
16. SECTION HEADINGS. The section headings used in this Guarantee
----------------
are for convenience of reference only and are not to affect the construction
hereof or be taken into consideration in the interpretation hereof.
17. SUCCESSORS AND ASSIGNS. This Guarantee shall be binding upon the
----------------------
successors and assigns of the Guarantor and shall inure to the benefit of the
Lenders and their successors and assigns.
18. GOVERNING LAW. THIS GUARANTEE SHALL BE GOVERNED BY, AND
-------------
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
19. SUBMISSION TO JURISDICTION; WAIVERS. The Guarantor hereby
-----------------------------------
irrevocably and unconditionally:
(a) submits for itself and its property in any legal action or
proceeding relating to this Guarantee and the other Guarantor Documents to which
it is a party, or for recognition and enforcement of any judgment in respect
thereof, to the non-exclusive general jurisdiction of the courts of the State of
New York, the courts of the United States of America for the Southern District
of New York, and appellate courts from any thereof;
(b) consents that any such action or proceeding may be brought in
such courts and waives any objection that it may now or hereafter have to the
venue of any such action or proceeding in any such court or that such action or
proceeding was brought in an inconvenient court and agrees not to plead or claim
the same;
(c) agrees that service of process in any such action or proceeding
may be effected by mailing a copy thereof by registered or certified mail (or
any substantially similar form of mail), postage prepaid, to the Guarantor at
its address set forth under its signature below or at such other address of
which the Lenders shall have been notified pursuant hereto;
(d) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by law or shall limit the right
to sue in any other jurisdiction; and
(e) waives, to the maximum extent not prohibited by law, any right it
may have to claim or recover in any legal action or proceeding referred to in
this Section any special, exemplary, punitive or consequential damages.
20. ACKNOWLEDGMENTS. The Guarantor hereby acknowledges that:
---------------
9
<PAGE>
(a) it has been advised by counsel in the negotiation, execution and
delivery of this Guarantee and the other Guarantor Documents to which it is a
party;
(b) no Lender has any fiduciary relationship with or duty to the
Guarantor arising out of or in connection with this Guarantee or any of the
other Guarantor Documents to which it is a party, and the relationship between
the Guarantor and the Borrower, on one hand, and among the Lenders, on the other
hand, in connection herewith or therewith is solely that of debtor and creditor;
and
(c) no joint venture is created hereby or by the other Guarantor
Documents or otherwise exists by virtue of the transactions contemplated hereby
among the Lenders or among the Guarantor, the Borrower, any other party to a
Financing Agreement and the Lenders.
21. WAIVERS OF JURY TRIAL. THE GUARANTOR HEREBY IRREVOCABLY AND
---------------------
UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING
TO THIS GUARANTEE OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN.
10
<PAGE>
IN WITNESS WHEREOF, each of the undersigned has caused this Guarantee to be duly
executed and delivered by its duly authorized officer as of the day and year
first above written.
NATIONAL MORTGAGE SALES CORPORATION
By:_________________________________
Name:
Title:
Address for Notices:
Harlequin Plaza, Suite 330S
7600 East Orchard Road
Englewood, Colorado 80111-4943
Attention: President
Fax: (303) 741-8131
With a copy to:
Howard J. Glicksman, Esq.
Plaza Tower One, Suite 1200
6400 South Fiddler's Green Circle
Englewood, Colorado 80111
Fax: (303) 741-2630
11
<PAGE>
EXHIBIT 10.6
PLEDGE AGREEMENT
PLEDGE AGREEMENT, dated as of January 30, 1998, made by NATIONAL
MORTGAGE CORPORATION, a Colorado corporation, (formerly MORTGAGE SERVICING
ACQUISITION CORPORATION) (the "Borrower") and STEVEN B. CHOTIN (the "Individual
-------- ----------
Pledgor") (each one, a "Pledgor" and, together, the "Pledgors") for the lenders
- ------- ------- --------
(the "Lenders") parties to the Financing Agreements referred to below.
-------
RECITALS
--------
Reference is hereby made to the following Financing Agreements:
(i) The Amended and Restated Loan and Security Agreement, dated as
of June 30, 1997 (as amended, supplemented or otherwise modified from time
to time, the "Warehouse Agreement"), by and between the Borrower and
-------------------
Greenwich Capital Financial Products, Inc. ("GCFP") (in such capacity, the
----
"Warehouse Lender");
----------------
(ii) The Amended and Restated Custodial Agreement, dated as of June
30, 1997 (as amended, supplemented or otherwise modified from time to time,
the "Custodial Agreement"), by and among the Borrower, Chase Bank of Texas,
-------------------
N.A. (formerly Texas Commerce Bank National Association), as custodian for
the Warehouse Lender pursuant to the Warehouse Agreement (in such capacity,
the "Custodian"), and GCFP (in such capacity, the "Warehouse Lender");
--------- ----------------
(iii) The Residual and Working Capital Financing Agreement, dated as
of June 30, 1997 (as amended, supplemented or otherwise modified from time
to time, the "Residual Agreement") by and among the Borrower, ContiTrade
------------------
Services, L.L.C. ("CTS"), as the agent and a lender, (in such capacity, a
---
"Residual Lender") and Greenwich Capital Markets, Inc. ("GCM") (in such
--------------- ---
capacity, a "Residual Lender") (collectively, the "Residual Lenders");
--------------- ----------------
(iv) The Subordinated Debt Agreement, dated as of June 30, 1997 (as
amended, supplemented or otherwise modified from time to time, the
"Subordinated Debt Agreement") by and between the Borrower and CTS (in such
---------------------------
capacity, the "Subordinated Debt Lender"); and
------------------------
<PAGE>
(v) The Intercreditor and Subordination Agreement, dated as of June
30, 1997 (as amended, supplemented or otherwise modified from time to time,
the "Intercreditor Agreement) among the Borrower, CTS, as a lender, and
-----------------------
GCM, as a lender, (together with GCFP, the "Lenders").
-------
The Borrower and the Warehouse Lender are parties to the Warehouse
Agreement, pursuant to which the Borrower has obtained financing from the
Warehouse Lender to provide interim funding for the origination and acquisition
of certain Mortgage Loans (as defined therein), which Mortgage Loans secure
Advances (as so defined).
The Borrower has created a subsidiary, National Mortgage Sales
Corporation ("NMSC"), a Colorado corporation, one-hundred percent of the common
----
stock of which is owned by the Pledgors and which has entered into the Mortgage
Loan Flow Contribution and Subservicing Agreement, dated as of January 30, 1998,
between the Borrower and NMSC, pursuant to which the Borrower shall make a
capital contribution of certain of the Mortgage Loans it currently holds to NMSC
and shall continue to make such capital contributions from time to time of
certain of the Mortgage Loans it hereafter acquires, through origination or
otherwise.
It is the intent of the Borrower and the Warehouse Lender that the
Mortgage Loans remain subject to a security interest in favor of the Warehouse
Lender and continue to be used in the calculation of the Borrowing Base (as
defined in the Warehouse Agreement), and that such Mortgage Loans constitute
Primary Warehouse Loan Collateral (as defined in the Intercreditor Agreement)
among the Borrower, CTS and GCM notwithstanding the transfer of such Mortgage
Loans to NMSC.
To induce the Lenders to amend the Intercreditor Agreement, and to
induce the Warehouse Lender to amend the Warehouse Agreement and the Custodial
Agreement (as defined in the Warehouse Agreement) in each case to permit the
transfer of Mortgage Loans to NMSC subject to the terms of the Warehouse
Agreement and the Intercreditor Agreement, (i) NMSC shall execute a Security
Agreement whereby it pledges all of its interests in all Mortgage Loans to the
Lenders, (ii) NMSC shall execute a Guarantee whereby it guarantees the
borrowings of the Borrower under the Financing Agreements, as defined below, and
(iii) the Borrower and the Individual Pledgor shall execute this Pledge
Agreement.
NOW, THEREFORE, in consideration of the premises and to protect the
security interests granted pursuant to the Financing Agreements, the Pledgors
hereby agree with the Lenders, for their ratable benefit, as follows:
1. Defined Terms. (a) Unless otherwise defined herein, terms which
-------------
are defined in the Warehouse Agreement and used herein shall have the meanings
given to them in the Warehouse Agreement.
(b) The following terms shall have the following meanings:
<PAGE>
"Code" means the Uniform Commercial Code from time to time in effect
----
in the State of New York.
"Collateral" means the Pledged Stock and all Proceeds.
----------
"Hedge Agreement": as to any Person, any swap, cap, collar or similar
---------------
arrangement entered into by such Person providing for protection against
fluctuations in interest rates or currency exchange rates or the exchange of
nominal interest obligations, either generally or under specific contingencies.
"Issuer" means NMSC.
------
"Pledge Agreement" means this Pledge Agreement, as amended,
----------------
supplemented or otherwise modified from time to time.
"Pledged Stock" means the shares of capital stock listed on Schedule I
-------------
hereto, together with all stock certificates, options or rights of any nature
whatsoever which may be issued or granted by the Issuer to the Pledgors in
respect of the Pledged Stock while this Pledge Agreement is in effect.
"Proceeds" means all "proceeds" as such term is defined in Section 9-
--------
306(1) of the Uniform Commercial Code in effect in the State of New York on the
date hereof and, in any event, shall include, without limitation, all dividends
or other income from the Pledged Stock, collections thereon or distributions
with respect thereto.
"Secured Obligations" is the collective reference to:
-------------------
(i) the Secured Obligations as defined in the Warehouse Agreement;
(ii) the repayment of principal and interest on any Residual Advance
(as defined in the Residual Agreement) and all other amounts owing to the
Lenders pursuant to the Residual Agreement with respect to Residual
Advances;
(iii) the repayment of principal and interest on any Working Capital
Advance (as defined in the Residual Agreement) and all other amounts owing
to the Lenders pursuant to the Residual Agreement with respect to Working
Capital Advances; and
(iv) the repayment of principal and interest on any amounts
outstanding under the Subordinated Debt Agreement and all other amounts
owing to the lender of Subordinated Debt Agreement pursuant to the
Subordinated Debt Agreement.
"Securities Act" means the Securities Act of 1933, as amended.
--------------
(c) The words "hereof", "herein" and "hereunder" and words of
similar import when used in this Pledge Agreement shall refer to this Pledge
Agreement as a whole and not to any particular provision of this Pledge
Agreement, and Section, Schedule, Annex, and Exhibit
<PAGE>
references are to this Pledge Agreement unless otherwise specified. The meanings
given to terms defined herein shall be equally applicable to both the singular
and plural forms of such terms.
2. Pledge; Grant of Security Interest. The Pledgors hereby deliver
----------------------------------
to GCFP all the Pledged Stock and hereby grant to GCFP, for the ratable benefit
of the Lenders, a first security interest in the Collateral, as collateral
security for the prompt and complete payment and performance when due (whether
at the stated maturity, by acceleration or otherwise) of the Secured
Obligations.
3. Stock Powers. Concurrently with the delivery to GCFP of each
------------
certificate representing one or more shares of the Pledged Stock, the Pledgors
shall deliver an undated stock power covering such certificate, duly executed in
blank with, if GCFP so requests, signature guaranteed.
4. Representations and Warranties. The Pledgors represent and
------------------------------
warrant that:
(a) the shares of Pledged Stock listed on Schedule I constitute all
the issued and outstanding shares of all classes of the Capital Stock of
the Issuer and are represented by the certificates listed thereon;
(b) all the shares of the Pledged Stock have been duly and validly
issued and are fully paid and nonassessable;
(c) the Pledgors are the record and beneficial owners of, and have
title to, the Pledged Stock, free of any and all Liens or options in favor
of, or claims of, any other Person, except the Lien created by this Pledge
Agreement; and
(d) upon delivery to GCFP of the stock certificates evidencing the
Pledged Stock (and assuming the continuing possession by GCFP of such stock
certificate in accordance with the requirements of applicable law), the
Lien granted pursuant to this Pledge Agreement will constitute a valid,
perfected first priority Lien on the Pledged Stock in favor of GCFP, for
the ratable benefit of the Lenders, enforceable as such against all
creditors of the Pledgors and any Persons purporting to purchase any
Collateral from the Pledgors.
5. Covenants. The Pledgors covenant and agree with GCFP that, from
---------
and after the date of this Pledge Agreement until the Secured Obligations are
paid in full:
(a) If either Pledgor shall, as a result of its ownership of the
Pledged Stock, become entitled to receive or shall receive any stock
certificate (including, without limitation, any certificate representing a
stock dividend or a distribution in connection with any reclassification,
increase or reduction of capital or any certificate issued in connection
with any reorganization), option or rights, whether in addition to, in
substitution for, as a conversion of, or in exchange for any shares of the
Pledged Stock, or otherwise in respect thereof, such Pledgor shall accept
the same GCFP's and the Lenders' agent, hold the same in trust for GCFP and
the Lenders and deliver the same forthwith to
<PAGE>
GCFP in the exact form received, duly indorsed by the Pledgors to GCFP, if
required, together with an undated stock power covering such certificate
duly executed in blank and with, if GCFP so requests, signature guaranteed,
to be held by GCFP, for the ratable benefit of the Lenders, subject to the
terms hereof as additional collateral security for the Secured Obligations.
Any sums paid upon or in respect of the Pledged Stock upon the liquidation
or dissolution of the Issuer shall be paid over to GCFP to be held by it
hereunder for the ratable benefit of the Lenders as additional collateral
security for the Secured Obligations, and in case any distribution of
capital shall be made on or in respect of the Pledged Stock or any property
shall be distributed upon or with respect to the Pledged Stock pursuant to
the recapitalization or reclassification of the capital of the Issuer or
pursuant to the reorganization thereof, the property so distributed shall
be delivered to GCFP to be held by it for the ratable benefit of the
Lenders and the Issuer, subject to the terms hereof, as additional
collateral security for the Secured Obligations. If any sums of money or
property so paid or distributed in respect of the Pledged Stock shall be
received by either Pledgor, such Pledgor shall, until such money or
property is paid or delivered to GCFP, hold such money or property in trust
for the Lenders segregated from other funds of the such Pledgor, as
additional collateral security for the Secured Obligations.
(b) Without the prior written consent of GCFP, the Pledgors will not
(i) vote to enable, or take any other action to permit, the Issuer to issue
any stock or other equity securities of any nature or to issue any other
securities convertible into or granting the right to purchase or exchange
for any stock or other equity securities of any Issuer, or (ii) sell,
assign, transfer, exchange or otherwise dispose of, or grant any option
with respect to, the Collateral, or (iii) create, incur or permit to exist
any Lien or option in favor of, or any claim of any Person with respect to,
any of the Collateral, or any interest therein, except for the Lien
provided for by this Pledge Agreement, or (iv) enter into any agreement or
undertaking restricting the right or ability of the Pledgors or GCFP to
sell, assign or transfer any of the Collateral.
(c) The Pledgors shall maintain the security interest created by this
Pledge Agreement as a first, perfected security interest and shall defend
such security interest against the claims and demands of all Persons
whomsoever. At any time and from time to time, upon the written request of
GCFP, and at the sole expense of the Pledgors, the Pledgors will promptly
and duly execute and deliver such further instruments and documents and
take such further actions as GCFP may reasonably request for the purposes
of obtaining or preserving the full benefits of this Pledge Agreement and
of the rights and powers herein granted. If any amount payable under or in
connection with any of the Collateral shall be or become evidenced by any
promissory note, other instrument or chattel paper, such note, instrument
or chattel paper shall be immediately delivered to GCFP, duly endorsed in a
manner satisfactory to GCFP, to be held as Collateral pursuant to this
Pledge Agreement.
(d) The Pledgors agree to pay, and to save the Lenders harmless from,
any and all liabilities with respect to, or resulting from any delay in
paying, any and all stamp,
<PAGE>
excise, sales or other taxes which may be payable or determined to be
payable with respect to any of the Collateral or in connection with any of
the transactions contemplated by this Pledge Agreement.
(e) In no event shall this Section 5 be interpreted to limit the
Pledgor's rights under Section 6.
6. Cash Dividends; Voting Rights. Unless an Event of Default shall
-----------------------------
have occurred and be continuing and GCFP shall have given notice to the Pledgor
of GCFP's intent to exercise its corresponding rights pursuant to Section 7
below, each Pledgor shall be permitted to receive all cash dividends paid in the
normal course of business of the Issuer, to the extent permitted in the
Warehouse Agreement and the Intercreditor Agreement, in respect of the Pledged
Stock and to exercise all voting and corporate rights with respect to the
Pledged Stock; provided, however, that no vote shall be cast or corporate right
-------- -------
exercised or other action taken which would impair the Collateral or which would
be inconsistent with or result in any violation of any provision of the
Warehouse Agreement or the other Financing Agreements.
7. Rights of GCFP. (a) All money Proceeds received by GCFP
--------------
hereunder shall be held by GCFP for the benefit of the Lenders. All Proceeds
while held by GCFP (or by the Pledgors in trust for the Lenders) shall continue
to be held as collateral security for all the Secured Obligations and shall not
constitute payment thereof until applied as provided in Section 8(a).
(b) If an Event of Default shall occur and be continuing and GCFP
shall give notice to the Pledgors of its intent to exercise its rights under
this Section 7: (i) GCFP shall have the right to receive any and all cash
dividends paid in respect of the Pledged Stock and make application thereof to
the Secured Obligations in the order set forth in the Intercreditor Agreement,
and (ii) at the request of GCFP, all shares of the Pledged Stock shall be
registered in the name of GCFP or its nominee, and GCFP or its nominee may
thereafter exercise (A) all voting, corporate and other rights pertaining to
such shares of the Pledged Stock at any meeting of shareholders of the Issuer or
otherwise and (B) any and all rights of conversion, exchange, subscription and
any other rights, privileges or options pertaining to such shares of the Pledged
Stock as if it were the absolute owner thereof (including, without limitation,
the right to exchange at its discretion any and all of the Pledged Stock upon
the merger, consolidation, reorganization, recapitalization or other fundamental
change in the corporate structure of the Issuer, or upon the exercise by the
Pledgors or GCFP of any right, privilege or option pertaining to such shares of
the Pledged Stock, and in connection therewith, the right to deposit and deliver
any and all of the Pledged Stock with any committee, depository, transfer agent,
registrar or other designated agency upon such terms and conditions as it may
determine), all without liability except to account for property actually
received by it, but GCFP shall have no duty to exercise any such right,
privilege or option and shall not be responsible for any failure to do so or
delay in so doing.
(c) The rights of GCFP hereunder shall not be conditioned or
contingent upon the pursuit by GCFP of any right or remedy against the Issuer or
against any other Person which
<PAGE>
may be or become liable in respect of all or any part of the Obligations or
against any other collateral security therefor, guarantee thereof or right of
offset with respect thereto. GCFP shall not be liable for any failure to demand,
collect or realize upon all or any part of the Collateral or for any delay in
doing so, nor shall it be under any obligation to sell or otherwise dispose of
any Collateral upon the request of the Pledgors or any other Person or to take
any other action whatsoever with regard to the Collateral or any part thereof.
8. Remedies. (a) If an Event of Default shall have occurred and be
--------
continuing, at any time at GCFP's election, GCFP shall apply the Proceeds in
payment of the Secured Obligations in such order as directed by the
Intercreditor Agreement.
(b) If an Event of Default shall occur and be continuing, GCFP may
exercise, in addition to all other rights and remedies granted in this Pledge
Agreement and in any other instrument or agreement securing, evidencing or
relating to the Obligations, all rights and remedies of a secured party under
the Code. Without limiting the generality of the foregoing, GCFP, without
demand of performance or other demand, presentment, protest, advertisement or
notice of any kind (except any notice required by law referred to below) to or
upon the Pledgors, the Issuer or any other Person (all and each of which
demands, defenses, advertisements and notices are hereby waived), may in such
circumstances forthwith collect, receive, appropriate and realize upon the
Collateral, or any part thereof, and/or may forthwith sell, assign, give option
or options to purchase or otherwise dispose of and deliver the Collateral or any
part thereof (or contract to do any of the foregoing), in one or more parcels at
public or private sale or sales, in the over-the-counter market, at any
exchange, broker's board or office of GCFP or elsewhere upon such terms and
conditions as it may deem advisable and at such prices as it may deem best, for
cash or on credit or for future delivery without assumption of any credit risk.
Any Lender shall have the right upon any such public sale or sales, and, to the
extent permitted by law, upon any such private sale or sales, to purchase the
whole or any part of the Collateral so sold, free of any right or equity of
redemption in the Pledgors, which right or equity is hereby waived or released.
GCFP shall apply any Proceeds from time to time held by it and the net proceeds
of any such collection, recovery, receipt, appropriation, realization or sale,
after deducting all reasonable costs and expenses of every kind incurred therein
or incidental to the care or safekeeping of any of the Collateral or the pursuit
by the Lenders of their rights and remedies hereunder, including, without
limitation, reasonable attorneys' fees and disbursements, to the payment in
whole or in part of the Secured Obligations, in such order as set forth by the
Intercreditor Agreement, and only after such application and after the payment
by GCFP of any other amount required by any provision of law, including, without
limitation, Section 9-504(1)(c) of the Code, need GCFP account for the surplus,
if any, to the Pledgors. To the extent permitted by applicable law, the
Pledgors waive all claims, damages and demands they may acquire against any
Lender arising out of the exercise by GCFP of any of its rights hereunder. If
any notice of a proposed sale or other disposition of Collateral shall be
required by law, such notice shall be deemed reasonable and proper if given at
least 10 days before such sale or other disposition. The Pledgors shall remain
liable for any deficiency if the proceeds of any sale or other disposition of
Collateral are insufficient to pay the Secured Obligations and the fees and
disbursements of any attorneys employed by any Lender to collect such
deficiency.
<PAGE>
9. Limitation of Individual Pledgor's Liability. The liability of
--------------------------------------------
the Individual Pledgor shall be limited to the stock certificates pledged
hereunder. The Individual Pledgor has made no personal guarantee nor assumed
any personal liability other than this Pledge Agreement and is not liable for
any of the Secured Obligations.
10. Private Sales. Consistent with the other provisions of this
-------------
Pledge Agreement, the Pledgors agree to use their reasonable efforts to do or
cause to be done all such other acts as may be necessary to make any private
sale or sales of all or any portion of the Pledged Stock pursuant to this Pledge
Agreement valid and binding and in compliance with any and all other applicable
Requirements of Law. The Pledgors further agree that a breach of any of the
covenants contained in this Section will cause irreparable injury to the
Lenders, that the Lenders have no adequate remedy at law in respect of such
breach and, as a consequence, that each and every covenant contained in this
Section shall be specifically enforceable against the Pledgors, and the Pledgors
hereby waive and agree not to assert any defenses against an action for specific
performance of such covenants except for a defense that no Event of Default has
occurred under the Warehouse Agreement.
11. Irrevocable Authorization and Instruction to Issuer. The
---------------------------------------------------
Pledgors hereby authorize and instruct the Issuer to comply with any instruction
received by it from GCFP in writing that (a) states that an Event of Default has
occurred and (b) is otherwise in accordance with the terms of this Pledge
Agreement, without any other or further instructions from the Pledgors, and
Pledgors agree that the Issuer shall be fully protected in so complying.
12. GCFP's Appointment as Attorney-in-Fact. (a) The Pledgors hereby
--------------------------------------
irrevocably constitute and appoint GCFP and any officer or agent of GCFP, with
full power of substitution, as its true and lawful attorney-in-fact with full
irrevocable power and authority in the place and stead of the Pledgors and in
the names of the Pledgors or in GCFP's own name, from time to time in GCFP's
discretion, for the purpose of carrying out the terms of this Agreement, to take
any and all appropriate action and to execute any and all documents and
instruments which may be necessary or desirable to accomplish the purposes of
this Pledge Agreement, including, without limitation, any financing statements,
endorsements, assignments or other instruments of transfer.
(b) The Pledgors hereby ratify all that said attorneys shall lawfully
do or cause to be done pursuant to the power of attorney granted in Section 12.
All powers, authorizations and agencies contained in this Pledge Agreement are
coupled with an interest and are irrevocable until this Pledge Agreement is
terminated and the security interests created hereby are released.
13. Limitation on Duties Regarding Collateral. GCFP's sole duty with
-----------------------------------------
respect to the custody, safekeeping and physical preservation of the Collateral
in its possession, under Section 9-207 of the Code or otherwise, shall be to
deal with it in the same manner as GCFP deals with similar securities and
property for its own account, except that GCFP shall have no obligation to
invest such funds and may hold the same as demand deposits. No Lender or any of
its respective directors, officers, employees or agents shall be liable for
failure to demand, collect or realize upon any of the Collateral or for any
delay in doing so or shall be under any obligation
<PAGE>
to sell or otherwise dispose of any Collateral upon the request of the Pledgors
or any other Person or to take any other action whatsoever with regard to the
Collateral or any part thereof.
14. Execution of Financing Statements. Pursuant to Section 9-402 of
---------------------------------
the Code, the Pledgors hereby authorize GCFP to file financing statements with
respect to the Collateral without the signatures of the Pledgors in such form
and in such filing offices as GCFP reasonably determines appropriate to perfect
the security interests of GCFP under this Pledge Agreement. A carbon,
photographic or other reproduction of this Pledge Agreement shall be sufficient
as a financing statement for filing in any jurisdiction.
15. Powers Coupled with an Interest. All authorizations and agencies
-------------------------------
herein contained with respect to the Collateral are irrevocable and powers
coupled with an interest.
16. Notices. All notices, requests and demands to or upon any Lender
-------
or the Guarantor to be effective shall be in writing (or by telex, fax or
similar electronic transfer confirmed in writing) and shall be deemed to have
been duly given or made (1) when delivered to the intended recipient by hand or
(2) if given by mail, when received by the intended recipient, or (3) if by
telex, fax or similar electronic transfer, when sent and receipt has been
confirmed, addressed as follows:
(a) if to the Lenders, at the addresses or transmission numbers for
notices provided in Section 11.02 of the Warehouse Agreement; Section 11.01 of
the Residual Agreement; and Section 10.01 of the Subordinated Debt Agreement.
(b) if to the Pledgors, at the addresses or transmission numbers for
notices set forth under their signatures below.
17. Authority of GCFP. The Pledgors acknowledge that the rights and
-----------------
responsibilities of GCFP under this Pledge Agreement with respect to any action
taken by GCFP or the exercise or non-exercise by GCFP of any option, right,
request, judgment or other right or remedy provided for herein or resulting or
arising out of this Pledge Agreement shall, as between GCFP and the Lenders, be
governed by the Intercreditor Agreement and by such other agreements with
respect thereto as may exist from time to time among them, but, as between GCFP
and the Pledgors, GCFP shall be conclusively presumed to be acting as agent for
the Lenders with full and valid authority so to act or refrain from acting, and
neither the Pledgors nor the Issuer shall be under any obligation, or
entitlement, to make any inquiry respecting such authority.
18. Severability. Any provision of this Pledge Agreement which is
------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
<PAGE>
19. Paragraph Headings. The paragraph headings used in this Pledge
------------------
Agreement are for convenience of reference only and are not to affect the
construction hereof or be taken into consideration in the interpretation hereof.
20. No Waiver; Cumulative Remedies. No Lender shall by any act
------------------------------
(except by a written instrument pursuant to Section 21 hereof), delay,
indulgence, omission or otherwise be deemed to have waived any right or remedy
hereunder or to have acquiesced in any Default or Event of Default or in any
breach of any of the terms and conditions hereof. No failure to exercise, nor
any delay in exercising, on the part of any Lender any right, power or privilege
hereunder shall operate as a waiver thereof. No single or partial exercise of
any right, power or privilege hereunder shall preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. A
waiver by any Lender of any right or remedy hereunder on any one occasion shall
not be construed as a bar to any right or remedy which any Lender would
otherwise have on any future occasion. The rights and remedies herein provided
are cumulative, may be exercised singly or concurrently and are not exclusive of
any rights or remedies provided by law.
21. Waivers and Amendments; Successors and Assigns; Governing Law.
-------------------------------------------------------------
None of the terms or provisions of this Pledge Agreement may be waived, amended,
supplemented or otherwise modified except by a written instrument executed by
the Pledgors and GCFP, provided that any provision of this Pledge Agreement may
--------
be waived by GCFP in a letter or agreement executed by GCFP or by telex or
facsimile transmission GCFP. This Pledge Agreement shall be binding upon the
successors and assigns of the Pledgors and shall inure to the benefit of the
Lenders and their respective successors and assigns. THIS PLEDGE AGREEMENT
SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS
OF THE STATE OF NEW YORK.
[SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF, THE UNDERSIGNED HAS CAUSED THIS PLEDGE AGREEMENT
TO BE DULY EXECUTED AND DELIVERED AS OF THE DATE FIRST ABOVE WRITTEN.
NATIONAL MORTGAGE CORPORATION
By_______________________
Name:
Title:
STEVEN B. CHOTIN
_________________________
<PAGE>
ACKNOWLEDGMENT AND CONSENT
The undersigned, the Issuer referred to in the foregoing Pledge
Agreement, hereby acknowledge receipt of a copy thereof and agrees to be bound
thereby and to comply with the terms thereof insofar as such terms are
applicable to it. The undersigned agrees to notify GCFP promptly in writing of
the occurrence of any of the events described in Section 5(a) of the Pledge
Agreement. The undersigned further agree that the terms of Section 9(c) of the
Pledge Agreement shall apply to it, mutatis mutandis, with respect to all
------- --------
actions that may be required of it under or pursuant to or arising out of
Section 9 of the Pledge Agreement.
NATIONAL MORTGAGE SALES CORPORATION
By:______________________
Name:
Title:
<PAGE>
SCHEDULE I to
Pledge Agreement
----------------
DESCRIPTION OF PLEDGED STOCK
(Borrower)
<TABLE>
<CAPTION>
Stock
Name of Class of Certificate No. of
Issuer Stock No. Shares
- ------ -------- ----------- ------
<S> <C> <C> <C>
National Mortgage Common 1 950
Sales Corporation
</TABLE>
<PAGE>
DESCRIPTION OF PLEDGED STOCK
(Individual Pledgor)
<TABLE>
<CAPTION>
Stock
Name of Class of Certificate No. of
Issuer Stock No. Shares
- ------- -------- ---------- ------
<S> <C> <C> <C>
National Mortgage Common 2 50
Sales Corporation
</TABLE>
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF NATIONAL MORTGAGE CORPORATION
-----------------------------------------------------
National Mortgage Finance Corporation
Organized in Colorado
No alternative doing business names
100% owned by National Mortgage Corporation
National Mortgage Sales Corporation
Organized in Colorado
No alternative doing business names
National Mortgage Corporation owns all of the Class B Non-Voting Common Stock,
representing 95% of the total value of the Common Stock of this company
National Mortgage Administration Corporation
Organized in Colorado
No alternative doing business names
National Mortgage Corporation owns all of the Class B Non-Voting Common Stock,
representing 95% of the total value of the Common Stock of this company
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 MAR-31-1998
<CASH> 1,843 871
<SECURITIES> 18,826 23,912
<RECEIVABLES> 120,965 159,305
<ALLOWANCES> (552) (1,364)
<INVENTORY> 0 0
<CURRENT-ASSETS> 8,253 9,554
<PP&E> 2,552 3,019
<DEPRECIATION> (993) (1,096)
<TOTAL-ASSETS> 150,894 194,201
<CURRENT-LIABILITIES> 3,576 4,179
<BONDS> 140,975 184,954
0 0
2,100 2,100
<COMMON> 0 0
<OTHER-SE> 4,243 2,968
<TOTAL-LIABILITY-AND-EQUITY> 150,894 194,201
<SALES> 0 0
<TOTAL-REVENUES> 24,309 6,406
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 14,502 4,427
<LOSS-PROVISION> 730 245
<INTEREST-EXPENSE> 7,731 2,977
<INCOME-PRETAX> 1,346 (1,243)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 1,346 (1,243)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,346 (1,243)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
